Insurance Unit 2: Contracts (Gemini Ver.)

CLOAC

Acronym for the five elements of a legal contract: Consideration, Legal Purpose, Offer, Acceptance, and Competent Parties.

Consideration

An exchange of value where each party gives something valuable (e.g., insured gives premium/truthful statements; insurer promises to pay for covered losses).

Legal Purpose

The contract must be for a legal purpose (transfer of a legal risk) and not violate the law or public policy.

Offer

A proposal made by one party; in insurance, the insured typically makes the offer by submitting a completed application with the first premium.

Acceptance

The unconditional and unqualified agreement to an offer.

Counteroffer

When the insurer agrees to issue a policy but with different terms (higher premium or restrictions); this replaces the original offer.

Competent Parties

Parties must have legal capacity to contract: must be of legal age (usually 18), mentally sane, and sober.

Adhesion

A contract written by only one party (insurer) where the other party (insured) must "stick" to it without input; ambiguities are interpreted in favor of the insured.

Aleatory

A contract where the value received by each party is unequal because performance depends on an uncertain event (a loss).

Utmost Good Faith

The right for both parties to expect honesty from each other and that no pertinent information is concealed or deceptive.

Unilateral

A one-sided contract where only one party (the insurer) makes a legally enforceable promise to perform (pay claims).

Personal

A contract between the insurance company and a specific insured; it is generally non-transferable to another person.

Conditional

A contract that requires certain conditions to be met (like paying premiums or filing a proof of loss) for performance to be enforced.

Indemnity

The principle of restoring the insured to the financial state they enjoyed prior to the loss—"making them whole," not rich.

Representation

A statement made by the applicant that they believe to be true; statements on an application are considered representations.

Misrepresentation

A statement that is actually false.

Material Misrepresentation

A false statement that was a determining factor in the insurer's decision to accept the risk; can void the contract.

Warranty

A promise or statement guaranteed to be 100% true; a breach of warranty can void the contract.

Concealment

The failure to disclose known material facts; if intentional, it can void coverage.

Fraud

An intentional act designed to deceive or cheat another party to gain value.

Waiver

The intentional and voluntary giving up of a known legal right.

Estoppel

A legal doctrine preventing a party from reinstating a right that was previously waived.