Contract legal concepts: indemnity, utmost good faith, representations, warranties, concealment, fraud, waiver, and estoppel

Why insurance contracts have their own legal vocabulary

An insurance policy is a contract, but it is an unusual one. The insurer promises to pay for a loss that may never happen, and it sets its price almost entirely on what the applicant tells it. That is why insurance law leans on a handful of special concepts. Together they answer two questions: how much can the insured collect, and when can either party get out of the deal or be held to it.

Indemnity: put the insured back where they were

The principle of indemnity says insurance restores the insured to the same financial position they were in just before the loss, no better and no worse. The insured should not profit from a loss. That is why property and liability policies pay actual loss, subject to limits and deductibles, and why insurable interest, subrogation and other-insurance clauses exist.

• Contracts of indemnity (most property and casualty, and health expense coverage) pay the measured loss.
• Valued contracts, such as life insurance, pay a stated amount instead, because a human life cannot be measured in dollars.

Utmost good faith: both sides must deal honestly

Insurance is a contract of utmost good faith (uberrimae fidei). Each party is entitled to rely on the other's honesty. The applicant must disclose material facts truthfully; the insurer must describe its product and handle claims honestly. Representations, warranties, concealment and fraud are the specific rules that enforce this duty.

Representations: statements the applicant believes to be true

A representation is a statement of past or present fact made by or for the applicant, at or before the time the contract is made, to induce the insurer to issue it. Answers on an application are representations. They need only be substantially true to the best of the applicant's knowledge.

A misrepresentation is a false representation. It lets the insurer rescind the contract or deny a claim only if it is material: if knowing the true facts would have led the insurer to refuse the contract. An immaterial mistake, such as a wrong middle initial, does not void the policy. Evidence of how the insurer treats similar risks can be used to decide materiality.

Warranties: statements guaranteed to be true

A warranty is a statement or promise written into the contract that is guaranteed to be literally true and acts as a condition of coverage, for example a promise that a sprinkler system will be maintained. At common law any breach of warranty, material or not, voided the contract. Modern statutes soften this: a breach generally defeats coverage only if it materially increases the risk of the loss. Most states, by statute, treat an applicant's statements in a life or health application as representations, not warranties, absent fraud.

Concealment: staying silent about a material fact

Concealment is the intentional failure to disclose a material fact that the applicant knows. A representation is a false statement; concealment is a deliberate silence. If the concealed fact is material, the insurer may void the contract.

Fraud: deliberate deception for gain

Fraud is an intentional misrepresentation or concealment of a material fact, made to deceive, that the other party relies on to its harm. Fraud makes a contract voidable by the innocent party, and insurance fraud is also a crime.

Waiver and estoppel: when the insurer loses a right

• Waiver is the voluntary, intentional giving up of a known right. If an insurer knowingly accepts a late premium without objection, it may have waived its right to treat the policy as lapsed.
• Estoppel is a legal bar that prevents a party from reasserting a right it has waived when the other party reasonably relied on its words or conduct. Waiver is the act of giving up the right; estoppel is the consequence that stops the insurer from taking it back.

Because producers are agents of the insurer, what a producer says or knows can create waiver and estoppel against the insurer.

Exam shortcut: representation = believed true; warranty = guaranteed true; concealment = silence; fraud = intent to deceive; waiver = giving up a right; estoppel = can't take it back.