GENERAL INSURANCE PRINCIPLES class 4 INSURANCE CONTRACTORS AND REGULATIONS

Which of the following statements about representations and warranties is most correct?

Insurers can rescind (cancel) an insurance contract if a misrepresentation is discovered on the application during the contestability period. Because Statements made by the applicant on the application that are true to the applicant's best knowledge are considered representations, while promises made by the insurer in the contract are warranties. False statements that the applicant knowingly makes are misrepresentations and may result in the insurer rescinding the policy if the misrepresentations are discovered during the contestability period.

Jerry owns a life insurance policy with premiums payable directly to the insurer's home office. However, for the past five years Jerry has sent his payments to his agent, who then forwards them to the insurer. The insurer had accepted this arrangement but then tries to cancel Jerry's policy when it learns he had died while the premium was being forwarded by the agent. The insurer will probably not be able to cancel the policy in this case because of which of the following legal principles?

estoppel

What is the term for voluntarily giving up a known right?

waiver Because Waiver is voluntarily giving up a known right. If an insurer voluntarily gives up a legal right that it has under an insurance contract, it cannot deny a claim based on a violation of that right. Estoppel is similar to the idea of waiver but involves giving up a right without intending to do so. The difference is the lack of intent to give up the right.

Which of the following statements about utmost good faith in insurance contracts is correct?

Both the insured and insurer must act in utmost good faith. Because An insurance contract requires that both the insured and the insurer act in utmost good faith. Under this concept, both parties can expect complete, relevant, and accurate information. If one party fails to disclose critical information, the other party usually can void the contract.

If an applicant for an insurance policy submits an application without the first premium, which of the following is correct?

The applicant has invited the insurer to make an offer. Because When an applicant submits an application without the first premium, the applicant has invited the insurer to make an offer. In contrast, when an applicant submits an application to the insurer with the first premium payment, the applicant has made an offer that the insurer may or may not accept.

What will result if an insured decides to stop paying premiums for his or her insurance policy?

The insurance company is released from its promise to pay benefits and the contract expires. Because An insurance contract is a unilateral contract, which means that only one party-the insurer-makes a promise that can be enforced. The insured must only pay the first premium. The insurer cannot require the policyowner to pay more premiums. However, if the policyowner does not pay any required premiums, the insurer is released from its promise to pay the benefit and the contract expires.

Tim had paid only four premiums totaling $1000 on his health insurance policy when he was diagnosed with cancer. The insurance company paid more than $100,000 to cover the medical bills for his treatment during the next year. This situation demonstrates which of the following characteristics of insurance contracts?

They are aleatory. Because Insurance policies are aleatory contracts, which means that one party may receive a benefit that is entirely out of proportion to the consideration he or she is giving. In this case, Tim receives a disproportionate amount of benefits compared to the amount of premiums that he has paid for insurance coverage.

All the following types of insurance involve a personal contract EXCEPT:

a life insurance policy Because Most insurance policies are personal contracts between the insurer and the policyowner. This means that the policyowner cannot transfer the agreement without the insurer's consent. Life insurance is an exception. Life insurance policyowners may transfer ownership without the insurer's permission.

For a life insurance contract to be enforceable, which of the following parties must be legally competent?

applicant and insurer Because For a contract to be enforceable, the applicant for an insurance policy must be legally competent. This means that a person must be mentally sound, of legal age, and not under the influence of drugs or alcohol. In addition, the insurer must be competent, which is evidenced by its holding a certificate of authority in the state.

In an insurance transaction, who gives consideration?

both the applicant and the insurer Because Consideration, in the context of a contract, means something of value that both parties to the contract give. In an insurance contract, the insurance company promises to pay the amount specified in the contract, and the applicant pays the first premium.

Deliberately withholding material facts when applying for insurance is called:

concealment Because Concealment is deliberately withholding material facts when applying for insurance. If the concealed facts would have changed the insurer's decision to offer the insurance policy, then the insurer can void the insurance contract.

