Chapter 2: Policy Provisions and Contract Law

The part of the policy that sets forth the rules of conduct, duties, and obligations of the parties is called the A Conditions. B Exclusions. C Declarations. D Insuring clause.

A Conditions. The conditions is the part of an insurance policy that sets forth the obligations and duties of the insurer and the insured.

Which of the following is NOT an essential element of an insurance contract? A Counteroffer B Consideration C Agreement D Legal purpose

A Counteroffer In order for insurance contracts to be legally binding, they must have four essential elements: agreement (offer and acceptance), consideration, competent parties, and legal purpose. Counteroffer is not required.

The part of a policy that clarifies terms in the policy is the A Definitions. B Insuring agreement. C Conditions. D Exclusions.

A Definitions. The component of a policy that clarifies terms is the definitions.

The Federal Fair Credit Reporting Act A Regulates consumer reports. B Protects customer privacy. C Regulates telemarketing. D Prevents money laundering.

A Regulates consumer reports. The Federal Fair Credit Reporting Act regulates consumer reports, also known as consumer investigative reports, or credit reports.

The policy conditions define A The amount of coverage. B How parties to the contract must act following a loss. C The basic underwriting information. D The excluded perils.

B How parties to the contract must act following a loss. Conditions is an essential part of a policy structure. Conditions define what each party to the policy is required to do contractually in the event of a loss.

In forming an insurance contract, when does acceptance usually occur? A When an insured submits an application B When an insurer's underwriter approves coverage C When an insurer delivers the policy D When an insurer receives an application

B When an insurer's underwriter approves coverage 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.

The Gramm-Leach-Bliley Act was passed to A Allow consumers access to credit and private consumer reports. B Allow insurance companies access to medical information for underwriting purposes. C Protect private customer information filed with a financial institution. D Define insurance as interstate commerce.

C Protect private customer information filed with a financial institution. The Gramm-Leach-Bliley Act was passed to protect private customer information that is filed with a financial institution. Customers must be given two disclosure notices (one at the onset of business and one before information is disclosed), as well as a yearly updated disclosure notice.

Which of the following is a statement that is guaranteed to be true, and if untrue, may breach an insurance contract? A Indemnity B Representation C Warranty D Concealment

C Warranty A warranty in insurance is a statement guaranteed to be true. When an applicant is applying for an insurance contract, the statements he or she makes are generally not warranties but representations. Representations are statements that are true to the best of the applicant's knowledge.

The section of an insurance policy that details what perils are not insured against and what persons are not insured is known as the A Exclusions. B Declarations. C Endorsements. D Conditions

A Exclusions. The exclusions section of an insurance policy details what perils are not insured against and what persons are not insured.

Persons covered under an insurance policy, whether named or not, are known as the A First named insureds. B Additional insureds. C Insureds. D Named insureds.

C Insureds. The insureds are persons covered under a policy, whether named or not.

Which of the following would modify the original insurance contract by either adding or removing coverage? A Flexible policy B Endorsement C Additional coverage form D Condition

B Endorsement Endorsements change the policy's original terms, conditions, or coverages. Endorsements can add or delete coverage, or merely correct items such as the insured's name, address, etc.

An insured stated on her application for life insurance that she had never had a heart attack, when in fact she had a series of minor heart attacks last year for which she sought medical attention. Which of the following will explain the reason a death benefit claim is denied? A Material misrepresentation B Waiver C Utmost Good Faith D Estoppel不容反悔

A Material misrepresentation A material misrepresentation will affect whether or not a policy is issued. If the insured had been truthful, it is very likely that the policy would not be issued.

The policy conditions define A The amount of coverage. B How parties to the contract must act following a loss. C The basic underwriting information. D The excluded perils.

B How parties to the contract must act following a loss Correct! Conditions is an essential part of a policy structure. Conditions define what each party to the policy is required to do contractually in the event of a loss.

In return for premium, an insurance company must A Provide the insured with coverage adequate for all potential losses. B Use standardized tables of coverage for specific risks to be excluded from coverage. C Give the insurer valuable consideration. D Be fair in underwriting and pay covered losses.

D Be fair in underwriting and pay covered losses. In return for premium, an insurance company must be fair and impartial in underwriting of risks and must pay claims made for all covered losses.

