Cfpe 1101 Mod 5

Front 1

5–1 Explain the steps of the risk management process and their importance.

In the first step of the risk management process, “identify risk management goals,” what should be accomplished? How do you know when it is done properly?

Back 1

This step involves deciding precisely what the client wants from his or her risk management program.
accomplished when clearly defined objectives have been outlined,
often in a formal risk management policy,
which can serve as a source of guidance for the planner and
can be used by the client in evaluating the planner’s recommendations.

Front 2

5–1 Explain the steps of the risk management process and their importance.

Who should be responsible for formulating the objectives and risk management policy of the client?

Back 2

The client is ultimately responsible for preservation of his or her own assets.
The planner’s function is to assist the client in this process.

Front 3

5–1 Explain the steps of the risk management process and their importance.

In the second step of the risk management process, “gather pertinent data to determine risk exposures,” what tools are used to attempt to make the information gathering process systematic and thereby help the planner avoid missing important information?

Back 3

insurance policy checklists
risk analysis questionnaires
financial statements
review of the client’s activities, both personal and professional

Front 4

5–1 Explain the steps of the risk management process and their importance.

Why is it important to obtain thorough information on the client and his or her family?

Back 4

Virtually all of the client’s assets and activities may result in liability.
All assets represent the potential for loss of the asset itself—from contracts relating to its acquisition, from liability for losses attending its use, and from consequential losses.
Client activities can result in liability based on tort or contract law.
Obtaining thorough client data is the only way to anticipate these risk exposures.

Front 5

5–1 Explain the steps of the risk management process and their importance.
How do you identify risk exposures facing the client?

Back 5

The planner carefully reviews the client data, looking for risk exposures that could arise based on the assets and activities of the client and his or her family members.

Front 6

5–1 Explain the steps of the risk management process and their importance.
Why is monitoring, evaluating, and updating the risk management plan important?

Back 6

First, things change. Both risks and techniques for treating those risks change over time.
Second, mistakes sometimes occur. Monitoring and evaluating allow for a review of decisions and the discovery of mistakes.

Front 7

5–2 Explain a rule of risk management.

What is the #1 basic rule of risk management? Explain.

Back 7

Don’t risk more than you can afford to lose.
Always transfer (get insurance) those risks that could bring severe financial losses and whose potential severity cannot be reduced.

Front 8

5–2 Explain a rule of risk management.

What is the #2 basic rule of risk management? Explain.

Back 8

Consider the odds.
Don’t transfer risk (get insurance) where the probability of loss is very high.

Front 9

5–2 Explain a rule of risk management.

What is the #3 basic rules of risk management? Explain.

Back 9

Don’t risk a lot for a little. There should be a reasonable relationship between the cost of transferring risk (getting insurance) and the value to the transferor (your client).

Front 10

5–2 Explain a rule of risk management.
What are the basic rules regarding the severity and frequency of risk? High severity/High frequency

Back 10

Use risk avoidance (don’t play the sport) and/or risk reduction (wear protective gear).

Front 11

5–2 Explain a rule of risk management.
What are the basic rules regarding the severity and frequency of risk? High severity/Low frequency

Back 11

Use risk transfer (insurance).

Front 12

5–2 Explain a rule of risk management.
What are the basic rules regarding the severity and frequency of risk? Low severity/High frequency

Back 12

Use risk retention (take the punch if it comes; emergency fund) and risk reduction (wear the gear).

Front 13

5–2 Explain a rule of risk management.
What are the basic rules regarding the severity and frequency of risk? Low severity/Low frequency

Back 13

Use risk retention (take the punch if it comes; emergency fund).

Front 14

5–2 Explain a rule of risk management.

What is the “large-loss principle”?

Back 14

Essential coverages (those covering exposures with potentially catastrophic financial impact) should be purchased first.
The probability that a loss may or may not occur is less important than the possible size of the loss.

Front 15

5–3 Explain the elements of an insurable risk.
What is the “law of large numbers”?
Why is it considered the basis of insurance?

Front 16

5–3 Explain the elements of an insurable risk.

What are the four elements of an insurable risk?

