Contract Law - Quiz

What other term is used to refer to unintentional torts? A. Peril B. Breach of contract C. Negligence D. Hazard

C. Negligence - An unintentional tort is the result of acting without proper care. This is generally referred to as negligence.

What is a wrongful act or the violation of someone's rights that leads to legal liability called? A. Hazard B. Peril C. Loss D. Tort

D. Tort - A tort is a wrongful act or the violation of someone's rights that leads to legal liability.

Insurance policy is A. A written instrument in which a contract of insurance is set forth. B. A statement of insurable interest. C. A verbal or written agreement between two parties to transfer risk. D. Any method used to transfer or avoid catastrophic risk.

A. A written instrument in which a contract of insurance is set forth. - An insurance policy must be in writing to be legally binding. As defined by the California Insurance Code, "a policy" is a written instrument in which a contract of insurance is set forth.

All of the following are reasons an insurer or an insured would have the right to rescind a policy EXCEPT A. The amount of paid claims exceeds the premiums paid. B. The violation of a material warranty. C. When concealment is unintentional. D. An intentional omission in determining if a warranty is false.

A. The amount of paid claims exceeds the premiums paid. - The injured party has the right to rescind the contract whenever there is a violation of a material warranty, intentional or unintentional concealment, or intentional or fraudulent omissions. The amount of paid claims would not rescind the policy.

Which of the following does NOT need to be identified in an insurance policy? A. The insurer's financial rating B. The stated periodic premium C. A statement of insurable interest D. The first named insured

A. The insurer's financial rating - An insurer's financial rating does not need to be specified in an insurance policy.

An agreement that is enforceable by law is known as a/an A. Policy. B. Contract. C. Conditional receipt. D. Adhesion.

B. Contract. - Contracts than contain all of the essential elements required by the state are enforceable in a court of law. Because insurance policies meet these requirements, they are enforceable as legal contracts.

According to the Code, how many separate requirements should an insurance policy have? A. 4 B. 6 C. 8 D. 10

B. 6 - The following must be identified: the parties to the contract; the property or persons being insured; a statement of the insurable interest that exists if the insured is not the owner; the risk(s) being covered; the time period during which the policy will be in force or continue; the stated premium or manner to calculate premium.

If only one party to an insurance contract has made a legally enforceable promise, what kind of contract is it? A. A legal (but unethical) contract B. Unilateral C. Adhesion D. Conditional

B. Unilateral - In a unilateral contract, only one of the parties to the contract is legally bound to do anything.

Representations are written or oral statements made by the applicant which A. Are found to be false after further investigation. B. Are immaterial to the actual acceptability of the insurance contract. C. Are considered true to the best of the applicant's knowledge. D. Are guaranteed to be true.

C. Are considered true to the best of the applicant's knowledge. - Representations are statements made by an applicant which they believe to be true.

What is a definition of a unilateral contract? A. Two or more parties go into a contract understanding there may be an unequal exchange of value. B. One author: the company wrote the contract; the insured must accept it as written. C. If one party makes a condition, the other party can counteroffer. D. One-sided: only one party makes an enforceable promise.

D. One-sided: only one party makes an enforceable promise. - An insurance contract is unilateral in that only one of the parties to the contract is legally bound to do anything.

The importance of a misrepresentation is determined by A. Whether or not the policy is already issued. B. The materiality of a given concealment. C. The amount of money potentially lost. D. The cost of investigation.

B. The materiality of a given concealment. - The materiality of a given concealment determines the importance of a misrepresentation

A contract between an insured and an insurance company which agrees to pay the insured for loss caused by specific events is A. A premium. B. A guaranteed benefit. C. A policy. D. A rider.

C. A policy. - A contract between an insured and an insurance company which agrees to pay the insured for loss caused by specific events is a policy.

Factual statements about the insured or the risk in an insurance policy are considered A. Express warranty. B. Representations. C. Implied warranty. D. Material representations.

A. Express warranty.

If found material for underwriting, a misrepresentation A. Must have been in writing to affect a contract. B. Can void a contract. C. May be withdrawn. D. Does not affect either of the parties.

B. Can void a contract. - A misrepresentation is a written or oral declaration that is stated to intentionally distract, deceive or mislead a party to a contract. If found material for underwriting, it can void a contract.

What term best describes the act of withholding material information that would be crucial to an underwriting decision? A. Concealment B. Withholding C. Leading D. Breach of warranty

A. Concealment - Concealment occurs when a person withholds a material fact that is crucial to making a decision. In insurance, this involves withholding information that would be important for making underwriting decisions.

