Chapter 2 Contract Law
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In insurance, an offer is usually made when
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The agent hands the policy to the policyholder.
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An agent explains a policy to a potential applicant.
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The application is submitted.
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The insurer approves the application and receives the initial premium.
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Explore key aspects of contract law within the insurance sector through 'Chapter 2 Contract Law'. This quiz assesses understanding of insurance offers, misrepresentations, unilateral contracts, contracts of adhesion, and the effects of concealment, crucial for legal and insurance professionals.
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- 2.
An insured stated on her application for life insurance that she had never had a heart attack, when in fact she had a series of minor heart attacks last year for which she sought medical attention. Which of the following will explain the reason a death benefit claim is denied?
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Estoppel
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Material misrepresentation
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Waiver
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Utmost Good Faith
Correct Answer
A. Material misrepresentationExplanation
A material misrepresentation will affect whether or not a policy is issued. If the insured had been truthful, it is very likely that the policy would not be issued.Rate this question:
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- 3.
If only one party to an insurance contract has made a legally enforceable promise, what kind of contract is it?
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Conditional
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A legal, but unethical contract
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Unilateral
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Adhesive
Correct Answer
A. UnilateralExplanation
In a unilateral contract, only one of the parties to the contract is legally bound to do anything.Rate this question:
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- 4.
Contracts that are prepared by one party and submitted to the other party on a "take it or leave it" basis are classified as
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Contracts of adhesion
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Unilateral contracts
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Aletory contracts
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Binding Contracts
Correct Answer
A. Contracts of adhesionExplanation
Insurance policies are written by the insurer and submitted to the insured on a "take it or leave it" basis. The insured does not have any input into the contract, but simply adheres to the contract.Rate this question:
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- 5.
The importance of a misrepresentation is determined by
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Whether or not the policy is already issued.
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The materiality of a given concealment.
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The amount of money potentially lost.
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The cost of investigation.
Correct Answer
A. The materiality of a given concealment.Explanation
The materiality of a given concealment determines the importance of a misrepresentationRate this question:
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- 6.
An intentional or unintentional concealment entitles the affected party to which of the following?
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Waiver of concealed conditions
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Subrogation of a contract.
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Rescission of a contract.
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Estoppel.
Correct Answer
A. Rescission of a contract.Explanation
Concealment, whether intentional or unintentional, entitles the affected party to rescind the insurance policy.Rate this question:
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- 7.
Which of the following is NOT correct regarding false statements by a person engaged in the business of insurance?
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Oral statements cannot be considered fraud.
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Omissions of material fact on insurance application are fraud.
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False statements about financial condition of an insurer are unlawful.
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Statements made with the intent to deceive are unlawful.
Correct Answer
A. Oral statements cannot be considered fraud.Explanation
According to Title 18, Sections 1033 & 1034 of the U.S. Code, any oral or written statements by any person engaged in the business of insurance that are false or any omissions of material fact are considered unlawful insurance fraud.Rate this question:
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- 8.
Which of the following is NOT a required element of an insurance contract?
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Acceptance
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Competent parties
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Consideration
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Counteroffer
Correct Answer
A. CounterofferExplanation
Each contract must have the following 4 elements: agreement (offer and acceptance), legal purpose, competent parties, and consideration. Counteroffer, while sometimes used as part of the agreement, is not a required element.Rate this question:
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- 9.
When an insured makes truthful statements on the application for insurance and pays the required premium, it is known as which of the following?
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Consideration
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Legal purpose
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Contract of adhesion
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Acceptance
Correct Answer
A. ConsiderationExplanation
Consideration is something of value that each party gives to the other. The consideration on the part of the insured is the payment of premium and the representations made in the application.Rate this question:
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- 10.
An insured wants to transfer his personal insurance policy to a friend. Under what conditions would this be possible?
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The insured can transfer the policy to his friend and then notify the insurer of the change.
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The insured will need a written consent of the insurer.
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It is impossible to transfer a policy.
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The insured would have to surrender his policy to the insurer, and his friend could then ask to buy it.
Correct Answer
A. The insured will need a written consent of the insurer.Explanation
A personal insurance contract is written between an insurance company and an individual, and the company has a right to decide with whom it will and will not do business. An insured can transfer an insurance contract to another person, but he or she must first obtain the written consent of the insurer.Rate this question:
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- 11.
Insurance contracts have unique characteristics not usually found in other types of contracts. They require each party to rely upon the representations of the other and reasonably expect the other is acting without attempts to conceal or deceive. This is known as
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Utmost good faith.
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Estoppel.
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Parol evidence rule.
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Warranties.
Correct Answer
A. Utmost good faith.Explanation
If it can be shown that either party did not act in "utmost good faith", the other party may void the insurance contract.Rate this question:
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- 12.
Which of the following best describes a misrepresentation?