Back 16

a. There must be a SUFFICIENTLY LARGE NUMBER OF HOMOGENEOUS EXPOSURE UNITS to make the losses reasonably predictable.
b. The LOSS PRODUCED by the risk MUST BE DEFINITE AND MEASURABLE.
c. The loss must be FORTUITOUS OR ACCIDENTAL.
d. The LOSS MUST NOT BE CATASTROPHIC.

Front 17

5–3 Explain the elements of an insurable risk.
How do the four elements of an insurable risk help prevent adverse selection?

Back 17

Large numbers provide the quantity of risk exposures necessary to allow the law of large numbers to operate effectively.
Measurability reduces the ability to counterfeit the loss.
If the loss is accidental, the insured cannot control the loss.
When a loss is not catastrophic, it is suffered by only a small percentage of the group, thereby keeping the law of large numbers in play.

Front 18

5–4 Explain the purpose of the underwriting process and its implications for the client.
What is underwriting and what is its purpose?

Back 18

Underwriting is the process of selecting and classifying risks.
This means that the underwriter must:
select risks to guard against a concentration of exposures that could result in a catastrophic loss to the company (e.g., if 80% of an insurer’s homeowners policies insure people living on the same fault line, one earthquake could bankrupt the insurer)
select risks to obtain a sufficient number of similar exposures so that the law of large numbers can operate
select risks to guard against adverse selection
evaluate the risk that a prospective contract presents to the company and compare that with the risks the company has priced to determine if the rate should be modified
determine if the proposed insurance is acceptable at any rate

Front 19

5–4 Explain the purpose of the underwriting process and its implications for the client.

What are the practical implications of the underwriting process?

Back 19

The most important practical implication is that there are definite limits on the amount and type of insurance that can be obtained for the client, regardless of what the client is willing to pay.
Another practical implication of the underwriting process is that if a situation was not anticipated by normal underwriting guidelines, the planner must be prepared to present information to the underwriter that will make a case for the requested exception.

Front 20

5–4 Explain the purpose of the underwriting process and its implications for the client.
What is the agent’s role in the underwriting process?

Back 20

The agent’s role is to SUBMIT BUSINESS THAT WILL PRODUCE PROFIT FOR THE COMPANY—through marketing and an initial screening to determine whether the applicant fits within the general underwriting guidelines.

Front 21

5–4 Explain the purpose of the underwriting process and its implications for the client.
What are the various underwriting policy regulations that the underwriter applies to incoming applications?

Back 21

lines of insurance that will be written
prohibited exposures
amounts of coverage permitted on various types of exposures
geographic locations in which each line will be written

Front 22

5–4 Explain the purpose of the underwriting process and its implications for the client.
Post-selection underwriting involves not only reviewing applications but also deciding whether to cancel an existing policy before it expires. What regulations have many states enacted to restrict the insurer’s rights in this underwriting process?

Back 22

The insurer must give advance notice of an intent to refuse renewal.

Front 23

5–4 Explain the purpose of the underwriting process and its implications for the client.
What five sources of information are used in the underwriting of insurance?

Back 23

a. the application
b. information from the agent or broker
c. investigations
d. information bureaus
e. physical examinations or inspections

Front 24

5–4 Explain the purpose of the underwriting process and its implications for the client.
Briefly explain how each of the five sources of information operates to assist the underwriter in making the decision to accept or reject an exposure. a. The application:

Back 24

Questions are designed to give the underwriter the information needed to decide if the exposure will be accepted or rejected, or if additional information is needed.

Front 25

5–4 Explain the purpose of the underwriting process and its implications for the client.
Briefly explain how each of the five sources of information operates to assist the underwriter in making the decision to accept or reject an exposure. b. Information from the agent or broker:

Back 25

The underwriter often places great weight on the recommendations of an agent or broker, because the agent or broker is the one who sees the person or property proposed to be insured.

Front 26

5–4 Explain the purpose of the underwriting process and its implications for the client.
Briefly explain how each of the five sources of information operates to assist the underwriter in making the decision to accept or reject an exposure. c. Investigations:

Back 26

The underwriter may require a report from an inspection company.

Front 27

5–4 Explain the purpose of the underwriting process and its implications for the client.
Briefly explain how each of the five sources of information operates to assist the underwriter in making the decision to accept or reject an exposure. d. Information bureaus:

Back 27

The underwriter may seek information from one of the company’s cooperative information bureaus, which may indicate undisclosed problems.

