Deck 9: Fundamental Doctrines Affecting Insurance Contracts

Question 1

A mortgage lender on a building does not have an insurable interest in the building.

Answer 1

False

Question 2

Unlike intoxicated persons, mentally ill persons are not recognized as competent.

Answer 2

False

Question 3

An agency relationship cannot be created by estoppel, even if the conduct of the principal implies that an agency exists.

Answer 3

False

Question 4

The purpose of the insurance contract is to restore the insured to the same economic position as before the loss.

Question 5

In property insurance, insurable interest must exist at the time of the loss.

Question 6

The company has the right to refuse business provided by suspended agents when it is presented, but once the business is accepted, the company waives the right to deny coverage on the basis of denial of acceptance.

Question 7

Even if people misrepresent material facts, insurers cannot void their contracts because the insureds have policies as proof and the insurers' right to deny would be waived.

Question 8

The insurance contract we receive when we transfer risk to the insurance company is the only thing makes the exchange tangible.

Question 9

An insurance policy is voidable even if the misrepresentation is not material.

Question 10

In the case of contracts other than for insurance, it is generally assumed that each party has equal knowledge and access to the facts, and thus each is subject to requirements of "good faith," not "utmost good faith.

Question 11

To waive a right, a person must know he or she has the right and must give it up intentionally.

Question 12

The conditional binder provides coverage immediately, even if the applicant is later found to be an unacceptable policyholder and coverage is canceled at that point.

Question 13

Most insurance contracts are prepared by the insured and then accepted or rejected by the insurer.

Question 14

Janitor's insurance is inexpensive life insurance coverage.

Question 15

Contracts cannot be oral due to the difficulties in proving the existence of oral contracts.

Question 16

In the making of insurance contracts, the insurer usually offers to sell and the insured accepts or rejects the offer.

Question 17

No insurance agent is going to ask you when you apply for insurance if the neighbor's house is on fire.The fact that the agent does not ask does not relieve you of the responsibility.

Question 18

The source of the agent's authority is the policyholder.

Question 19

Lack of consideration will cause the contract to be unenforceable.

Question 20

Neither insurers nor regulators consider an agency relationship as an independent contractor relationship.

Question 21

If this requirement in a contract is absent, enforcing the contract would be contrary to public policy.Identify this requirement.

A)Offer and acceptance
B)Consideration
C)Competent parties
D)Legal purpose
E)Legal form

Question 22

Which of the following occurs when the insurer or its agent has led the insured into believing that coverage exists and, as a consequence, the insurer cannot later claim that no coverage existed?

A)Escrow
B)Duress
C)Estoppel
D)Waiver
E)Escheat

Question 23

Since an insurable interest must exist at the inception of a life insurance contract to make it enforceable, the amount of payment is usually limited by the extent of such insurable interest.

Question 24

If you call a GEICO agent in the middle of the night to obtain insurance for your new automobile, you are covered as of the time of your conversation with the agent.Identify this authority of the agent.

A)Duress authority
B)Facultative authority
C)Binding authority
D)Waiver authority
E)Estoppel authority

Question 25

An insurance company suspends an agent, but the agent retains possession of blank policies.Which of the following is likely to happen if the former agent issues those policies?

A)The company provides the suspension order of the agent in front of a judge and cancels those policies.
B)The company waives the agent's authority and the existence of an agency relationship and cancels the policies.
C)The premiums of these policyholders are paid back, and the policy cancelled by their consent.
D)The court holds the authority to decide whether the policy stands or is cancelled.
E)The company is estopped from denying the existence of an agency relationship and will be bound by the policy.

Question 26

In an agency, the principle creates an agency relationship with a second party by authorizing him or her to make contracts with third parties on the principal's behalf.The second party to this relationship is authorized to make contracts with a third party and is known as the:

A)insurer.
B)policyholder.
C)reinsurer.
D)insured.
E)agent.

Question 27

Identify the policies in which the policyholders were led to believe that they would be paid in full after a certain period of time, and they would no longer have to make premium payments.

A)Supplementary policies
B)Vanishing premium policies
C)Waiver policies
D)Estoppel policies
E)Conditional policies

Question 28

Identify the law that deals basically with the legal consequences of people acting on behalf of other people or organizations.

A)Law of numbers
B)Law of adverse selection
C)Law of moral hazard
D)Law of agency
E)Law of torts

Question 29

A contract of insurance to cover losses caused by the insured's own arson would be illegal and contrary to public policy, and thus unenforceable.Identify the contract requirement that is most like absent.

A)Legal form
B)Legal purpose
C)Offer and acceptance
D)Consideration
E)Competent parties

Question 30

In many situations, an agent is able to exercise this authority, which secures coverage for an insured without any additional input from the insurer.Identify this authority.

A)Waiver authority
B)Estoppel authority
C)Duress authority
D)Binding authority
E)Facultative authority

Question 31

The vexing problem of vanishing premiums has proven to be an expensive lesson for insurance companies on the doctrine of _____-a Latin phrase referring to the doctrine that the master is responsible for the actions taken by his or her servant during the course of duty.

