10 - Legal Concepts of the Insurance Contract

All are competent parties who can enter into insurance contracts EXCEPT? A) Applicants. B) Business entities. C) Those under influence of alcohol. D) Trusts and estates.

C) Those under influence of alcohol. Applicants, trusts and estates, and business entities are all considered competent parties. The exclusions to these would be minors, the mentally infirm, and those under the influence of alcohol or narcotics.

Doug approaches Ed about purchasing term life insurance. Ed has access to many different life insurance companies to get the best quote for Doug. In this situation, Ed would best be described as a(an)? A) Broker. B) Contractor. C) Agent. D) Fiduciary.

A) Broker. Unlike agents, brokers legally represent the insured. A broker solicits and accepts applications for insurance and then places the coverage with an insurer.

Which of the following statements regarding insurable interest is NOT correct? A) The applicant must be subject to loss upon the death, illness,or disability of the insured. B) A policy obtained by a person without an insurable interest in the insured can be enforced. C) Generally, the person to be insured must give consent before a policy is issued, even if the applicant has an insurable interest. D) Insurable interest exists when the applicant is the insured.

B) A policy obtained by a person without an insurable interest in the insured can be enforced. Insurable interest occurs when the policyowner faces the possibility of losing money or something of value in the event of loss.

Special features of insurance contracts include all of the following EXCEPT? A) aleatory. B) estoppel. C) conditional. D) unilateral.

B) estoppel. All of these are special features of insurance contracts except "estoppel".

Insurable interest must exist at what time? A) At the time of death. B) At all times. C) At the time of application. D) At the time of delivery.

C) At the time of application. It is important to note that insurable interests must exist upon issuance of a life or health insurance contract. It does not have to continue throughout the duration of the policy nor does it have to exist at the time of claim.

Which is considered a statement made by an applicant that he/she believes to be true? A) Concealment. B) Good Faith. C) Warranty. D) Representation.

D) Representation. Representations are statements made by applicants to which they believe are true. They are used by insurers to evaluate whether or not to issue a policy.

Which of the following terms is used for the voluntary relinquishment of a known right? A) Unilateral. B) Estoppel. C) Adhesion. D) Waiver.

D) Waiver. If an insurer voluntarily waives a legal right it has under the contract, it cannot later deny a claim based on a violation of that right.

A life insurance policy would be considered a wagering contract WITHOUT? A) agent solicitation. B) premium payment. C) constructive delivery. D) insurable interest.

D) insurable interest. Without insurable interest, a life insurance policy would be considered a wagering contract.

Which of the following statements describes the parol evidence rule? A) An oral contract cannot be modified by written evidence. B) A written contract cannot be changed by oral evidence. C) An oral contract takes preference over any earlier written contracts. D) A written contract cannot be changed once it is signed.

B) A written contract cannot be changed by oral evidence. Parol evidence rule basically states that you cannot use oral testimony to contradict the terms of a signed document.

All of the following would be considered non-competent parties in an insurance contract EXCEPT? A) minors. B) the disabled. C) those under the influence of drugs or alcohol. D) the mentally infirm.

B) the disabled. Minors, the mentally infirm, and those under the influence of drugs or alcohol would be considered non-competent parties in an insurance contract. This does not necessarily apply to a disabled person.

The following are all characteristics of insurance contracts EXCEPT? A) insurable interest. B) unilateral. C) unconditional. D) valued or indemnity.

C) unconditional. Unconditional is not a characteristic of an insurance contract.

All of the following are considered to be typical characteristics describing the nature of an insurance contract EXCEPT? A) Unilateral. B) Adhesion. C) Aleatory. D) Bilateral.

D) Bilateral. Unilateral, aleatory, and adhesion are all special features of insurance contracts. Bilateral is not.

Which of the following statements regarding utmost good faith in insurance contracts is CORRECT? A) Although a warranty is a statement, it is not technically part of the contract. B) A representation is a statement that the applicant guarantees to be true. C) The concept of utmost good faith (that there is no attempt to conceal, disguise, or deceive) applies only to the insurer. D) Most state insurance laws consider statements made in an application for an insurance policy to be representations, not warranties.

D) Most state insurance laws consider statements made in an application for an insurance policy to be representations, not warranties. Representations are statements believed to be true to the best of one's knowledge, but they are not guaranteed to be true. Warranties are an absolutely true statement upon which the validity of the insurance policy depends.

An insurer is considered authorized if it? A) follows the Code of Ethics of the state Office of Insurance Regulation. B) is registered with the Securities and Exchange Commission. C) is licensed or admitted by the state. D) is registered with the NAIC.

C) is licensed or admitted by the state. Competence is determined by whether or not the insurer has been licensed or authorized by the state (or states) in which it conducts business.

