Offer and Acceptance
To be legally enforceable, a contract must be made with a definite,
unqualified proposal (offer) by one party and the acceptance of
its exact terms by the other. In many cases, the offer of an insurance
contract is made by the applicant when the applicati
Consideration
For a contract to be enforceable, the promise or promises it contains must be supported by consideration.
Consideration can be defined as the value given in exchange for the promises sought. In an insurance contract,
consideration is given by the applican
Legal Purpose
To be legal, a contract must have a legal purpose. This means that the object of the contract and the reason the
parties enter into the agreement must be legal. A contract in which one party agrees to commit murder for money
would be unenforceable in cour
Competent Parties
To be enforceable, a contract must be entered into by competent parties. With a contract of insurance, the parties
to the contract are the applicant and the insurer. The insurer is considered competent if it has been licensed or
authorized by the state(s)
Aleatory
Insurance contracts are aleatory. This means there is an element of chance and potential for unequal exchange of
value or consideration for both parties. An aleatory contract is conditioned upon the occurrence of an event.
Consequently, the benefits provi
Adhesion
insurance contracts are contracts of adhesion. This means that the contract has been prepared by one party (the
insurance company) with no negotiation between the applicant and insurer. In effect, the applicant "adheres" to the
terms of the contract on a
Unilateral
Insurance contracts are unilateral. This means that only one party (the insurer) makes any kind of enforceable
promise. Insurers promise to pay benefits upon the occurrence of a specific event, such as death or disability. The
applicant makes no such prom
Personal Contract
Life insurance is a personal contract or personal agreement between the insurer and the insured. The owner of
the policy has no bearing on the risk the insurer has assumed. For this reason, people who buy life insurance policies
are called policyowners ra
Conditional
An insurance contract is conditional. This means that the insurer's promise to pay benefits depend on the occurrence
of an event covered by the contract. If the event does not materialize, no benefits are paid. Furthermore, the insurer's
obligations under
Valued or Indemnity
An insurance contract is either a valued contract or an indemnity contract. A valued contract pays a stated sum
regardless of the actual loss incurred. Life insurance contracts are valued contracts. If an individual acquires a life
insurance policy insuri
Utmost Good Faith
Insurance is a contract of utmost good faith. This means both the policyowner and the insurer must know all material
facts and relevant information. There can be no attempt by either party to conceal, disguise, or deceive. A consumer
purchases a policy ba
Warranty
A warranty in insurance is a statement made by the applicant that is guaranteed to be true in every respect. It
becomes part of the contract and, if found to be untrue, can be grounds for revoking the contract. Warranties are
presumed to be material becau
Representation
A representation is a statement made by the applicant that they consider to be true and accurate to
the best of the applicant's belief. It is used by the insurer to evaluate whether or not to issue a policy. Unlike
warranties, representations are not a pa
Concealment
The issue of concealment is also important to insurance contracts. Concealment is defined as the failure by the
applicant to disclose a known material fact when applying for insurance. If the purpose for concealing information is
to defraud the insurer (t
Insurable Interest
Another element of a valid insurance contract is insurable interest. This means that the person acquiring the
contract (the applicant) must be subject to loss upon the death, illness, or disability of the person being insured.
To have "an insurable intere
Stranger-Originated Life Insurance (STOLl)
Stranger-Originated Life Insurance (STOLl), or sometimes called Investor-Originated Life Insurance (IOLI),
transactions are life insurance arrangements where investors persuade individuals (typically seniors) to take
out new life insurance, with the inves
The Law of Agency
As noted earlier, an agent is an individual who is authorized by an insurer to sell its goods and services on its behalf.
An agent's role involves the following duties:
? Describing the company's insurance policies to prospective buyers and explaining the
Principles of Agency Law
By legal definition, an agent is a person who acts for another person or entity (known as the principal) with regard
to contractual arrangements with third parties. An authorized agent has the power to bind the principal to contracts
(and to the rights an
Agent Authority
Agent authority is another important concept of agency law. Authority is what's given by an insurer to a licensee to
transact insurance on their behalf. Technically, only those actions for which an agent is actually authorized can bind
a principal. In rea
Agent as a Fiduciary
Fiduciary is another legal concept which governs the activity of an agent. A fiduciary is a person who holds a
position of financial trust and confidence. Agents act in a fiduciary capacity when they accept premiums on behalf
of the insurer or offer advic
Brokers versus Agents
Unlike agents, brokers legally represent the insureds. A broker (or independent agent) may represent a number of
insurance companies under separate contractual agreements. A broker solicits and accepts applications for
insurance and then places the covera
Professional Liability Insurance (E&O)
Just as doctors should have malpractice insurance to protect against legal liability arising from their professional
services, insurance agents need errors and omissions (E&O) professional liability insurance. Under this insurance,
the insurer agrees to p
Waiver
A waiver is the voluntary giving up of a legal, given right. If an insurer fails to enforce (waives) a provision of a
contract, it cannot later deny a claim based on a violation of that provision.
Estoppel
The concepts of waiver and estoppel are closely related. Estoppel is the legal impediment to one party denying the
consequences of its own actions or deeds if such actions or deeds result in another party acting in a specific manner
or if certain conclusi
Parol Evidence Rule
Parol evidence is oral or verbal evidence, or that which is given verbally in a court of law. The parol evidence rule
states that when parties put their agreement in writing, all previous verbal statements come together in that writing
and a written contr
Void versus Voidable Contracts
The terms void and voidable are often incorrectly used interchangeably. A void contract is simply an agreement
without legal effect. In essence, it is not a contract at all, for it lacks one of the elements specified by law for a valid
contract. A void co
Fraud
In the event of fraud, insurance contracts are unique in that they run counter to a basic rule of contract law. Under
most contracts, fraud can be a reason to void a contract. With life insurance contracts, an insurer has only a limited
period of time (us