Unit 2: Contracts

Question 1

Elements of a Legal Contract CLOAC

Answer 1

• Consideration
• Legal Purpose
• Offer
• Acceptance
• Competent Parties

Question 2

Consideration

Answer 2

money and statements made on application

Question 3

Legal Purpose

Answer 3

transfer of legal risk

Question 4

Offer and Acceptance

Answer 4

Offer (made by insured)

• Insured submits application and first month premium to insurer
• insurer accepts or insurer declines the risk

Counteroffer (made by insurer)

• Agrees to issue policy but with higher premium or restrictions/exclusions
• Insured either accepts the conditions or withdraws their application

Question 5

Competent Parties

Answer 5

• Legal age
• Mentally sane
• Sober

Question 6

Adhesion

Answer 6

Policy written by the insurance company with no input from the insured, insured adheres to the poilcy

Question 7

Aleatory

Answer 7

Unequal value; the insurer’s performance under the contract depends upon an uncertain event

Question 8

Utmost Good Faith and Reasonable Expectation

Answer 8

The insured and the insurance company have a right to expect honesty from each other

Question 9

Unilateral

Answer 9

• Insurance company makes a legal promise to pay for covered claim and is required by law to pay for any covered losses that occur
• Insured may cancel the contract anytime

Question 10

Personal

Answer 10

• Contract between the insurance company and the insured
• Cannot be changed to someone else

Question 11

Conditional

Answer 11

Insured must pay the premium for coverage and file a claim if a loss occurs

Question 12

Indemnity

Answer 12

The insured is not entitled to profit from payments made in excess of the amount of loss

Question 13

Representations, Misrepresentations, and Warranties

Answer 13

• Representation: believed to be true; Statements on applications are considered representations
• Misrepresentation: information given that is not true but would not affect the insurance company’s decision
• Material misrepresentation: information given that is not true and DOES affect the insurer’s decision
• Warranty: a statement that is guaranteed to be true, and it may be relied on by the other party

Question 14

Concealment

Answer 14

• Failure to disclose known facts
• If intentional and information is material, coverage could be voided

Question 15

Fraud

Answer 15

Intentional misrepresentation and concealment of material information

Question 16

Waiver and Estoppel

Answer 16

• Waiver: voluntarily giving up a right
• Estoppel: once a waiver has been created, it can’t be changed