Chapter 2 Insurance Exam

Legal Contract

a contract is an agreement between two or more parties that is enforceable by law

Offer

enter into an insurance contract is most commonly made by the applicant when submitting an application that is accompanied by the initial premium

Acceptance

of an offer to provide an insurance contract usually takes place when the insurance company agrees to issue the insurance applied for, after receiving an initial premium and complete application

Consideration

the exchange of value between the parties to the contract that make the contract binding

Insurable Event

any event, past or present, that may cause loss or damage, or that may create legal liability on the part of an insured

Principle of Indemnity

compensation for a loss; designed to restore the insured to the same financial or physical condition that existed prior to the loss, depending on the amount and type of insurance purchased

Predetermined Limit

insurance indemnifies losses to this; this limit could be determined by the policy limit (face value), which is the amount of insurance purchased

Insurable Interest

the potential for an insured to suffer financial or economic hardship in the event of a loss to an individual or object, such as property, and sentimental attachment alone does not establish insurance interest

Contract of Adhesion

the contract is written by one party (the insurance company) without any input from the applicant; the insurer prepares the contract and presents it to the applicant on a take-it-or-leave-it basis

Unilateral Contract

only one party is legally bound to the contractual obligations

Conditional Contract

both parties must perform certain duties to make the contract enforceable

Aleatory Contract

a contract that results in an unequal exchange of consideration due to the uncertainty of an event or loss

Personal Contract

one between the insurance company and the individual, and it is specific to only the person insured at the time the contract is formed

Utmost Good Faith

assumes that both parties bargain in good faith when forming and entering into an insurance contract

Material Representation

statements that impact the acceptance of an insurable risk

Immaterial Representations

do not affect the acceptance or rating of the risk

Misrepresentations

a false statement contained in the application

Warranty

a statement that is guaranteed to be true in all aspects; often basis for the validity of the contract and, if later discovered to be untrue or breached, may void the policy

Concealment

the willful holding back or failure to communicate material information pertinent to issuance of the contract or payment of a claim

Fraud

a false statement, whether it is a misrepresentation or concealment, that is made intentionally to deceive or induce another party to issue a contract, part with something of value, or surrender a legal right

Waiver

the voluntary surrender of a known or legal right or advantage

Principle of Estoppel

estoppel is the judicial consequence that follows a waiver; it denies a contractual right based on prior actions contrary to what the contract states

Core components of p&c insurance policies

DICE - Declarations, Insuring Agreement, Conditions, Exclusions

Monoline policy

contains a single type of insurance, such as a policy that only covers property losses or a policy that only covers liability losses

Package Policy

contains at least 2 types of insurance and offers advantages that are not offered in a monoline policy, such as avoiding coverage gaps

Insuring Agreement

states the insurer’s consideration; this is the promise of protection to the insured, affirming that the insurer will indemnify the insured for covered losses

Conditions

specifies the obligations that the insured and insurer agree to follow in order for the policy provisions to take effect, as well as other conditions of coverage

Exclusions

specifies the perils that are not insured against or the property that is not covered by the policy; can make sure a policy is limited to its intended purpose

Limitations

reduce coverage without excluding it

Endorsements

policy forms that alter the provisions of an insurance contract, typically added to the policy for an additional premium

Additional Coverage

coverages automatically included in the policy without an additional premium, such as payment for costs to remove debris from the property after a covered loss or payment for fire department service charges

Definitions

policy section containing words, terms, and phrases that are clearly described and used in an insurance policy

Personal Lines

offers protection to individuals and families; includes dwelling, homeowners, personal auto, and personal umbrella liability policies

Commercial Lines

offers protection to business and similar organizations; includes commercial property, commercial general liability, commercial auto, inland marine, ocean marine, crime, businessowners, and workers compensation policies

Named Insured

a person, company, or organization designated on the Dec page of the policy

First Named Insured

the person, company, or organization whose name appears first on the Declarations; is granted rights and responsibilities by the policy that are not granted to other insureds, such as rights of ownership and being responsible for premium payments

Additional Insured

a person, company, or organization not ordinarily protected by a policy but who, through the addition of an endorsement to the policy, is granted status as an insured

Accident

a sudden, unforeseen, unintended, and unplanned event that results in bodily injury or property damage

Occurrence

an accident, including continuous or repeated exposure to the same generally harmful conditions that results in loss or damage

Primary Insurance

any type of coverage that responds to a loss first, before all other coverage responds

Excess Insurance

coverage provided only after the limits of a primary insurance policy are exhausted

Concurrent Policies

two or more primary policies covering the same exposures for the same policy period and with the same coverage triggers

Nonconcurrent Policies

two or more primary policies apply coverage during the same policy period, but provide coverage against different perils

Binder

a temporary written or oral legal agreement (contract) issued by an insurance company/producer to provide short-term insurance

Binding authority

producers who are able to issue binders, meaning they are permitted to commit insurers to coverage without prior approval from the company’s underwriters

Certificate of Insurance

a document that shows evidence that specific types of insurance were purchased by the insured, at certain limits, and that they were in place on the date the certificate of insurance was issued

Notice of Loss

a written notice in the event of a loss or occurrence, the insured must notify the insurer in writing as soon as possible

Proof of Loss

a sworn, formal statement made by the insured and delivered to the insurer within a specified period of time after the insured delivers the notice of loss

Cancellation

the mid-term termination of a policy before its expiration date, and coverage is not provided as of the effective date of cancellation

Earned Premium

the amount of premium already paid by the insured that applies to the actual number of days coverage was in place

Unearned Premium

the amount of premium already paid by the insured that applies to the actual number of days coverage will not be in place after cancellation

Pro Rata Cancellation

if the insurer cancels the policy, a proportionate cancellation of insurance will refund the unearned premium, and the insurer only retains the earned premium

Short-rate cancellation

if the insured cancels the policy, a financial penalty is put in place, and the insurer retains a portion of the unearned premium to cover administrative costs

Flat Cancellation

if the policy is cancelled within a certain number of days after being issued, or if the insurer reverses an offer of coverage, the policy may be cancelled retroactive to the effective date of the policy, meaning no coverage is provided whatsoever; the insurer must refund the entire policy premium paid by the insured

Nonrenewal

when the insurer chooses not to renew the policy, and coverage ends at the expiration of the policy term

Lapsed

if a policy is terminated because an insured fails to pay the premium