Chapter 2: Policy Provisions and Contract Law

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

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.

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

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.

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

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

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

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.

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

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.

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.

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).

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

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 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

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

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

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.

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.

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.

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.

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. .

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.

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

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

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

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

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

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

$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.

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.

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.

Under the professional liability loss settlement provision, what must an insurer do before offering to pay a claimant to settle a claim? A. Get the insured's consent B. Sue the claimant C. Cancel the insured's policy D. Refuse new business

Get the insured's consent If a claim has been filed under a professional liability policy, an insurer MUST get the consent of the insured before offering to pay to settle a claim. If the insured's professional reputation is at risk, and the insured feels he or she is not negligent, the insured can require the insurer to defend the action in court.

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.

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.

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

Provisions 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.

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

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

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

The applicant has a prior felony conviction. When an insurer and insured enter into a contract, both parties must be legal age and mentally competent. It is legal for a person convicted of a felony to buy an insurance contract.

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.

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 a disagreement occur as to how to settle a loss in a "fender bender" between two cars, what procedure is followed? A. Appeal to the DOI B. The adjuster's first opinion must be accepted C. Arbitration through the court D. A lawsuit is filed.

Arbitration through the court Arbitration is a low-cost alternative to a full-blown lawsuit.

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.

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

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.

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.

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

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.

A policy conditional that stipulates how the amount of damaged or lost property will be determined if the insured and the principal do not agree on the value of a property loss is known as A. Loss valuation B. Third-party provision C. Appraisal D. Coinsurance.

Appraisal If there is a disagreement between the insured and the insurer on the value of any property loss, either party can make a written demand for an appraisal.

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

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.

an applicant is purchasing a homeowners policy. A producer comes to her home, fills out the paperwork, and tells the applicant that her home will be covered as soon she signs all of the paperwork, and that she will receive a new policy in the mail in 5 business days. Even though the policy is not issued, the applicant's home is temporarily covered until then. Which of the following makes that possible? A. Binder B. Loss settlement provision C. Mortgagee clause D. Notice of claim

Binder A binder is a temporary agreement issued, usually in writing, but may be oral, by a producer or insurer providing temporary coverage until a policy can be issued.

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.

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).

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.

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

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

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.

Which of the following would NOT be considered a source of insurability information by an insurer? A. Interviews with the applicant's neighbors and friends B. Motor vehicle records C. Insurance history D. The applicant's marital status

The applicant's marital status An insurer may inspect, with the applicant's written permission, the following" application form, motor vehicle records, interviews with neighbors, friends and employers, inspection of property, and inspection of insurance history.

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

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.

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

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 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.

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.

The declarations page of the homeowners policy provides all of the following information EXCEPT A. The insured's address B. What deductible amount applies to each loss covered by the policy C. A statement that earthquake damage is not covered. D. The amount of premium charged for each coverage.

A statement that earthquake damage is not covered. The declarations section provides information as to who is insured, where they are located, when the policy provides coverage, how much coverage and the amount to deductible applied to a loss. The statement that earthquake damage is not covered is found in the policy form.

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.

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

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

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

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.

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

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.

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.

When a mortgagee is named in a mortgagee clause attached to a fire or other direct damage policy A. The loss reimbursement will be paid to the mortgagee as their interest may appear. B. The mortgagee's rights of recovery will not be defeated by any act or neglect of the insured. C. The mortgagee may bring a suit in their own name to recover damages to covered property. D. All of the above are true

All of the above are true

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

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.

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

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

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

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

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.

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.

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 benefits claim is denied? A Material misrepresentation B Waiver C Utmost Good Faith D Estoppel

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.

Representation are written or oral statements made by the applicant that are A. Considered true to the best of the applicant's knowledge B. Guaranteed to be true. C. Found to be false after further investigation D. Immaterial to the actual acceptability of the insurance contract

Considered true to the best of applicant's knowledge. Representation are statement made by an applicant that they believe to be true.

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. Fraud B. Warranty C. Concealment. D. Misrepresentation

Concealment Concealment occurs when a person withholds a material fact that is crucial to making a decision. Insurance, this involves withholds information that would be crucial to underwriting decisions.

Because an insurance policy is a legal contract, it must conform to the state laws governing contracts which require all of the following elements EXCEPT

Condition Condition are part of the policy structure. Consideration is an essential part of a contract

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

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 clauses establishes the procedure for determining the amount of a loss when the insurer and the insured cannot agree on the value of property or amount of loss? A. Loss settlement clause B. Appraisal clause C. Loss payment clause D. Valuation clause

Appraisal clause Either an insured or insurer can request an appraisal. Each hires an appraiser. The appraiser. The appraisers then select a disinterested third party ( umpire). Disagreements between the appraisers are settled by the umpire whose decisions are usually binding on both parties.

An insurance contract must contain all of the following to be considered legally binding EXCEPT A. Beneficiary's consent D. Offer and acceptance C. Consideration D. Competent parties

Beneficiary's consent The four essential elements of all legal contracts are offer and acceptance, consideration, competent parties, and legal purpose.

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.

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

who is responsible for filling out a notice of claim form? A. Insurer B. Insured C. Adjuster D. Agent

Insured Notice of claim is a form or statement form an insured to an insurer, informing the insurer that events leading to possible claim have occurred.

The part of the insurance contract that describes the covered perils and the nature of coverage of the contractual agreement between the insurer and the insured is called the A. Declarations B. Insuring agreement C. Conditions D. Exclusions

Insuring agreement The insuring agreement is the part of the policy structure that describes the insured perils and the method of indemnification.

A sworn written statement that must be furnished by the insured to the insurer before any loss under a policy can be paid is called A. Proof of loss B. Notice of claim C. Claim report D. Binder

Proof of loss Proof of loss is a sworn statement that must usually be furnished by the insured to an insurer before any loss under policy can be paid. Proof of loss must be writing.

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.

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.

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

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.