Insurance Principles, Contracts, and Policy Provisions: Exam Practice

Fundamental purposes of the principle of indemnity include which of the following? 1. To reduce physical hazards 2. To prevent the insured from profiting from insurance 3. A) I only 4. B) II only 5. C) both I and II 6. D) neither I nor II

B) II only

Which of the following is a fundamental purpose of the principle of indemnity?

A) to reduce moral hazard

Sam's furniture was destroyed by a fire. The furniture cost $1200 when it was purchased, but similar new furniture now costs $1800. Assuming the furniture was 50 percent depreciated, what is the actual cash value of Sam's loss?

B) $900

The loss settlement under which of the following supports the principle of indemnity?

D) actual cash value property insurance

Under which of the following rules is actual cash value determined by taking into consideration all relevant factors an expert would use to determine the value of the property?

B) the broad evidence rule

A total loss under a valued policy is settled on the basis of the

D) amount of insurance covering the loss.

Which of the following statements describes how losses will be settled if a property insurance policy is written on a replacement cost basis?

B) Losses are settled without a deduction for depreciation.

Which of the following statements about the principle of insurable interest is (are) true? 1. It makes it difficult to measure the amount of an insured's loss. 2. It reduces moral hazard.

B) II only

All of the following will support an insurable interest for purposes of purchasing property and liability insurance EXCEPT

A) former ownership of property.

Which of the following statements about an insurable interest in life insurance is (are) true? 1. It is required of any person named as beneficiary. 2. It may result from a pecuniary (financial) interest.

B) II only

When must an insurable interest legally exist in life insurance?

B) only at the inception of the policy

When must an insurable interest legally exist in property insurance for an insured to receive payment for a loss from the insurer?

A) only at the time of the loss

Sue's office building was damaged by a fire caused by a careless tenant. After paying Sue for the loss, the insurance company sued the tenant to recover its loss. This suit is based on the principle of

D) subrogation.

Which of the following statements about subrogation is true?

B) Subrogation helps to hold down the cost of insurance.

Which of the following statements about subrogation is true?

C) The insured's right to collect benefits may be forfeited if the insured interferes with the insurer's subrogation rights after a loss occurs.

The principle of utmost good faith is supported by all of the following legal doctrines EXCEPT

C) subrogation.

What is the legal significance of a material concealment by an insurance applicant?

B) The contract is voidable at the insurer's option.

What is the legal significance of a material misrepresentation in an insurance application?

B) The contract is voidable at the insurer's option.

A false material statement made by an applicant for insurance is an example of

D) misrepresentation.

Which of the following statements about a warranty in an insurance contract is (are) true? 1. It is part of the insurance contract. 2. Statements made by an insurance applicant are considered warranties rather than representations.

A) I only

David owns a liquor store in a high-crime area. In order to obtain a reduced insurance premium, David promised to have a burglar alarm operating at the store when the store was closed. This agreement, which was incorporated into the insurance contract, is an example of a

D) warranty.

Which of the following statements about offer and acceptance for insurance contracts is true?

C) In property insurance, the offer and acceptance are usually in writing but may be oral.

Chris applied for life insurance and paid the first premium on Monday. She was given an insurability premium receipt which specified that coverage was effective on the date of the application or the date of the medical exam, whichever is later. She took the medical exam the following Thursday. She was found to be in perfect health. On which day was her coverage effective?

C) on Thursday when she passed the medical exam

Which of the following statements about consideration in an insurance contract is (are) true? 1. The insured's total consideration is submission of a completed application. 2. The insurer's consideration is the promise to do those things specified in the policy.

B) II only

A contract in which the values exchanged are not equal because chance is involved is called a(n)

D) aleatory contract.

Why are insurance contracts said to be contracts of adhesion?

B) One party writes the contract, and the other party must accept the entire contract as written.

Why does the insured get the benefit of the doubt if an insurance policy contains any ambiguities or uncertainties?

D) because insurance contracts are contracts of adhesion

Why can an insurer refuse to pay a claim if an insured fails to abide by the policy provisions?

C) because insurance contracts are conditional

Which of the following types of insurance policies can usually be assigned without the insurer's consent? 1. Life insurance 2. Property insurance

A) I only

What is the practical effect of an insurance policy being a conditional contract?

