Chapter 2 : Contract Law

summary

Chapter 2 teaches you what makes an insurance contract legally valid and how insurance contracts work. For the exam, your goal is to recognize the rules from the situation described—not just memorize definitions.

Start with the 4 elements of a contract: Agreement, Consideration, Competent Parties, and Legal Purpose. Agreement involves an offer and acceptance; your guide describes the application submitted with the initial premium as the offer and issuance of the policy as acceptance. Consideration includes the insurer's promise to pay a claim. Competent parties must understand what they're agreeing to, and the contract must have a legal purpose. Study Guide

Next, master the types of insurance contracts. Unilateral means only one party makes a legally enforceable promise. Adhesion means the contract is essentially offered on a “take-it-or-leave-it” basis rather than negotiated. Aleatory means the exchange between the parties can be unequal. These terms are easy to confuse, so connect each word to its meaning instead of memorizing them as one list. Study Guide

Pay close attention to the legal terminology. A Representation is a statement believed to be true; Misrepresentation is a false statement; Concealment involves intentionally withholding material information; and a Warranty is treated as an absolute truth in your study guide. Your guide also connects violations involving material facts or warranties with an insurer's ability to rescind a policy. Study Guide

Also know the different ways a policy can end: Cancel refers to the insured wanting to cancel; Rescind/Rescission refers to the insurer canceling; Lapse results from nonpayment; and Surrender means the insured withdraws the policy's cash value.