Termination of an in-force insurance policy prior to the expiration date shown in the policy is known as A Cessation. 停止 B Cancellation. C Rescission. 解僱 D Nonrenewal.

B Cancellation. Cancellation is the termination of an in-force insurance policy by either the insured or the insurer prior to the expiration date shown in the policy. Termination may be voluntary, involuntary, or in mutual accordance with provisions contained in the policy.

An insurer neglects to pay a legitimate claim that is covered under the terms of the policy. Which of the following insurance principles has the insurer violated? A Adhesion B Consideration C Good faith D Representation

B Consideration The binding force in any contract is consideration. Consideration on the part of the insured is the payment of premiums and the health representations made in the application. Consideration on the part of the insurer is the promise to pay in the event of loss.

In the event of a loss covered by the policy, if the insurer requests a signed sworn proof of loss, the named insured is required to submit it within A 1 year. B 5 business days. C 30 days. D A specified time.

D A specified time. In the event of a loss covered by the policy, the named insured is required to submit to the insurer a signed sworn proof of loss within the allotted time (usually 60 days, but may vary).

The ABC Corporation has $100,000 of coverage on its building through insurance Company A, and $50,000 of identical coverage on the same building through insurance Company B. Assuming coinsurance is not an issue, when a $24,000 loss occurs and the pro rata method is used, how much will each insurer pay? A Company A will pay $20,000; Company B will pay $4,000. B Company A will pay $12,000; Company B will pay $12,000. C Company A will pay $24,000; Company B will pay $0. D Company A will pay $16,000; Company B will pay $8,000.

D Company A will pay $16,000; Company B will pay $8,000. Each policy pays its pro rata share of the loss based upon each policy's share of the total amount of coverage.

In terms of parties to a contract, which of the following does NOT describe a competent party? A The person must not be under the influence of drugs or alcohol. B The person must be of legal age. C The person must be mentally competent to understand the contract. D The person must have at least completed secondary education.

D The person must have at least completed secondary education. The parties to a contract must be capable of entering into a contract in the eyes of the law. Generally, this requires that both parties be of legal age, mentally competent to understand the contract, and not under the influence of drugs or alcohol.

When an insured makes truthful statements on the application for insurance and pays the required premium, it is known as which of the following? A Consideration B Legal purpose C Contract of adhesion D Acceptance

A Consideration Consideration is something of value that each party gives to the other. The consideration on the part of the insured is the payment of premium and the representations made in the application.

All of the following are found in the declarations section of a policy EXCEPT the A Exclusions. B Policy premiums. C Name of the insured. D Limits of insurance.

A Exclusions Declarations state who is insured, what is insured, where the property is located, when the policy begins and ends, how much insurance and how much premium. The exclusions tell what is not covered. .

Which of the following describes the transfer of a legal right or interest in an insurance policy? A Abandonment B Obligation C Legal purpose D Assignment

D Assignment Assignment is the transfer of a legal right or interest in an insurance policy. In property and casualty insurance, assignments of policies are usually valid only with the prior written consent of the insurer.

For a contract to be enforceable by law, the purpose of the contract must be A Legal and not against public policy. B For financial gain. C For the benefit of the general public. D Of pure intent.

A Legal and not against public policy. The purpose of a contract must be legal and not against public policy for the contract itself to be enforceable by law (or legal).

When an insurance policy does not offer a continuation or replacement at its expiration date, it is considered a A Cancellation. B Nonrenewal C Suspension. D Cessation.

B Nonrenewal When an insurance policy does not offer a continuation or replacement at its expiration date, it is considered a nonrenewal.

An agent tries to sell insurance over the phone to an applicant who appears to be confused, but is eventually able to give enough information for the application to be completed. After the policy was issued, the agent talked to the insured's family, and they explained that the insured was recovering from a surgery and might have been under the influence of medication at the time of application. Which of the following is true? A The policy is not legal; agents cannot sell insurance over the phone. B The policy may be voided if it can be proven that the applicant was not capable of making a buying decision at the time of application. C The policy will remain in force as long as there are no material misrepresentations on the application. D The policy is legal since the applicant was able to give all required information.

B The policy may be voided if it can be proven that the applicant was not capable of making a buying decision at the time of application. When an insurer and insured enter into a contract, both parties must be of legal age and mentally competent. Because the applicant was confused, it is possible she was suffering from pain or could have been affected by medication, or was having other issues; therefore, if it can be proven that the applicant was incapable of making a buying decision during the application and acceptance process, the policy could be voided.

