CHAPTER 7 INSURANCE CONTRACTS CONTRACT TERMINOLOGY A CONTRACT is a legally binding agreement creating rights and duities for those who are parties to it. If one party to the contract fails to perform its duties without a legal excuse, the contract is said to be breached. Courts can enforce thier judgements and settle contractual disputes. A VALID CONTRACT is one court will enforce. A VOIDABLE CONTRACT allows one party the option of breaking the agreement because of an act or omission of an act by the other party. A VOID CONTRACT is pme a court will not enforce because from its begining it laked one or more features of a valid contract. BINDER In property insurance, a temporary contract called a binder is often used before isssuance of the formal insurance policy. The binder must meet all the requirements for a legal contract. BINDER 30 DAYS OR LESS Purpose is to provide coverage during the time it takes to process an application. Oral or written Parol evidence rule : written agreement takes the precedence over oral agreement. CONDITIONAL RECEIPT Binders are not used in life insurance because life insurance agents lacks the authority to bind their companies. Temporary coverage, however, contingent on an applicants ability to present evidence of insurability can be provided by a conditional receipt. Coverage begins from the date of receipt. ELEMENTS OF A VALID CONTRACT OFFER AND ACCEPTANCE Deals begin when one person makes a proposal to exchange something of value with another person. The proposal to make an exchange is called OFFER. If the second person agrees to the exchange, this is ACCEPTANCE. The offer must be reasonably definite and communicated clearly. There must be meetings of the minds. Insurer issues policy indicating an accpetance to an offer. CONSIDERATION The value exchanged between the parties to the contract is the consideration. Consideration may take a tangible form such as money, or it may take the form of a promise to do something or not to do it. There must be an exchange of consideration to have a valid contract. CONSIDERATION In an insurance contract, the consideration the insurer is a contingent promise to pay the insured. Most insurance contracts are UNILATERAL CONTRACTS. That is, only the insurer makes an enforceable pay the promise. The insured does not promise to pay the premiums and cannot be sued for failure to do so. Contracts in which both parties make enforceable promises are called bilateral contracts. CAPACITY Not every person legally has the capacity to enter into a contract. As a general rule, for reasons of social welfare, minors, the insane and the intoxicated can not enter into a binding agreement. LEGAL PURPOSE A Contract must have a legal purpose, an end or intention permitted by law contracts having an antisocial purpose are legally unenforceable. An insurance policy purchased as a gamble on a famous person`s life or any life in which the contract owner has no legal interest is an example of an unenforceable contract. DISTINGUISHING CHARACTERISTICS OF INSURANCE CONTRACTS PRINCIPLE OF INDEMNITY: it means the insured should be in the same financial position after as before the insured loss. Exceptions Life Insurance Replacement-Cost Insurance Valued Insurance Policies 1. SUBROGATION Is the legal substitution of one person in another`s place. eg. If a person must pay a debt for which another is liable, such payment should give the person a right to collect the debt from the liable party. CONTRACT OF ADHESION That is the unequal knowledge and unequal bargaining power are perceived to give the insurer a significant advantage over the insured , most states classify insurance contracts as contracts of adhesion.( due to wording) REPRESENTAION Before entering insurance contracts applicants are asked questions and if the consumer give false answers then the answers are material to the tisk, the insurer can void the contract. eg. Any accidents in past 3 years `no` materiality-negative answer. CONCELMENT Is silence when obliged to speak or a failure to disclose material information. ENTIRE CONTRACT Any statement made by applicant for life insurance be attached to the policy. INCONTESTABLE CLAUSE 1-2 YEARS have the right to void. THE ALETORY FEATURE ALETRORY is gambling. Premium is the loss of the insured when there is no loss however, it is a gain for the insurer. RECESION IS AN AGREEMENT BY BOTH PARTIES TO END THE CONTRACT. REFORMED When the contract is needed to be written again due to typing mistakes.