Legal Concepts of the Insurance Contract

The payment of the first premium, the promise to pay a covered loss, and the agreement to abide by policy conditions are all examples of - Consideration - Legal purpose - Representation - Acceptance

Consideration Consideration can be defined as the value given in exchange for the promises sought.

An insurance contract may be voided if a misrepresentation found on the application is determined to be - Conditional - Aleatory - Material - Intentional

Material An insurer can void an insurance policy if a misrepresentation on the application is found to be material.

Greg applies for insurance and makes a false statement on the application that will influence whether or not the insurer will accept the risk. Greg's false statement is called a(n) - Substandard representation - Unacceptable risk - Material misrepresentation - Adverse selection

Material misrepresentation A false statement made by an applicant that would influence an insurer in determining whether or not to accept the risk is considered a material misrepresentation.

Giving up a known right on a voluntary basis is called a(n) - Disclaimer - Estoppel - Waiver - Surrender

Waiver Waiver is defined as the intentional and voluntary giving up of a known right.

An insurance company's failure to enforce a contract's provision is called a(n) - Waiver - Warranty - Assignment - Concealment

Waiver When an insurance company does not enforce a contract's provision, it's known as a waiver.

During the application process, a statement made by an applicant that becomes part of the contract is considered to be a(n) - Warranty - Representation - Waiver - Exclusion

Warranty A warranty is a statement made by the applicant that is guaranteed to be true in every respect and becomes part of the contract.

The unwritten authority given to a producer to carry out necessary incidental acts of the agency agreement is called - Implied authority - Express authority - Apparent authority - Acknowledged authority

Implied authority Implied authority is authority that is not expressly granted, but which the agent is assumed to have in order to transact the business of the principal.

When must insurable interest exist for a life insurance contract to be valid? - Inception of the contract - Throughout the entire length of the contract - When the insured dies - During the contestable period

Inception of the contract Insurable interest must only exist at the inception of the contract.

What happens when an initial offer is answered with a counteroffer? - An arbitrator decides on a compromise - The counteroffer is legally enforceable - Initial offer is void - Initial offer is automatically accepted

Initial offer is void When an offer is answered by a counteroffer, the first offer is void.

Which element of a contract consitutes a definite and unqualified proposal by one party to another? - Adhesion - Consideration - Acceptance - Offer

Offer A proposal of contract terms by one party to another is called an offer.

Which situation would not require the insured's consent when a life insurance policy is issued? - A policy is purchased by a husband for his wife - A policy is purchased by a parent for a minor child - A policy is purchased by a business partner for another partner - A policy is purchased by an employer for an employee

A policy is purchased by a parent for a minor child

A producer working for an insurance company may be personally liable for - Acts performed which are expressed in the agency contract - Acts performed which are prohibited in the agency contract - All actions taken on behalf of the insurer - Nothing

Acts performed which are prohibited in the agency contract

What qualifies as acceptance of an insurance contract offer? - A declined policy - An issued policy - The application and initial premium - The initial premium only

An issued policy An issued policy signifies acceptance of an offer of an insurance contract.

Use of XYZ Insurance Company brochures, business cards, and rating guides is an example of - Express authority - Implied authority - Apparent authority - Fiduciary duty

Apparent authority Apparent authority is what a third party (such as a member of the public) assumes an agent has, based on the actions or words of the principal. By supplying the agent with business cards, brochures, and rating guides, the insurance company has given the impression that it supports the words and actions of its agent.

Which of these is true regarding the exchange of consideration among parties involved in an insurance contract? - Required to be in currency - Must be equal - Can be unequal - Must be certified by the state where transaction takes place

Can be unequal Insurance contracts are aleatory. This means there is an element of chance and potential for unequal exchange of value for both parties.

Voluntarily terminating an insurance policy is also known as - Discontinuation - Elimination - Estoppel - Cancellation

Cancellation The voluntary act of terminating an insurance contract is called cancellation.

The insurer's obligation to pay a claim depends on whether the insured or beneficiary has complied with all policy conditions. This makes the policy a(n) - Agency agreement - Aleatory agreement - Contract of good faith - Conditional contract

Conditional contract

The courts will normally interpret a policy in favor of the insured when the meaning of the policy is not clear. This is because an insurance policy is a(n) - Warranty contract - Aleatory contract - Contract of adhesion - Unilateral contract

Contract of adhesion In a case where the meaning of an insurance policy is not clear, a court of law will usually interpret the policy in favor of the insured because an insurance contract is a contract of adhesion.

An insurance application requires an applicant to make a full, accurate disclosure of the risk factor involved. Using this criteria, an insurance policy is considered what type of contract? - Aleatory contract - Estoppel contract - Contract of utmost good faith - Unilateral contract

Contract of utmost good faith A contract of utmost good faith is a minimum standard that requires both the buyer and seller in a transaction to act honestly toward each other and to not mislead or withhold critical information from one another.

Christopher is issued an insurance policy that contains an attached agreement which alters the terms of the policy. This attached agreement is called a(n) - Extension - Endorsement - Sanction - Restriction

Endorsement An endorsement is a written form attached to an insurance policy that alters the policy's coverage, terms, or conditions. Sometimes it's also called a rider.

An agreement is reached when an insurance contract is formed. Which of the following is NOT considered to be an element of an agreement? - Meeting of the minds - Offer - Acceptance - Equity

Equity Agreement in an insurance contract includes all of these EXCEPT "Equity".

The powers directly given to a producer in an agency contract are called - Express - Apparent - Implied - Assumed

Express A producer's powers directly stated in the agency contract are considered express authority.

