Which one of the following is NOT an element of a valid contract?
A) Legal purpose.
B) Consideration.
C) Intent.
D) Competent parties.
Answer: C
A valid contract must involve competent parties. This means the parties to the agreement must have the legal capacity to act. The contract must have a legal purpose. For example, a valid contract could not be undertaken to smuggle illegal drugs.
Ann and her agent meet to discuss automobile insurance. The agent completes an application for coverage, takes Ann's check for $200, and mails the application to the insurance company. Two weeks later Ann receives the policy in the mail. When did the cons
Answer: B
The consideration is the exchange of value. In insurance, the insured's consideration is paying the premium. The insurance company's consideration is the promise to pay in case of a covered loss.
The attempt to restore an insured to his preloss condition is known as:
A) indemnification.
B) subrogation.
C) coinsurance.
D) self-insurance.
Answer: A
Indemnification is the process by which an insured is restored to a preloss condition. Indemnity indicates that compensation in the form of payment, repair, or replacement has been given to an insured to make him whole again and to relieve him f
Bryce owns a $50,000 lake cabin that he has insured for $40,000. He sustains a $5,000 covered loss. According to the principle of indemnity, how much will his insurer pay?
A) $4,000.00
B) $50,000.00
C) $40,000.00
D) $5,000.00
Answer: D
Under the principle of indemnity, a person should not profit from his loss or collect more than the actual cash value of a loss. The insured should be restored to approximately the same financial position as existed before the loss. In the examp
The principle that restores someone to the condition he enjoyed before a loss is
A) insurance.
B) indemnity.
C) risk transfer.
D) risk reduction.
Answer: B
Insurance is a contract of indemnity. The insurance contract seeks to return the policyholder to substantially the same financial position she enjoyed before the loss.
Which of the following describes a personal contract?
A) The contract is a promise made only by one party.
B) The contract is subject to numerous conditions.
C) The persons involved may void the contract.
D) The contract protects the individual who owns t
Answer: D
Insurance policies are considered to be personal because they protect the individual who owns the property. It is made between the insured and the insurer and cannot be transferred to another person.
An insurance company issued a homeowners policy that included ambiguous language regarding how a loss was settled. The insured sued the insurance company and won. The judge stated that due to the ambiguous language in the contract the decision must be mad
Answer: C
The insurance company writes the contract, which is either accepted or rejected by the applicant. Modifications by the applicant cannot be made. As a result, courts generally have held that any ambiguity in the contract should be interpreted in
Which one of the following terms indicates that an insurance contract contains the enforceable promises of only one party?
A) Adhesion.
B) Conditional.
C) Aleatory.
D) Unilateral.
Answer: D
Insurance contracts are unilateral in that only one party (the insurer) makes any kind of enforceable promise. Insurers promise to pay benefits when a certain event occurs, such as death or disability. The applicant makes no such promise. He doe
Both parties rely on statements made to each other when writing a contract. This contract is known as a:
A) speculative contract.
B) contract of utmost good faith.
C) conditional contract.
D) unilateral contract.
Answer: B
The principle of utmost good faith imposes a higher degree of honesty on parties to an insurance contract. Both parties must know all material facts and relevant information; neither may attempt to conceal facts or deceive the other party. A uni
Jennifer and David signed a homeowners insurance application for coverage on their home. They did not divulge that last year their garage burned down after their 16-year-old son left a cigarette burning. The agent sent in the application and a policy was
Answer: C
The insurance company relied on the facts supplied by Jennifer and David as the truth. Because Jennifer and David did not enter into the agreement in good faith by not divulging the loss, the insurance company may void the contract. Each party m
Which one of the following components of an insurance contract contains information about the risk, the effective date of coverage, deductible, premium amounts, coinsurance percentage, and location of the insured property?
A) Definitions.
B) Declarations
Answer: B
The declarations page of an insurance policy contains statements made by the insured on the application, information about the risk, and other pertinent data, such as insured's name, effective date of coverage, deductible, premium amounts, coins
All of the following are basic parts of an insurance policy EXCEPT:
A) exclusions.
B) conditions.
C) binders.
D) declarations.
Answer: C
The four basic parts of a policy are declarations, insuring agreement, conditions, and exclusions. A binder is an oral or written statement that provides immediate insurance protection for a temporary period.
The procedure for resolving a disagreement between an insured and an insurance company about a loss is described in which of the following parts of an insurance policy?
A) Exclusions.
B) Conditions.
C) Declaration.
D) Insuring agreement.
Answer: B
An insurance policy's conditions set forth the insurer's and the insured's rights and duties, including the procedure for resolving a disagreement involving a loss between the insured and the company
The limits of liability are found in which of the following sections of a casualty policy?
A) Definitions.
B) Declarations.
C) Conditions.
D) Insuring agreement.
Answer: B
A policy's declarations page contains information from statements the insured made on the application and information about the risk insured. Specifically, it identifies the persons or entities that are the insureds and includes other pertinent
The insuring agreement section of a policy describes:
A) losses excluded.
B) duties of the insured after a loss.
C) perils insured against.
D) description of the property insured.
Answer: C
The insuring agreement is the section of an insurance contract containing the obligation of the insurer to pay covered claims, subject to specified conditions and exclusions. It contains the insurance company's promise to pay for loss, if it sho
A policy may be amended only with a(n):
A) warranty.
B) condition.
C) endorsement.
D) declaration.
Answer: C
An endorsement is a form attached to the policy that changes the policy to fit special circumstances. Such modification of the contract is not permitted unless the insurance company approves it in writing. The endorsement may be attached at the
The insured is looking for the amount of coverage in a property and casualty policy. This information would be found in the
A) conditions.
B) liberalization clause.
C) declarations.
D) endorsements.
Answer: C
The declarations contain identifying information about the insured, the amount of coverage provided, a description of the property, and the cost of the policy.