General Requirements - Enforceable Contract

1. General Requirements - Enforceable Contract • 1. Offer and acceptance • 2. Consideration • 3. Legal object • 4. Competent parties • 5. Legal form

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

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.

4. 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.

5. 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.

6. Legal Object • 1. The contract must be for a legal purpose.

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.

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

9. 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.

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.

11. 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.

12. 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

13. 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.

14. 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.

15. 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.

16. 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.

17. 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.

18. 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.

19. 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.

20. Doctrines Related to Concept of Good Faith • 1. Misrepresentation • 2. Concealment • 3. Warranties

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.

22. The Insurance Contract as a Contract • 1. Reasonable expectations • 2. Complexity of insurance contracts • 3. Insurance contracts and the courts

23. Insurance Policy Construction • 1. Declarations • 2. Insuring agreement • 3. Exclusions • 4. Conditions