Insurance Licensing Unit 2: Contracts (Perplexity Ver.)

Legal contract

A binding agreement enforceable by law; insurance policies are legal contracts subject to contract law.

Elements of a legal contract

Five required elements remembered by CLOAC: Consideration, Legal purpose, Offer, Acceptance, Competent parties.

CLOAC

Acronym for the elements of a valid legal contract: Consideration, Legal purpose, Offer, Acceptance, Competent parties.

Consideration (general)

Exchange of value given by each party to a contract.

Consideration (insured)

Money and statements made on the application (premium paid and truthful answers).

Consideration (insurer)

The promise to pay for covered losses according to the policy.

Legal purpose

Contract must be for a lawful purpose and not against public policy; insurance transfers a legal risk and does not violate the law.

Offer

Proposal made by one party; in insurance, the insured usually makes the offer by submitting an application and first premium.

Acceptance

Unconditional and unqualified agreement to an offer; in insurance, the insurer accepts by issuing the policy as applied for.

Counteroffer

Response to an offer with different terms (e.g., higher premium or restrictions); the insured must then accept or withdraw.

Competent parties

Parties who have legal capacity to contract: of legal age (usually 18), mentally sane, and sober.

Insurance contract

Legal agreement between insured and insurer that transfers risk and has special legal characteristics.

Contract of adhesion

Contract written entirely by one party (insurer); the other party (insured) must “adhere” to it and cannot negotiate terms.

Adhesion (keyword)

“Glue” concept: policy sticks as written; insured has no input, and unclear wording is resolved for the insured.

Aleatory contract

Contract where the value exchanged is unequal; the insured may pay small premiums and receive a large claim or vice versa.

Utmost good faith

Principle that both the insured and insurer have the right to expect honesty and full disclosure from each other.

Reasonable expectations

Concept that policy language should support the reasonable coverage expectations of the insured.

Unilateral contract

Contract in which only one party (the insurer) makes a legally enforceable promise to pay covered claims.

Insured’s promise to pay

Not legally required; if the insured stops paying premiums, the insurer cancels the policy rather than suing to enforce payment.

Insurer’s promise to pay

Legally enforceable promise; if the insurer doesn’t pay a covered claim, the insured can sue.

Personal contract

Contract between the insurance company and the specific insured; generally cannot be transferred without consent.

Conditional contract

Contract that requires certain conditions to be met (e.g., paying premiums, reporting a loss) before the insurer is obligated to pay.

Policy conditions

Part of the contract describing duties and obligations of insured and insurer.

Contract of indemnity

Contract intended to restore the insured to the same financial position as before the loss, without allowing a profit.

Indemnity

Principle of “making whole”: pays for the loss with no gain; insured cannot collect more than the actual loss.

Indemnification

Process of restoring an insured to their pre-loss financial state through claim payment.

Representation

Statement the applicant believes to be true; answers on an insurance application are considered representations.

Misrepresentation

A false statement given on an application that is not true.

Material misrepresentation

False statement that does affect the insurer’s decision or the premium charged; can void coverage.

Nonmaterial misrepresentation

False statement that would not affect the insurer’s decision; does not usually void coverage.

Warranty

A promise or statement guaranteed to be true and relied upon by the insurer; breach may void the contract.

Warranty by insured

Example: insured promises to maintain a burglar alarm; if not kept and a burglary occurs, insurer may deny the claim.

Concealment

Failure to disclose known material facts; hiding information from the insurer.

Intentional concealment

Deliberate hiding of important (material) information; may allow the insurer to void coverage.

Unintentional concealment

Failure to disclose material information without intent; generally does not void coverage.

Material fact

Information important enough that it could affect the insurer’s decision to issue or price coverage.

Fraud

Intentional act to deceive or cheat another person, designed to induce someone to part with something of value.

Waiver

Voluntary and intentional giving up of a known right by a party (e.g., insurer not enforcing a requirement).

Estoppel

Legal principle that once a right has been waived, it cannot be reclaimed and used against the insured.

Waiver and estoppel interaction

Insurer that waives a right may be “estopped” from later asserting that right to deny coverage.