Principles of Risk Management Chapter 9 Key Terms

Actual or express authority

Refers to specific powers given to the agent by the principal.

Actual cash value

replacement cost less depreciation

Agency agreement

an agreement between the agent and the principal that specifies the rights and duties of each party

Aleatory contract

a contract where the values exchanged may not be equal but depend on an uncertain event.

Apparent authority

an agent who has the authority to act on behalf of the principal when actions or expressions by the principal to a third party lead a reasonable third party to believe that the principal authorized the agent to act

Binder

a temporary contract for insurance and can be either written or oral

Broad evidence rule

the determination of actual cash value should include all relevant factors an expert would use to determine the value of the property.

Commutative contract

one in which the values exchanged by both parties are theoretically equal.

Concealment

intentional failure of the applicant for insurance to reveal a material fact to the insurer

Conditional contract

An insurance contract is the insurer's obligation to pay a claim depends on whether the insured or the beneficiary has complied with all policy conditions

Conditional premium receipt

a receipt that binds coverage for life insurance without reference to actual delivery of the policy

Conditions

provisions inserted in the policy that qualify or place limitations on the insurer's promise to perform.

Contract of adhesion

the insured must accept the entire contract, with all of its terms and conditions

Estoppel

the loss of a legal defense because of previous actions that are now inconsistent with that defense

Exchange of consideration

the value that each party in a contract gives to the other.

Fair market value

the price a willing buyer would pay a willing seller in a free market

Implied authority

the authority of the agent to perform all incidental acts necessary to fulfill the purposes of the agency agreement

Innocent misrepresentation

A false statement of fact or an act made in good faith that deceives and causes harm or injury to another; makes the contract voidable

Legal purpose

a contract that is legal and enforceable only if it complies with the law and public policy

Legally competent

the parties must have legal capacity to enter into a binding contract

Material (fact)

if the insurer knew the true facts, the policy would not be issued, or it would be issued on different terms

Offer and acceptance

Two essential components of a valid contract; a "meeting of the minds." The first requirement of a binding insurance contract

Pecuniary (financial) interest

a financial interest that may result in financial loss if death occurs

Personal contract

the contract is between the insured and the insurer

Principle of indemnity

the insurer agrees to pay no more than the actual amount of the loss; stated differently, the insured should not profit from a loss

Principle of insurable interest

the insured must be in a position to lose financially if a covered loss occurs

Principle of reasonable expectations

an insured is entitled to coverage under a policy that he or she reasonably expects it to provide, regardless of policy provisions

Principle of utmost good faith

a higher degree of honesty is imposed on both parties to an insurance contract than is imposed on parties to other contracts.

Replacement cost insurance

there is no deduction for physical depreciation in determining the amount paid for a loss.

Representations

statements made by the applicant for insurance to induce the insurer to enter into an insurance contract

Subrogation

substitution of the insurer in place of the insured for the purpose of claiming indemnity from a third party for a loss covered by insurance. Stated differently, the insurance company is entitled to recover from a negligent third party any loss payments made to the insured

Unilateral contract

only one party makes a legally enforceable promise

Valued policy

a policy that pays the face amount of insurance if a total loss occurs

Valued Policy Law (in some states)

a law that exists in some states that requires payment of the face amount of insurance to the insured if a total loss to real property occurs from a peril specified in the law

Waiver

the voluntary relinquishment of a known legal right

Warranty

a statement that becomes part of the insurance contract and is guaranteed by the maker to be true in all respects