Front 28

5–4 Explain the purpose of the underwriting process and its implications for the client.
Briefly explain how each of the five sources of information operates to assist the underwriter in making the decision to accept or reject an exposure. e. Physical examinations or inspections:

Back 28

The life underwriter may require the applicant to submit to a medical exam.

Front 29

5–5 Apply methods of handling risk in a given situation.

Step 4 of the risk management process, “construct a risk management plan (determine appropriate risk treatment methods),” requires the planner to consider alternative risk treatment approaches and select which should be used for each risk. List the methods of handling risk and give an example of each method.

Back 29

RISK CONTROL:
risk avoidance (e.g., do not drive)
risk reduction (e.g., a fire safety sprinkler system)
RISK FINANCING:
risk retention (e.g., an insurance deductible, obtaining no insurance at all, or self-insuring)
risk transference (e.g., insurance)
risk sharing (e.g., incorporation) Remember that risk sharing is a form of risk reduction, more limited in scope.

Hint 29

ARSTR

Front 30

5–5 Apply methods of handling risk in a given situation.
Why is risk avoidance sometimes considered a negative technique?

Back 30

Nothing is actively done to deal with risk. Furthermore, the activity giving rise to the risk is not engaged in. If used extensively, individuals and society would suffer.

Front 31

5–5 Apply methods of handling risk in a given situation.
How does voluntary risk retention differ from involuntary risk retention?

Back 31

Voluntary risk retention: characterized by recognition that risk exists; a tacit agreement to assume losses involved
Involuntary risk retention: the individual exposed to risk does not recognize its existence, or there is no other option available

Front 32

5–5 Apply methods of handling risk in a given situation.
Kerby Jones owns a retail cleaning firm. He is the employee most qualified to do the physical maintenance work, but he is also essential in the office because of his other knowledge and abilities. For that reason, he does not do the maintenance work. Because the company would find it difficult to pay the bills if Kerby were disabled, it recently purchased business overhead insurance with Kerby as the insured. What are two methods the company is using to handle risk?

Back 32

Kerby's decision not to do the physical maintenance work is risk avoidance, and the disability insurance is risk transfer.

Front 33

5–5 Apply methods of handling risk in a given situation.
What is probability theory?

Back 33

Probability theory is a body of knowledge concerned with measuring the likelihood that something will happen and with making predictions on the basis of that likelihood.

Front 34

5–5 Apply methods of handling risk in a given situation.
What is adverse selection, and why is it a problem?

Back 34

Adverse selection is the tendency of poorer-than-average risks to purchase or continue insurance. It is a problem because, unchecked, it could render past experience useless in predicting future losses.

Front 35

5–6 Identify the advantages and disadvantages of self-insurance.
Why is “self-insurance” a misleading term?

Back 35

The insurance mechanism essentially consists of a transfer of risk or the pooling of exposure units; one cannot pool with or transfer to oneself.

Front 36

5–6 Identify the advantages and disadvantages of self-insurance.

What are the advantages of self-insurance?

Back 36

Eliminates selling costs
Eliminates state premium taxes
Eliminates insurance company profit
Provides opportunity to benefit directly from more efficient administration
Allows the self-insured to retain the investment returns on any reserves established to pay claims

Front 37

5–6 Identify the advantages and disadvantages of self-insurance.

What are the disadvantages of self-insurance?

Back 37

the need to replace all services provided by the insurer, such as:
(1) impartial claims service
(2) loss prevention services
(3) actuarial services
(4) consulting services
(5) investment management services
The possibility of higher income taxes because contributions to the self-insurance fund cannot be deducted; deductions are limited to incurred losses
The potential for losses that exceed the ability of the business to pay or that exceed premiums for insurance

Front 38

5–7 Explain an essential legal liability term.

Define each of the following legal terms.

Criminal acts

Back 38

public wrongs
violations of laws governing the relationship of the individual with the rest of society
prosecuted by the state as plaintiff against any citizen for violation of a duty prescribed by statute or common law

Front 39

5–7 Explain an essential legal liability term.

Define each of the following legal terms.

