What is consideration and how does it relate to an insurance contract?
Consideration is defined as an exchange of values and is a required element in order for a contract to be legally enforceable.
In insurance, what is the applicant’s consideration?
The consideration that an insurance applicant brings to the contract is their answers on the application, which are primarily known as representations. A representation is a truth to the best of the applicant’s knowledge. Additionally, the applicant’s initial premium is also considered to make up their consideration towards the contract.
What is the insurer’s (insurance company’s) consideration?
The insurer’s consideration is their promise to provide coverage in return for the premium paid. If the insured has a loss, the insurer agrees to provide coverage for the loss.
Is consideration required to be equal?
No! Can it be equal? Sure. However, it is not required to be. For example, an applicant may apply for term life insurance with a $100 premium, and once the policy is issued the insurer could pay a $100,000 claim. Is that an equal exchange of values? Nope. However, it’s okay, because the exchange of values is not required to be.
What happens if the exchange of values never takes place?
If there is no exchange of values, a contract will NOT be legally enforceable by either party. Not just an insurance contract, all contracts require consideration to have taken place. There are actually four essential elements required of every legal contract which you need to know for your insurance licensing exam. You can easily remember them with the acronym COAL. They are as follows:
Consideration – An exchange of values between the parties which is not required to be equal.
Offer – An offer must be present. In insurance, it is usually the applicant making an offer to buy.
Acceptance – In insurance, this is usually done by the underwriter when they accept the risk and issue the policy.
Legal purpose and capacity – This is actually a two-parter. The contract must be for a legal purpose, and all parties to the contract must be of legal age, sound mind, and not under the influence of drugs or alcohol (legal capacity).
If any of these items are missing, a contract is NOT legally enforceable by either party.
What else can help me prepare to pass my insurance licensing exam on my first attempt?
Other tips to help you pass your insurance licensing exam on your first attempt:
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