Unit 1: Insurance Fundamentals

Unit 1: Insurance Fundamentals

1. What is Insurance?

   • - A protective measure  - A contract binds 1 party to indemnify another party - In the event that a specified loss should occur - In return, the covered party pays the insurer an insurance premium
   • Indemnify
     • To compensate someone for harm or loss
   • Insurance Premium
     • A sum of money that the insured pays to the insurer in exchange for insurance coverage.

2. What is a Contract?

   • A legally enforceable agreement between two or more parties.
   • 2 Basic Elements of a Contract
     • Offer
     • Acceptance
   • If Agreement is to be Enforceable by Law..
     • There Must be Consideration
       • An exchange of values.
     • Parties Must Have Legal Capacity to Enter the Contract
     • Legal Intention
       • By both parties to enter into a contract.
     • Parties Must Have the Capacity to Contract
   • Insurance Contract
     • - Similar to a regular contract - Insurance carriers promise to pay is made in return for premium payment by policy holder.
     • Offer and Acceptance
       • Offer: The completion of the insurance application by an individual. Acceptance: When the insurance carrier issues the contract and it is delivered to the applicant.
     • Consideration
       • - The payment of insurance premiums by policy owner is consideration from one party. - The contract itself becomes the consideration put forth by the insurance carrier. 
     • The Parties
       • Applicant
         • The individual who wishes to be the owner of the insurance contract. - Does not have to be the "Life Insured" 
         • Insurable Interest
           • At the time the policy becomes effective, the policy owner must have an insurable interest. If not, the the contract is void.    - If there is no insurable interest, the individual who's life is being insured can give written consent for the insurance to be placed on their life. 
       • Insurance Carrier
         • The party who accepts the applicants offer - By agreeing to issue the contract or; - By making a counter offer that modifies terms 
     • Contract Validity
       • A number of factors may be found to affect the validity of an insurance contract.
       • Representaion
         • Applicant provides statements that are true to the best of their knowledge.  Ex: An approximation of the age at which the life insured had measles (30 years ago when he was a child)
         • Underwriting
           • The process an insurance carrier goes through to assess the risk associated with an applicant for insurance.
       • Warranty
         • A guarantee.  -Involves a presentation of facts that are material to underwriting of the contract. -Critical to the acceptance of risk
       • Material Fact
         • A fact that has a definite influence on the decision of the parties. - A mistake could be serious enough to affect the validity of the contract
       • Material Misrepresentation
         • Both parties in an insurance contract are obliged to disclose all pertinent information. 
         • Uberrimae Fidei
           • An insurance contracts is considered to be one of the "utmost good faith."
       • Mistake of Law
         • The parties to a contract are mistaken with regard to the legal effect of some facts with reference to which the contract is made. - If there has been no error in connection with the facts, a mistake of law will not affect the validity of a contract.
       • Concealment
         • When an applicant for insurance consciously choses not to disclose know facts to the insurance carrier. - May also skew the facts to achieve a particular slant.
       • Incontestability Period
         • A two year limitation on the insurance carrier's ability to void the contract. - Within the first two years that the contract is in force (during the lifetime of the life insured) - If there is a non-disclosure or misrepresentation
     • Contract Formation
       • Application
         • 1. Completed by the policy owner (& life insured if life insurance)     - Often with assistance of agent       of insurer     - Signiture is witnessed2. Submitted to insurance carrier3. Applicant has a duty to read the completed application before signing it & is responsible for the info that it contains
       • Premium Payment
         • A policy can only come into effect by delivery of the policy to the policy owner, along with the first premium payment. 
       • Conditional Receipt
         • If the applicant has met conditions, there are situations where a carrier will provide interim insurance, accepting the risk. 

3. Insurance Contract

   • Characteristics
     • Aleatory
       • One party to the contract offers a conditional promise should a specific event occur, in exchange for the other party offering something of value. - The insurance carrier provides the promise of benefits should an event occur ( death, injury, damage) in exchange for premiums from policy owner.
     • Adhesion
       • Prepared by one party and requires the other party to accept or reject all of the conditions within the contract as a whole.  - No opportunity to negotiate contract
     • Unilateral
       • One party agrees to fulfill the conditions of the contract, and can be held accountable for the fulfillment of the contract.  -Carrier must fulfill contract if something happens - Owner must pay premiums in order for contract to remain viable
   • Elements
     • Declarations
       • A statement of fact by the policy owner that ties to the risk exposure that is to be insured. - Forms basis for decisions of acceptability of the risk being underwritten by carrier
     • Rating
       • A term used in the insurance industry to identify the level of risk relative to a base-line risk. A rated policy is one where the risk is classified as greater than average.  -The ratings on a policy will affect the premium or cost of insurance. 
     • Exclusions
       • A loss for which the insurance carrier does not provide any coverage.  - Common to exclude losses that would imperil solvency of the insurer, non accidental losses, inevitable losses, or those covered by another insurance contract.
     • Riders, Endorsements and Floaters
       • Rider: An amendment or addition to a contract that forms part of the contract by extending coverage. (Standardized additions so it still follows adhesion)     - Often referred to as      Endorsements Floaters: Are riders attached to property and fire insurance policies to extend coverage
   • Principles
     • Insurable Interest
       • To discourage financial gain through speculation, the law requires that an individual has a insurable interest  before a contract can be issued and valid. - For a life insurance contract, insurable interest must only be present at issuing of contract. (Normally ownership may be transferred at will & without need for insurable interest)
     • Principle of Indemnity
       • An individual is compensated for a specific  loss, with no possibility of profiting from that loss
     • Valued Contract
       • The amount of benefit payable under the contract is established in advance of any loss.  - Life insurance is valued contract because the max amount of benefit is pre established prior to the claim.  - Useful for property insurance by predetermining value of item and then insuring for that amount. 
     • Parol Evidence Rule
       • Specifically applies to the written contract that has evolved from a discussion b/w two parties, & effects the addition of excluded contract items.  - prevents a party to a written contract from presenting exterior evidence that discloses a doubt and clarifies it or adds to the written terms of the contract that appears to be whole.
     • Subrogation
       • Involves the transfer of rights and entitlements from one person to another. - Does not apply to life insurance - Applies to property and disability insurance