Fundamental purposes of the principle of indemnity include which of
the following?
To reduce physical hazards To prevent the insured
from profiting from insurance A) I only B) II
only C) both I and II D) neither I nor II
Answer: B
Which of the following is a fundamental purpose of the principle of indemnity?
A) to reduce moral hazard B) to minimize physical
hazards C) to settle property insurance losses on a
replacement cost basis D) to require deductibles in all
property insurance policies
Answer: A
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?
A) $600 B) $900 C) $1200 D)
$1800
Answer: B
The loss settlement under which of the following supports the
principle of indemnity?
A) life insurance B) valued policies C)
replacement cost property insurance D) actual cash value
property insurance
Answer: D
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?
A) the circumstantial evidence rule B) the broad
evidence rule C) the property indemnity rule D)
the objective value rule
Answer: B
A total loss under a valued policy is settled on the basis of the
A) market value of the loss. B) actual cash value of
the loss. C) replacement value of the loss. D)
amount of insurance covering the loss.
Answer: D
Which of the following statements describes how losses will be
settled if a property insurance policy is written on a replacement
cost basis?
A) Losses are settled without the applicable deductible.
B) Losses are settled without a deduction for depreciation.
C) The insurer must replace the damaged or destroyed property in
lieu of a cash settlement. D) The policy is converted to a
valued policy.
Answer: B
Which of the following statements about the principle of insurable
interest is (are) true?
It makes it difficult to measure the amount of an insured's
loss. It reduces moral hazard. A) I only B)
II only C) both I and II D) neither I nor II
Answer: B
All of the following will support an insurable interest for purposes
of purchasing property and liability insurance EXCEPT
A) former ownership of property. B) potential legal
liability. C) secured creditors. D) contractual
right.
Answer: A
Which of the following statements about an insurable interest in life
insurance is (are) true?
It is required of any person named as beneficiary. It
may result from a pecuniary (financial) interest. A) I
only B) II only C) both I and II D) neither
I nor II
Answer: B
When must an insurable interest legally exist in life insurance?
A) only at the time of the insured's death B) only at
the inception of the policy C) only at the time the
beneficiary is paid D) both at the time of the insured's
death and at the inception of the policy
Answer: B
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 B) only at the
inception of the policy C) only at the time the loss
settlement takes place D) both at the time of the loss and
at the inception of the policy
Answer: A
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
A) warranty. B) insurable interest. C)
utmost good faith. D) subrogation.
Answer: D
Which of the following statements about subrogation is true?
A) Subrogation eliminates adverse selection. B)
Subrogation helps to hold down the cost of insurance. C)
Subrogation results in violation of the principle of indemnity.
D) Subrogation permits a party who caused a loss to avoid
responsibility for the loss.
Answer: B
Which of the following statements about subrogation is true?
A) It is used primarily for losses paid under life insurance
policies. B) It allows the insurer to sue its own insured who
is negligent. 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. D) The insurer is
required to exercise its subrogation rights.
Answer: C
The principle of utmost good faith is supported by all of the
following legal doctrines EXCEPT
A) representations. B) warranty. C)
subrogation. D) concealment.
Answer: C
What is the legal significance of a material concealment by an
insurance applicant?
A) The contract is automatically voided from its
inception. B) The contract is voidable at the insurer's
option. C) Loss payments are reduced by the degree of the
concealment. D) The insurer is immediately entitled to a
higher premium.
Answer: B
What is the legal significance of a material misrepresentation in an
insurance application?
A) The contract is automatically voided from its
inception. B) The contract is voidable at the insurer's
option. C) Loss payments are reduced by the degree of the
misrepresentation. D) The insurer is immediately entitled to
a higher premium.
Answer: B
A false material statement made by an applicant for insurance is an
example of
A) concealment. B) breach of warranty. C)
lack of offer and acceptance. D) misrepresentation.
Answer: D
Which of the following statements about a warranty in an insurance
contract is (are) true?
It is part of the insurance contract. Statements made
by an insurance applicant are considered warranties rather than
representations. A) I only B) II only C)
both I and II D) neither I nor II
Answer: A
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
A) representation. B) binder. C) rider.
D) warranty.
Answer: D
Which of the following statements about offer and acceptance for
insurance contracts is true?
A) In property and liability insurance, agents typically do
not have the authority to bind coverage. B) In life
insurance, the agent can usually accept an offer by immediately
binding coverage. C) In property insurance, the offer and
acceptance are usually in writing but may be oral. D) In
life insurance, completing the application and paying the first
premium constitute acceptance of the offer from the insurer.
