Chapter 3 Exam: Legal Concepts of the Insurance Contract

What does the insurance term "indemnity" refer to? a. Make whole b. unequal consideration c. Law of large numbers d. Competent parties

a. Make whole Contracts of indemnity attempt to return the insured to their original financial position, or "made whole."

A unilateral contract is one in which a. There is an element of chance and potential for unequal exchange of value or consideration for both parties b. only one party (the insurer) makes any kind of legally enforceable promise c. the contract has been prepared by one party (the insurance company) with no negotiation between the applicant and insurer d. both the policy owner and the insurer must know all material facts and relevant information

b. only one party (the insurer) makes any kind of legally enforceable promise Insurance contracts are unilateral. This means that only one party (the insurer) makes any kind of enforceable promise.

Which of the following statements about aleatory contracts is NOT true? a. Insurance contract are considered aleatory b. The insured and the insurer have the potential for unequal contributions c. The insured and the insurer contribute equally to the contract d. Aleatory contracts are conditioned upon the occurrence of an event

c. The insured and the insurer contribute equally to the contract this statement is NOT true. An aleatory contract has the potential for the unequal exchange of value or consideration for both parties. For example, an individual who is covered under a disability insurance policy will collect benefits upon disability. However, if no disability occurs, benefits are not paid.

A contract requires a. implied authority b. only an offer c. negotiation between he involved parties d. an offer and acceptance of the contract terms

d. an offer and acceptance of the contract terms A contract requires an offer and acceptance of the contract terms.

Which course of action is the insurer entitled to when deliberate concealment is committed by the insured? a. Rescinding the contract b. charge a higher premium c. charge a penalty d. nothing

a. Rescinding the contract intentional concealment entitles the insrace company to void the policy

when handling premiums for an insured, an agent is acting in which capacity? a. Adhesion b. Fiduciary c. Conditional d. Aleatory

b. Fiduciary An agent who is acting as an insurance agent, broker, solicitor, life agent accident and health, or bail agent acts in fiduciary capacity when handling premiums or return premiums for an insured.

Express power given to an agent is an agency agreement is a. the appearance of authority an insurer gives to its agent b. the unwritten authority that the agent is assumed to have c. The authority to represent the insurer d. the authority to add provision to a contract

c. The authority to represent the insurer Express authority is granted by means of the agent's contract, which is he insurer's appointment of the agent to act on its behalf.

Which statement is CORRECT when describing a contract of adhesion? a. contract may be accepted or rejected by the insured b. contract involves negotiation between insurer and insured c. Any confusing language in the contract would be interpreted in favor of the insurer d. contract cannot be modified by the insurer

a. contract may be accepted or rejected by the insured with a contract of adhesion, a contract may be accepted or rejected by the insured

Which of the following statements correctly describes a contract of indemnity? a. one party is restored to the same financial position the party was in before the loss occurred b. the unequal exchange of value or consideration for both parties c. One party (the insurance company)prepares the contract with no negotiation between the applicant and insurer. d. Only one party (the insurer) makes any kind of enforceable promise.

a. one party is restored to the same financial position the party was in before the loss occurred a contract of indemnity is a contract in which one party is restored to the same financial position the party was in before the loss occurred.

Which of the following is NOT a requirement of a contract? a. Parties involved must be competent b. Equal consideration is required between the involved parties c. Contract must have a legal purpose d. Offer and acceptance must be involved

b. Equal consideration is required between the involved parties Equal consideration between parties is NOT a requirement of a contract.

Which principle is accurately described with the statement "Insureds are entitled to recover an amount NOT greater than the amount of their loss"? a. Unilateral b. Indemnity c. aleatory d. Utmost good faith

b. Indemnity Insureds are entitled to recover an amount NOT greater than the amount of their loss under the principle of indemnity.

Reasonably necessary acts that an agent must perform for carrying out his/her expressly authorized duties are covered by an agent's a. Express authority b. implied authority c. Apparent authority d. evident authority

b. implied authority implied authority is the unwritten authority that is not expressly granted, but which the agent is assumed to have in order to transact the business of the insurer.

If a material warranty violation on the part of the insured is found, what recourse does an insurer have? a. Sue the insured b. rescind the policy c. charge more premium d. terminate the agent

b. rescind the policy A warranty in insurance is a statement made by the applicant that is guaranteed to be true in every respect. It becomes part of the contract and, if found to be untrue, can be grounds for revoking the contract.

Which of the following contracts is defined as "one that restores an injured party to the condition that was present before the loss?" a. Unilateral contract b. contract of adhesion c. Indemnity contract d. Personal contract

c. Indemnity contract A contract that restores an injured party to the condition that was present before the loss is an indemnity contract.

Which of the following is NOT required in the content of policy? a. parties involved in the contract b. period to which the coverage exists. c. Probability of loss d. Risk insured against

c. Probability of loss The probability of loss is not required in the content of a policy.