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GeneralInsurance
Before you learn the different types of policies that you will
encounterasaninsuranceproducer,youwillneedtounderstand
some basic terminology and concepts. First you need to
understand what insurance is and who or what may become
insured. This chapter will discuss some basic underwriting concepts,
address different classifications of insurers, and will end with an
explanation of contracts. In general, this chapter will help build a
foundation of concepts that will make it easier for you to learn the rest of
thematerialinthiscourse,soitisimportantforyoutomastertheseideas
beforemovingontothenextchapter.

A.Concepts
Insuranceisacontractinwhichoneparty(theinsurancecompany)agrees
toindemnify(makewhole)theinsuredpartyagainstloss,damageor
liabilityarisingfromanunknownevent.Inlifeinsurance,thepolicy
protectssurvivorsfromlossessufferedafteraninsuredsdeath.
Insurancetransferstheriskoflossfromanindividualorbusinessentity
toaninsurancecompany,whichinturnspreadsthecostsofunexpected
lossestomanyindividuals.Iftherewerenoinsurancemechanism,thecost
ofalosswouldhavetobebornesolelybytheindividualwhosufferedthe
loss.
1.RiskManagementKeyTerms

Risk
Riskistheuncertaintyorchanceofalossoccurring.Thetwotypesofrisks
arepureandspeculative,onlyoneofwhichisinsurable.
Pureriskreferstosituationsthatcanonlyresultinalossornochange.
Thereisnoopportunityforfinancialgain.Pureriskistheonlytype
insurancecompaniesarewillingtoaccept.
Speculativeriskinvolvestheopportunityforeitherlossorgain.An
exampleofspeculativeriskisgambling.Thesetypesofrisksarenot
insurable.
Hazard
Hazardsareconditionsorsituationsthatincreasetheprobabilityofan
insuredlossoccurring.Hazardsareclassifiedasphysicalhazards,moral
hazards,ormoralehazards.Conditionssuchaslifestyleandexisting
health,oractivitiessuchasscubadiving,arehazardsandmayincreasethe
chanceofalossoccurring.

Physicalhazardsareindividualcharacteristicsthatincreasethechances
ofthecauseofloss.Physicalhazardsexistbecauseofaphysicalcondition,
pastmedicalhistory,oraconditionatbirth,suchasblindness.
Moralhazardsaretendenciestowardsincreasedrisk.Moralhazards
involveevaluatingthecharacterandreputationoftheproposedinsured.
Moralhazardsrefertothoseapplicantswhomaylieonanapplicationfor
insurance,orinthepast,havesubmittedfraudulentclaimsagainstan
insurer.
Moralehazardsaresimilartomoralhazards,exceptthattheyarisefroma
stateofmindthatcausesindifferencetoloss,suchascarelessness.Actions
takenwithoutforethoughtmaycausephysicalinjuries.
Peril
Perilsarethecausesoflossinsuredagainstinaninsurancepolicy.
Lifeinsuranceinsuresagainstthefinanciallosscausedbythepremature
deathoftheinsured
Healthinsuranceinsuresagainstthemedicalexpensesand/orlossof
incomecausedbytheinsuredssicknessoraccidentalinjury
Propertyinsuranceinsuresagainstthelossofphysicalpropertyorthe
lossofitsincomeproducingabilities
Casualtyinsuranceinsuresagainstthelossand/ordamageofproperty
andresultingliabilities.
Loss
Lossisdefinedasthereduction,decrease,ordisappearanceofvalueofthe
personorpropertyinsuredinapolicy,causedbyanamedperil.Insurance
providesameanstotransferloss.

