Chapter 1 General Insurance
A life insurance applicant's answers on the application indicate that they in good health. In fact, the applicant actually has a disease that they are not aware of. The statement on the application is considered:
A A representation
Each of the following is an element of a legal contract, except:
A Agreement B Legal Purpose C Consideration D Indemnity
What is the correct term for a contract written by one party without input from or negotiation with the other party?
A Contract of Adhesion
Insurers that are incorporated in another state, but doing business in this state, are considered:
A Foreign
___________ manufacture and sell insurance coverage in the form of policies or contracts of insurance.
A Insurers
A warranty is defined as which of the following?
A Statement in the application that is guaranteed to be true
What gives an insurer the authority to operate within this state?
A certificate of authority
Misrepresentations
A false statement contained in the application is considered a misrepresentation. If it is material to the issuance of coverage, meaning the insurer would not have issued a policy had the misrepresentation not been made, or premiums charged would have been higher, or coverage limited, coverage does not apply. A material misrepresentation may void the policy.
An insurer that is authorized to do business in this state MUST be:
An admitted insurer
Insurance Contract
An insurance policy is a legal contract between two parties, purchased by the insured and stating that the insurance company promises to make payment for a loss arising from an unexpected event. The contract involves the exchange of a relatively small and definite expense (known as premium) for the promise of payment for a large uncertain loss.
Domestic Insurer
An insurer organized under the laws of a state in which it is placing business is considered a domestic insurer in that particular state. An insurer can only be domestic to the state in which it is incorporated. Example: An insurer organized under the laws of New York is considered domestic to New York.
Foreign Insurer
An insurer placing business anywhere within the United States OTHER THAN the state, district, or territory in which it was organized and incorporated is considered a foreign insurer in that jurisdiction. Example: An insurer incorporated in New York is considered foreign to Kansas.
Alien Insurer
An insurer placing business within the United States which was organized under the laws of another country is considered an alien insurer within the U.S. jurisdiction. Example: An insurer incorporated in Ontario, Canada, is considered alien to New York.
Agreement (Offer and Acceptance)
An offer is made when the applicant submits an application for insurance with initial premium to the insurer. The offer is accepted after it has been approved by the insurer
For life and health insurance, insurable interest must exist at the time of:
Application
Dividends issued by mutual insurance companies:
Are non-taxable refunds (returns) of unused or surplus premiums
An organization that transacts insurance only with its own members is a(n):
B Fraternal Benefit society
Mutual insurance companies are owned by:
C Policyowners
What happens if an applicant discovers that there has been inaccurate or incomplete information in any report used during the underwriting process for life insurance?
C The applicant has the right to challenge the inaccurate or incomplete information
Consideration
Consideration is the exchange of value that makes a contract binding. The insured's consideration is the payment of premium, along with an agreement to abide by the conditions of the contract. The insurer's promise to indemnify in the event of a loss is its consideration, as is specified in the insuring clause of the policy.
Which of the following best describes a conditional contract?
D Both parties must perform specified duties in order for the contract to be enforceable
Fraternal insurance companies are owned by:
D Members
What is the correct insurance term for a statement that is guaranteed to be true?
D Warranty
Which branch of the state government is responsible for enforcing the existing statutes that have been put in place?
Executive
A federal regulation called the ______________ protects consumer privacy.
Fair Credit Reporting Act
USA PATRIOT Act and Anti-Money Laundering (AML)
Financial institutions are required to report any activity they believe or even have reason to suspect is an effort to launder money. A Currency Transaction Report (CTR) must be filed with FINCEN (Financial Crimes Enforcement Network) through the Department of Treasury for every cash transaction that exceeds $10,000 and wire transfers in excess of $3,000.
An insurer authorized to do business in State A, which was incorporated in State B, is considered what type of insurer in State A?
Foreign
Fraternal insurers are known as
Fraternal Benefit Societies
______ are primarily social organizations that engage in charitable and benevolent activities consisting of members of a given faith, lodge, or order, and are usually organized as non-profits.
Fraternal Benefit Societies
Which principle states that an insured may be reimbursed up to the amount of the actual loss?
Indemnity
Legal Purpose
Insurance may not be issued for an illegal activity or immoral purpose. Intentional acts that cause a loss to collect from a policy, such as arson or murder, remove the legal aspect of purchasing insurance. Since an insurable interest must exist between the applicant and the insured, a contract must be issued in good faith that the owner is not looking to gain from a loss.
The ___________ branch is responsible for interpreting and determining the constitutionality of the statutes.
Judicial
Which branch of the government is responsible for writing and passing state insurance laws, or statutes, to protect the insuring public?
Legislative
A ______________ insurance company is owned by its policyholders.
Mutual
An insurer NOT authorized to do business within this state is considered what type of insurer?