Answer: C
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?
A) on Monday, when she completed the application and paid the
first premium B) on Wednesday, two days after completing
the application and paying the first premium C) on Thursday
when she passed the medical exam D) on Saturday, two days
after passing the medical exam
Answer: C
Which of the following statements about consideration in an insurance
contract is (are) true?
The insured's total consideration is submission of a completed
application. The insurer's consideration is the promise to do
those things specified in the policy. A) I only B)
II only C) both I and II D) neither I nor II
Answer: B
A contract in which the values exchanged are not equal because chance
is involved is called a(n)
A) contract of adhesion. B) unilateral contract.
C) conditional contract. D) aleatory contract.
Answer: D
Why are insurance contracts said to be contracts of adhesion?
A) The values exchanged by the parties to the contract are not
equal. B) One party writes the contract, and the other party
must accept the entire contract as written. C) Only one
party makes a legally enforceable promise. D) Conditions
are placed on the insurer's promise to perform.
Answer: B
Why does the insured get the benefit of the doubt if an insurance
policy contains any ambiguities or uncertainties?
A) because insurance contracts are aleatory B)
because insurance contracts are unilateral C) because
insurance contracts are conditional D) because insurance
contracts are contracts of adhesion
Answer: D
Why can an insurer refuse to pay a claim if an insured fails to abide
by the policy provisions?
A) because insurance contracts are aleatory B)
because insurance contracts are unilateral C) because
insurance contracts are conditional D) because insurance
contracts are contracts of adhesion
Answer: C
Which of the following types of insurance policies can usually be
assigned without the insurer's consent?
Life insurance Property insurance A) I
only B) II only C) both I and II D) neither
I nor II
Answer: A
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. B) The insured can
assign the policy only with the insurer's consent. C) The
insurer can sue the insured for failure to pay any premiums.
D) The insured gets the benefit of the doubt if a policy
contains any ambiguities or uncertainties.
Answer: A
What is the practical effect of an insurance contract being a
contract of adhesion?
A) The insurer can refuse to pay claims if the insured has not
complied with all policy provisions. B) The insured can
assign the policy only with the insurer's consent. C) The
insurer can sue the insured for failure to pay any premiums.
D) The policy is interpreted in the insured's favor if the
policy contains any ambiguities or uncertainties.
Answer: D
All of the following statements about the rules governing agency
relationships are true EXCEPT
A) An agent must be authorized to act on behalf of a
principal. B) An agency agreement may grant certain powers to
the agent as well as denying the agent other powers. C) The
principal is responsible for the acts of agents only if the acts are
criminal. D) Knowledge of the agent is presumed to be
knowledge of the principal with respect to matters within the scope
of the agency relationship.
Answer: C
The voluntary relinquishment of a legal right is called
A) subrogation. B) adhesion. C)
estoppel. D) waiver.
Answer: D
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?
A) adhesion B) waiver C) estoppel
D) subrogation
Answer: C
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 B) $950 C) $1,000 D)
$1,200
Answer: A
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?
A) Insurance contracts are unilateral contracts. B)
Insurance contacts are contracts of adhesion. C) Insurance
contracts are aleatory contracts. D) Insurance contracts
are personal contracts.
Answer: D
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?
A) the principle of utmost good faith B) the
principle of insurable interest C) the principle of
subrogation D) the principle of reasonable expectations
Answer: C
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?
A) warranty B) misrepresentation C)
waiver D) concealment
Answer: B
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
A) binder. B) warranty. C) waiver.
D) deductible.
Answer: B
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?
A) There is no presumption of an agency relationship.
B) Agents should be compensated based on the quality of the
business they generate. C) A principal is responsible for
the acts of its agents who are acting within the scope of their
authority. D) An agent must have authority to represent the
principal.
Answer: C
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
A) personal contracts. B) unilateral contracts.
C) aleatory contracts. D) contracts of adhesion.
Answer: D
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?
A) consideration B) offer and acceptance C)
legal purpose D) competent parties
Answer: C
Which distinct legal characteristic of insurance contracts states
that only the insurer's promise to perform is legally enforceable?
A) contracts of adhesion B) unilateral contracts
C) aleatory contracts D) personal contracts
Answer: B
Some courts have ruled that an alternative to "replacement cost
less depreciation" should be used to determine the actual cash
value of a property loss. Under this alternative, the value of
property lost is determined by the price a willing buyer would pay a
willing seller for the property in a free market. This method of
determining actual cash value is called the
A) intrinsic value method. B) valued policy
method. C) fair market value method. D) forensic
cost method.