A) The insurer can refuse to a pay claim if the insured has not complied with all policy provisions.

What is the practical effect of an insurance contract being a contract of adhesion?

D) The policy is interpreted in the insured's favor if the policy contains any ambiguities or uncertainties.

All of the following statements about the rules governing agency relationships are true EXCEPT

C) The principal is responsible for the acts of agents only if the acts are criminal.

The voluntary relinquishment of a legal right is called

D) waiver.

Frank asked his company's employee benefits director if his group health coverage could be converted to individual coverage. The benefits director said, "Yes, you can convert to an individual policy, and the coverage is identical to your group coverage." Frank quit his job and converted to an individual policy. Six months later he filed a claim. He was dismayed to learn the conversion policy was more limited compared to the group coverage, and his claim was denied. What legal doctrine will allow Frank to bring a successful legal action against his former employer because he was financially harmed due to his reasonable reliance upon a representation of fact?

C) estoppel

Janice purchased a living room set for $1,000 and insured this furniture on an actual cash value basis. Two years later the living room set was destroyed by a covered peril. At the time of loss, the property had depreciated in value by 25 percent. The replacement cost of the furniture at the time of loss was $1,200. Assuming no deductible, how much will Janice receive from her insurer?

A) $900

Jacob sold his house to Shelia for $140,000 in cash. Jacob "threw in" insurance on the house as part of the deal and did not bother telling the insurer that there was a new owner. Four months after Shelia purchased the home, a windstorm damaged the roof. Which of the following legal characteristics of insurance contracts could the insurer use to legally deny payment for the damage to the roof?

D) Insurance contracts are personal contracts.

Melody's car was damaged when another driver ran a stop sign and hit her car. Melody decided to collect from her own insurer and to let her insurer recoup the loss payment from the negligent driver who hit her. What fundamental legal principle is illustrated in this scenario?

C) the principle of subrogation

When Ben applied for life insurance, he was asked on the application if he smoked or used tobacco products. Ben answered "No." In reality, Ben smokes two packs of cigarettes a day. The policy was issued at the "preferred, nonsmoker rate." If Ben dies 6 months after the policy is issued, upon what grounds will the insurer be able to legally deny the claim?

B) misrepresentation

Robin plans to open a bar in a high-crime area. She had difficulty obtaining insurance for the business. She found an insurer willing to write the coverage, but only if Robin agreed to have a security alarm system in operation at all times when the business is closed. Robin's promise to have a security alarm system operational as a condition of having the insurance coverage in force is a

B) warranty.

Dave is an agent for Easy Pay Insurance. Easy Pay insures only high-quality applicants. Dave wanted to earn more commissions, so he sold some policies to applicants he knew were below-average risks. When these policyowners started filing claims, Easy Pay tried to deny the claims stating that Dave had not acted appropriately. Which general rule of agency makes Easy Pay responsible for the claims of the higher-than-average risk policyowners?

C) A principal is responsible for the acts of its agents who are acting within the scope of their authority.

Ted's insurance claim was denied by XYZ Insurance Company. When Ted inquired why the claim was denied, he was told to, "Read the exclusion on page 5 of the policy." Ted read the exclusion. In his opinion, the exclusion was poorly worded and vague. If a court of law agrees with Ted's assessment of the exclusion, Ted may still be able to have his claim paid by the insurer because insurance contracts are

D) contracts of adhesion.

Mark owns a bar. The bar has a back room where Mark has some slot machines. Mark lets some of his patrons play the machines, and Mark keeps any profits. This type of gambling is illegal where Mark lives. Mark wanted to purchase insurance in case his slot machines were confiscated by the police. Such an insurance contract would not be enforceable. Which requirement needed to form a valid insurance contract is missing?

C) legal purpose

Which distinct legal characteristic of insurance contracts states that only the insurer's promise to perform is legally enforceable?

B) unilateral contracts

That part of a property and liability insurance contract that contains information about the property or activity to be insured is called the

A) declarations.

What information is contained in the insuring agreement of an insurance policy?

