Deck 8: Insurance Contracts

Question 1

The personal feature of property insurance contracts means that:

A)subrogation always applies
B)ambiguities in the wording will always be construed against the insurer
C)insurance contracts cannot be freely transferred to other parties
D)the buyer of insurance must have insurable interest in property before the policy is issued

Answer 1

C

Question 2

Which of the following is a contract of indemnity,using a strict definition of the term "indemnity"?

A)life insurance
B)replacement cost insurance
C)legal liability insurance
D)valued insurance policies

Answer 2

C

Question 3

Choose the best example of a promissory warranty:

A)the cargo is not flammable
B)this vessel is seaworthy
C)the building's fire sprinkler system works and will work
D)the dumptruck is in good condition

Answer 3

C

Question 4

Which of the following is false concerning concealment?

A)would be illustrated by a false answer to a question
B)to make a contract avoidable must be material
C)typically involves an element of deception
D)the result is treated very much like material misrepresentations in insurance law

Question 5

An affirmative warranty states that:

A)something is true only at the present time
B)something will be true in the future
C)all information provided on the application for coverage is affirmed to be truthful
D)none of the above

Question 6

If an insured has actual cash value coverage,how much would he collect given the following facts?
1) replacement cost of the building is $200,000,
2) replacement cost of the loss is $30,000,
3) estimated total useful life is 30 years,and,
4) building has been in use 15 years.

A)$70,000
B)$45,000
C)$30,000
D)$15,000

Question 7

Jasmine phones her agent to obtain auto insurance. The agent binds coverage over the phone,and tells her she will have a $250 collision deductible. When the insurer issues the policy,the underwriter imposes a $1,000 deductible because of Jasmine's poor driving record,then mails her the policy. She does not read it or notice this change until she has an accident six months later. She then demands that the insurer only require a $250 deductible rather than a $1,000 deductible,since she did not approve this change.Which legal principle of insurance contracts would be the insurers most convincing reason for refusing to honor the $250 deductible?

A)contract of adhesion
B)parol evidence rule
C)indemnity
D)utmost good faith

Question 8

In property insurance,to collect for a loss,insurable interest must exist:

A)at the beginning of the contract
B)at all times
C)when the insurer waives it
D)at the time of the loss

Question 9

What is the principle of indemnity? (choose the best answer)

A)a court precedent that gives insureds the right to sue their insurers if they get bad claims service
B)the rule that a person may not collect more than his actual loss in the event of damage caused by an insured peril
C)the rule that a person will not be reimbursed for a loss unless he can show proof of loss
D)a way of requiring a person to pay a premium

Question 10

In most property insurance contracts assignment is:

A)specifically prohibited
B)permitted, but requires additional premium
C)not mentioned, but is not permitted because insurance contracts are personal contracts
D)valid with the written consent of the insurer

Question 11

The parol evidence rule says:

A)oral statements made prior to the issuance of an insurance policy are not a part of the contract
B)oral statements made after a policy is issued are not a part of the contract
C)after an oral agreement is put into writing, it becomes a contract of adhesion
D)none of the above

Question 12

All the following features are unique to insurance contracts (versus other business contracts)except:

A)insurable interest
B)subrogation
C)utmost good faith
D)consideration

Question 13

Mr.Jiminez wants his 16 year old son to buy a life insurance policy as an investment for college. He asks you if it is legal for a minor child to purchase and own life insurance. You correctly respond by saying:

A)minors never have capacity to enter contracts
B)minors always have capacity to enter contracts
C)the courts have ruled that it is illegal for minors to purchase life insurance
D)the courts have ruled both ways on minors' ability to own life insurance

Question 14

If a property insurance agent goes to Maria's door,convinces her to apply for insurance and write a check for the policy premium,which of the following has occurred?

A)offer, acceptance
B)soliciting an offer, offer, acceptance, consideration
C)offer, counter offer, acceptance, consideration
D)offer, consideration

Question 15

Which of the following does not support the principal of indemnity?

