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University of London Policy and Contract Analysis

University of London Policy and Contract Analysis



Write about each of the two contracts. You may select any of the contract analysis topics below. You can focus on one topic, you can use several, or you can select all the topics, if you’d like (although that would be difficult to fit on two to four pages). The important point is to correlate something in each of the two contracts with specific issues from Chapter 6 of the text. Key point – these are administrative services agreements, which are not really insurance contracts. Therefore, they will not include all of the elements from Chapter 6.

Elements of an Enforceable Contract

  • Offer and acceptance –written application and premium must be submitted in exchange for the promise
  • Legal purpose –cannot be illegal. Contract by an unlicensed company is illegal. Cannot be speculative (for wagering or gain)
  • Competent parties– cannot be a minor, intoxicated or legally insane
  • Consideration– something of value must be exchanged
  • Unilateral—only one party, the insurer, can be held liable for breach of contract. Only one party makes a promise.
  • Personal—it covers a person,even if the policy is property insurance
  • Conditional—one party (the insurer) has an obligation to perform only if the other party (the insured or the life insurance policyowner) meets conditions specified in the contract. There are conditions precedent and subsequent.
  • Contract of Adhesion— Contract prepared by one party, rather than having its terms negotiated
    • Non-drafting party can only accept or reject contract as is
    • If ambiguity exists in an insurance policy, courts are likely to rule in favor of the insured and against the insurer (the party that drew up the contract).
  • Characteristics of an
    Insurance Contract

Characteristics of an Insurance Contract

Parol (spoken) Evidence Rule

  • Legal principle: oral contemporaneous evidence may not be used to contradict or vary the terms of a valid written contract. Written contract prevails over anything said by either party.
  • Statements by the agent selling insurance do not alter the written policy
  • Contract of Indemnity vs. Valued Contract

Contract of indemnity– policyowner is entitled to payment of an amount directly related to the amount of a covered loss. Insurance seeks to compensate the insured for approximately the amount lost, but not more. Make policyowner whole- to put in same position as before the loss. Applies primarily to property insurance

Valued contract – policyowner is entitled to recover the amount specified in the policy, regardless of any measurable financial loss

  • Insurable Interest
  • A right or relationship with regard to an insurance contract such that the policyowner will suffer financial loss from damage, loss, or destruction to that subject matter
  • The purposes of requiring an insurable interest in insurance contract is to prevent gambling (speculation) and decrease the moral hazard
  • When must insurable interest exist?

Life insurance

  • Insurable interest must exist when insurance is purchased
  • Policy can later be sold to a third party with no insurable interest

Property insurance

  • Insurable interest must exist at the time of the loss. Without insurable interest, that party (policyowner) would have no loss.
  • Insurance Contracts
  • Subrogation– a process by which an insurer takes over the legal rights of recovery its insured has against a responsible third party
  • Concealment – failure to disclose relevant information (material fact). Primarily in application or claim.
  • Misrepresentation – knowingly false statement of a material fact made by an insurance applicant
  • Insurance Contracts
  • Voidable contract– a contract that can be affirmed or rejected at the option of one of the parties but is binding on the other party. May be the result of concealment, misrepresentation, or fraud
  • Void contract– a contract that has no legal effect and is, therefore, unenforceable by either party
  • Fraud
    • false representation
    • knowingly made
    • intent to influence or deceive
    • material fact
    • reasonable reliance
    • detriment (in damages suit)

Elements considered when evaluating allegations of fraud:

  • Contractual Statements


The answers to specific questions on an insurance application made part of the policy are warranties.

A warranty, if false, makes the policy voidable, even

if the false statement is not material.


  • A representation is an incidental statement preceding the contract, not part of the contract.
  • To void a contract, any representation must be both false and material.
  • Insurance Contract Provisions
  • Declarations—factual statements that identify the parties to the insurance transaction, the amount of insurance, the property or activity being covered, the effective date of the coverage, etc.
  • Definitions—precise meanings of terms used in the contract, such as “family member,” “disability,” “covered auto,” etc.
  • Insuring agreements—the promises made by the insurer, such as to pay, to defend, to reimburse, etc. Open perils versus named-perils
  • Insurance contract provisions
  • Exclusions—the perils, properties, types of losses, circumstances, etc., that the insurance does not cover
  • Conditions—the duties that (usually) the policyowner must fulfill before it can hold the other party to the terms of the contract
  • Miscellaneous provisions—other clauses that don’t fall into the above categories, such as those concerning policy continuation, loss valuation, optional modes of settlement, etc.
  • Endorsements or riders—provisions added to the policy to modify or clarify the coverage, perhaps for an additional or reduced premium
  • Renewability (Continuation) Provisions


  • policyowner has the right to renew coverage at each policy anniversary date, usually up to some stated age
  • coverage may not be terminated by the insurer during the term of coverage
  • rates for the coverage are guaranteed, but not necessarily level
  • Renewability Provisions

Guaranteed Renewable

  • Policyowner retains the right to renew the coverage at each policy anniversary date, usually up to a stated age
  • Insurer is not allowed to cancel the coverage during the period of protection
  • The insurer retains the right to raise rates for broad classes of insureds
  • Renewability Provisions

Optionally Renewable

  • insurer may refuse to renew the policy on its anniversary or premium-due date
  • policyowner must receive advance notice of nonrenewal


  • Insurer may terminate the policy at any time for any reason
  • Advance notice usually required
  • Insurer refunds any unearned premium

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