Exposure
Exposureisaunitofmeasureusedtodeterminerateschargedfor
insurancecoverage.Inlifeinsurance,allofthefollowingfactorsare
consideredindeterminingrates:
Theageoftheinsured

Theageoftheinsured
Medicalhistory
Occupationand
Sex.
Alargenumberofunitshavingthesameorsimilarexposuretolossis
knownashomogeneous.Thebasisofinsuranceissharingriskamongthe
membersofalargehomogeneousgroupwithsimilarexposuretoloss.
2.MethodsofHandlingRisk

Avoidance
Oneofthemethodsofdealingwithriskisavoidance,whichmeans
eliminatingexposuretoaloss.Forexample,ifapersonwantedtoavoid
theriskofbeingkilledinanairplanecrash,he/shemightchooseneverto
flyinanairplane.Riskavoidanceiseffective,butseldompractical.
Retention
Riskretentionistheplannedassumptionofriskbyaninsuredthrough
theuseofdeductibles,copayments,orselfinsurance.Itisalsoknownas
selfinsurancewhentheinsuredacceptstheresponsibilityfortheloss
beforetheinsurancecompanypays.Thepurposeofretentionis
1.Toreduceexpensesandimprovecashflow
2.Toincreasecontrolofclaimreservingandclaimssettlementsand
3.Tofundforlossesthatcannotbeinsured.
Sharing
Sharingisamethodofdealingwithriskforagroupofindividualpersons
orbusinesseswiththesameorsimilarexposuretolosstosharethelosses
thatoccurwithinthatgroup.Areciprocalinsuranceexchangeisaformal
risksharingarrangement.
Reduction
Sinceweusuallycannotavoidriskentirely,weoftenattempttolessenthe
possibilityorseverityofaloss.Reductionwouldincludeactionssuchas
installingsmokedetectorsinourhomes,havinganannualphysicalto
detecthealthproblemsearly,orperhapsmakingachangeinourlifestyles.
Transfer
Themosteffectivewaytohandleriskistotransferitsothatthelossis
bornebyanotherparty.Insuranceisthemostcommonmethodof
transferringriskfromanindividualorgrouptoaninsurancecompany.
Thoughthepurchasingofinsurancewillnoteliminatetheriskofdeathor
illness,itrelievestheinsuredofthefinanciallossestheserisksbring.

Thereareseveralwaystotransferrisk,suchasholdharmlessagreements
andothercontractualagreements,butthesafestandmostcommon
methodistopurchaseinsurancecoverage.
3.ElementsofInsurableRisks

Notallrisksareinsurable.Asnotedearlier,insurerswillinsureonlypure
risks,orthosethatinvolveonlythechanceoflosswithnochanceof
gain.Furthermore,evenpurerisksmusthavecertaincharacteristicsin
ordertobeinsurable.Insurablerisksinvolvethefollowinglosses:
Duetochance:alossthatisoutsidetheinsuredscontrol.
Definiteandmeasurable:alossthatisspecificastothecause,time,
placeandamount.Aninsurermustbeabletodeterminehowmuchthe
benefitwillbeandwhenitbecomespayable.
Statisticallypredictable:Insurersmustbeabletoestimatetheaverage
frequencyandseverityoffuturelossesandsetappropriatepremiumrates.
(Inlifeandhealthinsurance,theuseofmortalitytablesandmorbidity
tablesallowstheinsurertoprojectlossesbasedonstatistics.)
Notcatastrophic:Insurersneedtobereasonablycertaintheirlosses
willnotexceedspecificlimits.Thatiswhyinsurancepoliciesusually
excludecoverageforlosscausedbywarornuclearevents:Thereisno
statisticaldatathatallowsforthedevelopmentofratesthatwouldbe
necessarytocoverlossesfromeventsofthisnature.
Randomlyselectedandlargelossexposure:Theremustbea
sufficientlylargepooloftheinsuredthatrepresentsarandomselectionof
risksintermsofage,gender,occupation,healthandeconomicstatus,and
geographiclocation.
4.LawofLargeNumbers

Thebasisofinsuranceissharingriskamongalargepoolofpeoplewitha
similarexposuretoloss(ahomogeneousgroup).Thelawoflarge
numbersstatesthatthelargerthenumberofpeoplewithasimilar
exposuretoloss,themorepredictableactuallosseswillbe.Thislawforms
thebasisforstatisticalpredictionoflossuponwhichinsuranceratesare
calculated.
Example:
Whenaninsurancecompanyissuesapolicyona35yearoldmale,the
companyreallyhasnowayofknowingoraccuratelypredictingwhenhe
willdie.However,theLawofLargeNumberslooksatalargegroupof
similarrisks35yearoldmalesofsimilarlifestylesandhealthconditions
andmakessomeconclusionsbasedonstatisticsofpastlosses.This
allowstheinsurancecompanytohaveageneralideaaboutthepredicted
timeofdeathforthistypeofinsuredandtosetthepremiumsaccordingly.
5.AdverseSelection

