Podcast
Questions and Answers
Which of the following is NOT a category of risk?
Which of the following is NOT a category of risk?
Which risk management method involves eliminating all chances of financial loss?
Which risk management method involves eliminating all chances of financial loss?
Which risk management method relies on self-insuring or covering part of the risk?
Which risk management method relies on self-insuring or covering part of the risk?
Which risk management method involves shifting financial responsibility to a third party?
Which risk management method involves shifting financial responsibility to a third party?
Signup and view all the answers
Speculative risks are insurable because society profits from their potential failures.
Speculative risks are insurable because society profits from their potential failures.
Signup and view all the answers
Which type of risk is insurable?
Which type of risk is insurable?
Signup and view all the answers
What are the five essential elements of a contract?
What are the five essential elements of a contract?
Signup and view all the answers
What are the three insurance-specific elements of a contract?
What are the three insurance-specific elements of a contract?
Signup and view all the answers
Void contracts are invalid from the beginning.
Void contracts are invalid from the beginning.
Signup and view all the answers
Voidable contracts are immediately invalid.
Voidable contracts are immediately invalid.
Signup and view all the answers
Insurance binders are temporary agreements that can only be written.
Insurance binders are temporary agreements that can only be written.
Signup and view all the answers
What are the common documents used to document changes to insurance contracts?
What are the common documents used to document changes to insurance contracts?
Signup and view all the answers
Endorsements or Riders are used to add coverages for movable properties.
Endorsements or Riders are used to add coverages for movable properties.
Signup and view all the answers
Separate Policies are always issued by the same insurer as the original contract.
Separate Policies are always issued by the same insurer as the original contract.
Signup and view all the answers
Brokers exceeding their binding authority limits are immune from errors and omissions claims.
Brokers exceeding their binding authority limits are immune from errors and omissions claims.
Signup and view all the answers
Which of the following is a key takeaway regarding insurance contracts?
Which of the following is a key takeaway regarding insurance contracts?
Signup and view all the answers
Study Notes
Insurance Contracts
- Insurance manages risk by providing financial compensation in case of loss.
- Categories of risk:
- Personal risk: Financial loss due to health or life issues.
- Property risk: Loss or damage to owned property.
- Liability risk: Responsibility for injury or damage caused to others.
- Four ways to deal with risk:
- Avoidance of risk: Eliminates all chances of financial loss. Examples include selling a business or avoiding driving. Not always feasible for most risks
- Controlling risk: Reduces the frequency or severity of losses. Examples include installing alarms or implementing safety protocols. Limitations include preventative measures may fail and natural perils are uncontrollable.
- Retention of risk: Involves self-insuring or covering part of the risk. Organizations may self-insure for cost efficiency or use deductibles to remain within manageable exposure. Best for less critical risks.
- Transfer of risk: Shifts financial responsibility to a third party. Insurance policies are the most practical and popular method.
Speculative and Pure Risk
- Speculative risks involve potential for financial gain or loss. Examples include business ventures or gambling. Not insurable as society doesn't profit from failure.
- Pure risks involve financial loss without potential gain. Examples include natural disasters, theft, or property damage. Only pure risks are insurable.
Understanding Insurance Contracts
- Insurance companies assume risk through formal contracts.
- A contract is an agreement enforceable by law. Contracts are a routine part of personal and business life. Examples: leases, real estate, coffee purchases
- Contracts must have five essential elements:
- Agreement: Requires an offer, unconditional acceptance, and no agreement during negotiations. Written or oral contracts are valid.
- Consideration: Exchange of value between parties. In insurance, the insured pays a premium and the insurer provides coverage.
- Legality of object: Contracts for illegal purposes (fraudulent claims, stolen property) are unenforceable. Insurance contracts must align with public good.
- Legal capacity of parties: Parties must be legally competent. Incompetents include minors (except for necessities), mentally incapacitated persons, and individuals under the influence of substances.
- Genuine intention: Parties must genuinely intend to form a contract. Factors negating intention include fraud, duress, concealment, and mistake.
Insurable Interest
- Insurable interest exists if financial loss occurs from damage.
- Examples include property owners, mortgage lenders, and businesses entrusted with property.
Utmost Good Faith
- Both parties must act with honesty and transparency.
- Insured: Disclose all relevant information.
- Insurer: Use clear contract terms and handle claims promptly and fairly.
Indemnity
- Insurance compensates only for actual loss.
- The principle of indemnity ensures no profit from the claim and restoration to pre-loss financial position.
Void and Voidable Contracts
- Void contracts are invalid from the beginning.
- Voidable contracts are valid unless rejected by the wronged party.
Insurance Binders
- Temporary agreements before policy issuance.
- Can be oral or written.
- Include essential terms and conditions.
Summary of Essential Elements
- Five general elements: agreement, consideration, legality of object, legal capacity, and genuine intention
- Three insurance-specific elements: insurable interest, utmost good faith, and indemnity.
Broker's Authority
- Brokers operate under an insurer's Agency Agreement.
- Authority to bind the insurer is typically specified for dwelling and contents, commercial buildings and contents. Industrial risks may require referral to the insurer. Others may be automatically declined.
- Brokers exceeding binding limits may face errors and omissions claims.
Errors and Omissions Risks for Brokers
- Binding beyond authority can result in financial liability.
- Errors and omissions claims negatively impact brokerage financial stability and reputation.
Termination of Insurance Contracts
- Contracts must allow termination by both parties.
- Termination rules are stated in the contract and may potentially be enforced by law.
Changes to Insurance Contracts
- Insurance contracts can be amended if both parties agree to the changes.
- Changes are common for contracts with longer durations (e.g., one year).
- Premium adjustments may apply for expanded coverage.
Documentation of Contract Changes
- Changes to contracts are always documented.
- Common documents used are:
- Endorsements or riders: Modify existing terms.
- Floators: Add coverage for movable property.
- Separate Policies: Provide additional coverage outside the original agreement.
Endorsements or Riders
- Acknowledge and document changes to the policy.
- Commonly used to adjust terms, add or remove coverages.
Floators
- Provide coverage for movable property, initially designed for property away from designated locations.
- Examples include tools, equipment, or jewelry.
Separate Policies
- Issued for additional coverage outside the original contract.
- May be provided by a different insurer.
Examples of Policy Changes
- Increase coverage limits through an endorsement.
- Add floater coverage for business tools.
- Purchase separate flood insurance policy.
Importance of Written Documentation
- Ensures clarity and avoids disputes.
- Provides legal evidence of agreed changes.
Summary of Broker's Role
- Adhere to binding authority limits.
- Ensure changes to contracts are documented.
- Protect the brokerage from errors and omissions risks.
Key Takeaways
- Binding authority defines a broker's ability to commit the insurer.
- Insurance contracts allow changes but require agreement from both parties.
- Documentation ensures clarity and legal enforceability.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Related Documents
Description
This quiz covers the fundamental concepts of insurance contracts, including the various types of risks such as personal, property, and liability risks. Additionally, it discusses methods for managing these risks, including avoidance, control, retention, and transfer. Understand how these principles apply to real-world situations and their significance in financial planning.
