chapter 2 Contract and Tort Law

Contract

a binding legal agreement that creates an obligation that courts will enforce. Insurance polices are legal contracts

elements of a contract

1. agreement (offer and acceptance or mutual consent)

2. consideration or payment

3. competent parties

4. valid legal purpose

Mutual consent/assent

in an insurance contract the applicant makes an offer to the insurer when they complete and submit the application. The insurer then accepts or rejects the offer. The agreement is made when the insurer makes an acceptance to the offer.

valuable consideration

must be exchanged between the parties to an insurance contract. The insured agrees to pay a premium to the insurer, and the insurer promises to pay a valid claim.

competent parties

in order for the contract to be valid, the parties must have competence, also known as legal capacity.

The parties to the contract must be:

1. mentally or emotionally competent

   1. of sound mind and able to rationalize

2. physically competent

   1. not under the influence of drugs or alcohol, legal or otherwise

3. of age

   1. must be 16 or older

valid legal purpose

the contract must not violate any laws or be detrimental to the public good

parties subject to a contract

california insurance policies are two-party contracts with the issuing insurer. the other party to the contract is the insured or policyholder/owner

contract of adhesion

insurance policies are “take it or leave it” contracts written by insurers. This means there are no negotiations between the insurer and prospective insured. Adhesion means that by accepting a contract an insured agrees with the terms and must adhere to them. therefore, id the contract is written in an ambiguous way the law will usually side with the insured, because they did not wrote the contract and had no control of the content.

conditional contracts

the insurance contract defines conditions for each party that must be met. Insureds must show proof of loss and at times insurable interest before insurers will pay a claim

Aleatory

unlike most other contracts an equal value is not exchanged between the parties. (the actual performance of the contract depends on the occurrence of an uncertain event

unilateral

policies are unilateral because only the insurer makes an enforceable promise. Insurance contracts remain unilateral as long as the insured pays the premium.

personal contracts

an insurance policy is a personal contract between the insurer and the insured and cannot be transferred one party to another without the express written permission of the insurer.

utmost good faith

is a legal term meaning that all parties are entitled to rely on each other to be honest and to, in no way, attempt to misrepresent, disguise, deceive or conceal any information pertinent or material to the contract

indemnity

the concept that when a loss occurs, the insured will be restored to the condition they were in before the loss occured.

insurance policy

the contract between two parties the insured and the insurer that for consideration the insurer will pay a claim providing that a loss occurs during the term of the contract. All conditions and policy limits are stated in the contract and must be agreed to prior to coverage being in force. The limit if liability of any policy is the maximum amount the policy will pay in the event of a claim.

endorsement & rider

an attachment to an insurance policy that changes its conditions by increasing or decreasing benefits or excluding specific types oof coverage. When an endorsement is attached to a life insurance policy, it is called a rider

tort law

a tort is a legal wrong other than

1. crime, which is controlled by criminal law

2. breach of contract, controlled by contract law

tort law deals with…

legal liability. while legal systems are similar from state to state, each state determines its own law of torts

what are the three areas of torts in liability insurance

• intentional acts or omissions of employees

• cases or negligence

• cases or strict absolute liability

intentional torts

are “on purpose” and wrongful acts or omissions

intentional torts protects employers from the consequences of the intentional acts of their employees. this protection includes insurance against

• false arrest, detention or imprisonment, or malicious prosecution

• libel, slander or defamation of character

• invasion of privacy, wrongful eviction or entry

• personal injury (other than bodily injury or property damage)

negligence

failing to act in a prudent manner through an act, error or omission that result in an injury to someone or damage property

in insurance elements of negligence are

1. duty

   1. There is a legal duty to do or not to do something

2. breach

   1. Something is not done

3. injury

   1. bodily injury or property damage is caused

4. unbroken chain

   1. There is an unbroken chain of events between the cause (proximate cause) and outcome

liability

is a legal enforceable obligation. Strict and absolute liability is usually applied to claims against products

strict liablity

a manufacturer can be held strictly liable, without regard to a fault or negligence, if a claimant can prove that a product was defective and that the defect caused an injury

absolute liablity

is imposed when conduct is so hazardous that those engaging in it are held fully responsible for resulting injuries or damages. Under absolute liability the claimant does not have to prove the conduct was hazardous.

keeping dangerous animals and operating an unsafe workplace are examples of…

absolute liability

proximate cause

occurs when an insured loss occurs and an unbroken chain of cause and effect exist between the occurrence or negligent act and the resulting damage or injury.

gross negligence

any act or omission which is willful and intentional, rather than inadvertent and which is committed with conscious indifference to the consequences

vicarious liability

the liability imposed on one party as the result of the action of another. (parents can be held liable for injuries or damages caused by their children

types of damage

• specific damages

• general damages

• compensatory damages

• punitive damages

specific damages are…

measurable. (property damage or bodily injury that results in medical expenses are specific losses for which a claim could be filed to cover specific damages)

general damages

may include a number of intagible elements that cannot be specifically measured in terms of dollar amounts

compensatory damages

encompasses both specific and general damages. The purpose of compensatory damages is to reimburse someone for the tangible and intangible elements of a loss.

punitive damages

are a form of punishment that is often intended to serve as an example to thers and to discourage bad behavior

contributory negligence

attempt to determine whether the injured party was careless or contributed in any way to his injury. A finding of contributory negligence will reduce or defeat the claim, even if the other party is also found to be negligent.

