General Requirements - Enforceable

Contract

1. Offer and acceptance

2. Consideration

3. Legal object

4. Competent parties

5. Legal form

13-1
 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

13-2
 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
13-3
 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.

13-4
 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.

13-5
 Legal Object

1. The contract must be for a legal purpose.

2. Insurance where no insurable interest

exists, for example.

3. Business interruption insurance on an

illegal operation.

13-6
 Void and Voidable

1. A void contract is a contradiction of

terms. A “void” contract is not a contract
at all, and is unenforceable.

2. A voidable contract is a contract that may

be declared unenforceable by one of the
parties. It is binding unless the party with
the rights to void it wishes to do so.

13-7
 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 contract of adhesion

5. Insurance is an aleatory contract

6. Insurance is a contract of utmost good faith

13-8
 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

13-9
 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.
13-10
 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.

13-11
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 the 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.
13-12
 Other Insurance Provisions

Primary purpose of “Other Insurance”

provisions in insurance contracts 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
13-13
 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

13-14
 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.
13-15
 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.

13-16
 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.
13-17
 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.

13-18
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.
13-19
 Doctrines Related to Concept of Good
Faith

1. Misrepresentation

2. Concealment

3. Warranties

13-20
 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.
13-21
 Parol Evidence Rule

1. When the parties to a contract have

committed their agreement to writing, the
written contract is presumed to contain the
agreement of the parties.
2. Contract cannot be modified by parol (oral)
evidence.
3. Parol evidence may be admissible when
terms of the contract are incomplete, if the
contract is ambiguous, or in case of a
mistake or fraud in preparing the contract.

13-22
 The Insurance Contract as a Contract

1. Reasonable expectations

2. Complexity of insurance contracts

3. Insurance contracts and the courts

13-23
 Insurance Policy Construction

1. Declarations

2. Insuring agreement

3. Exclusions

4. Conditions

13-24