Insurancecompaniesstrivetoprotectthemselvesfromadverse

selection,theinsuringofrisksthataremorepronetolossesthanthe
averagerisk.Poorerriskstendtoseekinsuranceorfileclaimstoagreater
extentthanbetterrisks.
Toprotectthemselvesfromadverseselection,insurancecompanieshave
anoptiontorefuseorrestrictcoverageforbadrisks,orchargethema
higherrateforinsurancecoverage.

B.Insurers
Insuranceisavailablefrombothprivatecompaniesandthegovernment.
Themajordifferencebetweengovernmentandprivateinsuranceisthatthe
governmentprogramsarefundedwithtaxesandservenationalandstate
socialpurposes,whileprivatepoliciesarefundedbypremiums.
Privateinsurancecompaniescanbeclassifiedinavarietyofways:
Ownership
Authoritytotransactbusiness
Location(domicile)
Marketinganddistributionsystemsor
Rating(financialstrength).
Asyoureadaboutdifferentclassificationsofinsurers,keepinmindthat
thesecategoriesarenotmutuallyexclusive,andthesamecompanycanbe
describedbasedonwhereitislocatedandallowedtotransactthebusiness
ofinsurance,whoownsit,andwhattypeofagentsitappoints.
1.Ownership

Thefollowingarethemostcommontypesofownership.
StockCompanies
Stockcompaniesareownedbythestockholderswhoprovidethecapital
necessarytoestablishandoperatetheinsurancecompanyandwhoshare
inanyprofitsorlosses.Officersareelectedbythestockholdersand
managestockinsurancecompanies.Traditionally,stockcompaniesissue
nonparticipatingpolicies,inwhichpolicyownersdonotshareinprofits
orlosses.
Anonparticipating(stock)policydoesnotpaydividendsto
policyownershowever,taxabledividendsarepaidtostockholders.
MutualCompanies
Mutualcompaniesareownedbythepolicyownersandissue
participatingpolicies.Withparticipatingpolicies,policyownersare
entitledtodividends,which,inthecaseofmutualcompanies,areareturn

ofexcesspremiumsandarethereforenontaxable.Dividendsare
generatedwhenthepremiumsandtheearningscombinedexceedthe
actualcostsofprovidingcoverage,creatingasurplus.Dividendsarenot
guaranteed.
FraternalBenefitSocieties
Afraternalbenefitsocietyisanorganizationformedtoprovide
insurancebenefitsformembersofanaffiliatedlodge,religious
organization,orfraternalorganizationwitharepresentativeformof
government.Fraternalssellonlytotheirmembersandareconsidered
charitableinstitutions,andnotinsurers.Theyarenotsubjecttoallofthe
regulationsthatapplytotheinsurersthatoffercoveragetothepublicat
large.
Lloyd'sAssociations
Lloyd'sisnotaninsurancecompany.Lloyd'sprovidessupportfacilities
forunderwritersorgroupsofindividualsthatacceptinsurancerisk.
Lloyd'sassociationsareagroupofindividualswhooperateaninsurance
mechanismusingthesameprinciplesofindividualliabilityofinsurersthat
Lloyd'sofLondonuses,inthateachindividualunderwriterassumesapart
ofeachrisk.Eachindividualpromisestopayaspecifiedamountinthe
eventthatthecontingencyinsuredagainstoccurs.Membersareliableonly
fortheirportionoftheriskandarenotboundtoassumeanyportionofa
defaultingmember.
WhileLloyd'sformedinthiscountryoperateinessentiallythesame
mannerasLloyd'sofLondon,theyarenotsubjecttothestrictregulation
whichLloyd'sofLondonimposesuponitsmembers.Moststateshavelaws
whichprohibittheorganizationorlicensingofAmericanLloyd's.Those
Lloyd'swhichdoexistoperatealmostexclusivelyinthepropertyinsurance
field.
Reciprocals
Areciprocalisinsuranceresultingfromaninterchangeofreciprocal
agreementsofindemnityamongpersonsknownassubscribers,collectively
knownasaReciprocalInsuranceCompanyorExchange.Thecompanyis
putintoeffectandadministeredthroughanattorneyinfactcommontoall
persons.Subscribersagreetobecomeliablefortheirshareoflossesand
expensesincurredamongallsubscribers,andtheyauthorizetheattorney
infacttomanageandoperatetheexchange.
RiskRetentionandRiskPurchasingGroups
Ariskretentiongroup(RRG)isaliabilityinsurancecompanyownedby
itsmembers.Themembersareexposedtosimilarliabilityrisksbyvirtueof