Intentional torts

Back 39

Such torts are infringements of the rights of others resulting from an intentional act on the part of the defendant; these include such torts as assault, battery, libel, slander, false arrest, false imprisonment, trespass, and invasion of privacy.

Front 40

5–7 Explain an essential legal liability term.

Define each of the following legal terms.

Trespasser

Back 40

A trespasser is a person who comes onto property without right and without consent of the owner or occupier.

Front 41

5–7 Explain an essential legal liability term.
Define each of the following legal terms. Licensee

Back 41

A licensee is a person who comes onto property with the knowledge or tolerance of the owner but for no purpose of, or benefit to, the latter (e.g., door-to-door salespeople).

Front 42

5–7 Explain an essential legal liability term.
Define each of the following legal terms. Invitee

Back 42

An invitee is a person who has been invited into or onto the property for some purpose of the owner (e.g., delivery people) or any person on premises open for admission to the general public, such as a church, a theater, etc.

Front 43

5–7 Explain an essential legal liability term.
Define each of the following legal terms. Survival of tort actions

Back 43

A cause of action for most torts survives the death of either the plaintiff or the defendant.

Front 44

5–7 Explain an essential legal liability term.
Define each of the following legal terms. Attractive nuisance

Back 44

A high degree of care is imposed on a land occupier for certain conditions on the land (attractive nuisances) that attract and possibly injure children; the land occupier is obligated to use due care to discover children on property, then warn them to protect them from conditions threatening death or serious bodily harm.

Front 45

5–7 Explain an essential legal liability term.
What is the collateral source rule and what prevents a plaintiff from using it to defeat the concept of indemnity under an insurance contract?

Back 45

The collateral source rule states that A TORTFEASOR (ONE WHO COMMITS A TORT) WILL BE LIABLE FOR FULL DAMAGES EVEN THOUGH THE PLAINTIFF HAS AVAILABLE TO HIM OR HER OTHER SOURCES OF RECOVERY that can compensate for his or her loss.
Note that if the plaintiff recovered from his or her insurance and also from the tortfeasor, as allowed by the collateral source rule, the principle of indemnity would be violated. For this reason, insurance companies put a “subrogation” clause in the insurance contract, giving the insurance company the insured’s right to recover from the defendant an amount equal to what the company has paid the insured.

Front 46

5–7 Explain an essential legal liability term.
Define each of the following legal liability terms. Negligence (unintentional tort)

Back 46

This term refers to wrongs resulting from negligence or carelessness.

Front 47

5–7 Explain an essential legal liability term.
Define each of the following legal terms.Negligence per se

Back 47

Negligence per se describes a situation where the standard of care (duty) of the defendant is set by statute. For this to occur, the statute generally must be found to be intended to protect the class of people to which the plaintiff belongs; it must also be intended to protect against the type of harm which has in fact occurred in the case. In such a situation, an unexcused violation of the statute is held to be negligence.

Front 48

5–7 Explain an essential legal liability term.
Define each of the following legal terms. Absolute liability

Back 48

If a person maintains an extra-hazardous condition (such as keeping wild animals) or engages in extra-hazardous activities (such as dynamite blasting), he or she will have to bear such losses as result to others even though he or she may not be negligent in the typical meaning of the word.
Workers’ compensation is not, to be precise, an application of absolute liability in tort. Rather, it is a statutory preemption of tort law for work-related injuries—i.e., it applies the tort law concept of absolute liability to implement a public policy compromise.
Strict liability is generally limited to product liability situations.

Front 49

5–7 Explain an essential legal liability term.
Define each of the following legal terms. Vicarious liability

Back 49

This is imputed liability: one person is held liable for the negligent behavior of another. For example, principals can be held liable for the negligent acts of their agents.

Front 50

5–7 Explain an essential legal liability term.
Define each of the following legal terms. Res ipsa loquitur

Back 50

Literally, “the thing speaks for itself.”
It is a name given to circumstantial evidence in certain situations; the requirements for using res ipsa loquitur generally are formulated as follows:
(1) the accident was caused by something under the exclusive control of the defendant,
(2) the accident involved an event that does not ordinarily happen in the absence of negligence, and
(3) the plaintiff did not contribute to the accident.