B) a summary of the major promises of the insurer

Which of the following statements about "open-perils" coverage is (are) true? 1. All losses are covered except those losses specifically excluded. 2. The burden of proof is on the insured to prove that a loss is covered.

A) I only

The exclusion of flood in a homeowners policy is an example of an

D) excluded peril.

Exclusions are used in insurance policies for all of the following reasons EXCEPT

B) to waive policy conditions.

Reasons why a peril may be considered uninsurable and therefore excluded from insurance contracts include which of the following? 1. The losses from the occurrence of the peril may be due to a predictable decline in value. 2. The losses from the occurrence of the peril may be incalculable and catastrophic.

C) both I and II

The policy provision requiring the filing of proof of loss with the insurer is an example of a(n)

B) condition.

Which of the following statements about the definition of the insured is (are) true? 1. In some cases, a person who is not specifically named may be classified as an insured. 2. Under no circumstances can more than one person be named as an insured.

A) I only

All of the following statements about endorsements and riders are true EXCEPT

D) They are primarily used to circumvent legislation requiring specific policy provisions.

Deductibles are not used in which of the following type of insurance?

A) life insurance

One of the reasons that deductible are used in insurance policies is to

A) eliminate coverage for small claims.

The deductible used for automobile collision losses is an example of a(n)

C) straight deductible.

Which of the following statements about a calendar-year deductible is (are) true? 1. It requires the insured to pay a specified amount of each claim regardless of when the claim occurs during the year and regardless of any previous claims during the year. 2. It is used only in policies which cover direct property losses.

D) neither I nor II

A provision in a disability income insurance policy that requires a person to be disabled for 60 days before receiving benefits is an example of a(n)

C) elimination period.

At what point in time must an insured meet the coinsurance requirement in a property insurance policy in order to avoid having to pay a portion of the loss?

A) only at the time of loss

David owns a commercial building with a replacement cost of $4 million. The building is insured on a replacement cost basis for $2.4 million under a fire insurance policy that has an 80 percent coinsurance clause. How much will David collect if the building sustains a covered fire loss with a replacement cost of $80,000?

B) $60,000

The primary purpose of coinsurance in property insurance is to

B) achieve equity in rating.

Which of the following statements about problems arising from the use of a coinsurance clause is (are) true? 1. The amount of insurance should be periodically evaluated to avoid a coinsurance penalty because of inflation. 2. An agreed value coverage option is one method used to solve the problem of values that fluctuate throughout the policy term.

C) both I and II

Connie has an individual medical expense policy with a $1,000 deductible. She is required to pay 20 percent of covered expenses in excess of the deductible. The insurer will pay 80 percent of expenses in excess of the deductible. If Connie has eligible medical expenses of $26,000, how much will be paid by her insurer?

C) $20,000

Purposes of the coinsurance clause in health insurance contracts include which of the following? 1. To reduce premiums. 2. To exclude coverage for certain medical procedures.

A) I only

The purpose of other-insurance provisions is to

D) preserve the principle of indemnity.

Lisa has three fire insurance policies on her office building. The policy from company A is for $400,000, and the policies from companies B and C are for $100,000 each. If Lisa has a $360,000 loss, how much of the loss will be covered by each policy if the loss is settled on a pro rata basis by the insurers?

C) policy A: $240,000; policies B and C: $60,000 each

Kevin has three liability policies which provide for contribution by equal shares if other insurance applies to a loss. How much will each policy pay for a $3,000,000 liability judgment if policy A provides $500,000 of coverage, policy B provides $1,000,000 of coverage, and policy C provides $3,000,000 of coverage?

D) Policy A will pay $500,000, policy B will pay $1,000,000, and policy C will pay $1,500,000.

Helen and John both own automobiles on which they carry liability insurance. If Helen is negligent and has an accident while driving John's car with his permission, how will each insurer respond to any liability judgment against Helen?

C) Helen's insurance will pay on an excess basis if John's insurance is insufficient to cover the judgment.

Kate is covered under her employer's group health plan. She is also covered as a dependent under her husband's group health plan. Under the usual coordination-of-benefits provision, how will each company respond to a claim filed by Kate?

A) Kate's plan is primary, and her husband's plan is excess.