A)respondeat superior
B)reformatio in peius
C)res ipsa loquitur
D)restitutio in integrum
E)res judicata

Question 32

When you call an insurance agent for insurance on your new automobile and the agent provides coverage, there is an offer to buy and the agent has accepted the offer on behalf of his or her company.This acceptance is called:

A)an estoppel.
B)a duress.
C)an escrow.
D)a binder.
E)a waiver.

Question 33

When an insured specifically requests a certain kind of coverage when applying for insurance and is not told it is not available, that coverage likely exists, even if the policy wording states otherwise, because the agent implied such coverage at the time of sale, and the insurer cannot deny it.Which of the following best explains this situation?

A)Escrow
B)Waiver
C)Escheat
D)Duress
E)Estoppel

Question 34

What do we mean when we say that a contract must have a legal purpose?

A)It must not be for the performance of an activity prohibited by law.
B)It must not be signed when one or both the parties are intoxicated.
C)It must be in written format so that it is easier to understand and so that it stands as proof.
D)It must not be done for minor or petty agreements.
E)It must only be for situations where monetary incentives are concerned.

Question 35

Identify the contracts whose provisions are dynamic with respect to the environment in which they are executed.

A)Facultative contracts
B)Relational contracts
C)Volatile contacts
D)Transient contracts
E)Mutable contracts

Question 36

This type of binder implies that coverage exists only if the underwriter ultimately accepts the application for insurance.Thus, if the applicant dies prior to the final policy issuance, payment is made if the applicant would have been acceptable to the insurer as an insured.Identify this type of binder.

A)Facultative binder
B)Conditional binder
C)General binder
D)Estoppel
E)Waiver

Question 37

The law of agency is significant to insurance in large part because:

A)the only direct interaction most buyers of insurance have with the insurance company is through an agent or a broker.
B)it allows the insurance companies to interact directly with the buyers without the help of agents or brokers.
C)it gives the insurance company the clarity it requires while passing it's authority as principle to the agent.
D)it makes investigation of claims easier.
E)it provides clarity on the types of risks and makes risk classification easier.

Question 38

Russell, an auto insurance agent, knew that Gyle's seventeen-year-old son, Phelix, was allowed to drive the covered automobile, and also knew the company did not accept such risks.If Russell issues the policy, the company looses the right to refuse coverage on this basis later in the policy period.This is an example of:

A)an estoppel.
B)a conditional binder.
C)a contract of adhesion.
D)a waiver.
E)a supplementary binder.

Question 39

Consideration is the:

A)process of two parties entering into a contract.
B)process of confirming the lack performance of an activity prohibited by law.
C)the price each party demands for agreeing to carry out his or her part of the contract.
D)change in the contract agreement when the party to whom the offer was made requests for change in terms.
E)process where a contract is converted to an written document to be enforceable by law.

Question 40

This is the process of two parties entering into a contract; an agreement is reached only after this process between the contracting parties.Identify this process.

A)Consideration
B)Underwriting
C)Acturial
D)Waiver
E)Estoppel

Question 41

Differentiate between general binder and conditional binder.

Question 42

The fact that buyers usually have no influence over the content or form of insurance policies has had a significant impact on the way courts interpret policies when there is a dispute.Which of the following is true when there is a dispute and the matter goes to court?

A)When the terms of a policy are ambiguous, the courts favor the insurer.
B)When the terms of a policy are ambiguous, it is assumed that the insured that writes the contract should know what it wants to say and how to state it clearly.
C)The policy language generally is interpreted according to the underwriter who is knowledgeable about insurance.
D)The policy language is interpreted according to the insured's level of expertise and situation.
E)When the terms are not ambiguous, the courts have changed the contract in favor of the insured.

Question 43

The law concerning insurable interest is important to the buyer of insurance because it determines whether the:

A)benefits from an insurance policy will be collectible.
B)court will favor the insured in case of a dispute.
C)insured favors the contract of adherence.
D)principle of indemnity holds.
E)expectations principle is applicable in the contract.

Question 44

_____ gives the insurer whatever claim against third parties the insured may have as a result of the loss for which the insurer paid.

A)Demutualization
B)Gentrification
C)Subrogation
D)Estoppel
E)Waiver

Question 45

Identify the Latin phrase for "utmost good faith."

A)Uberrimae fidei
B)Umraniye lisesi
C)Uyma elin picine
D)Ukte icinde ukte
E)Ukteye getirmek

Question 46

Insurance policies are contracts of adhesion.Which of the following statements best explains this phrase?

A)Insurers take full responsibility of the information provided by the insureds during the formation of the contract.
B)In case of a dispute, the court will read the contract as an insured would, and give decisions based on what the insured would understand after reading the contract.
C)Insureds have no input in the design of a policy's terms.
D)The insurer cannot void a contract, on the grounds of misrepresentation, after two years, even if it was a major fraud.
E)After the insurance policy is in force, it cannot be cancelled or terminated until the contract period expires.

Question 47

Identify the principle that discourages insureds to cause intentional losses to gain from insurance contracts.