Front 51

5–7 Explain an essential legal liability term.
Briefly explain the defenses to a negligence suit. Assumption of risk

Back 51

This refers to risk assumed by the injured party. If one party recognizes and understands danger in an activity and voluntarily chooses to encounter it, another party cannot be held responsible for the injury.

Front 52

5–7 Explain an essential legal liability term.
Briefly explain the defenses to a negligence suit. Contributory negligence

Back 52

Any negligence on the part of the injured party, even though slight, defeats the claim.

Front 53

5–7 Explain an essential legal liability term.
Briefly explain the defenses to a negligence suit. Comparative negligence

Back 53

This is an alternative to contributory negligence. Comparative negligence means that contributory negligence on the part of the injured party does not defeat the claim but is used in some manner to mitigate damages payable by the other party.

Front 54

5–7 Explain an essential legal liability term.
Briefly explain the defenses to a negligence suit. Last clear chance

Back 54

This is a modification of the contributory negligence rule. According to the last clear chance doctrine, contributory negligence of the injured party will not bar recovery if the other party, immediately prior to the accident, had a last clear chance to prevent the accident but failed to seize the chance.

Front 55

5–8 Analyze a given situation to identify the risk treatment device that should be used to handle risk exposures based on criminal, tort, and contract law.
While Herbert Martin was driving home from his vacation, he fell asleep at the wheel. His car then collided with Diane Johnson’s car, resulting in severe injuries to Diane. What is Herbert’s liability exposure in this situation?

Back 55

It is likely that Herbert will be found liable because a “reasonable man” would have known he was tired, perceived the potential danger, and stopped to get some sleep.
would extend to the cost of the loss to the automobile, loss of use of the automobile, medical expenses for Diane, and Diane’s pain and suffering.
also could extend to consequential damages
Punitive damages also could be awarded (although this is unlikely) if it is shown that Herbert had a conscious and deliberate disregard for the safety of others, continued to drive.

Front 56

5–8 Analyze a given situation to identify the risk treatment device that should be used to handle risk exposures based on criminal, tort, and contract law.
Barbara Barnett is an active environmentalist and keeps many wild animals in her yard. Last week, the neighbor’s child climbed over the fence and was badly scratched by a bear cub. What is Barbara’s liability exposure in this situation?

Back 56

Keeping wild animals creates an extra-hazardous situation. Thus, even though Barbara is not negligent as such (she did put up a fence that the child intentionally climbed over), she will be held responsible for damages under the absolute liability doctrine.

Front 57

5–8 Analyze a given situation to identify the risk treatment device that should be used to handle risk exposures based on criminal, tort, and contract law.
Paul Hemmitz is the owner/manager of a restaurant. He was closing up the business one evening when Doris Franklin came in and ordered a pizza and a glass of red wine. Mr. Hemmitz told Mrs. Franklin that the restaurant was closing and he could not make her a pizza. Mrs. Franklin protested, but Mr. Hemmitz would not serve her. Mrs. Franklin responded by throwing an ashtray across the room. The ashtray hit Mr. Hemmitz in the head, knocking him unconscious. What are Mrs. Franklin’s liability exposures in this situation?

Back 57

Mrs. Franklin has tort liability and also criminal liability. There was a criminal and tort battery when she hit Mr. Hemmitz in the head with the ashtray.

Front 58

5–8 Analyze a given situation to identify the risk treatment device that should be used to handle risk exposures based on criminal, tort, and contract law.
Does liability insurance cover liability for all types of conduct?

Back 58

No. It is generally against public policy to protect an individual from the consequences of his or her intentional acts.

Front 59

5–8 Analyze a given situation to identify the risk treatment device that should be used to handle risk exposures based on criminal, tort, and contract law.
What type of insurance is available to an individual accused of a crime to indemnify the person against whom the crime was committed?

Back 59

There is no insurance that will protect an individual from financial obligations arising out of criminal activity.

Front 60

5–9 Identify a legal requirement for an enforceable contract.
List five legal requirements for an enforceable insurance contract. Explain each requirement.

Back 60

Offer and acceptance There must be an offer by one party, and the offer must be accepted by the other party.
Consideration Each party must give the other something of value.
Legal object The purpose of the contract must be legal.
Competent parties The parties to the agreement must be capable of entering into a contract in the eyes of the law.
Legal form If there are legal requirements concerning the form of the particular type of contract entered into, the contract must meet those requirements.

