Law and the Insurance Contract
MR. WATSON: This chapter is on your exam, no matter which license type you are getting. We will be discussing this chapter in the context of life insurance, using life insurance examples. But everything in this chapter also applies to different types of health insurance policies. So don’t let the life insurance examples throw you off, because pretty much everything in this chapter applies to both life and health insurance. Health insurance incorporates a certain type of life insurance policy (a later chapter), so those taking the health insurance exam will need to know these terms as well. The most important thing is that you Know this vocabulary. Understand the stories. This information is extremely important.
Required elements in ALL contracts
For a contract to be legal, valid, and binding, you have to have four essential elements. I don't care what kind of contract you have in the United States, these have to be there: CLOC (see chart). If it's missing any one part of C.L.O.C., you have a void contract.
MR. WATSON: These characteristics are:
- Consideration
- Legal Purpose
- Offer & Acceptance
- Competent Parties
They are in EVERY contract, insurance, real estate, or otherwise. Do y'all agree?
Consideration . Consideration can be anything of value. You wash my car, I will mow your lawn. That's consideration, isn't it?
MR. WATSON: The consideration on the part of the company, what do they promise to do? Provide the benefit. If you become sick or die, they pay.
MR. WATSON: What's the consideration on the part of the applicant? It's two things.
- The premium and
- the completed application is the other one. You must have both, completed application and the premium.
MR. WATSON: What if you give me an application and no money? What have you done?
STUDENT: You've done half of it, but you've done nothing legally.
MR. WATSON: What if you give me money but no application. What have you done? Something stupid. Do you agree? I'm going to the track, right? Everybody okay?
STUDENTS: Yes.
There has to be an offer by one party and acceptance in its entirety by the other. Listen carefully to what I say and file it away. I have a story to tell.
MR. WATSON: When you complete the application and give me money --I could have said "consideration," which means you, the applicant, gave me the application and money. When you have done that, you, the applicant, are making an offer to buy. The company will either accept it, reject it, or counteroffer. Once you complete that application and give me money, once you have given me consideration, you are then making the offer to buy.
MR. WATSON: The company will accept it, reject it or counteroffer. What do I mean by "counteroffer"? They say, "You have high blood pressure. We will charge you more money." You accept their counter-offer. Got it?
STUDENTS: Um-hmm.
MR. WATSON: Again, know this, if the applicant gives consideration (premium and application), then they are making the offer. If only the application was given, with no premium, then the company will make the offer. The offer will be the date of policy issue. For example, on March 1, an application was taken with no premium and on March 15 the insurer issued a policy. This policy was delivered to the applicant on March 20 and a premium was collected at that time. The company made the offer on March 15 (issuance of the policy) and the applicant accepted on March 20 (payment of the premium).
What if I hire a drug cartel to bring in a boatload of cocaine in those porcelain dolls? What if I give them a couple hundred thousand dollars and they run off with $100,000? Can I take him to court? "Your Honor, he stole my drug money." Stupid, isn't it? It has to be for a legal purpose . Insurance is a legal purpose.