Chapter 2: Legal Concepts and Contracts

Question 1

What is a contract?

Answer 1

a legally binding agreement between two or more parties where a promise of benefits is exchanged for valuable consideration. An agreement must have both an offer and an acceptance.

Question 2

The purpose of an insurance policy is to ______ (make whole) the insured when a covered loss occurs.

Answer 2

Indemnify

Question 3

What is another name for premium?

Answer 3

Consideration

Question 4

Related to indemnity, _________ is the right of the insurer to assume the rights of the insured and sue the responsible third party for damages inflicted upon the insured. It primarily applies to property and casualty, and seldom to life and health insurance.

Answer 4

Subrogation

Question 5

Four elements must be present in a legal contract

Answer 5

Offer and Acceptance
Consideration
Competent parties
Legal Purpose

Question 6

_______ occurs when a policy is issued.

Answer 6

Acceptance

Question 7

_______ is an exchange of value between two parties of the contract

Answer 7

Consideration

Question 8

TF: Beneficiaries and Insureds (unless the insured is the applicant) are NOT parties to the contract.

Answer 8

True

Question 9

Insurable interest must exist when?

Answer 9

At the time of the application

Question 10

Four basic components of insurance contracts?

Answer 10

The policy face,
Insuring clause,
Conditions, and
Exclusions.

Question 11

The _____ ____, or title page, includes:
The named insured,
Policy number,
Policy issue date,
Policy limits,
Premium amount,
Premium due dates,
A right of examination statement (right to return the policy), and
Signatures of the insurer’s secretary and president

Answer 11

Policy Face

Question 12

The _____ _____is the insurer’s promise to pay covered losses as long as the insured pays premiums and abides by the terms and conditions of the policy.

Answer 12

Insuring Clause

Question 13

The ______ are the rights and responsibilities of all parties, and all policy provisions are found here.

Answer 13

Conditions

Question 14

The ___________ section lists the risks the insurer will not cover.

Answer 14

Exclusions

Question 15

______ _______ requires that an individual have a valid concern for the continuation of the life or well being of the person insured

Answer 15

Insurable Interest

Question 16

The four examples of insurable interest:

Answer 16

The purchaser is also the person insured under the policy
Marriage or blood relationship (e.g., spouses have insurable interest in each other; parents and children have insurable interest in each other)
Business partners
Creditor-debtor relationship

Question 17

In a _____ of ____, there is only one author, the insurance company.

Answer 17

Contract of Adhesion

Question 18

In a ____ _____, there is an unequal exchange of value (payment of benefits is contingent upon the occurance of an uncertain loss).

Answer 18

Aleatory Contract

Question 19

A ____ ____ is a contract between an individual and the insurer.

Answer 19

Personal contract

Question 20

TF: Life insurance is not considered a personal contract because the policyholder has no stake in the risk assumed by the insurer.

Answer 20

True

Question 21

a ____ _____ is a one sided contract (only 1 promiser)

Answer 21

Unilateral Contract

Question 22

A _____ _____ means all parties must meet certain conditions when a loss occurs in order for the contract to be legally enforceable (if-then contract)

Answer 22

conditional contract

Question 23

________ are statements that are guaranteed to be true and are part of the legal contract (Breach of _______ is grounds for voiding an insurance contract)

Answer 23

Warranties, Warranty

Question 24

_______ = statements made by insured, true to the best of their knowledge

Answer 24

Representations

Question 25

_______ = intentional lies made by the insured.

Answer 25

Misrepresentations

Question 26

All parties to a contract must be of a legal age, mentally capable of understanding the terms of the contract, and not influenced by drugs or alcohol. Which of the following elements of a legal contract is described?
Select one:
a. Competent parties
b. Consideration
c. Agreement
d. Legal purpose

Answer 26

A

Question 27

All of the following statements are true regarding warranties, EXCEPT:
Select one:
a. Warranties are statements that are guaranteed to be true in every respect.
b. Insurance companies are held to the principle of warranties.
c. Insureds are held to the principle of warranties.
d. Breach of warranty is grounds for voiding an insurance contract.

Answer 27

C

Question 28

Joyce applies for a health insurance policy. When the agent delivers the policy to Joyce, an additional premium is required to account for Joyce’s medical conditions. Joyce must agree to pay the additional premium before the policy is effective. The insurer has made:
Select one:
a. An invitation to offer
b. Acceptance
c. A counter-offer
d. Consideration

Answer 28

C

Question 29

Which of the following terms best describes the applicant’s statements on an insurance application?
Select one:
a. Indemnities
b. Adhesion
c. Representations
d. Warranties

Answer 29

C

Question 30

All of the following are part of the consideration element of an insurance contract, EXCEPT:
Select one:
a. The insurer’s promise to pay a covered loss
b. The applicant’s statements on the application
c. The initial premium paid by the applicant
d. The applicant’s promises

Answer 30

D

Question 31

In order to be valid, a contract must have:
Select one:
a. Legal purpose
b. Public purpose
c. Government purpose
d. Private purpose

Answer 31

A

Question 32

What are the basic elements of a legal contract?
Select one:
a. Offer, acceptance, consideration, competent parties and legal purpose
b. Acceptance and consideration
c. Policy face, insuring clause and adhesion
d. Competent parties, acceptance and reasonable expectations

Answer 32

A

Question 33

Insurance contracts are conditional. Which of the following would be a characteristic of a conditional contract?

Select one:
a. If a loss occurs, then the insurance company will pay benefits.
b. Only the insurance company makes legally enforceable promises in the contract.
c. The contract is a “take it or leave it” contract.
d. There is an unequal exchange of value with the contract.

Answer 33

A

Question 34

Insurable interest requires that an individual have a valid concern for the well being of the person insured. In a life policy insurable interest can be present in all of the following, EXCEPT:

Select one:
a. Business partners
b. Second cousins
c. Spouse or parent
d. Creditors

Answer 34

B

Question 35

What type contract is said to be, if…then?
Select one:
a. Personal
b. Conditional
c. Adhesion
d. Unilateral

Answer 35

B