Front 61

5–9 Identify a legal requirement for an enforceable contract.
Denisha Swallow signed a contract to purchase a set of “Great Books” when she was 16. Is there any requirement for making this an enforceable contract that is missing? If so, which requirement, and if not, how are the requirements met?

Back 61

Yes, the requirement that both parties be legally competent is missing.
Denisha is a minor and cannot be forced to comply with the terms of the contract. While the contract is valid and she could force the company to comply with its part of the contract, the company cannot enforce its rights against her.

Front 62

5–10 Explain legal issues affecting financial planners.
What legal concepts or activities is a planner likely to encounter in his or her daily activities?

Back 62

contract law
law of agency
professional liability

Front 63

5–10 Explain legal issues affecting financial planners.
Give an example of each of the following that would reflect how a financial planner might be involved. Contract law

Back 63

The planner could be sued for failing to deliver services or plans agreed to in a contract with his or her client.

Front 64

5–10 Explain legal issues affecting financial planners.
Give an example of each of the following that would reflect how a financial planner might be involved. Law of agency

Back 64

A planner who is part of a financial planning firm may be considered an agent. As a representative (agent) of the planning firm, he or she might make some promises to a client that the firm doesn’t permit. The client could reasonably expect the promises to be kept.

Front 65

5–10 Explain legal issues affecting financial planners.
Give an example of each of the following that would reflect how a financial planner might be involved. Professional liability

Back 65

A planner makes recommendations to a client based on a “gut feeling” rather than careful consideration of the client’s needs and circumstances. If the recommendation turns out to be bad for the client, the planner may be deemed to have failed to use the care required in providing professional services.

Front 66

5–10 Explain legal issues affecting financial planners.
David White, a financial planner, had an agreement that he would provide a financial plan for Cheryl and Steven Barner. They were to set up a fact-finding meeting, and the plan was to be completed within 30 days of that meeting. In return they paid a retainer of $500 and agreed to pay the balance owed for the plan when it was delivered. After nine months of repeated calls by the Barners, David still hadn’t made himself available for a fact-finding meeting, didn’t have their plan, and failed to return their money when asked. The Barners sued him. Under which of the general areas of exposure is David most subject to a lawsuit by the Barners, and why?

Back 66

It is contract exposure. David and the Barners entered into a bilateral contract, and David failed to meet his part of the agreement in a reasonable time.

Front 67

5–11 Identify a concept, doctrine, or remedy used in settling disputes among parties to an insurance contract.
Explain the following as used in the process of settling contract disputes. Doctrine of Waiver

Back 67

Waiver occurs when a party, with full knowledge of the material facts and by his or her own actions (or the actions of his or her agent), has voluntarily relinquished or surrendered a known right. No action is required by the other party.

Front 68

5–11 Identify a concept, doctrine, or remedy used in settling disputes among parties to an insurance contract.
Explain the following as used in the process of settling contract disputes. Estoppel

Back 68

Estoppel is a doctrine that PREVENTS A PARTY FROM ASSERTING A RIGHT TO WHICH HE OR SHE OTHERWISE WOULD BE ENTITLED WHERE, BECAUSE OF HIS OR HER OWN ACTIONS OR BEHAVIOR, HE OR SHE MISLED SOMEONE (even though unintentionally) who relied on the understanding created thereby to his or her own detriment. Note that ACTION IS REQUIRED ON THE PART OF THE OTHER PARTY (he or she must rely on the misunderstanding to his or her detriment). The doctrine of estoppel is based on the idea that WHERE ONE OF TWO INNOCENT PERSONS MUST SUFFER, THE ONE WHOSE ACT OCCASIONED THE LOSS MUST BEAR IT.

Front 69

5–11 Identify a concept, doctrine, or remedy used in settling disputes among parties to an insurance contract.
Explain the following as used in the process of settling contract disputes. Parol evidence rule

Back 69

Under this rule, when the parties put their agreement into a final, complete, binding, written contract (in the absence of fraud, mutual mistake, duress, or the like), evidence, whether oral or written, of PRIOR UNDERSTANDINGS WILL NOT BE ADMITTED TO CONTRADICT THE WRITING.
Note, however, that the parol evidence rule does not apply to subsequent modifications: evidence of oral modifications made after the agreement is in written form are admissible to clarify the parties’ intent.

