Question 1

Dave is an agent for Easy Pay Insurance.Easy Pay insures only the highest-quality applicants.Dave wanted to earn more commissions,so he sold some policies to applicants he knew were below-average risks.When these policyowners started filing claims,Easy Pay tried to deny the claims stating that Dave had not acted appropriately.Which general rule of agency makes Easy Pay responsible for the claims of the higher-than-average risk policyowners?

Accepted Answer

A)  There is no presumption of an agency relationship.
B)  Agents should be compensated based on the quality of the business they generate.
C)  A principal is responsible for the acts of its agents who are acting within the scope of their authority.
D)  An agent must have authority to represent the principal. C

Question 2

Chris applied for life insurance and paid the first premium on Monday.She was given an insurability premium receipt which specified that coverage was effective on the date of the application or the date of the medical exam,whichever is later.She took the medical exam the following Thursday.She was found to be in perfect health.On which day was her coverage effective?

Accepted Answer

A)  on Monday,when she completed the application and paid the first premium
B)  on Wednesday,two days after completing the application and paying the first premium
C)  on Thursday when she passed the medical exam
D)  on Saturday,two days after passing the medical exam C

Question 3

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

Accepted Answer

A)  The insurer can refuse to a pay claim 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 insured gets the benefit of the doubt if a policy contains any ambiguities or uncertainties. A

Question 4

Mark owns a bar.The bar has a back room where Mark has some slot machines.Mark lets some of his patrons play the machines,and Mark keeps any profits.This type of gambling is illegal where Mark lives.Mark wanted to purchase insurance in case his slot machines were confiscated by the police.Such an insurance contract would not be enforceable.Which requirement needed to form a valid insurance contract is missing?

Accepted Answer

A)  consideration
B)  offer and acceptance
C)  legal purpose
D)  competent parties

Question 5

Which of the following statements about subrogation is true?

Accepted Answer

A)  It is used primarily for losses paid under life insurance policies.
B)  It allows the insurer to sue its own insured who is negligent.
C)  The insured's right to collect benefits may be forfeited if the insured interferes with the insurer's rights after a loss occurs.
D)  The insurer is required to exercise its subrogation rights.

Question 6

All of the following statements about subrogation are true EXCEPT

Accepted Answer

A)  the insurer is only entitled to recover the amount it has paid its insured under the policy.
B)  subrogation does not apply in life insurance.
C)  interfering with the insurer's subrogation rights can jeopardize indemnification of the insured.
D)  the insurer reserves the right to subrogate against its own insureds.

Question 7

Jacob sold his house to Shelia for $140,000 in cash.Jacob "threw in" insurance on the house as part of the deal and did not bother telling the insurer that there was a new owner.Four months after Shelia purchased the home,a windstorm damaged the roof.Which of the following legal characteristics of insurance contracts could the insurer use to legally deny payment for the damage to the roof?

Accepted Answer

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

Question 8

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)  unilateral contract.
C)  contract of adhesion.
D)  warranty.

Question 9

The voluntary relinquishment of a legal right is called

Accepted Answer

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

Question 10

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

Question 11

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 12

Which of the following statements about consideration in an insurance contract is (are)true?
I.The insured's total consideration is submission of a completed application.
II.The insurer's consideration is the promise to do those things specified in the policy.

Accepted Answer

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

Question 13

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.

Question 14

Janice purchased a living room set for $1,000 and insured this furniture on an actual cash value basis.Two years later the living room set was destroyed by a covered peril.At the time of loss,the property had depreciated in value by 25 percent.The replacement cost of the furniture at the time of loss was $1,200.Assuming no deductible,how much will Janice receive from her insurer?

Accepted Answer

A)  $900
B)  $950
C)  $1,000
D)  $1,200

Question 15

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.

Question 16

When Ben applied for life insurance,he was asked on the application if he smoked or used tobacco products.Ben answered "No." In reality,Ben smokes two packs of cigarettes a day.The policy was issued at the "preferred,nonsmoker rate." If Ben dies 6 months after the policy is issued,upon what grounds will the insurer be able to legally deny the claim?

Accepted Answer

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

Question 17

When must an insurable interest legally exist in life insurance?

Accepted Answer

A)  only at the time of the insured's death
B)  only at the inception of the policy
C)  only at the time the beneficiary is paid
D)  both at the time of the insured's death and at the inception of the policy

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

Some courts have ruled that an alternative to "replacement cost less depreciation" should be used to determine the actual cash value of a property loss.Under this alternative,the value of property lost is determined by the price a willing buyer would pay a willing seller for the property in a free market.This method of determining actual cash value is called the

Accepted Answer

A)  intrinsic value method.
B)  valued policy method.
C)  fair market value method.
D)  reconstruction cost method.

Question 20

What is the legal significance of a material concealment by an insurance applicant?

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 concealment.
D)  The insurer is immediately entitled to a higher premium.

Exam 9: Fundamental Legal Principles