Chapter 4 Flashcards
An insurance binder is best described as:
A) a bound collection of rules, rates, and forms.
B) a rate manual supplied by one of the rating organizations.
C) a temporary agreement to pay a claim pending final settlement.
D) temporary, short-term evidence of coverage.
Answer: D
An insurance binder is an agreement, usually issued in writing but occasionally issued orally, by an agent or an insurer providing temporary, short-term coverage until a policy can be issued. The binder is accepted by the insured with the understanding that it provides the same coverage as the policy form that the company will issue. Typically, binders are written by an insurance company representative who does not have the authority to issue a policy or by an agent or broker awaiting information before deciding whether to accept an application. Some state statutes limit the duration of oral binders.
Which one of the following requires that insurance applicants be advised that a consumer report may be requested on them and the scope of any investigation resulting from the application?
A) Freedom of Privacy Act.
B) Financial Freedom Act.
C) Fair Credit Reporting Act.
D) Fair Disclosure Act.
Answer: C
The federal Fair Credit Reporting Act requires that insurance applicants be advised that a consumer report may be requested on them and the scope of any investigation resulting from the application. If coverage is denied or restricted based solely on the report, the applicant must be supplied with the name and address of the reporting company that collected the information. The applicant may obtain from this company a copy of the information in its files and may dispute any information in the report. The reporting company then must reinvestigate and change its report, if necessary.
All of the following consumer characteristics are considered in a consumer report regulated by the Fair Credit Reporting Act EXCEPT:
A) creditworthiness.
B) credit standing.
C) character.
D) occupation.
Answer: D
A consumer report is any written, oral, or other communication of information by a consumer reporting agency regulated under the federal Fair Credit Reporting Act that bears on a consumer’s creditworthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living.
Which of the following is an example of adverse selection?
A) An individual, who has a new, healthy baby, purchases medical insurance.
B) An individual with a terminal illness purchases health insurance.
C) An individual buys a new house and the mortgage company requires homeowner insurance.
D) An individual with a new car purchases collision coverage.
Answer: B
Adverse selection is the tendency of individuals whose exposure to loss is higher than average to purchase or continue insurance to a greater extent than those whose exposure is less than average. An individual with a terminal illness is more likely to need health insurance than a healthy individual.
What is the cost of a unit of insurance?
A) Loss.
B) Reserve.
C) Rate.
D) Premium.
Answer: C
The rate is the amount of dollars and cents charged for a particular amount of insurance. For example, the rate charged for a fire policy might be $.50 per $100 of value. If the insured wishes to cover property valued at $100,000, the annual premium would be $500 ($.50 × 1,000 hundreds = $500). Rates are based on different factors, such as building construction and location for fire insurance, and use and type of car for auto insurance.
Joan and Steven have applied for automobile insurance with ABC Auto Insurers. When the agent asks if anyone else drives the car, they do not tell him that their neighbor, George, who lost his drivers license due to drunk driving, uses one of their cars on a regular basis to drive to work. Once the company found out about George after he had an accident, they denied the claim, citing what legal concept as the reason?
A) Breach of warranty.
B) Fraud.
C) Misrepresentation.
D) Concealment.
Answer: B
Fraud is an intentional misrepresentation of material facts. Joan and Steve intentionally lied that no one else used the car. The normal use of an insured car would be considered material to the application facts, and therefore fraud was committed. The company can rescind the policy, deny the claim, and even pursue legal action against Joan and Steve because fraud is a felony.
Joan and Steven have applied for automobile insurance with ABC Auto Insurers. They do not tell the agent that their neighbor, George, who lost his drivers license due to drunk driving, uses one of their cars on a regular basis to drive to work. Once the company found out about George after he had an accident, they denied the claim, citing what legal concept as the reason?
A) Misrepresentation.
B) Breach of warranty.
C) Concealment.
D) Fraud.
Answer: C
Concealment is the failure to disclose accurate information voluntarily. This includes material facts that may adversely affect the underwriting of the application. The agent would not normally ask if a neighbor regularly uses the car, so this material fact is extraordinary and grounds for cancellation or denying the claim.
