Chapter 2 - The Insurance Contract
A contract is a legal agreement between two or more competent parties that promises a certain performance in exchange for a certain consideration. When an insurance company agrees to pay for an insured's losses in exchange for a certain premium, the two parties have entered into a contract. Although a contract of insurance can be oral, it is usually written in the form of an insurance policy.
- 1.
Which of the following is not a requirement for forming a valid contract?
- A.
Consideration
- B.
Offer and acceptance
- C.
Competent parties
- D.
Signatures of the parties involved
Correct Answer
D. Signatures of the parties involvedExplanation
D is correct. The four requirements for forming a valid contract are competent parties, a legal purpose, offer and acceptance, and consideration. Oral contracts are valid. Contracts do not have to be written or include signatures (although it is a good idea to do so).Rate this question:
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- 2.
What is meant by a contract of adhesion?
- A.
Both parties are required to provide services for the other.
- B.
One party draws up the contract provisions, and the other party adheres to the terms.
- C.
The contract can be revoked by any party at any time for any reason.
- D.
A contract that is formed without any consideration by either party.
Correct Answer
B. One party draws up the contract provisions, and the other party adheres to the terms.Explanation
B is correct. Insurance policies are contracts of adhesion because the insurance company drafts the policy provisions and the insuredadheres to the policy terms.Rate this question:
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- 3.
Which of the following describes the principle of indemnity?
- A.
After a loss, an insured should be restored to approximately the same condition that existed before the loss.
- B.
Every insured will receive full compensation for all losses in all cases.
- C.
When property is damaged or destroyed, the insurance company must pay the full replacement cost.
- D.
In the case of bodily injuries, liability coverage must be available without regard to any policy exclusions.
Correct Answer
A. After a loss, an insured should be restored to approximately the same condition that existed before the loss.Explanation
A is correct. The principle of indemnity states that when a loss occurs, an individual should be restored to the approximate financial condition he or she was in before the loss.Rate this question:
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- 4.
Which part of an insurance policy describes what property and/or perils will be covered by the contract?
- A.
Definitions
- B.
Exclusions
- C.
Insuring agreement
- D.
Conditions
Correct Answer
C. Insuring agreementExplanation
C is correct. The insuring agreements state what types of losses the insured will be indemnified for. This section also describes the type of property covered and the perils against which it is insured.Rate this question:
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- 5.
What is the consideration that an insurer gives to the insured under an insurance contract?
- A.
Stated benefits and the dates on which they are to be paid
- B.
The premium
- C.
A promise to pay for certain losses if they occur
- D.
A promise to be conscientious about the customer's situation
Correct Answer
C. A promise to pay for certain losses if they occurExplanation
C is correct. Consideration is the thing of value exchanged under a contract. The insured's consideration is the premium; in return, the insurer promises to pay for certain losses if they occur.Rate this question:
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- 6.
Under an insurance contract, the uncertainty of events can lead to unequal financial results for the two parties. This means that insurance is what kind of contract?
- A.
Unilateral
- B.
Aleatory
- C.
Conditional
- D.
Utmost good faith
Correct Answer
B. AleatoryExplanation
B is correct. If no loss occurs, the insured will receive no benefits although he or she paid premiums, but if a large loss occurs, the insured might receive benefits that far exceed the premium payments.Rate this question:
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- 7.
The "ground rules" are described in which part of an insurance policy?
- A.
Definitions
- B.
Exclusions
- C.
Insuring agreement
- D.
Conditions
Correct Answer
D. ConditionsExplanation
D is correct. The conditions describe the responsibilities and obligations of the insurer and the insured.Rate this question:
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May 03, 2023Quiz Edited by
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Feb 24, 2009Quiz Created by
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