Chapter 2 - The Insurance Contract

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  • 1/7 Questions

    Which of the following describes the principle of indemnity?

    • After a loss, an insured should be restored to approximately the same condition that existed before the loss.
    • Every insured will receive full compensation for all losses in all cases.
    • When property is damaged or destroyed, the insurance company must pay the full replacement cost.
    • In the case of bodily injuries, liability coverage must be available without regard to any policy exclusions.
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About This Quiz

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.

Chapter 2 - The Insurance Contract - Quiz

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  • 2. 

    What is meant by a contract of adhesion?

    • Both parties are required to provide services for the other.

    • One party draws up the contract provisions, and the other party adheres to the terms.

    • The contract can be revoked by any party at any time for any reason.

    • A contract that is formed without any consideration by either party.

    Correct Answer
    A. 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.

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  • 3. 

    What is the consideration that an insurer gives to the insured under an insurance contract?

    • Stated benefits and the dates on which they are to be paid

    • The premium

    • A promise to pay for certain losses if they occur

    • A promise to be conscientious about the customer's situation

    Correct Answer
    A. A promise to pay for certain losses if they occur
    Explanation
    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.

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  • 4. 

    The "ground rules" are described in which part of an insurance policy?

    • Definitions

    • Exclusions

    • Insuring agreement

    • Conditions

    Correct Answer
    A. Conditions
    Explanation
    D is correct. The conditions describe the responsibilities and obligations of the insurer and the insured.

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  • 5. 

    Which of the following is not a requirement for forming a valid contract?

    • Consideration

    • Offer and acceptance

    • Competent parties

    • Signatures of the parties involved

    Correct Answer
    A. Signatures of the parties involved
    Explanation
    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).

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  • 6. 

    Which part of an insurance policy describes what property and/or perils will be covered by the contract?

    • Definitions

    • Exclusions

    • Insuring agreement

    • Conditions

    Correct Answer
    A. Insuring agreement
    Explanation
    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.

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  • 7. 

    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?

    • Unilateral

    • Aleatory

    • Conditional

    • Utmost good faith

    Correct Answer
    A. Aleatory
    Explanation
    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.

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  • Current Version
  • May 03, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • Feb 24, 2009
    Quiz Created by
    Fsspc
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