RMIN Chapter 9 review
*A contract in which the values exchanged are not equal because chance is involved is called a(n)* A) contract of adhesion B) unilateral contract C) conditional contract D) aleatory contract
D) aleatory contract
*A total loss under a valued policy is settled on the basis of the:* A) market value of the loss B) actual cash value of the loss C) replacement value of the loss D) amount of insurance covering the loss
D) amount of insurance covering the loss
*Ted's insurance claim was denied by XYZ Insurance Company. When Ted inquired why the claim was denied, he was told to "Read the exclusion on page 5 of the policy". Ted read the exclusion. In his opinion, the exclusion was poorly worded and vague. If a court of law agrees with Ted's assessment of the exclusion, Ted may still be able to have his claim paid by the insurer because insurance contracts are:*
D) contracts of adhesion
*Jacob sold his house to Sheila for $140,000 in cash. Jacob "threw in" insurance on the house as part of the deal and did not bother telling the insurer that there was a new owner. Four months after Sheila purchased the home, a windstorm damaged the roof. Which of the following legal characteristics of the insurance contracts could the insurer use to legally deny payment for the damage to the rood?*
D) insurance contracts are personal contracts
*A false statement made by an applicant for insurance is an example of a:* A) concealment B) breach of warranty C) lack of offer and acceptance D) misrepresentation
D) misrepresentation
*Sue's office building was damaged by a fire caused by a careless tenant. After paying Sue for her loss, the insurance company sued the tenant to recover its loss. This suit is based on the principle of:*
D) subrogation
*What is the practical effect of an insurance policy being a contract of adhesion?*
D) the policy is interpreted in the insured's favor if the policy contains any ambiguities or uncertainties.
*Some states have a law that requires payment of the face amount of insurance to the insured if a total loss to real property occurs from a peril specified in the law. These laws are called:*
D) valued policy laws
*David owns a liquor store in a high-crime area. In order to obtain a reduced insurance premium, David promised to have a burglar alarm operating at the store when the store was closed. This agreement, which was incorporated into the insurance contract, is an example of a:* A) representation B) unilateral contract C) contract of adhesion D) warranty
D) warranty
*Which of the following statements about a warranty in an insurance contract is (are) true?* I. It is part of the insurance contract II. Statements made by an insurance applicant are considered warranties rather than representations.
A) I only
*Which of the following types of insurance policies can usually be assigned without the insurer's consent?* I. Life insurance II. Property insurance
A) I only
*Janice purchased a living room set for $1,000 and insured this furniture on an actual cash value basis. Two years later the living room set was destroyed by a covered peril. At the time of loss, the property had depreciated in value by 25 percent. The replacement cost of the furniture at the time of loss was $1,200. Assuming no deductible, how much will Janice receive from her insurer?*
A) $900 1200 - (1200 x .25) = $900
*When must an insurable interest legally exist in property insurance for an insured to receive payment for a loss from the insurer?*
A) only at the time of the loss
*What is the practical effect of an insurance policy being a conditional contract?*
A) the insurer can refuse to pay a claim unless the insured has complied with all policy provisions
*All of the following are basic purposes of subrogation EXCEPT*
A) to eliminate adverse selection
*Which of the following is a fundamental purpose of the principle of indemnity?* A) to reduce moral hazard B) to minimize physical hazards C) to settle property insurance losses on a replacement cost basis D) to require deductibles in all property insurance policies
A) to reduce moral hazard
*Sam's furniture was destroyed by a fire. The furniture cost $1200 when it was purchased, but similar new furniture now costs $1800. Assuming the furniture was 50 percent depreciated, what is the actual cash value of Sam's loss?* A) $600 B) $900 C) $1200 D) $1800
B) $900 1800 - (1800 x .5) = $900
*Which of the following statements about an insurable interest in life insurance is (are) true?* I. It is required of any person named as beneficiary. II. It may result from a pecuniary (financial) interest.
B) II only
*Which of the following statements about consideration in an insurance contract is (are) true?* I. The insured's total consideration is submission of a completed application. II. The insurer's consideration is the promise to do those things specified in the policy.
B) II only
*Which of the following statements about the principle of insurable interest is (are) true?* I. It makes it difficult to measure the amount of an insured's loss. II. It reduces moral hazard.
B) II only
*Fundamental purposes of the principle of indemnity include which of the following?* I. To reduce physical hazards II. To prevent the insured from profiting from insurance.
B) II only.
*Which of the following statements describes how losses will be settled if a property insurance policy is written on a replacement cost basis?*
B) losses are settled without a deduction for depreciation
*When Ben applied for life insurance, he was asked on the application if he smoked or used tobacco products. Ben answered "No". In reality, Ben smokes two packs of cigarettes a day. The policy was issued at the "preferred, nonsmoker" rate. If Ben dies 6 months after the policy is issued, upon what grounds will the insurer be able to legally deny the claim?* a) warranty b) misrepresentation c) waiver d) concealment
B) misrepresentation
*Why are insurance contracts said to be contracts of adhesion?*
B) one party writes the contract, and the other party must accept the entire contract as written
*When must an insurable interest legally exist in life insurance?*
B) only at the inception of the policy
*What is the legal significance of a material concealment by an insurance applicant?*
B) the contract is voidable at the insurer's option
*Which distinct legal characteristic of insurance contracts states that only the insurer's promise to perform is legally enforceable?*
B) unilateral contracts
*Why can an insurer refuse to pay a claim if an insured fails to abide by the policy provisions?*
C) because insurance contracts are conditional
*Some courts have ruled that an alternative to "replacement cost less depreciation" should be used to determine the actual cash value of a property loss. Under this alternative, the value of the property lost is determined by the price a willing buyer would pay a willing seller for the property in a free market. This method of determining actual cash value is called the:*
C) fair market value method
*Which of the following statements about offer and acceptance for insurance contracts is true?*
C) in property insurance, the offer and acceptance are usually in writing but may be oral
*Chris applied for life insurance and paid the first premium on Monday. She was given an insurability premium receipt which specified that coverage was effective on the date of the application or the date of the medical exam, whichever is later. She took the medical exam the following Thursday. She was found to be in perfect health. On which day was her coverage effective?*
C) on Thursday when she passed the medical exam
*The principle of utmost good faith is supported by all of the following legal doctrines EXCEPT* A) representations B) warranty C) subrogation D) concealment
C) subrogation
*Melody's car was damaged when another driver ran a stop sign and hit her car. Melody decided to collect from her own insurer and let her insurer recoup the loss payment from the negligent driver who hit her. What fundamental legal principle is illustrated in this scenario?*
C) the principle of subrogation
*All of the following are exceptions to the principle of indemnity EXCEPT* A) life insurance B) valued policies C) replacement cost property insurance D) actual cash value property insurance
D) actual cash value property insurance
*Robin plans to open a bar in a high-crime area. She had difficulty obtaining insurance for the business. She found an insurer willing to write the coverage, but only if Robin agreed to have a security alarm system in operation at all times when the business is closed. Robin's promise to have a security alarm system operational as a condition of having the insurance coverage in force is a:* a) binder b) warranty c) waiver d) deductible
b) warranty