Ambiguities in an insurance contract are most often interpreted in favor of the policyowner because insurance contracts are:

contracts of adhesion Because As contracts of adhesion, insurance policies must be accepted "as-is" by policyowners. Since the policyowner had no say in drafting the terms of the contract, ambiguities in an insurance contract are usually interpreted in favor of the policyowner.

Medical expense insurance policies are what type of contract?

indemnity contract Because A medical expense insurance contract is an indemnity contract. This means that the benefit cannot exceed the contract owner's actual loss (or the policy's maximum benefit amount, if less).

Jana applied for a life insurance policy and submitted the initial premium with her application. When Acme Insurers reviewed Jana's application, it decided to offer her a modified policy at a higher premium. In this case, what has Acme Insurers done?

made a counteroffer to Jana Because When an insurer issues a policy on a basis other than as applied for, the insurer has rejected the applicant's offer and made a counteroffer. In this case, Acme Insurers did not accept Jana's application but offered her a modified policy at a higher premium. Acme therefore made a counteroffer that Jana can either accept or reject.

An applicant for a $500,000 whole life insurance policy pays the initial premium along with his application. In this case, what has the applicant done?

made an offer to the insurer Because

Which of the following parties makes an enforceable promise in an insurance contract?

only the insurance company Because

The fact that ownership of a health insurance contract cannot be transferred to another party makes it what type of contract?

personal Because Most insurance policies are personal contracts between the insurer and the policyowner. This means that the policyowner cannot transfer the agreement without the insurer's consent. Life insurance is an exception. The owner of a life insurance policy can do what he or she wants with the policy, such as using it as collateral on a loan or transferring it to a third party.

Statements made on a life insurance application are considered:

representations Because An applicant's statements on an insurance application are considered representations and not warranties. A representation is a statement made at the time the contract was formed but not guaranteed by the maker to be true. A misrepresentation on the application allows the insurer to end the contract only if the misrepresentation was material.

In order to be grounds for the insurer to void a contract, an applicant's statements on an insurance application must involve:

the deliberate withholding of material facts Because If an applicant misrepresents himself or herself in an application, the insurer may end the contract only if the misrepresentation was material to the formation of the contract. For example, a misrepresentation is material if the insurer would not have issued the policy or would have issued the policy at a different premium rate if the truth had been known.

In an insurance transaction, what does the applicant give as consideration?

the initial premium Because In an insurance contract, both parties give consideration: the insurance company promises to pay the amount specified in the contract; the applicant pays the first premium.

Which of the following contract characteristics is unique to insurance contracts but NOT all contracts?

unilateral Because All legally enforceable contracts must contain an offer, acceptance, and consideration. The contract must also be for a legal purpose and between parties that are legally competent. In addition to these elements, insurance contracts have their own unique elements. For example, they are unilateral contracts because only one party-the insurer-makes an enforceable promise.

Statements that are guaranteed to be true, such as an insurer's promise in the policy, are called

warranties Because A warranty is a statement that its maker guarantees to be true in all ways. If a warranty is found false, the other party has the right to end the contract, even if the statement was not important to the contract's formation. However, statements made by insurance applicants on the application are deemed to be representations, not warranties.

Steven is filling out an application for life insurance. The application asked whether he had ever had heart problems. Steven intentionally skips this question even though he had heart surgery three years ago because he is afraid his application will be denied. What is the term for Steven's failure to give his entire medical history?

concealment Because Concealment is deliberately withholding material facts when applying for insurance. If the concealed facts would have changed the insurer's decision to offer the insurance policy, then the insurer can void the insurance contract.

If the parties disagree over the terms of an insurance contract, courts will typically interpret anything unclear in the contract in favor of which party?

policyowner Because Because the insurer drafts the insurance contract and offers it to the applicant "as is," applicants have little or no ability to change the terms of the policy. As a result, courts typically rule in favor of a policyowner if policy provisions are not clear.