Question 1

Which of the following is a fundamental purpose of the principle of indemnity?

Accepted Answer

A)  to reduce moral hazard
B)  to minimize physical hazards
C)  to settle property insurance losses on a replacement cost basis
D)  to require deductibles in all property insurance policies A

Question 2

Robin plans to open a bar in a high-crime area.She had difficulty obtaining insurance for the business.She found an insurer willing to write the coverage,but only if Robin agreed to have a security alarm system in operation at all times when the business is closed.Robin's promise to have a security alarm system operational as a condition of having the insurance coverage in force is a

Accepted Answer

A)  binder.
B)  warranty.
C)  waiver.
D)  deductible. B

Question 3

Ted's insurance claim was denied by XYZ Insurance Company.When Ted inquired why the claim was denied,he was told to,"Read the exclusion on page 5 of the policy." Ted read the exclusion.In his opinion,the exclusion was poorly worded and vague.If a court of law agrees with Ted's assessment of the exclusion,Ted may still be able to have his claim paid by the insurer because insurance contracts are

Accepted Answer

A)  personal contracts.
B)  unilateral contracts.
C)  aleatory contracts.
D)  contracts of adhesion. D

Question 4

Sue's office building was damaged by a fire caused by a careless tenant.After paying Sue for the loss,the insurance company sued the tenant to recover its loss.This suit is based on the principle of

Accepted Answer

A)  warranty.
B)  insurable interest.
C)  utmost good faith.
D)  subrogation.

Question 5

What is the practical effect of an insurance contract being a contract of adhesion?

Accepted Answer

A)  The insurer can refuse to pay claims unless the insured has complied with all policy provisions.
B)  The insured can assign the policy only with the insurer's consent.
C)  The insurer can sue the insured for failure to pay any premiums.
D)  The policy is interpreted in the insured's favor if the policy contains any ambiguities or uncertainties.

Question 6

Dave and Meagan Philips borrowed $150,000 from Fifth National Bank to help fund the purchase of a new home.The home serves as collateral for the loan.Fifth National has an insurable interest in the home based on

Accepted Answer

A)  potential responsibility for legal liability.
B)  being a secured creditor.
C)  expectation of ownership.
D)  having a contractual right.

Question 7

Frank asked his company's employee benefits director if his group health coverage could be converted to individual coverage.The benefits director said,"Yes,you can convert to an individual policy,and the coverage is identical to your group coverage." Frank quit his job and converted to an individual policy.Six months later he filed a claim.He was dismayed to learn the conversion policy was limited compared to the group coverage,and his claim was denied.What legal doctrine will allow Frank to bring a successful legal action against his former employer because he was financially harmed due to his reasonable reliance upon a representation of fact?

Accepted Answer

A)  adhesion
B)  waiver
C)  estoppel
D)  subrogation

Question 8

Which distinct legal characteristic of insurance contracts states that only the insurer's promise to perform is legally enforceable?

Accepted Answer

A)  contracts of adhesion
B)  unilateral contracts
C)  aleatory contracts
D)  personal contracts

Question 9

Fundamental purposes of the principle of indemnity include which of the following?
I.To reduce physical hazards
II.To prevent the insured from profiting from insurance

Accepted Answer

A)  I only
B)  II only
C)  both I and II
D)  neither I nor II

Question 10

Which of the following statements about offer and acceptance for insurance contracts is true?

Accepted Answer

A)  In property and liability insurance,agents typically do not have the authority to bind coverage.
B)  In life insurance,the agent can usually accept an offer by immediately binding coverage.
C)  In property insurance,the offer and acceptance are usually in writing but may be oral.
D)  In life insurance,the offer is merely the promise to pay the first premium.

Question 11

Powers specifically conferred on an agent to act on behalf of a principal are

Accepted Answer

A)  incidental authority.
B)  apparent authority.
C)  implied authority.
D)  express authority.

Question 12

A total loss under a valued policy is settled on the basis of the

Accepted Answer

A)  market value of the loss.
B)  actual cash value of the loss.
C)  replacement value of the loss.
D)  amount of insurance covering the loss.

Question 13

Hank bought a farm.There was an old barn on the land.One day Hank decided to take a look at the barn.It was windy,and Hank could see the roof swaying in the wind.Hank ran out of the barn fearing the roof might collapse.While driving home,Hank stopped to see his insurance agent.He insured the barn for $20,000.The agent didn't ask if the roof might collapse,and Hank didn't say anything about it.One week later there was a strong wind and the roof collapsed.Assuming the insurer can prove it,under what legal grounds could the insurer deny payment of the claim?

Accepted Answer

A)  estoppel
B)  concealment
C)  warranty
D)  misrepresentation

Question 14

A contract in which the values exchanged are not equal because chance is involved is called a(n)

Accepted Answer

A)  contract of adhesion.
B)  unilateral contract.
C)  conditional contract.
D)  aleatory contract.

Question 15

David owns a liquor store in a high-crime area.In order to obtain a reduced insurance premium,David promised to have a burglar alarm operating at the store when the store was closed.This agreement,which was incorporated into the insurance contract,is an example of a

Accepted Answer

A)  representation.
B)  binder.
C)  rider.
D)  warranty.

Question 16

Which of the following statements describes how losses will be settled if a property insurance policy is written on a replacement cost basis?

Accepted Answer

A)  Losses are settled without the applicable deductible.
B)  Losses are settled without a deduction for depreciation.
C)  The insurer must replace the damaged or destroyed property in lieu of a cash settlement.
D)  The policy is converted to a valued policy.

Question 17

Why can an insurer refuse to pay a claim if an insured fails to abide by the policy provisions?

Accepted Answer

A)  because insurance contracts are aleatory
B)  because insurance contracts are unilateral
C)  because insurance contracts are conditional
D)  because insurance contracts are contracts of adhesion

Question 18

Sam's furniture was destroyed by a fire.The furniture cost $1200 when it was purchased,but similar new furniture now costs $1800.Assuming the furniture was 50 percent depreciated,what is the actual cash value of Sam's loss?

Accepted Answer

A)  $600
B)  $900
C)  $1200
D)  $1800

Question 19

What is the legal significance of a material misrepresentation in an insurance application?

Accepted Answer

A)  The contract is automatically voided from its inception.
B)  The contract is voidable at the insurer's option.
C)  Loss payments are reduced by the degree of the misrepresentation.
D)  The insurer is immediately entitled to a higher premium.

Question 20

Melody's car was damaged when another driver ran a stop sign and hit her car.Melody decided to collect from her own insurer and to let her insurer recoup the loss payment from the negligent driver who hit her.What fundamental legal principle is illustrated in this scenario?

Accepted Answer

A)  the principle of utmost good faith
B)  the principle of insurable interest
C)  the principle of subrogation
D)  the principle of reasonable expectations

Exam 9: Fundamental Legal Principles