beinginthesamebusinessorindustry.Thepurposeofariskretention
groupistoassumeandspreadallorpartoftheliabilityofitsgroup
members.Ariskretentiongroupmayreinsureanotherriskretention
group'sliabilityaslongasthemembersofthesecondgroupareengagedin
thesameorsimilarbusinessorindustry.
Ariskpurchasinggroupisanentitywhichoffersinsurancetogroupsof
similarbusinesseswithsimilarexposurestorisk.Thepolicyisbasedonthe
insured'slossandexpenseexperienceandisnotaffordedtoother
policyholderswithrespecttorates,policyforms,orcoverages.Such
programsandthegroupsthatofferthemareexemptfrommoststatelaws,
rules,andregulations,exceptforthestateinwhichthegroupisdomiciled.
2.Privatevs.GovernmentInsurers

Privateinsurancecompaniesmayoffermanylinesofinsurance.Theymay
beformedasstock,mutual,reciprocalsorfraternalinsurers,andthey
mustbeauthorizedtotransactinsurancebythestateinsurance
departments.
Thegovernmentprovidesinsuranceinthoseareaswhereprivateinsurers
eithercannot,orwillnot,writeinsurance.Thoseinsuranceprograms
providedbythegovernmentarecommonlycalledsocialinsurance,suchas
Medicare,SocialSecurity,FederalCropinsuranceandNationalFlood
insurance.
Themajordifferencebetweengovernmentprogramsandprivateinsurance
programsisthatthegovernmentprogramsarefundedwithtaxesandserve
nationalandstatesocialpurposes,whileprivatepoliciesarefundedby
premiums.
3.Admittedvs.NonadmittedInsurers

Beforeinsurersmaytransactbusinessinaspecificstate,theymustapply
forandbegrantedalicenseorCertificateofAuthorityfromthestate
departmentofinsuranceandmeetanyfinancial(capitalandsurplus)
requirementssetbythestate.Insurerswhomeetthestate'sfinancial
requirementsandareapprovedtotransactbusinessinthestateare
consideredauthorizedoradmittedintothestateasalegalinsurer.
Thoseinsurerswhohavenotbeenapprovedtodobusinessinthestateare
consideredunauthorizedornonadmitted.Moststateshavelawsthat
prohibitunauthorizedinsurerstoconductbusinessinthestate,except
throughlicensedexcessandsurpluslinesbrokers.
SurplusLines
Insurancethatisnotavailableintheregularmarketplacefromadmitted
insurersisreferredtoasSurplusLines.Itusuallyinvolvesinsurancefor

highriskindividualsandisplacedwithnonadmittedinsurerswho
specializeinofferinginsurancetothehighriskmarket.
4.Domestic,Foreign,andAlienInsurers

