Contract of Adhesion
One party prepares a contract and submits it to the other party on a "take-it-or leave-it" basis (without negotiation).
Aleatory Contract
Parties to a contract exchange unequal amounts of money. In insurance, the premium paid is less than the potential benefit to be received in the event of loss. Performance depends on an uncertain future event. The exchange of values may be unequal.
Personal Contract
Insurance policies cover the insurable interest of the insured. The insured cannot transfer or assign any policy, except life insurance.
Unilateral Contract
Only one party is legally bound to contractual obligations after the premium is paid to the insurer. Only the insurer has made a promise of future performance, and only the insurer can be charged with breach of contract.
Conditional Contract
Both parties to a contract must perform certain duties and follow rules of conduct to make the contract enforceable. The insurer must pay claims if the insured has complied with policy conditions.
Indemnity Contract
This principle establishes that the insured is restored to the same financial condition as before the loss, with no intent of loss or gain.
Ambiguities in a Contract of Adhesion
any doubt or ambiguity found in the document is constructed against the party who drew up the contract (insurer).
Reasonable Expectations
the reasonable expectations of policyowners and beneficiaries will be honored even though the strict terms of the policy do not support these expectations; what a reasonable and prudent buyer can expect.
Indemnity
this principle establishes that the insured is restored to the same financial condition as before the loss, with no intent or loss or gain.
Utmost Good Faith
both parties bargain in good faith in forming the contract, and rely upon the statements and promises of each other (there should be no attempts to conceal or deceive).
Representations
statements made on the application by the applicant that are believed to be true to the best of his/her knowledge but are not warranted to be exact in every detail (may be withdrawn prior to policy issuance).
Misrepresentations
a false statement in the application that can render the contract void if material to acceptance of the risk (does not reflect the truth).
Warranties
statements made in an application for insurance or material stipulations in the policy that are guaranteed as true in all respects. If untrue or if breached, the contract may be voided; may be past, present or future.
Concealment
the withholding of known facts that are so important that the disclosure of them would change the decision of an insurer with respect to underwriting, settling a loss, or determining premium (must be material to the loss).
Fraud
the intentional misrepresentation, deceit, or concealment of a material fact known to a person with the intention of causing injury to another party.
Waiver
the voluntary abandonment of a known or legal right or advantage. An insurer's failure to enforce a provision of a contract.
Estoppel
prevents the denial of a fact if the fact was admitted to be true by a previous action.
Express
the power that is expressed (written) in the producer's/agent's contract.
Example: Binding authority.
Implied
the authority that the public assumes the producer/agent has. The active authority when conducting the insurance business, such as filling out applications, providing quotes, and accepting premiums for the insurer.
Apparent
the authority created when a producer/agent exceeds the authority expressed in his/her contract, and the insurer does nothing to counter the public impression that such authority exists.
Example: The producer/agent accepting premiums on lapsed policies.
Domestic
those insurers that are incorporated in this state.
Foreign
those insurers that are incorporated in any other state.
Alien
those insurers that are incorporated in another country.
Any of these insurers may conduct business in this state if they are admitted.
Authorized (Admitted) Insurers
have been authorized by the Commissioner of Insurance (Director or Superintendent) to transact business in this state.
Unauthorized (Nonadmitted) Insurers
have not sought approval from the Department or have been unable to obtain such approval
(Any insurer doing business in this state must operate under a Certificate of Authority). Insurance that cannot be placed with a licensed admitted company may be plac
Adverse Selection
The insuring of risks which are more prone to losses than the average (standard) risk. These risks tend to seek or continue insurance at a higher participation rate than does an average (standard) or above average (preferred) risk.
Reinsurance (Risk Sharing)
A device used by insurers to transfer or share in a risk. This process disperses the probability of a large loss in turn provides coverage for a possibly otherwise uninsurable risk. There are at least two insurers involved, the insurer originating the app
Automatic Agreements
The ceding company must transfer the amount of insurance in excess of the retention level immediately and automatically upon receipt of the premium. The transfer is automatic in accordance with the reinsurance agreement.
(These agreements are strictly bet
Facultative Agreements
Allows the ceding insurer and the reinsurance companies an opportunity to exchange advice about the underwriting of each case. This agreement is more time-consuming and may result in a higher premium.
(These agreements are strictly between the insurers; a
Avoidance
not being involved in the activity that gives rise to the chance of loss.
Retention
(self-insurance) - retaining the responsibility for the loss.
Sharing
pooling the risk of a large number of persons (corporation).
Reduction
reducing, but not preventing the risk.
Transfer
transferring the risk to another (insurance company).
Risk
a condition in which a chance of loss exists. The two types of risk are speculative and pure risk.
Speculative risk
instances where there is a chance of loss or gain.
Pure risk
situations where only the chance of loss and no chance for gain exist.
(Loss) Exposure
the extent to which one may be affected by a peril.
Hazard
a specific situation that increases the probability of a loss arising from a peril or that may influence the extent of the loss. There are tree types of hazards:
1) Physical (tangible characteristics).
2) Moral (dishonesty - giving false information on an
Peril
the cause of a possible loss.
Loss
a reduction in, decrease or disappearance of value.
Offer (Application)
A person makes the offer by submitting an application.
Acceptance (Issued Policy)
The insurer promises to pay by issuing a policy or a binder.
Consideration
generally means what the two parties to a contract give in exchange or value to abide by the conditions of the contract.