Answer: C
Some states have a law that requires payment of the face amount of
insurance to the insured if a total loss to real property occurs from
a peril specified in the law. These laws are called
A) agreed amount laws. B) replacement cost laws.
C) homestead laws. D) valued policy laws.
Answer: D
The general rule that ambiguity in insurance contracts is construed
against the insurer is reinforced by an important legal principle.
This principle states the insured is entitled to coverage under a
policy that he or she would assume the policy would provide, and
exclusions must be conspicuous, plain, and clear. This principle is
known as
A) the principle of utmost good faith. B) the
principle of reasonable expectations. C) the principle of
subrogation. D) the principle of indemnity.
Answer: B
Dave and Meagan Philips borrowed $150,000 from Fifth National Bank to
help fund the purchase of a new home. The home serves as collateral
for the loan. Fifth National has an insurable interest in the home
based on
A) potential responsibility for legal liability. B)
being a secured creditor. C) expectation of ownership.
D) having a contractual right.
Answer: B
All of the following statements about subrogation are true EXCEPT
A) The general rule allows the insurer to recover up to the
amount paid to its insured under the policy. B) Subrogation
does not apply in life insurance. C) Interfering with the
insurer's subrogation rights can jeopardize indemnification of the
insured. D) The insurer reserves the right to subrogate
against its own insureds.
Answer: D
Powers specifically conferred on an agent to act on behalf of a
principal are
A) incidental authority. B) apparent authority.
C) implied authority. D) express authority.
Answer: D
If a third party is led to reasonably believe that an agent is acting
within the scope of his/her authority, even though the agent is
exceeding his/her authority, the principal may still be bound by the
agent's actions. In this case, the agent has bound the principal by
A) implied authority. B) apparent authority.
C) incidental authority. D) express authority.
Answer: B
The authority of an agent to perform all incidental acts necessary to
fulfill the purposes of the agency agreement is called
A) implied authority. B) declared authority.
C) apparent authority. D) express authority.
Answer: A
ABC Life Insurance Company insures both smokers and nonsmokers. Beth
lied on her life insurance application, checking the box for
"no" in response to the question of whether she smokes
cigarettes or uses other tobacco products. Even though Beth smokes 10
to 15 cigarettes each day, the policy was issued at the
"preferred nonsmoker rate." Beth's lie is materiel in this
case because
A) it was in writing on the application. B) it was
given with the intent to deceive. C) the policy would have
been issued on different terms if the insurer knew the true
facts. D) the policy would have been issued for a lower face
value if the insurer knew the true facts.
Answer: C
Bob purchased insurance on his home with an insurer that was not
licensed to do business in the state. In this case, which requirement
to form a binding insurance contract is lacking?
A) exchange of consideration B) offer and
acceptance C) legal purpose D) competent
parties
Answer: D
A pharmaceutical company employs a young chemist who is responsible
for three new patents last year and for the development of the
company's two best-selling drugs. The company purchased a large life
insurance policy on the chemist. In this case, the insurable interest
requirement was met because of a(n)
A) ownership interest. B) close family
relationship. C) pecuniary interest. D) economic
family relationship.
Answer: C
Hank bought a farm that had an old barn. He noticed one day that the
roof of the barn was swaying in the wind. Hank went to see his
insurance agent and he insured the barn for $20,000. The agent didn't
ask if the roof might collapse, and Hank didn't say anything about it.
One week later there was a strong wind and the roof collapsed.
Assuming the insurer can prove it, under what legal grounds could the
insurer deny payment of the claim?
A) estoppel B) concealment C) warranty
D) misrepresentation
Answer: B
Kim purchased a one-year property insurance policy. She agreed to pay
half the premium when she bought the coverage, and the other half six
months later. If Kim fails to pay the second premium, the insurer
cannot sue her for the premium because insurance contracts are
A) unilateral contracts. B) contracts of
adhesion. C) personal contracts. D) aleatory
contracts.
Answer: A
Charles Blake told Wendy that he was an agent for Easy Pay Life
Insurance Company. He presented no credentials. He asked Wendy some
questions about her health and activities, and recorded the answers on
scrap paper. He collected a $250 cash premium from Wendy. When Wendy
did not receive a policy from Easy Pay, she contacted the company.
Easy Pay said they do not have an agent named Charles Blake. Easy Pay
is not responsible for Wendy�s loss of $250 because
A) the principal is never responsible for the acts of its
agents. B) there is no presumption of an agency
relationship. C) limitations can be placed on the powers of
agents. D) knowledge of the agent is assumed to be knowledge
of the principal.
Answer: B