Insurancecompaniesareclassifiedaccordingtothelocationof
incorporation(domicile).Regardlessofwhereaninsurancecompanyis
incorporated,itmustobtainaCertificateofAuthoritybeforetransacting
insurancewithinthestate.
Adomesticinsurerisaninsurancecompanythatisincorporatedinthis
state.Inmostcases,thecompany'shomeofficeisinthestateinwhichit
wasformedthecompany'sdomicile.Forinstance,acompanychartered
inPennsylvaniawouldbeconsideredaPennsylvaniadomesticcompany.
Aforeigninsurerisaninsurancecompanythatisincorporatedinanother
stateorterritorialpossession(suchasPuertoRico,GuamorAmerican
Samoa).Forexample,acompanycharteredinCaliforniawouldbea
foreigncompanywithinthestateofNewYork.
Analieninsurerisaninsurancecompanythatisincorporatedoutsidethe
UnitedStates.
5.Marketing(Distribution)Systems

Insurancecompaniesmarkettheirproductsindifferentways:through
agentsordirectsolicitationtothecustomers.
TYPEOF
MARKETING
ARRANGEMENTS
IndependentAgency
System/
AmericanAgency
System

CHARACTERISTICS

1independentagentrepresentsseveralcompanies
Nonexclusive
Commissionsonpersonalsales
Businessrenewalwithanycompany

ExclusiveAgency
System/
CaptiveAgents

1agentrepresents1company
Exclusive
Commissionsonpersonalsales
Renewalscanonlybeplacedwiththeappointing
insurer

GeneralAgency
System

Generalagententrepreneurrepresents1company
Exclusive
Compensationandcommissions
Appointssubagents

ManagerialSystem

Branchmanager(supervisesagents)
Salaried
Agentscanbeinsurersemployeesorindependent

Agentscanbeinsurersemployeesorindependent
contractors
DirectResponse
MarketingSystem

Noagents
Companyadvertisesdirectlytoconsumers
(throughmail,Internet,television,othermass
marketing)
Consumersapplydirectlytothecompany

6.FinancialStatus(IndependentRatingServices)

Thefinancialstrengthandstabilityofaninsurancecompanyaretwovitally
importantfactorstopotentialinsureds.Thefinancialstrengthofan
insurancecompanyisbasedonpriorclaimsexperience,investment
earnings,levelofreserves(amountofmoneykeptinaseparateaccountto
coverdebtstopolicyholders),andmanagement,tonameafew.Guidesto
insurancecompanies'financialintegrityarepublishedregularlybythe
followingvariousindependentratingservices:
AMBest
Fitch
StandardandPoor's
Moody's
Weiss

7.Reinsurance:InsuranceforInsurers

Reinsuranceisacontractunderwhichoneinsurancecompany(the
reinsurer)indemnifiesanotherinsurancecompanyforpartorallofits
liabilities.Thepurposeofreinsuranceistoprotectinsurersagainst
catastrophiclosses.Theoriginatingcompanythatprocuresinsuranceon
itselffromanotherinsureriscalledthecedinginsurer(becauseitcedes,or
gives,therisktothereinsurer).Theotherinsureriscalledtheassuming
insurer,orreinsurer.
Whenreinsuranceispurchasedonaspecificpolicy,itisclassifiedas
facultativereinsurance.Whenaninsurerhasanautomaticreinsurance
agreementbetweenitselfandthereinsurerinwhichthereinsurerisbound
toacceptallriskscededtoit,itisclassifiedasareinsurancetreaty.
Treatiesareusuallynegotiatedforaperiodofayearorlonger.

C.ProducersAndGeneralRulesOfAgency
Anagent/producerisanindividuallicensedtosell,solicitornegotiate
insurancecontractsonbehalfoftheprincipal(insurer).Thelawof
agencydefinestherelationshipbetweentheprincipalandthe
agent/producer:theactsoftheagent/producerwithinthescopeof
authorityaredeemedtobetheactsoftheinsurer.
Inthisrelationship,itisagiventhat
Anagentrepresentstheinsurer,nottheinsured
Anyknowledgeoftheagentispresumedtobeknowledgeoftheinsurer
Iftheagentisworkingwithintheconditionsofhis/hercontract,the
insurerisfullyresponsible
Whentheinsuredsubmitspaymenttotheagent,itisthesameas
submittingapaymenttotheinsurer.
Theagentisresponsibleforaccuratelycompletingapplicationsfor
insurancesubmittingtheapplicationtotheinsurerforunderwritingand
deliveringthepolicytothepolicyowner.
1.AuthorityandPowersofLicensees

