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Unit 3 Nature of the Industry
Section 10.1
Insurance Contracts
Objectives
After completing this section, you will be able to:
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Overview of Insurance Contracts
As you have learned throughout this text, insurance products
transfer risk from the consumer to the insurance company. When
a consumer decides to transfer risk to an insurer and the company
accepts it, both sides are entering into an insurance contract. The
insurance contract, also called a policy, is a legally binding agreement.
Legally binding means that both the customer and the insurance
company accept and agree to the contract’s provisions. If either party
fails to keep their end of the deal, the other can sue.
Legal principles are discussed in Chapter 14.
However, a central principle of insurance
contracts is utmost good faith. Utmost good
faith means that the consumer and the
insurance agent have been honest with each
other. An insurance agent, also called a
producer, is the professional licensed to sell an
insurance contract.
For example, when applying for an
automobile insurance policy, the customer
says he or she drives 15 miles to work, but
really drives 50. The principle of utmost good
faith has been broken because the customer
was not truthful. In another example, the
insurance agent sells somebody a policy that
is more coverage than needed. The principle
of utmost good faith has been broken because
the agent did not have the customer’s best
interest in mind.
Buying and selling insurance has to rely
on the utmost good faith of the parties. The
insurer has no real way of knowing if the
statements made by the customer, like the
distance driven to work, are true. Likewise, it
Terms
insurance contract
legally binding
utmost good faith
insurance agent
Insurance Services
Office, Inc. (ISO)
declarations
definitions
insuring agreement
named-perils policy
all-risk policy
conditions
exclusions
endorsements
A contract is central to an insurance agreement.
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