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.

Which of the following best defines an insurance policy? A. An agreement between an insurer and the Department of Insurance B. A written request to an insurance company for insurance coverage C. A contract between an insured and an insurer that guarantees payment for loss caused by a specific event. D. An endorsement or a modifying provision

C. A contract between an insured and an insurer that guarantees payment for loss caused by a specific event. - A policy is a contract between an insured and an insurance company which agrees to pay the insured for loss caused by specific events.

An insured pays a $100 premium every month for his insurance coverage, yet the insurer promises to pay $10,000 for a covered loss. What characteristic of an insurance contract does this describe? A. Adhesion B. Conditional C. Aleatory D. Good health

C. Aleatory - In an aleatory contract, unequal amounts are exchanged between payments and benefits. In this instance, the insured receives a large benefit for a small price.

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. Representation B. Adhesion C. Consideration D. Good faith

C. 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.

Which of the following is NOT a required element of an insurance contract? A. Competent parties B. Consideration C. Counteroffer D. Acceptance

C. Counteroffer - Each contract must have the following 4 elements: agreement (offer and acceptance), legal purpose, competent parties, and consideration. Counteroffer, while sometimes used as part of the agreement, is not a required element.

How is the premium in an insurance policy determined? A. According to the number of dependents B. By dividing life expectancy by premium mode C. By subtracting interest from mortality D. By multiplying the rate by the number of units of insurance purchased

D. By multiplying the rate by the number of units of insurance purchased - The premium is determined by multiplying the rate by the number of units of insurance purchased.

The act of revoking or terminating an insurance policy is called A. Forfeiture. B. Nonrenewal. C. Lapse. D. Cancellation.

D. Cancellation. - Cancellation is the act of revoking or terminating one's insurance policy.

Because an insurance policy is a contract between the insurer and the insured, it must conform to the state laws governing contracts which require all of the following elements EXCEPT A. Competent parties. B. Legal purpose. C. Offer and acceptance. D. Conditions.

D. Conditions. - Conditions are part of the policy structure. Consideration is an essential part of a contract.

In addition to penalties, fines, and possible imprisonment for violating the provision relating to misrepresentation, the Commissioner may suspend the license of such person for a period up to A. 6 months. B. 1 year. C. 3 years. D. 5 years.

C. 3 years. - According to CIC 783, after a hearing, the Commissioner may suspend the license of any such person for violating provision relating to misrepresentation for a period not to exceed 3 years.

The key factor of representation that allows the injured party to rescind the contract is A. That any misrepresentation is considered fraud. B. Representations are statements believed to be true and hold no legal consequences. C. The promise or assurance of the representation. D. If the representation is false in a material point.

D. If the representation is false in a material point. - If a representation is false in a material point the injured party is entitled to rescind the contract from the time the representation becomes false.

When applying for an individual life insurance policy, an applicant states that he went to the doctor for nausea, but fails to mention that he was also having severe chest pains. This is an example of A. Concealment. B. Misrepresentation. C. Fraud. D. Warranty.

A. Concealment. - Concealment occurs when a person withholds a material fact that is crucial to making a decision. In insurance, this involves withholding information that would be crucial to underwriting decisions.

Which of the following best describes the aleatory nature of an insurance contract? A. Only one of the parties being legally bound by the contract B. Ambiguities are interpreted in favor of the insured C. Policies are submitted to the insurer on a take-it-or-leave-it basis D.Exchange of unequal values

D.Exchange of unequal values - An aleatory contract is a contract in which unequal amounts or values are exchanged. The amount of premium the insured pays is much less than the potential loss assumed by the insurer.

An insured wants to transfer his personal insurance policy to a friend. Under what conditions would this be possible? A. The insured can transfer the policy to his friend and then notify the insurer of the change. B. The insured will need a written consent of the insurer. C. It is impossible to transfer a policy. D. The insured would have to surrender his policy to the insurer, and his friend could then ask to buy it.

B. The insured will need a written consent of the insurer. - A personal insurance contract is written between an insurance company and an individual, and the company has a right to decide with whom it will and will not do business. An insured can transfer an insurance contract to another person, but he or she must first obtain the written consent of the insurer.

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

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

In insurance policies, the insured is not legally bound to any particular action in the insurance contract, but the insurer is legally obligated to pay losses covered by the policy. What contract element does this describe? A. Conditional B. Unilateral C. Unidirectional D. Aleatory

B. Unilateral - In a unilateral contract, the insured is not legally bound to do anything. The insurer, however, must pay losses covered by the policy.