_____is a less harsh version of contrbutory negligence.

comparative negligence

comparative negligence

this doctrine is often used when both parties are found to be negligent. comparative negligence laws establish the amount of fault for an accident and loss payment in portion to each party’s contribution to the accident.

assumption of risk

common law concept that asserts that individuals accept risks for performing certain normal activities. individuals can use this defense to avoid or mitigate liability in a lawsuit

No-fault insurance

laws allow auto accident victims to collect medical and hospital expenses directly from their own insurance companies, no matter who was at fault for the accident

pure no-fault

insurance moves totally away from the tort systems because it eliminates the right of an injured party to sue the other party for damages. Instead the injured party collects for damages from their property.

There are no true no-fault plans available in the US today. However…

Many states have adopted “modified no-fault” plans that preserve the right to sue for additional compensation under certain circumstances

transacting insurance

defined as including any insurance related solicitation, ant preliminary negotiation, any execution of an insurance contract, any transaction subsequent to and arising out of an execution of an insurance contract, and any act of insuring.

the insurance code considers any of the following activities “transacting” insurance

• solicitation

  • asking someone to buy insurance

• negotiations

  • take place before contracts are written ( displaying premiums and demonstrating illustrations)

• execution

  • of a contract of insurance (indicating where to sign on the application, collecting premiums, and/or delivering the policy)

• transcation

  • of matters subsequent to and arising out of a contract of insurance (service not limited to explaining benefits or recommending changes in the policy)

A person may not act as an insurance agent, broker or solicitor without a valid license from the commissioner.

Anyone who acts, offers, or assumes to act in a capacity for which a license is required is guilty of a misdemeanor, subject to a fine of up to $50,000 or imprisonment in county jail for up to one year or both.

fraud

The common circumstances that define fraud include:

1. a knowing misrepresentation of the truth

2. concealment of material to induce another to their detriment

3. an intentional and deliberate act for unlawful gain or profit

the penalty for defrauding an insurance company is imprisonment for…

two, three, or five years, and/or a fine of up to $150,000 or twice that value of fraud, whichever is greater

what should an agent do if they suspect fraud?

they should contact their insurance marketing representative or the claims department for the company. The agent should not try to resolve the matter by themselves

concealment

is neglecting to communicate or failure to disclose facts that are known (or should be known) and are material to a contract. Intentional or unintentional concealment entities the injured party, insurer or insured, to rescind the contract.

information that need not be communicated includes

• information that is known

• information which, in the exercise of ordinary care the other ought to know, and of which the party waives

• information that the other party waives

• information which proves or tends to prove the existence of a risk excluded by a warranty, and which are not otherwise material

warranty

is a promise or statement that is assured to be true. It may be expressed or implied

express warranties

are written and “contained” in the contract. In insurance, all warranties must be expressed in writing

implied warranties

are “included but not specifically stated” in the contract

the agent/broker and carrier must adhere to the following warranty conditioned in conducting the business of insurance

1. warranties may relate to the past, present, future

2. unless the policy states that the violation of a specific provision will void the policy, the breach of an immaterial provision does not void the policy

3. a particular wording is not necessary to form a warranty

4. violation of a material warranty or provision, on the part of either party will entitle the other to rescind

5. an express warranty made at or before the execution of a policy must either be contained in the policy, or in another instrument signed by the insured party. If another instrument contains information the instrument must be referenced in the policy and made part thereof

6. when the performance of a future warranty becomes unlawful or impossible, the omission to fulfill the warranty does not void the policy

7. a policy statement that there is an intention to do or not do something, which materially affects the risk, is a warranty that such an act or omission will take place

8. a warranty breach, without fraud, merely exonerates an insurer from the time that it occurs. Where the warranty is broken in its inception, it prevents the policy from attaching to the risk

materiality is ______ that would probably influence a party’s assessment of a proposed contract.

relevant infromation

in insurance materiality is determined by three questions

1. are the facts important enough to influence the decision?

2. do they affect pr influence insurability or the risks involved?

3. does the information create any disadvantages to either the party entering into the contract

The materiality of a given concealment or representation determines its…

importance

representations

are oral or written statements made to the best of one’s knowledge and belief

a representation is false when…

1. when the facts fail to correspond with the assertions and stipulations.

2. the injured party (insurer or insured) is entitled to rescind that contract. All answers to questions on applications are deemed to be representations. A representation may be altered or withdrawn before the insurance is effective but not afterward.

a representation cannot qualify as an express provision but may qualify as a(n)…

implied warranty

misrepresentation

is a representation that is found to be untrue. it is illegal for anyone who transacts insurance to cause or allow misrepresentations of

1. policy terms

2. benefits or privileges

3. future dividends payable under the policy

what is the punishment for misrepresentation?

a fine not exceeding $25,000 or in a case in which the loss of the victim exceeds $10,000 by a fine not exceeding three time the amount of the loss suffered by the victim, by imprisonment in a county jail for a period not to exceed one year, or by both a fine and imprisonment

twisting

the act of making misleading statements or comparisons to induce someone to take out or refuse to take out an insurance policy or to lapse surrender or forfeit an existing insurance policy.

twisting is an illegal practice…

and those who engage in it are guilty of a misdemeanor and could be punished by a fine of up to $25,000 and up to one year in county jail.

the commissioner may not suspend the license of any agent, broker or solicitor who knowingly engages in twisting for up to 3 years and may suspend the certificate of authority of any insurer who knowingly engages in twisting or allows an officer, agent or broker to do so

True or False

False

waiver

is the act of waiving or excluding a right that is known to exist

estroppels

are legal right an insured had to prevent cancellation of a policy if an insurer persuades them to violate a contract condition. (in such situation, the insurer cannot void the contract because of the violation)