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General Concepts

Contract law, insurable interest, agent authority, and what makes a risk insurable. These ideas show up all over the exam, so it pays to know them cold.

Study questions and answers

Try each question first, then tap to check your answer.

1. Which element of an insurance contract is satisfied by the applicant's premium payment and the statements made on the application?

  1. Offer
  2. Acceptance
  3. Consideration
  4. Competent parties
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C. Consideration
Consideration is the value each party gives. The applicant's consideration is the premium plus the statements on the application; the insurer's is its promise to pay.

2. A contract in which one party writes the terms and the other party can only accept or reject them as written is a contract of:

  1. Adhesion
  2. Indemnity
  3. Utmost good faith
  4. Aleatory nature
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A. Adhesion
Because the insurer drafts the policy, any ambiguity is interpreted in favor of the insured.

3. Insurance contracts are considered aleatory because:

  1. Both parties make legally enforceable promises
  2. The values exchanged may be unequal
  3. Ambiguities are interpreted in favor of the insured
  4. The insurer must act in good faith
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B. The values exchanged may be unequal
An aleatory contract involves an unequal exchange. A small premium may result in a large benefit, or no benefit at all.

4. In an insurance contract, only the insurer makes a legally enforceable promise. This makes the contract:

  1. Bilateral
  2. Conditional
  3. Unilateral
  4. Voidable
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C. Unilateral
The insured is not legally obligated to keep paying premiums, but the insurer is obligated to pay covered claims while the policy is in force.

5. Statements on an application that are true to the best of the applicant's knowledge are called:

  1. Warranties
  2. Representations
  3. Concealments
  4. Stipulations
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B. Representations
Representations only need to be true to the best of the applicant's knowledge. Only a material misrepresentation can void the contract. Warranties are guaranteed to be true.

6. An applicant knowingly fails to disclose a material fact on an application. This is called:

  1. Misrepresentation
  2. Waiver
  3. Estoppel
  4. Concealment
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D. Concealment
Concealment is the intentional withholding of a known material fact. It can give the insurer grounds to void the contract.

7. Authority that is not written into the agent's contract but is needed for the agent to carry out assigned duties is:

  1. Express authority
  2. Apparent authority
  3. Implied authority
  4. Fiduciary authority
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C. Implied authority
Implied authority is the unwritten authority needed to perform the duties granted by express authority, such as collecting a premium at delivery.

8. For life insurance, insurable interest must exist:

  1. At the time of death only
  2. Throughout the life of the policy
  3. At both application and death
  4. At the time of application only
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D. At the time of application only
Insurable interest only has to exist when the policy is applied for. It does not have to exist at the time of death.

9. Which of the following is a characteristic of an insurable risk?

  1. Losses must be catastrophic
  2. The loss must be accidental and unintentional
  3. The insured must control whether a loss occurs
  4. The risk must be speculative
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B. The loss must be accidental and unintentional
Insurable risks are pure risks with losses that are accidental, measurable, and not catastrophic to the insurer. Speculative risks are not insurable.

10. An agent who collects premiums from clients and holds them before sending them to the insurer acts in a ____ capacity.

  1. Fiduciary
  2. Underwriting
  3. Brokerage
  4. Captive
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A. Fiduciary
Agents handle premiums in a position of trust. Mixing premium money with personal funds (commingling) is prohibited.
Next topic: Policy Types Full life practice test