Chapter 2 - The Insurance Contract - Quiz, Flashcards & Trivia

1. 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.

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.

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.

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.

B is correct. Insurance policies are contracts of adhesion because the insurance company drafts the policy provisions and the insuredadheres to the policy 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.

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

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.

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.

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

Definitions

Exclusions

Insuring agreement

Conditions

D is correct. The conditions describe the responsibilities and obligations of the insurer and the insured.

Explanation

D is correct. The conditions describe the responsibilities and obligations of the insurer and the insured.

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

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).

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).

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

Definitions

Exclusions

Insuring agreement

Conditions

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.

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.

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

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.

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.