Eric's property was damaged in an accident. He phoned his agent to see if the loss was covered under his property insurance policy. The agent said, "As long as the cause of loss is not specifically excluded in the policy, the loss is covered." Based on the agent's answer, what type of insuring agreement appears in the policy?

D) "open-perils" coverage

Janet hit a wall causing a large dent in the fender of her car. She was busy at work and delayed reporting the damage to her insurer for 9 months. When she finally reported the claim, her insurer denied payment, stating, "Although such a loss is usually covered, you are required under the terms of the contract to provide prompt notification in case of loss." The prompt notification requirement is an example of a(n)

D) condition.

Mark reviewed his homeowners policy. He learned that his personal property was insured on an actual cash value basis. He would like replacement cost coverage on his personal property. He contacted his agent who said, "I'll simply add an amendment to your contract that changes the basis of recovery to replacement cost." The written provision the agent was referring to is called a(n)

A) endorsement.

Under the terms of Jenny's auto insurance policy, she must pay the first $500 of any physical damage loss to her vehicle before her insurer will pay anything. What type of deductible is included in Jenny's auto insurance policy?

C) straight deductible

Shauna hurt her back and was unable to work. She filed a claim under her disability income insurance policy. Under terms of the policy, a period of time must pass between when the injury occurred and when the insurer begins to replace lost earnings. This time period is called a(n)

D) elimination (waiting) period.

ABC Company insured its building on a replacement cost basis for $700,000 under a property insurance policy that included an 80 percent coinsurance clause. The building had a replacement cost of $1 million when it sustained a $40,000 loss. How much will ABC Company receive from its insurer, assuming no deductible applies?

B) $35,000

XYZ Company insured its building on a replacement cost basis for $450,000 under a property insurance policy that included an 80 percent coinsurance clause. The building had a replacement cost of $500,000 when it sustained a $50,000 loss. How much will XYZ Company receive from its insurer, assuming no deductible applies?

C) $50,000

Laura's medical insurance policy includes a $500 deductible. Laura is required to pay 20 percent of covered expenses in excess of the deductible, and her insurer will pay 80 percent of covered expenses in excess of the deductible. Laura was hospitalized and her covered medical expenses were $10,500. How much of the $10,500 will be paid by the insurer?

C) $8,000

James purchased liability insurance with a $100,000 limit from Insurer A. When Insurer A denied a claim that James thought should be covered, he bought a second liability insurance policy with a $150,000 limit from Insurer B. Before he cancelled the policy with Insurer A, a $60,000 loss occurred. If this loss is settled on a pro rata basis, how much must each insurer pay?

C) Insurer A will pay $24,000 and Insurer B will pay $36,000.

Jane purchased a $50,000 liability insurance policy from Insurer A. Fearing that she did not have enough liability insurance, she purchased an additional $100,000 of liability coverage from Insurer B. As a result of a negligent act, Jane was ordered to pay $75,000 in damages. Assuming the coverage from Insurer A is primary and the coverage from Insurer B is excess, how will this claim be settled?

A) Insurer A will pay $50,000 and Insurer B will pay $25,000.

The purpose of a coordination-of-benefits provision in group health insurance plans is to

A) determine which plan pays first if more than one plan covers a loss.

As an alternative to coinsurance, rate discounts can be given as the amount of insurance to value increases. This alternative is called

A) graded rates.

Mark owns a building that he insured for $90,000. The replacement cost of the building is $100,000. Mark's property insurance policy has an 80 percent coinsurance clause. Ignoring any deductible, if Mark's building is destroyed by a covered peril, how much will Mark receive from his insurer?

B) $90,000

A special coverage policy is a policy that

B) provides open-perils coverage.

The section of the insurance policy that includes provisions that qualify or limit the insurer's promise to perform is the

D) conditions.

An elimination (waiting) period is an example of a(n)

B) deductible.

Roger owns some farmland that he rents to a tenant. The tenant lives in an old farmhouse on the property and raises crops on the land. Roger is concerned about possible legal liability if the tenant injures someone. Roger requires the tenant to have liability insurance and to add himself to the liability coverage through an endorsement. Under the tenant's liability insurance, Roger is a(n)

A) additional insured.