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A statement that is not guaranteed to be true.
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A statement intended to distract, mislead, or deceive a party to a contract.
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A failure to disclose known facts.
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An intentional omission of material information on the part of the insured.
Correct Answer
A. A statement intended to distract, mislead, or deceive a party to a contract.Explanation
Misrepresentation is a written or oral statement that is intended to distract, mislead, or deceive a party to a contract.Rate this question:
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- 13.
The key factor of representation that allows the injured party to rescind the contract is
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If the representation is false in a material point.
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If the representation is false in an immaterial point.
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Representations are statement’s believed to be true and hold no legal consequences.
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The promise or assurance of the representation.
Correct Answer
A. If the representation is false in a material point.Explanation
If a representation is false in a material point the injured party is entitled to rescind the contract from the time the representation becomes false.Rate this question:
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- 14.
In insurance policies, the insured is not legally bound to any particular action in the insurance contract, but the insurer is legally obligated to pay losses covered by the policy. What contract element does this describe?
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Conditional
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Unilateral
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Unidirectional
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Aleatory
Correct Answer
A. UnilateralExplanation
In a unilateral contract, the insured is not legally bound to do anything. The insurer, however, must pay losses covered by the policy.Rate this question:
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- 15.
The failure to disclose all known facts is called
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Waiver
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Concealment
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Twisting
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Misrepresentation
Correct Answer
A. ConcealmentExplanation
Withholding information that is material to the risk to be insured is concealment and makes a policy voidable.Rate this question:
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- 16.
When may a representation be withdrawn?
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After the policy is issued
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Within the first 2 years of the policy
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Prior to the issuance of the policy
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At any time
Correct Answer
A. Prior to the issuance of the policyExplanation
Once the policy is issued, representations cannot be withdrawn.Rate this question:
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- 17.
Which of the following is an absolute statement to the insurer by the insured upon which the validity of the insurance policy depends?
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Testimony
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Representation
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Warranty
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Application
Correct Answer
A. WarrantyExplanation
A warranty is an absolutely true statement to the insurer by the insured upon which the validity of the insurance policy depends.Rate this question:
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- 18.
Which of the following best describes the concept that the insured pays a small amount of premium for a large amount of risk on the part of the insurance company?
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Subrogation
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Warranty
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Aleatory
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Adhesion
Correct Answer
A. AleatoryExplanation
An insurance contract is an aleatory contract in that it requires a relatively small amount of premium for a large risk.Rate this question:
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- 19.
Fraudulent activities in health care are estimated in billions of dollars annually. This results in
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Stricter underwriting requirements.
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Increase in health care costs for everyone.
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More people going to jail.
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Fewer insurance policies being written.
Correct Answer
A. Increase in health care costs for everyone.Explanation
Although there is no exact figure it is believed that fraudulent activities account for billions of dollars annually in added health care cost nationally. This results in a significant increase in health care costs for everyone. (CIC 1871)Rate this question:
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- 20.
Which of the following would be covered by contract law?
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An employer suing an employee for spreading damaging rumors.
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An insured suing the insurer for failure to provide promised benefits.
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A consumer suing the manufacturer for a defective product.
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Neighbors suing each other for trespassing.
Correct Answer
A. An insured suing the insurer for failure to provide promised benefits.Explanation
Contract law applies to voluntarily undertaken written agreements between parties. The insurer’s failure to provide promised benefits to the insured would be in breach of contract, therefore, covered by contract law. All other scenarios illustrate tort law, which provides a remedy for civil, non-contractual wrong through legal action.Rate this question:
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- 21.
Statements made by an applicant for a life insurance policy that are true to the best of the applicant's knowledge are referred to as
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Warranties
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Information
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Representations
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Facts
Correct Answer
A. RepresentationsExplanation
Representations are statements that the applicant believes to be true, but that are not guaranteed.Rate this question:
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- 22.
Under what conditions would a contract between an insurer and prospective insured be legal?
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The applicant is drunk at the time of application.
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The applicant is a 12-year-old student.
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The applicant is high on methamphetamines at the time of application.
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The applicant has been convicted of a felony.
Correct Answer
A. The applicant has been convicted of a felony.Explanation
When an insurer and insured enter into a contract, both parties must be of legal age and mentally competent. It is legal for a person convicted of a felony to buy an insurance contract. An intoxicated person, however, may not be mentally competent, and a 12-year-old student is considered to be underage in most states.Rate this question:
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- 23.
When an insured makes truthful statements on the application for insurance and pays the required premium, it is known as which of the following?
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Contract of adhesion
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Acceptance
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Consideration
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Legal purpose
Correct Answer
A. ConsiderationExplanation
Consideration is something of value that each party gives to the other. The consideration on the part of the insured is the payment of premium and the representations made in the application.Rate this question:
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- 24.