Front 70

5–11 Identify a concept, doctrine, or remedy used in settling disputes among parties to an insurance contract.
Explain the following as used in the process of settling contract disputes. Waiver provision

Back 70

TO AVOID LIABILITY FROM AN AGENT OFFERING THE CLIENT TERMS NOT CONTEMPLATED BY THE CONTRACT, INSURERS GENERALLY PLACE A WAIVER CLAUSE IN INSURANCE CONTRACTS providing that “only the president, a vice president, or the secretary of the company has authority to alter this contract or to waive any of its provisions.” Such provisions are not always successful.

Front 71

5–11 Identify a concept, doctrine, or remedy used in settling disputes among parties to an insurance contract.
Explain the following as used in the process of settling contract disputes. Rescission

Back 71

Rescission is an equitable remedy by which the CONTRACT IS DEEMED NULL FROM ITS BEGINNING due to fraud, impossibility, misrepresentation of a material fact, concealment in the application, or mutual mistake as to a material fact.

Front 72

5–11 Identify a concept, doctrine, or remedy used in settling disputes among parties to an insurance contract.
Explain the following as used in the process of settling contract disputes. Reformation

Back 72

Reformation is an equitable remedy by which THE WRITTEN INSTRUMENT BETWEEN THE PARTIES IS CHANGED TO EXPRESS THE ORIGINAL INTENTIONS OF THE PARTIES. It must be shown that there was a mutual mistake, or a unilateral mistake coupled with actual or equitable fraud by the other party, duress, or related misconduct. The purpose of reformation is not to change the contract but to make the written contract conform to what was originally intended.

Front 73

5–11 Identify a concept, doctrine, or remedy used in settling disputes among parties to an insurance contract.
Susan Sewell’s insurance agent told her that her $25,000 boat, which she kept in her garage, was fully covered by her homeowners policy. When her boat was stolen, her homeowners policy insurance company eventually paid the claim. Under what concept or doctrine was the company compelled to pay the claim?

Back 73

The doctrine of estoppel. Because Susan relied on the statement of her agent, an agent of the insurance company, the company is estopped, or prevented, from denying the claim under the limitations spelled out in the policy.

Front 74

5–12 Identify a description, explanation, or example of an essential term in a contract or insurance policy, or a related legal term.
Briefly explain the difference between a void contract and a voidable contract.

Back 74

A VOID CONTRACT IS NOT A CONTRACT AT ALL. It is not enforceable because it lacks one of the requirements for being an enforceable contract.
A VOIDABLE CONTRACT IS ONE WHERE ONE PARTY HAS THE OPTION OF VOIDING THE CONTRACT IF DESIRED, while the other party is bound by the contract.

Front 75

5–12 Identify a description, explanation, or example of an essential term in a contract or insurance policy, or a related legal term.
What four concepts or policy provisions assure that the principle of indemnity will be enforced? Describe each one. Doctrine of insurable interest

Back 75

In property and liability insurance, it is the FINANCIAL (PECUNIARY) INTEREST the insured must possess IN THE SUBJECT MATTER OF AN INSURANCE CONTRACT AT THE TIME OF THE LOSS to have a legally enforceable right to indemnity under the contract. It must exist at the time of the loss.
In life insurance it is the financial (pecuniary) interest, sentimental interest, or interest in the love and affection of a person that the applicant must possess in the insured at the time of application to have a legally enforceable right to indemnity under the contract. It only has to exist at the time the contract was purchased. It need not be present at the time of death.

Front 76

5–12 Identify a description, explanation, or example of an essential term in a contract or insurance policy, or a related legal term.
What four concepts or policy provisions assure that the principle of indemnity will be enforced? Describe each one. Concept of actual cash value

Back 76

It is the depreciated replacement cost of a lost, stolen, damaged, or destroyed insured item.

Front 77

5–12 Identify a description, explanation, or example of an essential term in a contract or insurance policy, or a related legal term.
What four concepts or policy provisions assure that the principle of indemnity will be enforced? Describe each one.Other insurance provision

Back 77

It provides that all insurance policies combined will not provide the insured with more than 100% of the value of the asset that was lost, stolen, damaged, or destroyed.