A)actual cash value
B)contract of adhesion
C)insurable interest
D)subrogation

Question 16

A waiver is:

A)part of most property insurance contracts
B)a release of any additional claims against the insurer
C)a legal response when the insurer informs the insured a claim is denied
D)giving up a known right by either the insured or insurer

Question 17

A misrepresentation:

A)always voids a contract
B)makes a contract voidable if it is material
C)is sometimes referred to as a "concealment"
D)is legally treated the same way as a breach of warranty

Question 18

The ____________ clause in an insurance policy says that when the insurer indemnifies the insured for a loss,it takes over the insured's right to collect payment from any negligent third party that may have caused the loss.

A)indemnity
B)proof of loss
C)adhesion
D)subrogation

Question 19

The principle of utmost good faith

A)holds the insurer to a higher standard of honesty
B)does not apply in life insurance
C)holds the insured to a higher standard of honesty
D)requires the insurer and insured to enter the contract with utmost good faith

Question 20

In which case is there no insurable interest?

A)Barbie's 25% ownership in an oil well
B)a dry cleaner in its customers' clothes
C)a bank (creditor)in property used to secure a loan
D)a school principal in the lives of the students attending his school

Question 21

Which term below describes a contract in which there is an unequal dollar consideration?

A)commutative
B)aleatory
C)adhesion
D)unilateral

Question 22

The doctrine of reasonable expectations has typically resulted in:

A)a reduction in the scope of insurance coverage
B)an increase in morale hazard
C)difficulties preventing adverse selection
D)insurers having to cover things they never anticipated covering

Question 23

Void ab initio means

A)void at the option of the insurer
B)void at the option of the insured
C)void at the option of the court
D)void at the beginning

Question 24

The doctrine of proximate cause:

A)forces the insurer to pay for all claims arising out of an unbroken sequence of events if any one of the subsequent perils following the original excluded peril was covered
B)forces the insurer to pay for all claims arising out of an unbroken sequence of events if the original insured peril was covered
C)forces the insurer to pay for the loss when the proximate cause of the event is the insured's fault
D)divides any loss payment among parties proximately affected by the loss

Question 25

Sarah has a house valued at $200,000 and insured for $180,000. It is totally destroyed by fire,due to the negligence of Courtney. Sarah recovers $180,000 from her insurer,which then subrogates against Courtney. Suppose the courts decide that Courtney must pay $100,000 in damages,because that's all the money she has. How much of this $100,000 can the insurer keep,assuming that the policy has no special provision regarding the distribution of subrogation amounts?

A)$0 (The entire $100,000 must be passed on to Sarah)
B)$20,000 (Sarah gets the other $80,000)
C)$80,000 (Sarah gets the other $20,000)
D)$100,000 (Sarah will get no additional funds)

Question 26

Joe has a dispute with his insurance company regarding how much he is entitled to recover on a claim. Joe believes he is entitled to get $8,000 based upon his interpretation of the policy wording. The insurer says the claim is not covered by the policy. Joe sues and a court of law decides that the policy wording is vague and ambiguous,and rules that the loss IS covered. What legal characteristic of insurance resulted in the court's decision?

A)insurance is aleatory
B)insurance is a contract of indemnity
C)insurance is a contract of adhesion
D)insurance is personal

Question 27

While driving home from work,Bailey's car is struck from behind by a van full of drunken college students. Asimov is the driver of the van. The resulting damage to Bailey's car totals $7,000. Bailey files a claim under his own auto insurance policy to have his car repaired,but his insurance policy only covers $6,000 of the $7,000 loss. Bailey pays the remaining $1,000 of the loss out of his pocket. Which of the following is a true statement?

A)Bailey has no legal right of subrogation against Asimov for the $1,000 that he had to pay out of his pocket
B)Bailey's insurer has no legal right of subrogation against Asimov for the $6,000 of damages it had to pay to Bailey
C)Both Bailey and his insurer have subrogation RIGHTS against Asimov for the damages he (Asimov)caused
D)Bailey has the right under the principle of indemnity to now sue Asimov personally for the $7,000 damages to his car

Question 28

Which of the following is correct concerning when insurable interest must exist?

