Ch. 2 Contract Law Quiz (Examfx)
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.) Aleatory contracts B.) Binding contracts C.) Contracts of adhesion D.) Unilateral contracts
C.) Contracts of adhesion Rationale: 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.
A contract between an insured and an insurance company which agrees to pay the insured for loss caused by specific events is: A.) A policy B.) A rider C.) A premium D.) A guaranteed benefit
A.) A policy Rationale: A contract between an insured and an insurance company which agrees to pay the insured for loss caused by specific events is 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 Rationale: According to CIC 380, neglecting to communicate that which a party knows and ought to communicate is concealment.
In terms of parties to a contract, which of the following does NOT describe a competent party? A.) The person must be mentally competent to understand the contract. B.) The person must have at least completed secondary education. C.) The person must not be under the influence of drugs or alcohol. D.) The person must be of legal age.
B.) The person must have at least completed secondary education. Rationale: 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 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 Rationale: 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 is NOT the consideration in a policy? A.) The premium amount paid at the time of application B.) The promise to pay covered losses C.) The application given to a prospective insured D.) Something of value exchanged between parties
C.) The application given to a prospective insured Rationale: Consideration is something of value that is transferred between the two parties to form a legal contract.
Which of the following would qualify as a competent party in an insurance contract? A.) The applicant is intoxicated at the time of application. B.) The applicant is a 12-year-old student. C.) The applicant is under the influence of a mind-impairing medication at the time of application. D.) The applicant has a prior felony conviction.
D.) The applicant has a prior felony conviction. Rationale: 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 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 Rationale: 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.
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.) Estoppel B.) Material misrepresentation C.) Waiver D.) Utmost Good Faith
B.) Material misrepresentation Rationale: 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 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 Rationale: 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.
All of the following are reasons an insurer or an insured would have the right to rescind a policy EXCEPT: A.) When concealment is unintentional B.) An intentional omission in determining if a warranty is false C.) The amount of paid claims exceeds the premiums paid D.) The violation of a material warranty
C.) The amount of paid claims exceeds the premiums paid Rationale: 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.) A statement of insurable interest B.) The first named insured C.) The insurer's financial rating D.) The stated periodic premium
C.) The insurer's financial rating. Rationale: An insurer's financial rating does not need to be specified in an insurance policy.