What is a material misrepresentation? A. Any misstatement by the producer B. Concealment C. A statement by the applicant that, upon discovery, would affect the underwriting decision of the insurance company D. Any misstatement made by an applicant for insurance

C. A statement by the applicant that, upon discovery, would affect the underwriting decision of the insurance company - A material misrepresentation is a statement that, if discovered, would alter the underwriting decision of the insurance company.

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

A. 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.

The written instrument, in which a contract of insurance is set forth, is known as the A. Right of agency. B. Policy. C. Binding clause. D. Insuring clause.

B. Policy. - According to CIC 380, the written instrument in which a contract of insurance is set forth is the policy.

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.

A person caught violating provisions regarding misrepresentation could be subject to A. A written warning from the Commissioner. B. A permanent suspension of license. C. A fine up to $25,000. D. Imprisonment in a county jail for up to 3 years.

C. A fine up to $25,000. - Agents in violation of provision on misrepresentation may be punished by a fine up to $25,000, imprisonment in a county jail for a period no longer than 1 year, or by both a fine and imprisonment. The Commissioner may also suspend the agent's license for a maximum of 3 years.

What is an injured party entitled to receive if an intentional concealment is discovered? A. No less than $500 and no more than $5,000 for compensatory damages B. $1,000 for any compensatory damages C. Rescission of the policy D. Nothing. Only intentional concealment is punishable.

C. Rescission of the policy - An injured party is entitled to rescind the policy regardless of whether the concealment was intentional or unintentional.

During the grace period, the policyowner can A. Return the policy to the insurer for a full refund. B. Add riders to the existing policy. C. Renew the policy without proof of insurability. D. Pay a late premium without penalty.

D. Pay a late premium without penalty. - A grace period is the period of time specified in the policy that allows the policyowner to pay a premium after due date without penalty, or without policy lapsing.

Which of the following best describes a misrepresentation? A. An intentional omission of material information on the part of the insured. B. A statement that is not guaranteed to be true. C. A statement intended to distract, mislead, or deceive a party to a contract. D. A failure to disclose known facts.

C. A statement intended to distract, mislead, or deceive a party to a contract. - Misrepresentation is a written or oral statement that is intended to distract, mislead, or deceive a party to a contract.

Concealment as defined by the California Insurance Code is A. Statement based on the best knowledge and belief of the person giving the information. B. Neglect on the part of insured to communicate the information waived by the other party. C. Neglect on the part of insured to communicate all information known to be material to the insurer. D. Failure to communicate information that should be known.

C. Neglect on the part of insured to communicate all information known to be material to the insurer. - Concealment is a legal term for the intentional withholding of information by the insured that is material to the insurer (i.e. critical in making an underwriting decision). Information that is known or should be known, waived by the other party or immaterial to the risk, does not need to be communicated in a contract.

Representations in insurance contracts qualify as A. Express warranties. B. Misrepresentations. C. Facts. D. Implied warranties.

D. Implied warranties. - Representations in insurance contracts qualify as implied warranties.

In determining how material a piece of information is to each party of a contract, the value is not determined by the event itself, but solely by which of the following? A. Amount of information that has been previously disclosed through the inquiry process. B. Truthfulness of such statements being made. C. Influence this information would have in forming an estimate of the advantages or the disadvantages of the contract. D. Interpretation that the seller places on such information in the agreement.

C. Influence this information would have in forming an estimate of the advantages or the disadvantages of the contract. - Materiality is to be determined not by the event, but solely by the influence of the facts upon the party to whom the communication is due, in forming his/her estimate of the disadvantages of the contract.

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

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.

In insurance, an offer is usually made when A. An applicant submits an application to the insurer. 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. An applicant submits an application to the insurer. - 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.

A life insurance application is asking if the applicant has applied for any other life insurance within the past 6 months. The applicant states that he applied for $15,000 coverage from XYZ Co., but fails to mention the $150,000 coverage with DEF Co. The applicant is guilty of A. Concealment. B. Misrepresentation. C. Representation. D. Warranty.

A. Concealment. - According to CIC 380, neglecting to communicate that which a party knows and ought to communicate is concealment.

An insurance contract requires that both the insured and the insurer meet certain conditions in order for the contract to be enforceable. What contract characteristic does this describe? A. Conditional B. Contingent C. Aleatory D. Unilateral

A. Conditional - A conditional contract requires both the insurer and policyowner to meet certain conditions before the contract can be executed, unlike other types of policies which put the burden of condition on either the insurer or the policyowner.