Knowingly lying on an application in order to obtain coverage would be an example of:
A) recession.
B) fraud.
C) concealment.
D) misrepresentation.
Answer: B
Fraud is an act of deceit or misrepresentation of a material fact made knowingly, with the intention of having another person rely on that fact and consequently suffer a financial hardship. Concealment is the nondisclosure of a material fact by an applicant for insurance. If the concealment was intentional, it is grounds to void the insurance policy. Misrepresentation is any statement made by the applicant that is not true. It may or may not be made intentionally. If the misrepresentation is made with the intent to deceive and it involves a material fact, fraud has occurred.
Which of the following terms describes an insured’s oral or written statement that becomes part of an insurance contract and can void a policy if they are breached?
A) Waiver.
B) Misrepresentation.
C) Warranty.
D) Representation.
Answer: C
A warranty is a specific agreement between the insured and the insurer that becomes a part of the insurance policy. A breach of warranty can void the policy.
Statements made on an application that are guaranteed to be true are:
A) misrepresentations.
B) warranties.
C) representations.
D) promises.
Answer: B
A warranty is a statement guaranteed to be true. A warranty may also include a promise by the insured that is stated in the insurance policy. A breach of a warranty, meaning that the statement is not correct, may give grounds for voidance of a policy.
Joan and Steven have applied for automobile insurance with ABC Auto Insurers. The ABC agent asked Joan and Steven if their resident 18-year-old son, Henry, has had any moving traffic violations in the past 2 years. Both answer no. The fact is, Henry had 4 speeding tickets, but never told his parents. What legal concept does this scenario describe?
A) Misrepresentation.
B) Warranty.
C) Fraud.
D) Representation.
Answer: D
Joan and Steve made statements that they believed to be true. This was a representation, a factual statement on an application that is made to the best of one’s knowledge.
Joan and Steven have applied for automobile insurance with ABC Auto Insurers. The ABC agent asked Joan and Steven if their resident 18-year-old son, Henry, has had any moving traffic violations in the past 2 years. Both answer no. The fact is, Henry had 4 speeding tickets, but never told his parents. Once the company found out about Henry’s record, they voided the policy citing misrepresentation as the reason. Did Joan and Steve misrepresent Henry’s driving record?
A) Yes. Though not fraudulent, the misstatement was material.
B) No. They must have known about the tickets, but the company could not prove it.
C) No. They answered to the best of their knowledge.
D) No. The representation was not material.
Answer: A
Joan and Steve made statements that they believed to be true. However, voidable misrepresentations involve a material fact that turns out to be false. A material fact is a statement that may have caused the insurance company to reject the application or issue the policy with substantially different terms.
A warranty is a statement made by the applicant regarding the risk to be insured. Which of the following statements is NOT true about warranties?
A) A warranty is guaranteed to be true.
B) A warranty must refer to a material fact.
C) A policy can be cancelled if the warranty is false.
D) A warranty is part of the contract.
Answer: B
A warranty is an answer to a specific question and literally becomes part of the insurance contract. A breach of warranty, meaning that the answer is not correct, may be grounds for cancellation by the company. However, the materiality of the statement is not required in order to cancel the policy.
In insurance, a waiver is best considered as:
A) the voluntary surrender of a known right.
B) a warranty.
C) a material representation.
D) the suspension of a policy right.
Answer: A
A waiver is the voluntary relinquishment of a known right. It may be intentional or unintentional. An unintentional waiver, when relied upon by another party, can result in the waiving party being estopped from reasserting a right it previously held.
In legal terms, voluntary relinquishment of a known right is called:
A) a waiver.
B) a concealment.
C) a warranty.
D) a withdrawal.
Answer: A
A waiver is a voluntary relinquishment of a known right. If an insurer waives a legal right under an insurance policy, it cannot deny a future claim on the basis of a violation of that right. This is known as estoppel, because the insurer is estopped from denying the claim.