The pro rata liability clause is designed to protect the principle of A Waiver and estoppel. B Indemnity. C Subrogation. D Insurable interest

B Indemnity If more than one policy is in force on the same property at the same time covering the same perils, this is concurrent coverage. The intent of insurance is that after a loss, the insured is restored to the condition he or she was in before the loss (indemnified). Each policy pays a percentage of a loss directly related to the amount of insurance it provides compared to the total amount of coverage.

All of the following are considered parts of the policy structure EXCEPT A Conditions. B Provisions C Exclusions. D Insuring clause.

B Provisions規定 Provisions is a broad term used to refer to the sections or clauses of an insurance policy that communicate the policy's benefits, conditions, etc. The essential parts of the policy are declarations, insuring clause, conditions and exclusions.

If a property is covered by Company A for $20,000 and Company B covers the same property for $40,000, how much will Company A pay on a $24,000 loss? A $0 B $20,000 C $12,000 D $8,000

D $8,000 Pro rata liability applies. Each policy pays a percentage of the loss based on the percentage of coverage that policy provides. Company A carries 1/3 of the total coverage ($20,000 + $40,000 = $60,000). Therefore, it is responsible for 1/3 of the $24,000 loss, or $8,000.

Which of the following is NOT the consideration in a policy? A The promise to pay covered losses B The application given to a prospective insured C Something of value exchanged between parties D The premium amount paid at the time of application

B The application given to a prospective insured Consideration is something of value that is transferred between the two parties to form a legal contract.

Duties of the insurer found in property policy conditions include all of the following EXCEPT A Provide advance notice of cancellation. B Return any premiums to the insured. C Notify the insured in the event of financial difficulty. D Pay covered losses.

C Notify the insured in the event of financial difficulty. The insurance department monitors the financial conditions of insurers. The insurers report to the state, not to policyholders.

What insurance policy provision defines how the policy will respond if there is more than one insurance policy written on the same risk? A Nonconcurrency B Primary and excess C Other insurance D Valid insurance

C Other insurance Other insurance is a provision in an insurance policy that defines how the policy will respond if there is other valid insurance written on the same risk.

Which part of an insurance policy covers claims-related expenses, reasonable expenses incurred by an insured to protect damaged property from further loss, or defense expenses? A Additional coverage B Exclusions C Declarations D Insuring agreement

A Additional coverage The additional coverage portion of a policy provides an additional amount of coverage for specific loss expense, at no additional premium.

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

A The completed 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.

All of the following are conditions commonly found in the insurance policy EXCEPT: a. Appraisal b. Insuring Agreement c. Cancellation and nonrenewal d. Subrogation

b. Insurance Agreement Insurance Agreement provides on the policy's coverage. Condition states the legal obligations and duties of the parties to the contract.

Which of the following protects consumers against the circulation of inaccurate or obsolete personal or financial information? A Unfair Trade Practices Law B The Guaranty Association C Consumer Privacy Act D The Fair Credit Reporting Act

D The Fair Credit Reporting Act The purpose of the Fair Credit Reporting Act is to protect consumers against the circulation of inaccurate or obsolete information and to ensure that consumer reporting agencies are fair and equitable in their treatment of consumers.

Pro rata liability applies. Each policy pays a percentage of the loss based on the percentage of coverage that policy provides. Company A carries 1/3 of the total coverage ($20,000 + $40,000 = $60,000). Therefore, it is responsible for 1/3 of the $24,000 loss, or $8,000. Representations are written or oral statements made by the applicant that are A Guaranteed to be true. B Found to be false after further investigation. C Immaterial to the actual acceptability of the insurance contract. D Considered true to the best of the applicant's knowledge.

D Considered true to the best of the applicant's knowledge. Representations are statements made by an applicant that they believe to be true.

A person who is not named as an insured on the declarations page of a policy but is protected by the policy is known as the A First named insured. B Additional insured. C Policyowner. D Named insured.

B Additional insured. An additional insured is usually added by endorsement and is not named on the declarations page but is protected by the policy.

The part of a property policy that shows the amount of insurance, premium, and policy term is the A Conditions. B Endorsements. C Declarations. D Insuring clause.

C Declarations. Who, what, when, where, and how much insurance and premium all are stated in the policy Declarations.