Theagencycontractdetailstheauthorityanagenthaswithinhis/her
company.Contractually,onlythoseactionsforwhichtheagentis
authorizedcanbindtheprincipal(insurer).Inreality,anagent'sauthority
ismuchbroader.Thereare3typesofagentauthority:express,implied,
andapparent.
Express
Expressauthorityistheauthorityaprincipalintendstogranttoanagent
bymeansoftheagentscontract.Itistheauthoritythatiswritteninthe
contract.
Implied

Implied
Impliedauthorityisauthoritythatisnotexpressedorwritteninto
thecontract,butwhichtheagentisassumedtohaveinorderto
transactthebusinessofinsurancefortheprincipal.Impliedauthorityis
incidentaltoandderivesfromexpressauthoritysincenoteverysingle
detailofanagentsauthoritycanbespelledoutinthewrittencontract.
Example:
Iftheagencycontractdoesnotspecificallyauthorizetheagenttocollect
premiumsandremitthemtotheinsurer,buttheagentroutinelydoessoin
theprocessofsolicitationanddeliveryofpolicies,theagenthasthe
impliedauthoritytocollectandremitpremiums.
Apparent
Apparentauthorityistheappearanceortheassumptionofauthority
basedontheactions,words,ordeedsoftheprincipalorbecauseof
circumstancestheprincipalcreated.Forexample,whenaninsurer
furnishesanagentwitharatebook,applicationforms,andsalesliterature,
theinsurercannotlaterdenythatsucharelationshipexisted.
2.ResponsibilitiestotheApplicant/Insured

Althoughtheagentsactfortheinsurer,theyarelegallyobligatedtotreat
applicantsandinsuredsinanethicalmanner.Becauseanagenthandles
thefundsoftheinsuredandtheinsurer,he/shehasfiduciary
responsibility.Afiduciaryissomeoneinapositionoftrust.More
specifically,itisillegalforinsuranceproducerstocomminglepremiums
collectedfromtheapplicantswiththeirownpersonalfunds.
Marketconductdescribesthewaycompaniesandproducersshould
conducttheirbusiness.ItisaCodeofEthicsforproducers.Producers
mustadheretocertainestablishedprocedures,andfailuretocomplywill
resultinpenalties.Someofthemarketconductregulationsinclude,butare
notlimitedto,thefollowing:
Conflictofinterest
Arequestofagiftorloanasaconditiontocompletebusinessand
Supplyingconfidentialinformation.
Producersarerequiredtoperforminaprofessionalmanneratalltimes.
Professionalismmeansthatapersonisengagedinanoccupationrequiring
anadvancedleveloftraining,knowledge,orskill.Beingprofessional
meansplacingthepublic'sinterestaboveone'sowninallsituations.Any
deviationcouldresultinapenalty.

D.Contracts

Acontractisanagreementbetweentwoormorepartiesenforceableby
law.Becauseofuniqueaspectsofinsurancetransactions,thegenerallawof
contractshadtobemodifiedtofittheneedsofinsurance.
1.ElementsofaLegalContract

Inorderforinsurancecontractstobelegallybinding,theymusthave4
essentialelements:
1.Agreementofferandacceptance
2.Consideration
3.Competentparties
4.Legalpurpose
OfferandAcceptance
Theremustbeadefiniteofferbyoneparty,andtheotherpartymust
acceptthisofferinitsexactterms.Ininsurance,theapplicantusually
makestheofferwhensubmittingtheapplication.Acceptancetakesplace
whenaninsurersunderwriterapprovestheapplicationandissuesapolicy.
Consideration
Thebindingforceinanycontractistheconsideration.Considerationis
somethingofvaluethateachpartygivestotheother.Theconsiderationon
thepartoftheinsuredisthepaymentofpremiumandtherepresentations
madeintheapplication.Theconsiderationonthepartoftheinsureristhe
promisetopayintheeventofloss.
CompetentParties
Thepartiestoacontractmustbecapableofenteringintoacontractin
theeyesofthelaw.Generally,thisrequiresthatbothpartiesbeoflegal
age,mentallycompetenttounderstandthecontract,andnotunderthe
influenceofdrugsoralcohol.
LegalPurpose
Thepurposeofthecontractmustbelegalandnotagainstpublicpolicy.To
ensurelegalpurposeofaLifeInsurancepolicy,forexample,itmusthave
both:insurableinterestandconsent.Acontractwithoutalegalpurposeis
consideredvoid,andcannotbeenforcedbyanyparty.
2.DistinctCharacteristicsofanInsuranceContract