A)in property and liability insurance, it must exist at the inception of the contract
B)it is seldom required in property insurance unless there are liens on the property
C)it must exist at the time of death of the insured for the beneficiary to collect in life insurance
D)in life insurance it must exist at the inception of the policy but it is not necessary at the time of the loss

Question 29

Christopher purchases an insurance contract with the following warranty attached: "the burglar alarm system will be in good working order." What type of warranty is this?

A)the statement is not a warranty
B)implied affirmative
C)express affirmative
D)express promissory

Question 30

Tiffany,who is married to Saul,takes out a $1,000,000 life insurance policy on Saul's life in 2008. Two years later they get divorced and Tiffany immediately remarries. Saul is not required to pay any alimony or child support to Tiffany after the divorce. In 2015,Saul dies. What will Tiffany collect on the life insurance policy,assuming she continued to pay all premiums due following their divorce?

A)$0, because Tiffany has no insurable interest
B)$1,000,000, because Tiffany had insurable interest in Saul's life when the policy was purchased
C)$1,000,000, because Tiffany had insurable interest in Saul's life at the time of his death
D)$0, because Saul was not ordered to pay alimony to Tiffany

Question 31

Under a contract of adhesion:

A)subrogation is not allowed
B)ambiguous features are interpreted against the writer of the contract
C)ambiguous features are interpreted always against the insurer
D)ambiguous features are decided based upon the intent of the parties when the contract was entered

Question 32

The principle of insurable interest is important because it:

A)makes insurance companies more profitable
B)supports the principle of indemnity
C)prevents insurers from unfairly denying insurance claims
D)prevents an insurer from subrogating against a negligent third party

Question 33

Luis arrives home from work one day to discover that his apartment building is on fire. He drives directly to an insurance agency to buy renters insurance,since he realized he didn't have coverage for this loss.
Luis does not tell his agent that the building is on fire. There is also not a question on the application for coverage that asks if Luis's apartment is currently on fire. Luis pays the first premium,and the agent issues a coverage binder. Which of the following statements is/are true?
I) Luis committed a misrepresentation,so coverage may be voided at the option of the insurer
II)Luis breached a warranty,but the insurer will have to prove he did so fraudulently in order to deny coverage
III)Luis committed a concealment that was material to the risk,thus his coverage can be voided by the insurer as long as the insurer can prove that he concealed the fact with fraudulent intentions

A)I
B)I and III
C)III
D)II and III

Question 34

All of the following are requirements of a contract of insurance except:

A)the contract must be in writing
B)it must be for a legal purpose
C)there must be legal capacity of the parties
D)there needs to be an offer and an acceptance

Question 35

The functional replacement provision in some property insurance policies is used when:

A)replacing a lost item is impossible
B)replacing a lost item is much cheaper than expected
C)replacing a building will cost much more than its market value
D)an insured set of objects is collectively worth more than the sum of its individual components

Question 36

Which one of the following is false concerning subrogation?

A)it reinforces the principle of indemnity
B)it holds rates below what they would otherwise be
C)it places the burden of loss on one or more responsible parties
D)the insured can never receive any money collected through subrogation

Question 37

Willy Dye goes applies for life insurance. The agent takes Willy's application and his first premium payment,and issues Willy a conditional receipt for the payment. The next day Willy is run over by a sewage truck and killed. An autopsy shows that Willy was in excellent physical condition,and would thus have been issued an insurance policy had he lived. What will the insurer do?

A)pay Willy's beneficiary the full death benefit because coverage existed from the date the receipt was issued
B)not pay Willy's beneficiary because he died before the policy could actually be issued
C)not pay Willy's beneficiary because a conditional receipt does not take effect until after the underwriting process is completed
D)pay the beneficiary an amount equal to the premiums Willy paid for the policy

Question 38

Which one of the following is true concerning consideration in property insurance?