The authority of an agent which is spelled out in the written words of the agency contract between the agent and the insurer is called? A) presumed authority. B) implied authority. C) expressed authority. D) apparent authority.

C) expressed authority. Express authority is the authority a principal deliberately gives to its agent. Express authority is granted by means of the agent's contract, which is the principal's appointment of the agent to act on its behalf.

An agent is an individual that represents whom? A) Himself/Herself. B) Broker. C) Insurer. D) Insured.

C) Insurer. An agent is an individual who is authorized by an insurer to sell goods and services on its behalf. An agent is also the insurer's representative in dealing with the public.

When an agent is provided the materials from his/her company, which category of authority is the one which allows those items to be used? A) Apparent. B) Implied. C) Intended. D) Obvious.

A) Apparent. Apparent authority is the appearance or assumption of authority based on the actions, words, or deeds of the principal, or because of circumstances the principal created. For example, providing an individual with a rate book, application forms, and sales literature creates the impression that an agency relationship exists between the insurer and the individual.

In insurance, an offer is usually made when? A) The application is submitted. B) An agent explains a policy to a potental applicant. C) The agents hands the policy to the policyholder. D) The insurer approves the application and receives initial premium.

A) The application is submitted. In insurance, the offer is usually made by the applicant in the form of the application. Acceptance takes place when an insurer's underwriter approves the application and issues a policy.

Which of the following best describes the concept that the consideration is not equal in contract law? A) Adhesion. B) Aleatory. C) Subrogation. D) Warranty.

B) Aleatory. Insurance contracts are aleatory. This means there is an element of chance and potential for unequal exchange of value for both parties. An aleatory contract is conditioned upon the occurrence of an event. Consequently, the benefits provided by an insurance policy may or may not exceed the premiums paid.

Krissa and Janet enter into a contract in which Krissa agrees to fraudulently induce sick people to sell their insurance contracts to Janet's company. Krissa and Janet's contract can best be described as? A) Voidable. B) Competitive. C) Void. D) Conditional.

C) Void. A void contract is simply an agreement without legal effect. For example a contract created for an illegal purpose is void.

Which of the following statements about authority is NOT correct? A) Express authority is determined by a principal's conduct. B) Express authority is granted by means of the agent's contract. C) Implied authority is not overtly extended in the agent's contract but does permit many of the agent's operations. D) Apparent authority can be assumed from the actions of the principal.

A) Express authority is determined by a principal's conduct. Express authority is the authority an insurance company grants to an agent by means of the agent's contract.

An insurance company has how many years to challenge the validity of a life insurance contract? A) Four. B) Three. C) Two. D) One.

C) Two. After two years, the insurer cannot contest the policy or deny benefits based on any incorrect information in the insurance policy, this is called the Incontestable Clause.

Because an insurance contract has been prepared by an insurance company with no negotiation it is considered? A) a unilateral contract. B) an aleatory contract. C) a contract of adhesion. D) a commutative contract.

C) a contract of adhesion. Insurance contracts are contracts of adhesion. This means that the contract has been prepared by one party (the insurer). The contract is not the result of negotiation between the parties. The applicant "adheres" to the terms of the contract when she accepts it.

The authority given by an insurer or employer to a licensee to transact insurance or adjust claims on their behalf is called? A) appointment. B) certification. C) authorization. D) representation.

C) authorization. Authority is the actions and deeds an agent is authorized to conduct on behalf of an insurance company, as specified in the licensee's contract.

An agent is an individual who has been authorized by an insurer to be its representative and to perform all of the following acts EXCEPT? A) collect premiums from policyowners. B) render services to prospects. C) authorize payment of certain claims. D) solicit applications for insurance.

C) authorize payment of certain claims. Agents do not authorize payment of claims.

An agreement without legal effect is? A) void. B) fraudulent. C) parole evidence. D) estoppel.

A) void. A void contract is simply an agreement without legal effect. In essence, it is not a contract at all, for it lacks one of the elements specified by law for a valid contract. A void contract cannot be enforced by either party. For example, a contract having an illegal purpose is void, and neither party to the contract can enforce it.

Which of the following is an example of legal consideration? A) Legal purpose. B) Application and initial premium. C) Offer and acceptance. D) Politeness.

B) Application and initial premium. Consideration can be defined as something of value given in exchange for the promises sought. In an insurance contract, consideration is given by the applicant in the form of paying premiums in exchange for the insurer's promise to pay benefits.

Which of the following statements describes an insurable interest? A) The beneficiary, by definition, has an insurable interest in the insured. B) The policyowner must expect to benefit from the insured's death. C) The policyowner must expect to suffer a loss when the insured dies or becomes disabled. D) The insured must have a personal or business relationship with the beneficiary.

C) The policyowner must expect to suffer a loss when the insured dies or becomes disabled. The policyowner must face the possibility of losing money or something of value in the event of the death or disability of the insured.