The Insurance Contract

Which one of the following is NOT an element of a valid contract? A) Competent parties. B) Intent. C) Consideration. D) Legal purpose.

...Explanation: 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. Every contract must contain one party's offer and the other party's acceptance of the offer. Finally, each party must give consideration, something of value. In an insurance policy contract, the insured's consideration is his premium payment, and the insurer's consideration is the promise of indemnity. Intent is not a requirement for a valid contract.

Which of the following describes a personal contract? A) The contract is a promise made only by one party. B) The contract protects the individual who owns the property. C) The persons involved may void the contract. D) The contract is subject to numerous conditions.

...The correct answer was - B: The contract protects the individual who owns the property. Explanation: 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.

A policy may be amended only with a(n): A) condition. B) endorsement. C) warranty. D) declaration.

...The correct answer was - B: endorsement. Explanation: 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 beginning of the policy or added during the policy's term.

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 made in favor of the insured. The judge was basing this decision on which of the following types of insurance contract? A) Aleatory contract. B) Conditional contract. C) Contract of adhesion. D) Unilateral contract.

...The correct answer was - C: Contract of adhesion. Explanation: 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 favor of the insured.

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 issued. When another fire occurred 2 months after the policy was issued, the company voided the policy because the agent would not have sent in the application if he had known of the prior loss. Which contract principle does this situation describe? A) Reasonable expectations. B) Contract of adhesion. C) Utmost good faith. D) Waiver and estoppel.

...The correct answer was - C: Utmost good faith. Explanation: 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 must assume that the other party is telling the truth.

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 consideration take place? A) When the company mailed the application. B) When the agent quoted the premium. C) When Ann wrote the premium check. D) When the agent submitted the application.

...The correct answer was - C: When Ann wrote the premium check. Explanation: 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.

The correct answer was - A: indemnification. Explanation: 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 from his loss. Indemnity, as a legal principle, maintains that a person should not profit or collect more than the value of a loss, but should be restored to approximately the same financial position as existed before the loss.

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) $50,000.00 B) $5,000.00 C) $4,000.00 D) $40,000.00

The correct answer was - B: $5,000.00 Explanation: 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 example, Bryce's loss is $5,000, and he is limited to a $5,000 recovery.

The limits of liability are found in which of the following sections of a casualty policy? A) Conditions. B) Declarations. C) Insuring agreement. D) Definitions.

The correct answer was - B: Declarations. Explanation: 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 data, such as the effective date of coverage, deductible, premium amounts, coinsurance percentage, location of the property, and the insurer's limits of liability. The declarations page personalizes the insurance policy.

All of the following are basic parts of an insurance policy EXCEPT: A) conditions. B) binders. C) exclusions. D) declarations.

The correct answer was - B: binders. Explanation: 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.

Both parties rely on statements made to each other when writing a contract. This contract is known as a: A) conditional contract. B) contract of utmost good faith. C) speculative contract. D) unilateral contract.

The correct answer was - B: contract of utmost good faith. Explanation: 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 unilateral contract is one in which only one party makes a legally enforceable promise. In a conditional contract, the insurer's consideration is a promise to pay only if a certain condition is met. If the condition is not met, the insurer does not have to pay.

The insuring agreement section of a policy describes: A) duties of the insured after a loss. B) perils insured against. C) losses excluded. D) description of the property insured.

The correct answer was - B: perils insured against. Explanation: 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 should result from the perils insured against.

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) Conditions. B) Insuring agreement. C) Declarations page. D) Definitions.

The correct answer was - C: Declarations page. Explanation: 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, coinsurance percentage, and location of the property. The declarations page personalizes the policy.

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) Insuring agreement. C) Declaration. D) Conditions.

The correct answer was - D: Conditions. Explanation: 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 insured is looking for the amount of coverage in a property and casualty policy. This information would be found in the A) liberalization clause. B) endorsements. C) conditions. D) declarations.

The correct answer was - D: declarations. Explanation: The declarations contain identifying information about the insured, the amount of coverage provided, a description of the property, and the cost of the policy.