Life Insurance Chapter 3

Agent

A person who represents the insurer during an insurance transaction and has been authorized to act on the insurance company's behalf. Agents have a fiduciary responsibility to both the insurer and the policy owner.

Broker

A licensed producer who represents the insured (client) during an insurance transaction. Unlike agents, brokers don't hold appointments with insurers and cannot bind coverage.

Contract of Adhesion

An insurance contract prepared by the insurance company with no negotiation between the applicant and insurer. The applicant must accept the contract terms on a "take it or leave it" basis.

Consideration

The items of value that each party provides in a contract. The applicant provides material information and premiums; the insurer promises to pay covered claims.

Insurable Interest

The financial or economic interest that a person must have in the subject of insurance to purchase legally enforceable coverage. A person has an insurable interest if they would suffer a financial loss from damage to or loss of the insured person or property.

Material Misrepresentation

A false statement made by an applicant that influences either the insurer's decision to accept the risk or the classification and pricing of an accepted risk.

Utmost Good Faith

The principle that both the policy owner and insurer must disclose all material facts and relevant information, with no attempt to conceal or deceive.

Void Contract

A contract that has never been legally in force because it lacks one of the essential elements of a contract.

Voidable Contract

A contract that may be set aside by one of the parties for a reason satisfactory to the court.

Wavier

The voluntary giving up of a known legal right.

What are the 4 elements needed for a valid insurance contract?

• C = Competent parties

• L = Legal purpose

• O = Offer and acceptance

• C = Consideration

What does “competent parties” mean?

Both sides must have the legal ability to enter a contract.

What is legal purpose?

The contract must be lawful and not against public policy.

What is an offer in insurance?

The applicant’s completed application plus initial premium payment.

What is consideration in an insurance contract?

A reason to ensure someone like:

• Applicant gives premiums and truthful information.

• Insurer gives a promise to pay covered claims.

What is an aleatory contract?

A contract where the exchange of value may be unequal because it depends on chance.

What is a contract of adhesion?

A contract written by one party (the insurer) where the customer accepts or rejects it.

Why are insurance contracts unilateral?

Only the insurer makes an enforceable promise—to pay benefits.

Why is insurance conditional?

he insurer pays only if policy conditions are met.

What does a personal contract mean?

Insurance covers the person, not the property itself.

What is a valued contract?

Pays a predetermined amount.

What is an indemnity contract?

Pays for the actual financial loss.

What is insurable interest?

You must have a financial reason to insure something.

When is insurable interest required for life insurance?

Only when the policy is purchased.

When is insurable interest required for property insurance?

When purchasing the policy and when filing a claim.

What does utmost good faith mean?

Both sides must be honest and disclose important information.

What is a warranty?

A statement guaranteed to be true and part of the contract.

What is a representation?

A statement made by an applicant that is believed to be true.

What is concealment?

Hiding a known important fact from the insurer.

What is a void contract?

Never legally valid.

What is a voidable contract?

Valid at first but can be canceled by one party.

What is a waiver?

Giving up a known right.

What does the parole evidence rule say?

The written policy is the final agreement.

What is Estoppel?

Protects a customer who relied on incorrect information from an agent.

Who does an insurance agent represent?

The insurance company.

What is express authority?

Written authority given by the company.

Who does a broker represent?

The customer

What is implied authority?

Authority needed to perform the job.

What is apparent authority?

Authority customers believe an agent has because of the company’s actions.

What is a fiduciary?

Someone who must act in another person’s best interest.

What is subrogation?

The insurer “steps into the customer’s shoes” to recover money from the person who caused the loss.

What is a Tort?

A civil wrong caused by someone’s actions or negligence.

Simple negligence

Mistake or failure to use reasonable care.

Gross negligence

Serious carelessness.

Willful/wanton negligence

Knowing disregard for harm.

What does Errors and Omissions (E&O) insurance protect agents from?

Mistakes or failures while performing professional duties.