Principles of Risk and Insurance - Contract Characteristics

Law of Agency- Insurance Brokers vs. Insurance Agents
1) Insurance Brokers- A broker is a representative of the policy owner that acts as a marketing mediator between the insurer and the policy owner.
2) Insurance Agent- An agent is a legal representative of the insurance company authorized to offer the sale of its goods and services. An agent's authority to legally bind the insurer stems from three sources- Express, Implied, or Apparent Authority.

Agent's authority to Legally Bind a Principal:

Express Authority
Company\'s Appointment of Agent to act on its behalf
i.e. agent is given the authority to solicit applications (agent agreement)
Implied Authority
Public is led to believe the individual has this authority
i.e. agent runs TV ads noting themselves as a rep of the company
Apparent Authority
Company creates the impression that a relationship exists with the agent
i.e. agent is supplied with applications, sales materials, etc...

Aleatory
Insurance contracts are considered to be aleatory because the outcome is affected by chance and may be unequal.
a) There is an element of chance for both parties involved in the contract, and
b) The dollar values exchanged may not be equal

Unilateral
Insurance contracts are considered unilateral because only the insurance company (insurer) makes a promise under the contract. The insurer promises to pay a benefit upon the happening of a certain event, such as an auto accident, death, disability, etc... The applicant does not make any promise- they can even elect to stop paying premiums if they desire. The insurer will however have the right to cancel the policy if premiums are neglected to be paid.

Conditional
Insurance contracts are conditional contracts; whereas, the payment of benefits by the insurance company is conditioned upon the insured or owner paying the premium.

Incontestable Clause
An incontestable clause is an unusual feature sometimes found in life insurance contracts which makes the policy indisputable by the insurer after being enforce for a period of two years or more.

Personal Contracts
Most insurance contacts are personal contracts between the insurance company and the applicant/insured and they are non-transferable. Life insurance contracts are the exception, as they can transfer ownership by was of assignment.

Adhesion
An insurance contract is considered a contract of adhesion because the applicant adheres to the terms of the contract if they want the benefit to remain in effect. The contract is prepared by one party (insurance company) and accepted by the insured. These contracts are not negotiated between the two parties.

Practice Question:
A variable life insurance contract may be characterized as which of the following:

I. Conditional contract
II. Personal contract
III. Aleatory contract
IV. Unilateral contract

A. I and II only
B. I and III only
C. I, III, and IV
D. I. II. III, and IV

Answer: C
Life insurance is not a personal contract because ownership rights can be transferred or assigned to another party at the discretion of the current policy owner.

Insurance Ownership and Beneficiaries
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