A life insurance policy has a legal purpose if both of which of the following elements exist? A. Policyowners and named beneficiaries B. Insurable interest and consent C. Underwriting and reciprocity D. Offer and counteroffer

B. Insurable interest and consent - To ensure legal purpose of a life insurance policy, it must have both insurable interest and consent.

All of the following are true regarding representations EXCEPT A. They may be oral or written. B. They may be altered or withdrawn after the issuance of the policy. C. They are statements believed to be true. D. They may be made before or at the time of policy issue.

B. They may be altered or withdrawn after the issuance of the policy. - According to CIC 355, a representation may be altered or withdrawn before the insurance is affected, but not afterwards.

When both parties to a contract must perform certain duties and follow rules of conduct to make the contract enforceable, the contract is A. Personal. B. Unilateral. C. Conditional. D. Aleatory.

C. Conditional. - The contract is formed on the basis that certain conditions are met.

When would a misrepresentation on the insurance application be considered fraud? A. When the application is incomplete B. Any misrepresentation is considered fraud. C. If it is intentional and material D. Never: statements by the applicant are only representations.

C. If it is intentional and material - A misrepresentation would be considered fraud if it is intentional and material. Fraud would be grounds for voiding the contract.

Every expressed warranty made at or before the execution of a policy must be A. Binding and specific for the initial policy period. B. Contained in and referred to in the policy or other document and signed by the insured. C. Considered implied by the insurer and covered in the policy. D. Considered accepted by the insured upon delivery of the policy.

B. Contained in and referred to in the policy or other document and signed by the insured. - According to CIC 443, every express warranty made at or before the execution of a policy must be contained in the policy itself, or in another instrument signed by the insured and referred to in the policy.

The violation of a material warranty or other material provision of a policy allows A. Only the insured to rescind. B. Only the insurer to rescind. C. Both the insurer and the insured to rescind. D. Neither the insurer nor the insured to rescind.

C. Both the insurer and the insured to rescind. - The violation of a material warranty or other material provision of a policy, on the part of either party, entitles the other to rescind.

Which of the following would be covered by contract law? A. A consumer suing the manufacturer for a defective product. B. Neighbors suing each other for trespassing. C. An employer suing an employee for spreading damaging rumors. D. An insured suing the insurer for failure to provide promised benefits.

D. An insured suing the insurer for failure to provide promised benefits. - Contract law applies to voluntarily undertaken written agreements between parties. The insurer's failure to provide promised benefits to the insured would be in breach of contract, therefore, covered by contract law. All other scenarios illustrate tort law, which provides a remedy for civil, non-contractual wrong through legal action.

The failure to disclose known facts is known as A. Fraud. B. Warranty. C. Misstatement. D. Concealment.

D. Concealment. - According to CIC 380, neglecting to communicate that which a party knows, and ought to communicate is concealment.

Insurance policies are not drawn up through negotiations, and an insured has little to say about its provisions. What contract characteristic does this describe? A. Unilateral B. Conditional C. Personal D. Adhesion

D. Adhesion - A contract of adhesion is prepared by only the insurer; the insured's only option is to accept or reject the policy as it is written.

Factual statements about the insured or the risk in an insurance policy are considered A. Representations. B. Implied warranty. C. Material representations. D. Express warranty.

D. Express warranty. - Warranties can either be expressed or implied. Statements in a policy are considered express warranty. Every express warranty becomes part of the insurance contract. Implied warranty is an unwritten or unspoken guarantee presumed to be made based on the circumstances of a transaction.

Which of the following would qualify as a competent party in an insurance contract? A. The applicant is a 12-year-old student. B. The applicant is under the influence of a mind-impairing medication at the time of application. C. The applicant has a prior felony conviction. D. The applicant is intoxicated at the time of application.

C. The applicant has a prior felony conviction. - When an insurer and insured enter into a contract, both parties must be of legal age and mentally competent. It is legal for a person convicted of a felony to buy an insurance contract. An intoxicated person, however, may not be mentally competent, a 12-year-old student is considered to be underage in most states and a person under mind-impairing medication most likely would not be mentally competent.

An intentional or unintentional concealment entitles the affected party to which of the following? A. Waiver of concealed conditions. B. Subrogation of a contract. C. Rescission of a contract. D. Estoppel.

C. Rescission of a contract. - Concealment, whether intentional or unintentional, entitles the affected party to rescind the insurance policy.

