A contract must contain an agreement which consists of an offer and an acceptance
The initial offer is when the applicant files an application for coverage
The acceptance would be if the insurer issues a policy to the applicant
If the insurer doesn't accept the offer, they can issue a counter offer. The applicant then takes on the role of acceptance.
What is a "lawful objective"?
The contract should have a legal purpose and be consistent with public policy.
What is "consideration"?
An exchange of value between parties to a contract
So the consideration for the insured is the promise to provide indemnity in the event of a loss, while the consideration for the insurer is the insurance premium
What are the 5 special features of an Insurance Contract?
Contract of Adhesion - a contract drafted by the insurer that says all parties will adhere to the entire contract as a whole (take it or leave it). When ambiguities arise courts will rule in favor of the insured -> so it behooves insurers to be thorough.
Aleatory Contract - A contract in which the values exchanged are not equal. In insurance, the value of the premium will not equal the claims dollars potentially paid by the insurer.
Unilateral Contract - Only one party makes a legally enforceable promise. (the insurer is can be legally forced to pay claims according to the contract's provisions)
Conditional Contract - The contract may be voided if all policy conditions are not met.
Personal Contract - Insurs the person who owns the property, not the property. I.e. the insured can't transfer their rights and duties under the contract without the insurer's written permission.
What is the Doctrine of Reasonable Expectations?
What the average person would infer from a policy or contract, despite the use of technical language, hidden provisions, and confusing language.
This is used in TX, however about half of the states use it.
What is "utmost good faith"? (2)
Honesty, cooperation, and full disclosure for parties to a contract.
This is a requirement and standard for ALL contracts, not just insurance.
What is a "warranty"?
Statements or conditions that must be true at the time of loss or the policy is void.
Always contained in an insurance policy and have to exist for coverage to be in force.
If warranty is breached = contract void = claim denied
What is a "representation" as it relates to a contract? (2)
Statements made by the prospective insured on an application for insurance that are believed to be true to the applicant's best knowledge.
I.e. it's what the insured writes on their applications (personal info, item information, etc.)
What is "misrepresentation" as it relates to a contract?
Incorrect information given by the insured that, when corrected, does not affect coverage.
What is "material misrepresentation" as it relates to a contract?
Incorrect information given by the insured that, when corrected/discovered, does affect coverage -> voids the insurance contract
What is "concealment" as it relates to a contract? (2)
Deliberately witholding material information from the insurer.
What can be deemed as fraud in an insurance contract?
Material misrepresentation and concealments of material facts may be deemed fraudulent.
In TX you can't be liable for sending information on potential fraud.
What is a "waiver"? (3)
The voluntary reliquishment of a known right.
Ex: When an ajuster waives a requirement for a claimant to assist with the claim.
Waived conditions/rights cannot be held against the other party.
What is an estoppel? (2)
The involuntary relinquishment of a known right.
Most common application is when an agent or adjuster fails to do their job correctly and gives the insured the impression that they have coverage that they really don't. When this happens it "estops" the insurer's right to deny the claim.
What is "insurance" as it relates to an insurance company? (3)
A transfer of risk from one person or organization to an insurance company that accumulates premiums.
It is a financial arrangement in which one party agrees to compensate the other for a loss from events covered under the contract.
Even if there are no claims, coverage is still in force.
What principle are insurance contracts based on? (3)
Restored the insured to the pre-loss economic condition.
The insured is supposed to be no better off and no worse off than before the loss.
What is a "binder"? (3)
A temporary insurance contract that commits the insurer to act as if a policy has been issued.
Can be written or oral.
Can initiage coverage at any time
When do binder's expire?
Once policy coverage begins.
What is the purpose of a binder?
Essentially, they allow insureds to be covered between the time that coverage is requested and the time that the policy is finished and issued.
What is "loss"?
A reduction in value or unintentional decline in value.
What are the 4 types of loss?
What is "direct loss"? (2)
Immediate actual physical damage to tangible property.
Alex's motorcycle is demolished by an irresponsible car driver on their cell phone.
What is an "indirect loss"? (2)
Inability to use property as a result of a direct loss.
Alex has to rent a car to get to work because his motorcycle is in the shop.
What is "consequential loss"? (2)
An indirect loss usually resulting from spoilage or temperature change.
Alex's heater breaks down, causing the fuel lines in his motorcycle to freeze.
What is a "liability loss"? (2)
A damage/injury claim that arises out of actions of an insured that cause loss to a third party.
The irresponsible caused a liability loss, which will need to be covered by her insurer, when she demolished Alex's motorcycle because she was texting and driving.
What is "risk"?
The chance of a loss or the uncertainty of loss?
What is "speculative risk"? (3)
The chance of gain or loss
I can't take out an insurance policy on the funds that I bet on car races.
What is "pure risk"?
Involves only the chance of loss
This IS insurable
What are "perils"?
The actual causes of potential loss identified in a policy.
What is a "hazard"? (2)
Conditions that create or increase the chanc of loss or contribute to the loss.
In other words, these are the factors that create risk.
What are the 3 types of hazards?
What is a "physical hazard"? (2)
Visible hazards that arise from material, structural, or operational features of a risk.
Rain, sleet, and snow are all physical hazards.
What is a "moral hazard"? (2)
Hazards that arise from intentional, dishonest, or illegal actions of a person.
An arsonist burns down their own house or business.
What is a "morale hazard"? (2)
Hazards that arise from an attitude of carelessness or indifference to loss; they can also occur when a person takes additional risks because they know they have insurance.
A pyromaniac is constantly playing with blow torches in their house because they know they have insurance.
What is the Law of Large Numbers? (3)
States that there must be a large number of similar exposure units (hazards) to predict future losses accurately.
These large numbers make probability more accurate.
An insurance can make an accurate prediction that they will deal with more auto claims in a city of thousands of car owners vs. a township of a few dozen car owners.
What is the key difference betwenn a peril and a hazard? (3)
A peril is something bad that could happen.
A hazard is something that could contribute to a peril
A tornado is a peril. Living in Tornado Alley is a hazard.
What are the 4 parts of an insurance contract?
What are 3 other names for the Declarations?
face of the policy
What does declarations include?
What is "property" in declarations?
The property being covered and its location
What is "parties" in declarations? (4)
The parties to the contract
The insured or their legal rep
The payee or lien holder (for property)
What is the "policy period" in declarations?
The date the coverage begins and expires (usually begins and ends at 0001 hours)
What is the "policy limits" in declarations?
The amount of protection
What is the "limit of liability"?
The maximum amount that can be paid for the covered loss.
What is the "deductible"?
The amount of loss the insured agrees to pay before the policy limits are paid; per the contract
What are the reasons for deductibles? (3)
Insurers can charge lower premiums
Insureds are more careful
Helps to eliminate small claims
What is the "premium" in declarations?
The consideration paid by the insured is listed in declarations.