A)dollars must change hands from the insured to the insurer before a contract exists
B)the only valid consideration is cash payment of all premiums in full
C)abiding by the contractual language and paying the premium is the consideration the insured provides
D)if the premium is not paid at the time of a loss, the insured is given a 30 day grace period to pay

Question 39

Actual cash value is defined as:

A)Replacement cost minus accounting depreciation
B)Replacement cost minus depreciation
C)Actual replacement cost
D)Original purchase price minus depreciation

Question 40

The principle of indemnity

A)is illegal in many countries
B)reduces morale hazard
C)only applies in life and health insurance
D)eliminates insurance fraud

Question 41

The parol evidence rule

A)allows statements made before the policy is sold to affect policy coverage
B)benefits the insured more than the insurer
C)makes written evidence more important than oral evidence
D)makes oral evidence more important than written evidence

Question 42

A statement of opinion by the insured on a life insurance application:

A)is a sufficient reason to allow an insurer to later void the contract
B)is illegal, and insurers must not request such information
C)is not a sufficient reason for an insurer to later void the contract
D)provides reliable information to the underwriter

Question 43

If insurance policies were not designed to support the principle of indemnity,then we would have fewer moral hazards in our society.

Question 44

Evan has his house insured for $200,000. He sells the house to Ann for $225,000. Three days after the sale is complete the house is destroyed by fire. Evan has not canceled his homeowner's insurance policy,so he decides to file a claim for losses caused by the fire. What will most likely happen?

A)Evan will collect $200,000 in insurance payments
B)Evan will collect $200,000 in insurance payments ONLY IF Ann has not yet purchased a homeowner's policy of her own
C)Evan will collect nothing because he has no insurable interest
D)Ann will collect $200,000 from Evan's insurer

Question 45

Since the homeowners' insurance policy is written by the insurer,ambiguities are interpreted in favor of the insured.

Question 46

Explain the principle of subrogation. Provide a mathematical example of its use.

Question 47

The principle of indemnity says that the insured should profit from insurance.

Question 48

Since the automobile insurance policy is written by the insurer,ambiguities are interpreted in favor of the insurer.

Question 49

Explain the principle of indemnity. How does one measure indemnity?

Question 50

When entering into a legally enforceable insurance contract consideration must exist. Explain what consideration is and the form it takes in insurance contracts.

Question 51

"Actual cash value" means "historical cost less depreciation."

Question 52

A binder must meet all the requirements of a valid contract.

Question 53

Conditional receipts are associated with life insurance rather than non?life insurance.

Question 54

In property insurance the insured must have an insurable interest when the loss occurs and need not have it when the policy is taken out in order to collect.

Question 55

"Binders" are typically used with:

A)Life and health insurance
B)Property and liability insurance
C)Life and liability insurance
D)Health and property insurance

Question 56

Shicara owns a jewelry store. In exchange for a discount on her burglary insurance premium,she promises the insurer that her trained guard dog will be on the premises at all times,even when the store is closed. One evening she takes the dog home with her instead of leaving him at the store,and a burgler breaks in and steals everything. The insurance company finds out the dog wasn't in the store when the burglary happened,and denies the claim. WHY does the insurer do this?

A)Because Shicara committed a material misrepresentation
B)Because Shicara breached a warranty
C)Because Shicara committed a concealment
D)Because Shicara violated the principle of adhesion

Question 57

Jerry has a property insurance policy on a building that would cost $200,000 to replace. His insurance policy is written on an actual cash value basis. His building suffers fire damage that has a replacement cost of $50,000. The building is 2 years old,with an estimate useful life of 20 years. How much will he collect for the fire damage?

A)$5,000
B)$10,000
C)$25,000
D)$45,000

Question 58

Ambiguities in the wording of an insurance contract are always construed against the writer.

Question 59

There is no subrogation in life insurance.

Question 60

Dana loans her brother,Marcus,$500,000 with which to start a movie production company. The business assets are shown in the loan agreement as collateral for the loan. Dana can insure Marcus' life because:

A)The principle of insurable interest exists in this situation
B)The principle of utmost good faith exists in this situation
C)She and Marcus are brother and sister
D)This is a trick question; she cannot insure his life, but she can insure the business assets

Question 61

Explain what a contract of adhesion is. How does the doctrine of reasonable expectations influence adhesion?

Question 62

What is the doctrine of utmost good faith? What situations arise out of its application? Explain.