The proposed insured makes the premium payment on a new insurance policy. If the insured should die, the insurer will pay the death benefit to the beneficiary if the policy is approved. This is an example of what kind of contract? A. Adhesion B. Personal C. Unilateral D. Conditional

D. Conditional - A conditional contract requires both the insurer and policyowner to meet certain conditions before the contract can be executed, unlike other types of policies which put the burden of condition on either the insurer or the policyowner.

A person caught violating provisions regarding misrepresentation could be subject to A. A fine up to $25,000. B. Imprisonment in a county jail for up to 3 years. C. A written warning from the Commissioner. D. A permanent suspension of license.

A. A fine up to $25,000. - Agents in violation of provision on misrepresentation may be punished by a fine up to $25,000, imprisonment in a county jail for a period no longer than 1 year, or by both a fine and imprisonment. The Commissioner may also suspend the agent's license for a maximum of 3 years.

An applicant knowingly fails to communicate information that would help an underwriter make a sound decision regarding coverage. This is an example of A. Concealment. B. Waiver. C. Fraud. D. Breach of warranty.

A. Concealment. - In insurance, concealment is the withholding of information that will result in an imprecise underwriting decision.

Contracts that are prepared by one party and submitted to the other party on a take-it-or-leave-it basis are classified as A. Contracts of adhesion. B. Unilateral contracts. C. Aleatory contracts. D. Binding contracts.

A. Contracts of adhesion. - Insurance policies are written by the insurer and submitted to the insured on a take- it-or-leave-it basis. The insured does not have any input into the contract, but simply adheres to the contract.

All of the following information must be communicated in an insurance contract EXCEPT A. Information the other party already knows. B. Information that is material to the contract. C. Information that is material even though it cannot be proven. D. Information not requested by an agent and company, even if it's considered relevant.

A. Information the other party already knows. - Information that is already known by all parties does not need to be communicated in a contract.

The price of insurance for each exposure unit is known as A. Rate B. Consideration C. Insurable interest D. Premium

A. Rate - Rate is the price of insurance for each exposure unit. The rate helps determine the premium by multiplying it by the number of units of insurance purchased.

Which of the following would qualify as an implied warranty in an insurance contract? A. Statements in the policy B. An oral representation by the applicant C. The applicant's signature D. Contract's legal purpose

B. An oral representation by the applicant - A warranty is a statement considered to be guaranteed to be true and becomes part of the contract. Representations in insurance contracts qualify as implied warranties.

When may a representation be withdrawn? A. Within the first 2 years of the policy B. Prior to the issuance of the policy C. At any time D. After the policy is issued

B. Prior to the issuance of the policy - Once the policy is issued, representations cannot be withdrawn.

Which of the following best describes the policy nonrenewal? A. Voiding of a policy due to a misrepresentation on the application. B. Revocation of one's insurance policy by the insurer. C. Discontinuance of an insurance policy by the insured on the policy anniversary date. D. Return of the policy after a 10-day free look.

C. Discontinuance of an insurance policy by the insured on the policy anniversary date. - Nonrenewal is the discontinuance of an insurance policy beyond its original term, usually on the policy anniversary or premium due date.

The key factor of representation that allows the injured party to rescind the contract is A. Representations are statements believed to be true and hold no legal consequences. B. The promise or assurance of the representation. C. If the representation is false in a material point. D. That any misrepresentation is considered fraud.

C. If the representation is false in a material point. - If a representation is false in a material point the injured party is entitled to rescind the contract from the time the representation becomes false.

According to the California Insurance Code, any agent violating the regulations relating to misrepresentation will be charged with a A. Felony, a fine not to exceed $2,000, and a possible 2-5 year imprisonment. B. Felony, a fine not to exceed $5,000, and a possible 2 year imprisonment. C. Misdemeanor, a fine not to exceed $25,000, and/or a possible 1-year imprisonment. D. Misdemeanor, a fine not to exceed $500, and a possible 1-year imprisonment.

C. Misdemeanor, a fine not to exceed $25,000, and/or a possible 1-year imprisonment. - Any agent violating the misrepresentation provisions is guilty of a misdemeanor and punishable by a fine not to exceed $25,000 (for losses less than $10,000), and/or by imprisonment not to exceed 1 year. In addition, the Commissioner may suspend the license of the agent for a maximum period of 3 years.

All of the following must be specified in an insurance policy EXCEPT A. The risks insured against B. The period during which the insurance is in force C. The financial rating of the insurer D. The parties between whom the contract is made

C. The financial rating of the insurer -

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. Legal purpose B. Contract of adhesion C. Acceptance D. Consideration

D. 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.