Front 78

5–12 Identify a description, explanation, or example of an essential term in a contract or insurance policy, or a related legal term.
What four concepts or policy provisions assure that the principle of indemnity will be enforced? Describe each one.Subrogation clause

Back 78

It provides that if the insured is compensated for a loss by his or her insurance company and the responsible party is then found liable for the loss, any payments received from the responsible party will first be used to repay the insured’s insurance company.

Front 79

5–12 Identify a description, explanation, or example of an essential term in a contract or insurance policy, or a related legal term.
Give an example of a bilateral contract and a unilateral contract.

Back 79

Bilateral “I will pay you $100 per month and you will make sure all of my bills get paid on time.”
Unilateral “If you mow the lawn before Saturday, I will take you to the baseball game on Sunday.”

Front 80

5–12 Identify a description, explanation, or example of an essential term in a contract or insurance policy, or a related legal term.
There are six contract characteristics generally applicable to insurance contracts that make them unusual as compared with other types of contracts. Describe these characteristics. Contract of Indemnity

Back 80

The insured is entitled to payment from the insurance company only if he or she suffered a loss and only to the extent of the financial loss sustained.

Front 81

5–12 Identify a description, explanation, or example of an essential term in a contract or insurance policy, or a related legal term.
There are six contract characteristics generally applicable to insurance contracts that make them unusual as compared with other types of contracts. Describe these characteristics. Personal contract

Back 81

The insured cannot transfer the contract to another without the consent of the insurer (with the exception of life insurance).

Front 82

5–12 Identify a description, explanation, or example of an essential term in a contract or insurance policy, or a related legal term.
There are six contract characteristics generally applicable to insurance contracts that make them unusual as compared with other types of contracts. Describe these characteristics. Unilateral contract

Back 82

Only one party to the contract is legally bound to do anything; the insured makes no promise that can be legally enforced.

Front 83

5–12 Identify a description, explanation, or example of an essential term in a contract or insurance policy, or a related legal term.
There are six contract characteristics generally applicable to insurance contracts that make them unusual as compared with other types of contracts. Describe these characteristics. Contract of adhesion

Back 83

The contract is prepared by one of the parties (the insurance company) and accepted “as is” or not at all by the other party (the insured).

Front 84

5–12 Identify a description, explanation, or example of an essential term in a contract or insurance policy, or a related legal term.
There are six contract characteristics generally applicable to insurance contracts that make them unusual as compared with other types of contracts. Describe these characteristics. Aleatory contract

Back 84

The outcome is affected by chance, and the amount of money given up by each party is unequal.

Front 85

5–12 Identify a description, explanation, or example of an essential term in a contract or insurance policy, or a related legal term.
There are six contract characteristics generally applicable to insurance contracts that make them unusual as compared with other types of contracts. Describe these characteristics. Contract of utmost good faith

Back 85

Both the insurer and insured enter into an agreement where mutual honesty is of paramount importance; this is given legal effect by the doctrines of:
misrepresentation,
warranty, and
concealment.

Front 86

5–12 Identify a description, explanation, or example of an essential term in a contract or insurance policy, or a related legal term.
What is one characteristic of all insurance contracts that is critical for the insurance concept to work?

Back 86

Insurance contracts are contingent contracts. The policy doesn’t pay anything unless something happens first.

Front 87

5–12 Identify a description, explanation, or example of an essential term in a contract or insurance policy, or a related legal term.
What are the four basic parts of an insurance contract and what does each contain?

Back 87

Declarations This part contains the statements made by the insured, information identifying the property insured and the policyholder, and the cost and amount of coverage.
Insuring agreement This part of the contract lays out the major terms of the agreement under which the company insures the property.
Exclusions This part specifies what the company does not insure.
Conditions This section specifies the duties and rights of both parties.

Front 88

5–12 Identify a description, explanation, or example of an essential term in a contract or insurance policy, or a related legal term.
What is the purpose of the exclusion section of an insurance policy?

Back 88

The exclusion section states what the insurance policy will not cover. It generally identifies those things that are not insurable or are more appropriately covered under other policies.