Non-Admitted
Insurance is regulated primarily at the _____ level
State
Which person or entity issues a Certificate of Authority enabling an insurer to conduct insurance business within a particular state?
State insurance Commissioner or Director
The insurance industry is primarily regulated at the:
State level
Representations
Statements made by the applicant on the insurance application that are believed to be true, but are not guaranteed to be true.
Dividends issued by stock insurers are paid to:
Stockholders
Contract of Adhesion
The contract is written by one party, the insurance company, without any input from the applicant. The insurer prepares the contract and presents it to the applicant on a "take-it-or-leave-it" basis. Because the insured has no input regarding the terms of the contract, it is not negotiable.
Under the Fair Credit Reporting Act, which of the following statements is correct?
The reporting company can provide confidential information to anyone requesting it B The Act is designed to protect reporting agencies from the public C If an individual is denied coverage, they can request a copy of the report D The reporting agency has no responsibility to investigate inaccurate information
Fraternal Insurers
They are primarily social organizations that engage in charitable and benevolent activities that provide primarily life insurance to its members. They are usually organized on a nonprofit basis. Membership is typically drawn from members of a given religious organization, lodge, order, or society.
The contract type in which only one party is legally bound to its contractual obligations after a premium is paid is a(n)_______ contract.
Unilateral
When it comes to life insurance, insurable interest on one's own life is:
Unlimited
An applicant completes the application and submits it to the insurer along with a premium check. When is the applicant's offer considered accepted?
When the insurer issues a policy
Insurable Interest
a financial or economic hardship in the event of a loss due to an accident, sickness, or death of the insured. Insurable interest must exist between the person buying the insurance, the policyowner, and the person insured under the policy. Each person also has an unlimited insurable interest in his/her own life. insurable interest must exist at the time of the application, not the time of the loss
Warranties
are material statements in the application or stipulations in the policy that are guaranteed true in all respects. If warranties are later discovered untrue or breached, coverage and the contract may be voided.
Stockholders elect
board of directors
Based on the Principle of Indemnity
insurance is designed to restore an insured to the same physical or financial condition which existed prior to the loss, without a profit or gain
An admitted or authorized insurer
is approved to transact insurance in a given state if it has been granted a Certificate of Authority from that state's Department of Insurance. This authorization is not related to the insurer's domicile.
A non-admitted or unauthorized insurer
is not authorized to transact insurance in a given state, either by failing to comply with state requirements or by not seeking admission.
Judicial Branch
is responsible for interpreting and determining the constitutionality of the statutes
National Association of Insurance Commissioners (NAIC)
is the regulatory support organization created and governed by the chief insurance regulators and commissioners from the 50 states
Executive Branch
is to enforce the existing statutes that have been put in place
Competent Parties
must have the legal capacity to enter into a contract. Parties are assumed to be competent unless they are one of the following: Minors - For the purposes of insurance, a minor is a person under age 16. Mentally incompetent Under the influence of drugs or alcohol
stock insurers issue
non-participating policies
if declared by the Board, policyholders may receive
non-taxable dividends as a return of unused premium.
Conditional Contract
one in which both parties must perform certain duties to make the contract enforceable. The insured can only collect if there has been a covered loss, and the insurer has a list of conditions stated in the contract that must be met before a claim will be paid. As long as the specified conditions or duties are performed, the insurer must pay the claim.
Unilateral Contract
one in which only one party is legally bound to the contractual obligations. As long as all the conditions are met by the insured, the insurer makes an enforceable promise of future performance and can be charged with a breach of contract if those obligations are not met. The insured has the right to cancel the policy at any time and cannot be legally forced to pay the premiums.
Aleatory Contract
one that is based on an uncertain event, or "by chance". It can't be known in advance whether the insurer will have to pay a loss during the policy term, or whether the insured will make premium payments without receiving anything in return. Both parties agree to the terms of the contract, despite the uncertainty. It is very likely that there will be an unequal exchange of consideration by either party, depending on if a loss actually occurs and to what extent.
Mutual insurers typically issue
participating policies
A mutual insurer is owned by
policyholders (customers)
Domicile
refers to the location, or jurisdiction (state, district, territory, or country), where an insurer is formed or incorporated. The three kinds of insurer domicile are domestic, foreign, and alien.
A stock insurer is owned by
stockholders
The Fair Credit Reporting Act (FCRA) protects the consumer's right to
the privacy of credit and financial information, ensuring that all collected data is confidential, accurate, relevant and properly used. Under the FCRA, credit reports may be obtained only to determine the financial and moral status of an applicant, such as for employment screening or loan approval, or to assist in underwriting by an insurer.
legislative branch
writes and passes state insurance laws, or statutes, designed to protect the insuring public.