Level 1 chapter 2

Question 1

What is Insurance?

Answer 1

a form of risk transfer in which one party agrees to absorb a risk in exchange for compensation and attempts to pool several risks together.

Question 2

What is a Premium?

Answer 2

is the amount of money you pay to an insurance company for coverage, usually monthly or yearly. It’s like a regular payment to keep your insurance active.

Question 3

Life Insurance

Answer 3

helps manage the financial consequences of premature death. This category includes term life insurance, whole life insurance, universal life insurance, and variable life insurance.

Question 4

Accident and Health Insurance

Answer 4

assists with medical bill payments or replaces a portion of income after illness, injury, or disability.

Question 5

Property Insurance

Answer 5

compensates businesses and individuals when they suffer losses related to their physical assets, such as buildings, homes, or belongings. Homeowners insurance, renters’ insurance, and flood insurance are basic examples in this category.

Question 6

Casualty Insurance

Answer 6

provides financial protection when an insured person or entity becomes potentially liable for someone else’s losses. Auto liability insurance, malpractice insurance, and workers’ compensation insurance are examples in this category.

Question 7

Personal lines insurance

Answer 7

covers individuals or families in non-business activities. This includes homeowners’ insurance, renters’ insurance, and personal auto insurance.

Question 8

Commercial lines insurance

Answer 8

protects either a business or an individual within their professional context. Workers’ compensation insurance, medical malpractice insurance, product liability insurance, and property insurance for office buildings all fall under commercial lines insurance.

Question 9

Insurer or Carrier

Answer 9

The company issuing the policy

Question 10

Adding Coverage for Others

Answer 10

when the policyholder wants to add a specific person to a policy who isn’t already included within the contract’s definition of the insured. When this happens, the insurer can add an amendment to the contract and include the extra person as an additional insured.

Question 11

What are the four Essential Elements of Contracts

Answer 11

Legal purpose

Competent parties

Offer and acceptance

Consideration

Question 12

Legal Purpose

Answer 12

Contracts must have a lawful purpose to be valid. Any contract created for illegal activities is automatically void. If someone breaks an illegal agreement, the other party has no legal recourse to enforce it through the courts.

Question 13

Competent Parties

Answer 13

all parties involved must have the legal capacity to enter into an agreement. Competent parties must meet two key requirements. Be of legal age (typically 18 years in most states) and be of sound mind

Question 14

Offer and Acceptance

Answer 14

Contract formation begins with one party extending an offer and giving the other party time to accept it. This opportunity to accept remains valid until the offering party formally revokes or withdraws the offer.

Question 15

Consideration

Answer 15

involves things of value that are exchanged between parties. This can be money or simply a promise to perform a specific action.

Question 16

unilateral contract

Answer 16

An insurance policy is a unilateral contract, meaning only the insurance company makes a legally enforceable promise — to pay for covered losses. If they don’t, you can take them to court, but you aren’t forced to keep paying if you don’t want to.

Question 17

Bilateral Contracts

Answer 17

In contrast, a bilateral contract involves both parties making promises that can be legally enforced. The key distinction is that in bilateral contracts, either side can use the courts to enforce the agreement if the other party fails to keep their promise.

Insurance policies are generally not bilateral contracts.

Question 18

Aleatory Contracts

Answer 18

An aleatory contract is one where the value exchanged isn’t always equal — like in insurance. If no loss happens, the insurance company keeps your money. But if a big loss happens, they might pay you way more than you paid them. It all depends on chance.

Question 19

Personal Contract

Answer 19

The contract is considered personal because it’s explicitly tied to the insured’s relationship with risk. It requires an insurable interest from that specific person and no one else.

Question 20

Conditional Contract

Answer 20

The contract is considered conditional because it outlines specific procedures that must be followed for the policyholder to receive compensation from the insurer.

If these conditions aren’t properly met — or if no covered loss ever occurs — the consumer will not receive compensation from the insurance company.

Question 21

Contracts of Adhesion

Answer 21

contract of adhesion is a written agreement where one party creates all the language, and the other party can only accept or reject it as written.

Question 22

manuscript policy

Answer 22

In rare situations involving high-profile businesses, consumers might actively participate in drafting insurance contracts.

Question 23

Reasonable Expectation Doctrine

Answer 23

Under this doctrine, insurers should pay claims unless:

The policy clearly discloses the lack of coverage, or

An insurance company’s agent clearly disclosed the lack of coverage

Question 24

warranty

Answer 24

strict promises that must stay true. If broken, the insurance can be canceled even if it was a mistake.

Question 25

Representations

Answer 25

statements you believe are true. Insurance can only be canceled if the info was intentionally false or important (a material fact).

Question 26

Material fact

Answer 26

A material fact is information that could change whether the insurer offers a policy or how much they charge.

Question 27

misrepresentation

Answer 27

When someone actively provides false information to an insurance company

Question 28

concealment

Answer 28

when a consumer simply fails to disclose relevant information to the insurance company.

Question 29

What is Rescission?

Answer 29

means canceling an insurance policy as if it never happened. The insurance company gives back the premium, and the policyholder gives back any claim money. This usually happens if there was fraud or if the policy is canceled soon after it starts.

Question 30

What is Cancellation?

Answer 30

Cancellation means the insurance policy is ended before its normal expiration date, but it still counts as having existed. The company keeps payment for the time you were covered but won’t pay for anything that happens after the cancellation. It usually happens if you don’t pay or break the rules — but not because of fraud.

Question 31

What is Non-renewal?

Answer 31

With a non-renewal, coverage remains active for the entire agreed-upon contract period but cannot be extended beyond that time, even if the policyholder offers to pay a higher premium. Non-renewals most frequently occur when a policyholder hasn't violated any terms but has filed a significant number of claims, making them too high of a risk.

Question 32

principle of indemnity

Answer 32

This principle requires the insurance company to compensate policyholders, so they end up neither worse off nor better off after experiencing an insured loss. Instead, within the contract's limits, the insurer aims to make a policyholder "whole" again.

Question 33

actual cash value

Answer 33

An item's actual cash value equals the replacement cost minus depreciation.

Question 34

replacement-cost coverage

Answer 34

Replacement-cost coverage pays for items as if they’re new, without subtracting depreciation. To manage the risk, insurers charge more and may delay full payment until repairs or replacements are made.

Question 35

insurable interest

Answer 35

Insurable interest means you care about the person or property staying safe. It’s required to stop people from insuring things they don’t own or care about. In property insurance, you must have insurable interest at the time of the loss, not just when you buy the policy.

Question 36

Waiver and Estoppel

Answer 36

A waiver is when an insurer gives up a right (like accepting late payments). Estoppel stops the insurer from going back on that if the customer relied on it. Example: If the company always accepts late payments, they can’t suddenly cancel your policy for being late.