A)Expectations principle
B)Principle of subrogation
C)Redlining principle
D)Principle of indemnity
E)Principle of adhesion

Question 48

Explain contracts of adhesion.Summarize its significance.

Question 49

By entering into the relationship, the principal implies that the agent has the authority to fulfill the principal's responsibilities, implying _____ authority.

Question 50

Potential insureds are held to the highest standards of truthfulness and honesty in providing information for the underwriter because insurance involves a contract of:

A)umraniye lisesi.
B)respondeat superior.
C)ukteye getirmek.
D)reformatio in peius.
E)uberrimae fidei.

Question 51

Students who misrepresent to their auto insurers where their cars are garaged take the chance of having no coverage at the time of a loss because:

A)location is a factor in determining premium rates and therefore, material fact.
B)the insurance contracts of minors are voidable.
C)auto insurers are very strict about misrepresentations and do not cover them even if the information is not a material fact.
D)the auto insurance contracts of students are voidable.
E)auto insurances do not cover auto thefts that occur in the insured's garage.

Question 52

If an insurer wants to void a contract it has issued to a person in reliance upon the information she provided, it must prove that what she misrepresented was "material." That is, the insurer must prove that:

A)the information was incorrect, even though it was not relevant to the contract.
B)the information was incomplete, but complete knowledge would not result in any change in the contract.
C)the information was so important that if the truth had been known, the underwriter would not have made the contract.
D)the information was incorrect and get evidence for it.
E)the information provided was incorrect but unintentional.

Question 53

Insurance contracts are contract of indemnity because:

A)the courts favor the insured when terms of the contract drafted by the insurer are ambiguous.
B)the insurer agrees to pay no more than the actual loss suffered by the insured.
C)the courts read the contract as an insured would.
D)insureds have no input in the design of a policy's terms.
E)the courts determine the coverage on the basis of the reasonable expectations of the insured.

Question 54

In the event of a dispute, courts will read insurance policies as they would expect the insured to do.This is known as:

A)the principle-agent problem.
B)attribution bias.
C)the principle of indemnity.
D)subrogation.
E)expectations principles.

Question 55

Identify the misrepresentation under which an insurance contract would be voidable.

A)You stated in an application for life insurance that you were born on March 2 when in fact you were born on March 12.
B)You apply for life insurance and state that you are in good health, when in fact, you have a cold.
C)By mistake, you stated in an application for life insurance that you were born on 1980, when in fact you were born on 1984.
D)You state for life insurance that your annual income is $150,000 when in fact it is $200,000.
E)You apply for life insurance and state that you are in good health, even though you've just been diagnosed with a severe heart ailment.

Question 56

Wesley has no insurance on his home because he "doesn't believe in insurance." Upon his arrival home one afternoon, he discovers that his neighbor's house-only thirty feet from his-is on fire.Wesley promptly telephones the agency where he buys auto insurance and applies for a homeowner's policy, asking that it be put into effect immediately.He answers all the questions the agent asks but fails to mention the fire next door.The insurer has the right to void this contract because Wesley is guilty of:

A)misrepresentation.
B)concealment.
C)recommendation.
D)indemnity.
E)treason.

Question 57

These companies buy life insurance policies from senior citizens for a percentage of the value of the death benefits.They pay the premiums and become the beneficiary when the insured passes away.Identify these companies.

A)Viatical-settlement companies
B)Stock companies
C)Mutual companies
D)Demutualized companies
E)Life-settlement companies

Question 58

When people are negotiating with insurers for coverage, they make statements concerning their exposures, and these statements are called:

A)indemnifications.
B)recommendations.
C)undertakings.
D)representations.
E)references.

Question 59

Explain the difference between a waiver and an estoppel.

Question 60

Some contracts are known as _____ contracts because they contain terms that are implicit, rather than explicit.

Question 61

_____ are made for the purpose of inducing insurers to enter into contracts; that is, provide insurance.

Question 62

_____ companies buy life insurance policies from persons with short life expectancies, such as AIDS patients.

Question 63

_____ is the replacement cost at the time of the loss, less physical depreciation, including obsolescence

Question 64

A contract by a government employee to sell secret information to an agent of an enemy country would not have a(n) _____ and would be unenforceable.

Question 65

In an insurance contract, the _____ does not specify the terms of coverage but rather accepts the terms as stipulated.

Question 66

Property insurance is often written on a(n) _____ basis, which means that there is no deduction for depreciation of the property.

Question 67

If the party to whom the offer was made requests a change in terms, a _____ is made, which releases the first offerer from the terms of the original offer.

Question 68

_____ is the intentional relinquishment of a known right.

Question 69

Agents and brokers are also known as _____.

Question 70

A(n) _____ someone who is responsible for the safekeeping of property belonging to others and who must return it in good condition or pay for it.

Question 71

In the case of life insurance, the insurer can void the policy on grounds of material misrepresentation only for _____ years.

Question 72

_____ interest is financial interest in life or property that is subject to loss.

Question 73

When the investment portion or cash accumulation of a permanent life insurance policy is elevated to a position of a retirement account, it is known as _____.

Question 74

In _____ life insurance policies, employers own life insurance policies on employees.