Insurance Chapter 6

Unilateral Contract

a contract in which only one of the parties to it makes a binding promise that, if broken, gives rise to an action against that party for breach of contract.

Conditional Contract

an agreement in which one party has an obligation to perform only if the other party meets certain conditions specified in the agreement.

Contract of Adhesion

a contract that is prepared in all of its details by one party, rather than having its terms bargained over between the parties to the contract. Because insurance policies are generally contracts of adhesion, if ambiguity exists in the terms, the courts a

Parol Evidence Rule

a legal principle that specifies that oral contemporaneous evidence may not be used to contradict or to vary the terms of a valid written contract.

Contract of Indemnity

a policy in which the insurer agrees, if a covered loss occurs, to pay an amount directly related to the amount of loss.

Valued Contract

an insurance contract in which the amount of recovery does not depend on the financial amount of the loss but rather on the limit specified in the contract.

Insurable Interest

a right or relationship with regard to the subject matter of an insurance contract such that the insured will suffer financial loss from damage, loss, or destruction to that subject matter.


a process by which an insurer that has paid a claim takes over the legal rights of recovery its insured might have against a responsible third party.


failure by one party to a contract to affirmatively disclose to the other party all of the important facts that are the exclusive knowledge of the first party. Even if it is not intentional or fraudulent, concealment can make an insurance contract voidabl


a false and material statement made by an applicant for insurance. It is the basis for the insurer to make the contract voidable.

Voidable Contract

a contract that can be affirmed or rejected at the option of one of the parties but is binding on the other party.

Void Contract

contract that is entirely without legal effect and, therefore, unenforceable by either party. In essence, a void contract never was a contract.


a statement that becomes a part of an insurance contract and that must be strictly complied with. A warranty, if false, makes the policy voidable, even if the false statement is not material.


a statement in an insurance application that is substantially true to the best of the applicant's knowledge and belief. A false representation of a material fact is a misrepresentation.


factual statements that are a part of an insurance policy and that identify the specific person, property, or activity being insured; the parties to the insurance transaction; and other descriptive information about the insurance being provided.


explanations of the meaning of key terms in an insurance policy to clarify the coverage.

Insuring Agreement

a provision in an insurance contract that spells out the basic promise of the insurance company to pay benefits according to the term of the policy.


provisions in an insurance contract that indicate what the insurer does not cover. Exclusions can apply to perils, types of losses, types of property, or types of activities.