Chapter 1. General Insurance Chapter Recap

ExamFX course for Michigan producer insurance license.

Insurance

Transfers the risk of loss from an individual to an insurer; based on the principle of indemnity; based on the spreading of risk (risk pooling) and the law of large numbers

Hazards

Conditions that increase the probability of loss occurring.

Three Types of Hazard.

physical (a physical condition), moral (a tendency toward increased risk), morale (an indifference to loss)

Physical Hazard

A type of hazard that arises from the physical characteristics of an individual, such as a physical disability due to either current circumstance or a condition present at birth.

Moral Hazard

The effect of a person’s reputation, character, or living habits on their insurability.

Morale Hazard

The effect a person’s indifference concerning loss has on the risk to be insured.

Risk

Uncertainty as to the outcome of an event when two or more possibilities exist.

Two types of Risk

pure (insurable because it involves a chance of loss only) and speculative (not insurable because it involves a chance of gain)

Pure Risk

Insurable because it involves a chance of loss only

Speculative Risk

Not insurable because it involves a chance of gain

Methods of handling risk

sharing, transfer, avoidance, retention, reduction

Elements of Insurance Risk

Due to chance; definite and measurable; predictable; not catastrophic; large exposure ; randomly selected exposure

Element of Insurance Risk: Due to chance

Opportunity of loss beyond insured’s control

Element of Insurance Risk: Definite and measurable

loss must have definite time, place and amount

Element of Insurance Risk: Predicable

number of losses must be statistically predictable

Element of Insurance Risk: Not Catastrophic

There must be limits that the loss cannot exceed

Element of Insurance Risk: Large Exposure

Insurer must be able to predict losses based on the law of large numbers

Element of Insurance Risk: Randomly Selected Exposure

Insurer must have a fair proportion of both good and poor risks.

Stock Insurer

Owned by stockholders; issues nonparticipating policies (nonpar)

Mutual Insurer

Owned by policyowners (policyholders); issues participating policies (par); pays dividends as a refund of excess premiums

Fraternal Benefit Society

Life or health insurance companies formed to provide insurance for members of an affiliated lodge, religious organization, or fraternal organization with a representative form of government.

Agent’s Authorities

Expressed, implied, apparent

Expressed Authority

The authority granted to an agent by means of the agent's written contract.

Implied Authority

Authority that is not expressed or written into the contract, but which the agent is assumed to have in order to transact the business of insurance for the principal.

Apparent Authority

The appearance or the assumption of authority based on the actions, words, or deeds of the principal or because of circumstances the principal created.

Company Domicile

Domestic (incorporated in this state); foreign (incorporated in another state or territory); alien (incorporated in another country)

Authorized/Admitted Insurer

Approved by the Department of Insurance; has a Certificate of Authority

Unauthorized/Nonadmitted Insurer

No Certificate of Authority; cannot transact business in this state

Elements of a Legal Contract

Agreement, consideration, competent parties, legal purpose

Elements of a Legal Contract: Agreement

Offer and acceptance

Elements of a Legal Contract: Consideration

The binding force in a contract that requires something of value to be exchanged for the transfer of risk. The consideration on the part of the insured is the representations made in the application and the payment of premium; the consideration on the part of the insurer is the promise to pay in the event of loss.

Elements of a Legal Contract: Competent Parties

of legal age, sound mental capacity, and not under the influence of drugs or alcohol

Elements of a Legal Contract: Legal Purpose

not against public policy

Contract Characteristics

adhesion, aleatory, conditional, personal, unilateral

Contract Characteristics: Adhesion

A contract offered on a "take-it-or-leave-it" basis by an insurer, in which the insured's only option is to accept or reject the contract. Any ambiguities in the contract will be settled in favor of the insured.

Contract Characteristics: Aleatory

A contract in which participating parties exchange unequal amounts. Insurance contracts are aleatory in that the amount the insured will pay in premiums is unequal to the amount the insurer will pay in the event of a loss.

Contract Characteristics: Conditional

certain conditions must be met

Contract Characteristics: Personal

Between policyowner and insurance company

Contract Characteristics: Unilaterial

A contract that legally binds only one party to contractual obligations after the premium is paid.

Legal Interpretations

Ambiguities, reasonably expect, utmost good faith, material misrepresentations, warranties, concealment, fraud, waiver, estoppel

Ambiguities in Legal Interpretations

are always resolved in favor of the insured

Reasonable Expectations in Legal Interpretations

The insured can reasonably expect coverage based on the agent’s words and actions

Utmost good faith in Legal Interpretations

The fair and equal bargaining by both parties in forming the contract, where the applicant must make full disclosure of risk to the company, and the insurance company must be fair in underwriting the risk.

What can void the contract?

Material misrepresentations (if intentional), breach of warranties, concealment, fraud

Waiver

The voluntary abandonment of a known or legal right or advantage.

Estoppel

A legal impediment to denying a fact or restoring a right that has been previously waived.
Or: consequence of a waiver