9-1

General Requirements - Enforceable Contract

1. Offer and acceptance

2. Consideration

3. Legal object

4. Competent parties

5. Legal form

9-2

Offer and Acceptance

1. Offer normally made by applicant

2. Acceptance occurs when insurer approves application

3. In absence of statutory requirement, the contract can be oral

4. A “Binder” is a temporary contract (oral or written) pending issuance of a policy

9-3

Agent’s Authority

Property and liability agent’s authority to act on behalf of the insurer stems from three sources:

1. Express authority, specifically granted by contract or agreement.

2. Implied authority (also called incidental authority) required or reasonably necessary to execute the express authority.

3. Apparent authority (also called ostensible authority) is the power the public has come to expect the agent to have.

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Consideration

1. Insurer’s consideration is the promise to indemnify contained in the contract.

2. Insured’s consideration is the premium and an agreement to abide by the conditions of the contract.

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Competent Parties

1. Parties must have capacity to enter into a contract.

2. Competency issues generally deal with minors or mentally incompetent persons.

3. In some states, minors have been granted competency by statute for the purchase of life insurance.

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Legal Object

1. The contract must be for a legal purpose.

9-7

Special Characteristics of Insurance Contracts

1. Insurance is a contract of indemnity.

2. Insurance is a personal contract.

3. Insurance is a unilateral contract.

4. Insurance is a conditional contract.

5. Insurance is a contract of adhesion.

6. Insurance is an aleatory contract.

7. Insurance is a contract of utmost good faith.

9-8

Insurance is a Contract of Indemnity

1. Indemnity means that the insured should not be permitted to profit from existence of insurance.

2. The principle of indemnity is enforced by the following doctrines:

• insurable interest• actual cash value• “other insurance” provisions• subrogation

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Insurable Interest

Insurable interest is a relationship between the insured and the subject of insurance such that the insured will suffer financial loss in the event of damage to or destruction of the property.

1. In life insurance, insurable interest must exist at the inception of the policy.

2. In property and liability insurance, the insurable interest must exist at the time of the loss.

9-10

Actual Cash Value

1. Actual cash value is the traditional measure of value for payment of property losses.

2. Generally, actual cash value is defined as replacement cost minus depreciation.

3. The rationale is that the insured should not profit from the existence of the insurance.

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Exceptions to Actual Cash Value Payment

1. Some modern property insurance forms provide coverage for replacement cost (without a deduction for depreciation).

2. Under a valued policy, insurer agrees to pay the amount of insurance in the event of loss.

3. Under valued policy laws, insurer is required to pay face of policy in event of total loss.

4. Cash payment policies (e.g., life insurance) agree to pay stated sum regardless of the amount of loss.

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Other Insurance Provisions

The primary purpose of “Other Insurance” provisions is to prevent insured from collecting for the same loss under more than one policy.

1. Pro-rata provision: insurer will share proportionately in loss with other insurers.

2. Excess provision: insurer will pay only after other insurance is exhausted.

3. Exculpatory clause: the insurer will not cover losses covered under other insurance

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Subrogation

1. Subrogation is the assignment of an insured’s rights against a third party.

2. Assignment is required only to the extent of the amount paid by the insurer.

3. Prevents the insured from collecting twice for the same loss.

4. Applicable mainly in property insurance but sometimes in health insurance.

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Insurance is a Personal Contract

1. Although we speak of “insuring a house,” the contract is between the insurer and the specifically named insured.

2. If the insured sells the house, the contract is not binding between the insurer and the new owner.

3. Insured cannot transfer contract to another party without the specific consent of the insurer.

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Insurance is a Unilateral Contract

1. Only one party--the insurer--makes legally binding promises.

2. Although the insured agrees to do certain things (such as file a proof of loss in the event of a loss) he or she has no legal obligation to do so.

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Insurance is a Conditional Contract

Conditions of the contract are part of insured’s consideration.

Insurer must fulfill its promises only if the insured fulfills his or her obligations under the contract.

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Insurance is a Contract of Adhesion

1. A contract of adhesion is contrasted with a negotiated contract.

2. One party--the insurance company--draws the contract and offers it on a “take-it-or- leave-it” basis.

3. Because insurance contracts are contracts of adhesion, in the event of ambiguity, they are interpreted in favor of the insured.

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Insurance is an Aleatory Contract

1. Aleatory means that the outcome is affected by chance and that the dollars risked by the parties are unequal.

2. The insured’s premium is small in relation to the amount the insurer must pay if a loss occurs.

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Insurance is a Contract of Utmost Good Faith

1. Partly because the contract is aleatory, the insurer and insured enter into an agreement where mutual faith is of greatest importance.

2. Legal principle of uberrimae fidei (utmost good faith) has deep historical roots and originated in the early days of ocean marine insurance.

3. The doctrine is enforced by doctrines of misrepresentation, warranty, and concealment.

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Doctrines Related to Concept of Good Faith

1. Misrepresentation

2. Concealment

3. Warranties

9-21

Waiver and Estoppel

1. Waiver is the intentional relinquishment of a known right.

• An insurer can waive a violation or breach of contract provision that provides a basis for voiding the contract.

2. Estoppel prevents one from alleging or denying a fact, the contrary of which he has previously admitted.

• If an insurer or its agent waives a breach of policy conditions, it is estopped from later reasserting the breach as a defense.

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The Insurance Contract as a Contract

1. Reasonable expectations

2. Complexity of insurance contracts

3. Insurance contracts and the courts

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Insurance Policy Construction

1. Declarations

2. Insuring agreement

3. Exclusions

4. Conditions