Question 1

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

Accepted Answer

A)  The insurer can refuse to a pay claim if the insured has not 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.

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.

Question 3

If a third party is led to reasonably believe that an agent is acting within the scope of his/her authority, even though the agent is exceeding his/her authority, the principal may still be bound by the agent's actions. In this case, the agent has bound the principal by

Accepted Answer

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

Question 4

Dave is an agent for Easy Pay Insurance. Easy Pay insures only high-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.

Question 5

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)  forensic cost method.

Question 6

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 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 more 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

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 9

Hank bought a farm that had an old barn. He noticed one day that the roof of the barn was swaying in the wind. Hank went to see his insurance agent and 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 10

ABC Life Insurance Company insures both smokers and nonsmokers. Beth lied on her life insurance application, checking the box for "no" in response to the question of whether she smokes cigarettes or uses other tobacco products. Even though Beth smokes 10 to 15 cigarettes each day, the policy was issued at the "preferred nonsmoker rate." Beth's lie is materiel in this case because

Accepted Answer

A)  it was in writing on the application. 
B)  it was given with the intent to deceive. 
C)  the policy would have been issued on different terms if the insurer knew the true facts. 
D)  the policy would have been issued for a lower face value if the insurer knew the true facts.

Question 11

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 12

Bob purchased insurance on his home with an insurer that was not licensed to do business in the state. In this case, which requirement to form a binding insurance contract is lacking?

Accepted Answer

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

Question 13

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

Question 14

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 15

Under which of the following rules is actual cash value determined by taking into consideration all relevant factors an expert would use to determine the value of the property?

Accepted Answer

A)  the circumstantial evidence rule 
B)  the broad evidence rule 
C)  the property indemnity rule 
D)  the objective value rule

Question 16

The voluntary relinquishment of a legal right is called

Accepted Answer

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

Question 17

The loss settlement under which of the following supports the principle of indemnity?

Accepted Answer

A)  life insurance 
B)  valued policies 
C)  replacement cost property insurance 
D)  actual cash value property insurance

Question 18

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 19

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 20

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, completing the application and paying the first premium constitute acceptance of the offer from the insurer.

Exam 9: Fundamental Legal Principles