An appointed producer's implied authority is derived from - The NAIC - Express authority - The insurer's Certificate of Authority - Evident authority

Express authority By the very nature of what producers are authorized to do (express authority), producers have the implied authority to act on behalf of the principal (the insurer).

XYZ Insurance Company gives direct authority to its producers to sell insurance through an agency contract, but nothing is stated regarding the collection of premiums. Which authority grants the producer the right to collect premiums? - Implied authority - Apparent authority - Express authority - Assumed authority

Implied authority Implied authority is authority not specifically granted to the agent in the agency contract.

In what way are insurance policies said to be aleatory? - Only one party makes any kind of enforceable promise - Involves the potential for unequal exchange of value - Contract is prepared by one one party - Vagueness in a contract's wording is resolved in favor of the policyowner

Involves the potential for the unequal exchange of value

Which of these do NOT indicate the presence of insurable interest in a life insurance contract? - Lifelong friendship - Marriage - Blood-related - Co-owning a business

Lifelong friendship Maintaining a lifelong friendship with another person does not typically indicate the presence of insurable interest.

Which of the following situations would an insurance agent need to guard against liability for professional errors and omissions? - Remitting premiums to an insurer - Conducting a sales meeting with other agents - Making a recommendation to a potential insured to replace existing coverage - Setting a sales appointment with a potential client

Making a recommendation to a potential insured to replace existing coverage An insurance agent needs to guard against liability for professional errors and omissions, particularly when recommending replacement coverage to a potential insured.

Which of the following relationships demonstrates insurable interest in the absence of economic interest? - Lifelong friends - Employees - Marriage partners - Business associates

Marriage partners Insurable interest may exist in marriage partners while absent of an economic interest.

An agent whose actions exceed the authority granted by contract is - Acting under apparent authority - Acting under implied authority - Not backed by the insurer - Backed by the insurer

Not backed by the insurer An agent whose actions exceed the authority granted by contract is not backed by the insurer.

Insurable interest involves what assumption? - Insurable interest must exist during the entire life of the insured - One person gains from the death of another person - One person benefits from another person's continued life - Insurable interest must only exist at the time of the insured's death

One person benefits from another person's continued life To have insurable interest in the life of another person, an individual must have a reasonable expectation of benefitting from the other person's continued life.

All of these statements correctly describe an aleatory contract EXCEPT - A legal wager is considered an aleatory contract - Potential unequal exchange of value for both parties - Only one party makes any kind of legally enforceable offer - Element of chance is involved

Only one party makes any kind of legally enforceable offer Insurance contracts are aleatory, which means there is an unequal exchange. The premiums paid by the applicant are small in relation to the amount that will be paid by the insurance company in the event of a loss.

Ambiguities in insurance contracts are typically interpreted in favor of the insured. This rule is referred to as - Subrogation - Reasonable expectations - Insurable interest - Adhesion

Reasonable expectations "Reasonable expectations" is a legal principle that reinforces the rule that ambiguities in insurance contracts should be interpreted in favor of the policyholder.

An insured is entitled to coverage under a policy that a prudent person would expect it to provide. This principle is called - Adhesion - Reasonable sensibility - Reasonable expectations - Insurable interest

Reasonable expectations Reasonable expectations is a concept that states that the insured is entitled to coverage under a policy that a sensible and prudent person would expect it to provide.

Statements made by an insured on an accident and health insurance application are considered to be - Representations - Warranties - Conditional - Aleatory

Representations Statements made by applicants for insurance are considered to be representations and not warranties.

What is the insurer responsible for when a producer is acting within the scope of authority granted in the agency contract? - All actions by the producer - Not responsible for any acts by the producer - Responsible for acts that involve misrepresentation only - Responsible for acts by the producer that are authority only

Responsible for acts by the producer that are authority only The significance of authority (whether express, implied, or apparent) is that it ties the company to the acts and deeds of its producers. The law will view the producer and the company as one and the same when the producer acts within the scope of his/her authority.

Which of the following would NOT have a restricted ability to enter into a contract? - Mentally ill person - Minor - Person under the influence of alcohol - Small employer

Small employer Small employers do not have a restricted ability to enter in a contract.

Under the Law of Agency, the principal is considered to be - The producer - The insurer - The plan administrator - The insured

The insurer

When a producer acts within the scope of his/her contractual authority, which of the following is legally responsible for these actions? - The producer - The broker - The insurer - The insured

The insurer When a producer acts within the scope of his/her contractual authority, the insurer is legally responsible for these actions.

An arrangement where an individual is authorized to act on behalf of another person or company is established through - Estoppel - The law of agency - The law of adhesion - An aleatory contract

The law of agency An agency is a situation where an agent has the power to represent and act for another person or company.

A contract is considered void in all of the following situations EXCEPT - When one party is a minor - When consideration is unequal - When consideration is incomplete - When agreement cannot be reached between parties

When consideration is unequal An aleatory contract involves the possibility of unequal consideration and does not make it voidable.

An insurance company can be liable for a producer's unauthorized acts - Only when a felony is involved - When the agency contract is unclear concerning the authority given - At anytime - Only if the agency contract is unilateral

When the agency contract is unclear concerning the authority given An insurance company can be liable for a producer's unauthorized acts when the agency contract is vague concerning the authority granted.

The following are all elements of a valid contract EXCEPT - Consideration - Offer and acceptance - Competent parties - Written evidence

Written evidence A valid contract requires all of these things except written evidence.