Inadditiontorequiredelements,insurancecontractshaveunique
characteristicsthatdistinguishthemfromothertypesoflegalcontracts.It
isimportanttounderstandthesefeaturesandhowtheyaffectpartiestoan
insurancecontract.
ContractofAdhesion

ContractofAdhesion
Acontractofadhesionispreparedbyoneoftheparties(insurer)and
acceptedorrejectedbytheotherparty(insured).Insurancepoliciesare
notdrawnupthroughnegotiations,andaninsuredhaslittletosayabout
itsprovisions.Inotherwords,insurancecontractsareofferedona"takeit
orleaveit"basisbyaninsurer.
AleatoryContract
Insurancecontractsarealeatory,whichmeansthereisanexchangeof
unequalamountsorvalues.Thepremiumpaidbytheinsuredissmallin
relationtotheamountthatwillbepaidbytheinsurerintheeventofloss.
LifeandHealthExample:
Johnpurchasesalifeinsurancepolicyfor$100,000.Hismonthlypremium
is$100.IfJohnonlyhadthepolicyfor2months,whichmeansheonly
paid$200inpremiums,andheunexpectedlydied,hisbeneficiarywill
receive$100,000.A$200contributiononthepartoftheinsuredin
exchangefor$100,000benefitfromtheinsurerillustratesanaleatory
contract.
PropertyandCasualtyExample:
Johnpurchasesahomeownersinsurancepolicyfor$100,000.Hismonthly
premiumis$100.IfJohnonlyhadthepolicyfor2months,whichmeans
heonlypaid$200inpremiums,andthehomewasunexpectedlydestroyed
byacoveredperil,Johnwillreceive$100,000.A$200contributiononthe
partoftheinsuredinexchangefor$100,000benefitfromtheinsurer
illustratesanaleatorycontract.
PersonalContract
Ingeneral,aninsurancecontractisapersonalcontractbecauseitis
betweentheinsurancecompanyandanindividual.Becausethecompany
hasarighttodecidewithwhomitwillandwillnotdobusiness,theinsured
cannotbechangedtosomeoneelsewithoutthewrittenconsentofthe
insurer,norcantheownertransferthecontracttoanotherpersonwithout
theinsurer'sapproval.Lifeinsuranceisanexceptiontothisrule:A
policyownercantransfer(orassign)ownershiptoanotherperson.
However,theinsurermuststillbenotifiedinwriting.
UnilateralContract
Inaunilateralcontract,onlyoneofthepartiestothecontractislegally
boundtodoanything.Theinsuredmakesnolegallybindingpromises.
However,aninsurerislegallyboundtopaylossescoveredbyapolicyin
force.
ConditionalContract

ConditionalContract
Asthenameimplies,aconditionalcontractrequiresthatcertain
conditionsmustbemetbythepolicyownerandthecompanyinorderfor
thecontracttobeexecuted,andbeforeeachpartyfulfillsitsobligations.
Forexample,theinsuredmustpaythepremiumandprovideproofof
lossinorderfortheinsurertocoveraclaim.
3.LegalInterpretationsAffectingContracts

