Chapter 2: Insurance Contracts

Offer

This action is most commonly made by an insurance applicant when they submit an application accompanied by the initial premium

Personal Contract

Insurance policies cover the insurable interest of the insured

The insured cannot transfer or assign a policy to someone else

Unilateral Contract

Only one party is legally bound to contractual obligations after the premium is paid

Only the insurer has made an enforceable promise of future performance

Assignment

Specifies that the insured may not transfer rights of ownership or interest in an insurance policy to another party with the insurer's written consent

Valued Contract

A contract that pays a stated amount in the event of a loss

Most insurance policies are not this type of contract unless they include an endorsement that changes the policy terms to settle losses in this way

Estoppel

Once an insurer has waived a legal right, it cannot claim that right in the future

Hold Harmless Agreement

A contractual agreement removing the liability of one party from a second party

Agreement

One party must make and communicate an offer to the other party, and the second party must accept that party

Acceptance

This action takes place when the insurance company agrees to issue insurance

Lapsed

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

Insurance Contract

Contract of adhesion

One party (the insurer) prepares the contract and presents it to the second party (the insured), who must accept it on a "take-it-or-leave-it" basis

Flat Cancellation

If the policy is cancelled within a certain number of days after being issued, or if the insurer reverses coverage, the policy may be cancelled retroactive to the effective date of the policy, meaning no coverage is provided

The insurer must refund the entire policy premium paid by the insured

Contract of Adhesion

One party prepares a contract (insurer) and submits it to the other party on a take-it-or-leave-it basis (insured)

Insuring Agreement

The insurer's promise of protection to the insured

Compulsory vs. Elective

Compulsory: Employers required to provide Worker's Compensation benefits to employees or demonstrate the ability to provide

Elective: Employers have choice to accept or reject Workers' Compensation laws

Indemnity

To restore an individual to the same financial or physical condition that existed prior to a loss, depending on the amount and type of insurance purchased

Effective Date

The date when insurance coverage begins

Endorsements

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

These can add coverages, increase the limits of an existing policy, exclude coverage to make a policy more affordable, or amend a standardized policy to be consistent with state laws

Earned Premium

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

Definitions

Words, terms, and phrases that are clearly described and used in an insurance policy for the purpose of clarifying the intent of the insurer and to avoid coverage disputes with respect to the extent of coverage provided by the policy

Contribution by Equal Shares

When coordinating coverage, some policies require the insurers to share the loss by contributing equal shares until each insurer has paid its limit of insurance

Representations

Statements made on an application by an applicant that are believed to be true and to the best of the applicant's knowledge and belief at the time of application

Reasonable Expectations

Policy provisions must be interpreted in a way that a reasonable and prudent policyholder would expect, even when the strict terms of the policy might not support the expectations

Waiver

The voluntary surrender of a known or legal right or advantage

The insurer may accept a late premium payment that keeps the policy in force, meaning the insurer waives it's right to penalize the insured for the late premium payment

Utmost Good Faith

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

The two parties rely on the statements and promises of the other, and both assume that no attempt to conceal or deceive has been made

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 Liability

When policies coordinate coverage and they share the losses by the ratio of applicable limits of insurance each insurer writes compares to the total of all limits available for loss

Insurable Event

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

Elements of Fraud

1. False statement, made intentionally and pertaining to a material fact

2. Disregard for the victim

3. Victim believes the false statement

4. Victim makes a decision and/or acts based on the belief in, or reliance upon, the false statement

5. The victim's decision and/or action results in harm

Concurrency/Concurrent Policies

A situation under which at least 2 policies provide identical coverage for the same risk

Notice of Loss

Insured's duties in the event of a loss

- Provide _______________

- Call police if law is broken

- Cooperate with investigation

- Forwarding demands to insurer

- Protect the damaged property

- Inventory damaged property

- Submit proof of loss to insurer

Nonconcurrency/Nonconcurrent Policies

When two or more policies cover the same exposures but do not have the same policy periods

Aleatory Contract

Parties to a contract exchange unequal amounts of money

Insured's premium paid is less than the potential benefit to be received in the event of loss

Conditional Contract

Type of contract where both parties must perform certain duties and follow rules of conduct to make the contract enforceable

Binder

A temporary written or oral contract issued by an insurance company or producer that provides short-term insurance

Often issued to provide insurance until the insurer can issue the full policy

Cancellation

The termination of an insurance policy before its expiration date

Insured or insurer may cancel

Coverage is not provided as of this effective date

Certificate of Insurance

A document evidencing the fact that an insurance policy has been written

Concealment

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

Whether done intentionally or unintentionally, this may result in denial of coverage or voidance of the policy

Additional Coverage(s)

These are automatically included in property policies 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

Additional Insured

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

Arbitration

The process whereby a disrupted claim is decided by a neutral third party

Conditions

The insurance contract section that specifies the obligations that the insured and insurer agree to follow in order for the policy provisions to take effect

Excess Coverage

Insurance for certain perils or causes of loss that is provided only after the limits of a primary insurance policy are exhausted

Subrogation

The legal process by which an insurer seeks recovery of the amount paid to the insured from a third party responsible for having caused the loss

Accident

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

Named Insured

Any person, company, or organization specifically designated by name on the Declarations Page of the policy

Receive the broadest coverage of all insureds

Liberalization

Specifies that if the insurer broadens coverage with no increase in premium, the broadened coverage automatically applies to existing policies without the need for an endorsement

Legal Action Against Us

Specifies that the insured may not bring suit against the insurer until the insured has complied with all the terms of the policy

Insured

The party to an insurance contract whom the insurer agrees to indemnify for losses, to provide benefits for, or to render services to

Insurable Interest

Possibility of economic loss

Property: Interest must exist at time of loss/claim (ownership is evidence)

Casualty: Interest results from property rights, contract rights and potential legal liability

First Named Insured

The person, firm, or organization whose name appears in the first position of the Declarations Page of the policy when several names are listed

Exclusions and Limitations

The section of the insurance contract that specifies the perils that are not insured against or the property that is not covered by the policy

Consideration

The exchange of value between the contract's parties that make the contract binding

Insured pays premium, insurer promises to pay claims

Legal Purpose

Public policy cannot be violated by a legal contract

Insurance may not be issued for an illegal activity or immoral purpose

Occurrence

An accident

Includes continuous or repeated exposure to the same general harmful conditions

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

Elements of a Legal Contract

Competent Parties: Minors, mentally incompetent, persons under the influence of drugs or alcohol do not have legal capacity

Legal Purpose: Illegal activity voids contract

Consideration: Insured pays premium, insurer promises to pay claims

Warranties

Statements made in an application for insurance or material stipulations in the policy that are guaranteed as true in all respects

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

Nonrenewal

When an insurer determines not to renew a policy, and coverage ends at the expiration of the policy term

Other Insurance

This condition specifies the process to be followed when the insured has more than one policy that covers the same loss

If multiple primary policies exist on the same exposure, the policies will coordinate coverage so that insured is not overcompensated

Primary Coverage

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

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

Provides necessary details for the insurer to determine its liability under a policy