Insurance policy is
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Any method used to transfer or avoid catastrophic risk.
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A written instrument in which a contract of insurance is set forth.
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A statement of insurable interest.
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A verbal or written agreement between two parties to transfer risk.
Correct Answer
A. A written instrument in which a contract of insurance is set forth.Explanation
An insurance policy must be in writing to be legally binding. As defined by the California Insurance Code, "a policy" is a written instrument in which a contract of insurance is set forth.Rate this question:
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- 25.
An insured wants to transfer his personal insurance policy to a friend. Under what conditions would this be possible?
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It is impossible to transfer a policy.
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The insured would have to surrender his policy to the insurer, and his friend could then ask to buy it.
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The insured can transfer the policy to his friend and then notify the insurer of the change.
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The insured will need a written consent of the insurer.
Correct Answer
A. The insured will need a written consent of the insurer.Explanation
A personal insurance contract is written between an insurance company and an individual, and the company has a right to decide with whom it will and will not do business. An insured can transfer an insurance contract to another person, but he or she must first obtain the written consent of the insurer.Rate this question:
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- 26.
L’s insurer has made all of the decisions regarding the provisions included in her policy. L finds an objectionable provision and wants to negotiate it with the insurer but is not allowed to do so. Her only options are to reject the policy or accept it as is. Which contract feature does this describe?
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Dictatorial
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Adhesion
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Unilateral
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Conditional
Correct Answer
A. AdhesionExplanation
A contract of adhesion is prepared by only the insurer; the insured’s only option is to accept or reject the policy as it is written.Rate this question:
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- 27.
What is an injured party entitled to receive if an intentional concealment is discovered?
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$1,000 for any compensatory damages
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Rescission of the policy
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Nothing. Only intentional concealment is punishable.
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No less than $500 and no more than $5,000 for compensatory damages
Correct Answer
A. Rescission of the policyExplanation
An injured party is entitled to rescind the policy regardless of whether the concealment was intentional or unintentional.Rate this question:
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- 28.
Concealment as defined by the California Insurance Code is
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Statement based on the best knowledge and belief of the person giving the information.
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Neglect on the part of insured to communicate the information waived by the other party.
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Neglect on the part of insured to communicate all information known to be material to the insurer.
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Failure to communicate information that should be known.
Correct Answer
A. Neglect on the part of insured to communicate all information known to be material to the insurer.Explanation
Concealment is a legal term for the intentional withholding of information by the insured that is material to the insurer (i.e. critical in making an underwriting decision). Information that is known or should be known, waived by the other party or immaterial to the risk, does not need to be communicated in a contract.Rate this question:
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- 29.
An insured pays a small $100 premium every month, yet the insurer promises to pay a high percentage of all medical costs. What element of an insurance contract does this describe?
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Aleatory
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Good health
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Adhesion
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Conditional
Correct Answer
A. AleatoryExplanation
In an aleatory contract, unequal amounts are exchanged between payments and benefits. In this instance, the insured receives a large benefit for a small price.Rate this question:
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- 30.
Intentionally misrepresenting or concealing a material fact to induce an insurance company to make a contract is known as
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Misrepresentation.
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Concealment.
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Fraud.
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Avoidance.
Correct Answer
A. Fraud.Explanation
Fraud is the intentional misrepresentation or intentional concealment of a material fact used to induce another party to make or refrain from making a contract, or to deceive or cheat a party.Rate this question:
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- 31.
What other term is used to refer to unintentional torts?
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Peril
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Breach of contract
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Negligence
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Hazard
Correct Answer
A. NegligenceExplanation
an unintentional tort is the result of acting without proper care. This is generally referred to as negligenceRate this question:
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- 32.
The proposed insured makes the premium payment on a new insurance policy. if the insured should dies, the insurer will pay the death benefit to the beneficiary if the policy is approved. this is an example of what kind of contract?
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Adhesion
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Personal
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Unilateral
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Conditional
Correct Answer
A. ConditionalExplanation
A conditional contract requires both the insurer and policy owner to meet certain conditions before the contract can be executed, unlike other types of policies, which put the burden of condition on either the insurer or the policy owner.Rate this question:
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- 33.
The written instrument, in which a contract of insurance is set forth, is known as the
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Insuring cause
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Right of agency
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Policy
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Binding clause
Correct Answer
A. PolicyExplanation
A policy is the written instrument that sets forth the terms and conditions of a contract of insurance. It outlines the coverage provided by the insurance company and the obligations of the insured. The policy serves as a legal document that both parties can refer to in case of any disputes or claims. It is a crucial component of the insurance contract as it defines the scope of coverage and the rights and responsibilities of both the insurer and the insured.Rate this question:
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Apr 07, 2023Quiz Edited by
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Aug 22, 2015Quiz Created by
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