AmbiguitiesinaContractofAdhesion
Becauseonlytheinsurancecompanyhastherighttodrawupacontract,
andtheinsuredhastoadheretothecontractasissued,thecourtshave
heldthatanyambiguityinthecontractshouldbeinterpretedinfavorof
theinsured.
ReasonableExpectations
Itisnotalwayspracticalornecessarytostateeverydirectandindirect
provisionorcoverageofferedbyaninsurancepolicy.Ifanagentimplies
throughadvertising,salesliteratureorstatementsthattheseprovisions
exist,aninsuredcouldreasonablyexpectcoverage.Forexample,ifan
insurancecompanyadvertisesinlargeprintthatinsuranceisavailable
regardlessofpreexistingconditions,thebuyercouldreasonablyexpect
anypreexistingconditionstobecovered,evenifthesmallprintonthe
backofthesalesbrochurespecifiesthatnotallpreexistingconditions
wouldbecovered.
Indemnity
Indemnity(sometimesreferredtoasreimbursement)isaprovisionin
aninsurancepolicythatstatesthatintheeventofloss,aninsuredora
beneficiaryispermittedtocollectonlytotheextentofthefinancialloss,
andisnotallowedtogainfinanciallybecauseoftheexistenceofan
insurancecontract.Thepurposeofinsuranceistorestore,butnotletan
insuredorabeneficiaryprofitfromtheloss.
LifeandHealthExample:
Brendahasahealthinsurancepolicyfor$20,000.Aftershewas
hospitalized,hermedicalexpensesaddedupto$15,000.Theinsurance
policywillreimburseBrendaonlyfor$15,000(theamountoftheloss),
andnotfor$20,000(thetotalamountofinsurance).
PropertyandCasualtyExample:
Brendahasahomeownersinsurancepolicyfor$200,000.Afterherhome
wasdestroyed,herexpensetorebuildthehomeaddedupto$150,000.The

insurancepolicywillreimburseBrendaonlyfor$150,000(theamountof
theloss),andnotfor$200,000(thetotalamountofinsurance).
UtmostGoodFaith
Theprincipleofutmostgoodfaithimpliesthattherewillbenofraud,
misrepresentationorconcealmentbetweentheparties.Asitpertainsto
insurancepolicies,boththeinsurerandinsuredmustbeabletorelyonthe
otherforrelevantinformation.Theinsuredisexpectedtoprovideaccurate
informationontheapplicationforinsurance,andtheinsurermustclearly
andtruthfullydescribepolicyfeaturesandbenefits,andmustnotconceal
ormisleadtheinsured.
Representations/Misrepresentations
Representationsarestatementsbelievedtobetruetothebestofone's
knowledge,buttheyarenotguaranteedtobetrue.Forinsurancepurposes,
representationsaretheanswerstheinsuredgivestothequestionsonthe
insuranceapplication.
Untruestatementsontheapplicationareconsidered
misrepresentationsandcouldvoidthecontract.Amaterial
misrepresentationisastatementthat,ifdiscovered,wouldalterthe
underwritingdecisionoftheinsurancecompany.Furthermore,ifmaterial
misrepresentationsareintentional,theyareconsideredfraud.
Warranties
Awarrantyisanabsolutelytruestatementuponwhichthevalidityofthe
insurancepolicydepends.Breachofwarrantiescanbeconsideredgrounds
forvoidingthepolicyorareturnofpremium.Becauseofsuchastrict
definition,statementsmadebyapplicantsforlifeandhealthinsurance
policies,forexample,areusuallynotconsideredwarranties,exceptincases
offraud.
Concealment
Concealmentisthelegaltermfortheintentionalwithholdingof
informationofamaterialfactthatiscrucialinmakingadecision.In
insurance,concealmentisthewithholdingofinformationbytheapplicant
thatwillresultinanimpreciseunderwritingdecision.Concealmentmay
voidapolicy.
Fraud
Fraudistheintentionalmisrepresentationorintentionalconcealmentofa
materialfactusedtoinduceanotherpartytomakeorrefrainfrommaking
acontract,ortodeceiveorcheataparty.Fraudisgroundsforvoidingan
insurancecontract.
WaiverandEstoppel

WaiverandEstoppel
Waiveristhevoluntaryactofrelinquishingalegalright,claimor
privilege.
Estoppelisalegalprocessthatcanbeusedtopreventapartytoa
contractfromreassertingarightorprivilegeafterthatrightorprivilege
hasbeenwaived.Estoppelisalegalconsequenceofawaiver.