Question 1

Exemption clauses in insurance contracts are strictly interpreted by the courts.

Accepted Answer

This is because insurance is considered a contract of utmost good faith and any ambiguity or uncertainty in the wording of an exemption clause is usually resolved in favor of the insured, who is considered to be the weaker party in the contract.

Question 2

Which of the following is NOT a defence available to a guarantor when an action is brought by the creditor to have the guarantor held liable for the debt of the principal debtor?

Accepted Answer

Res ipsa loquitur is not a defence that can be used by a guarantor in an action brought by the creditor. It is a legal principle that can be used in certain negligence cases to establish a presumption of negligence on the part of the defendant. The other options listed could potentially be used as defences by a guarantor.

Question 3

Where certain terms are changed in a policy,the document that records the changes is not an endorsement.

Accepted Answer

An endorsement is the document that records changes, amendments, or additions to the existing terms and conditions of an insurance policy.

Question 4

The concept of subrogation applies to the liability of a guarantor under a loan guarantee.Under the concept of subrogation,

Accepted Answer

Subrogation means that the guarantor who compensates the lender takes over the right of the lender to sue the borrower. This means that the guarantor steps into the shoes of the lender and has the same rights and remedies as the lender would have had against the borrower. Therefore, option B is correct. Option A is incorrect as it refers to the realization of security and not subrogation. Option C is partially correct, as the lender can sue the guarantor in case of default, but it does not explain the concept of subrogation. Option D is incorrect as it is referring to the natural course of recovery, and not subrogation. Therefore, the correct option is B.

Question 5

An offer to purchase life insurance is accepted when the agent provides the applicant with an insurance binder.

Accepted Answer

An offer to purchase life insurance is accepted when the insurer issues a policy after reviewing the applicant's underwriting information and determining their insurability. An insurance binder is a temporary document that provides proof of insurance until the actual policy is issued.

Question 6

Subrogation allows an insurance company to recover its loss from the person(s)responsible without having to pay the insurance proceeds to the insured.

Accepted Answer

Subrogation allows an insurance company to step into the shoes of the insured to recover the amount of a claim paid by the insurance company to the insured from the person(s) responsible for causing the loss. The insurance proceeds are paid to the insured first, and then the insurance company seeks reimbursement.

Question 7

A comprehensive general insurance policy is one that covers most types of damage or loss to an insured's property as well as providing third party liability.

Accepted Answer

A comprehensive general insurance policy typically covers a wide range of potential damages or losses to the insured's property, as well as providing liability coverage for third parties who may be affected by those damages or losses.

Question 8

While Stella was in Hong Kong,a loan came due that she had guaranteed.The creditor,a kindly old man,extended the due date on the loan for thirty days,interest free.Did this action by the creditor discharge Stella from her obligation?

Accepted Answer

The creditor's action of extending the due date by 30 days, interest-free, did not materially alter the risk to Stella's detriment as a guarantor. Therefore, she is still obligated to pay the loan, and the creditor's action did not discharge her from her obligation.

Question 9

In May,farmer Smith sold one of his tractors to farmer Jones for $26 000.Smith received $6000 down and a 7 percent note payable (for $20 000)to be paid on October 15th.In need of cash,farmer Smith brought the note to his bank for discounting.The bank gave cash less 5 percent for the note,whereas farmer Smith endorsed the note in favour of the bank.Farmer Smith performed an act of

Accepted Answer

The answer of In May,farmer Smith sold one of his...

Question 10

Uncle Ralph told Jody's parents,"Supply Jody with what she needs to get off to a good start at university and I'll take care of all the bills." Legally,we identify Uncle Ralph as

Accepted Answer

Uncle Ralph is making a promise of indemnity, which means he is agreeing to financially protect or compensate Jody in case of any loss or damage related to her university education expenses. He is not necessarily an educational guarantor or sponsor, and he is not providing a guaranteed education.

Question 11

A building owned by X Company is insured for $100 000,but the insurance contract contains an 80 percent co-insurance clause.The building is damaged by fire to the amount of $20 000.The depreciated replacement value of the insured property is $250 000.The insurance company will then pay

Accepted Answer

The answer of A building owned by X Company is...

Question 12

An insurance contract is one that is usually said to require utmost good faith on the part of the parties.

Accepted Answer

This statement is true. An insurance contract is a type of contract where the insured party is required to disclose all relevant information about the risk being insured to the insurer. The insurer, in turn, is required to act in good faith and fully disclose all terms and conditions of the policy. This concept is known as the principle of utmost good faith or uberrimae fidei.

Question 13

James was the guarantor for a loan Edward had at the bank.Edward had also pledged a coin collection as security for the loan.The loan came in default,so James made the remaining payments.Who gets the coin collection?

Accepted Answer

As the guarantor, James has the right of subrogation, which means he can step into Edward's shoes and become the creditor, with the same legal rights as the bank. Therefore, he has the right to obtain the coin collection as security for his payments towards the loan. The bank does not automatically get the coin collection, as it was pledged as security for the loan in general, not specifically for the bank.

Question 14

Co-insurance is a technique used by insurance companies to

Accepted Answer

Co-insurance requires policy holders to pay a certain percentage (usually 20-30%) of the cost of medical services, which can discourage overutilization of services and prevent policy holders from taking advantage of the system.

Question 15

The act of forbearance of some deed at the request of the guarantor is usually consideration to the guarantor in a contract of guarantee.

Accepted Answer

The act of forbearance can be a form of consideration in a contract of guarantee, and it is usually provided to the guarantor at their request.

Question 16

A guarantee occurs when a third party agrees to pay off a loan made to another.

Accepted Answer

The answer of A guarantee occurs when a third party...

Question 17

A tenant carelessly drops a candle,and the resulting fire destroys the landlord's premises.The landlord's loss is fully covered under the landlord's fire insurance policy,and the insurance company compensates the landlord for the loss.In these circumstances,

Accepted Answer

The tenant will be liable to compensate the insurer because the principle of subrogation allows the insurer to step into the shoes of the insured (landlord) and seek compensation from the party (tenant) responsible for the loss.

Question 18

Which of the following does NOT affect the enforceability of a guarantee?

Accepted Answer

The death of the primary debtor does not affect the enforceability of a guarantee as the guarantor's obligation is to pay the debt if the primary debtor fails to do so. The other options, such as lack of consideration or the release of security or other guarantors, may affect the enforceability of a guarantee as they can impact the guarantor's rights and obligations. The absence of a note or memorandum signed by the guarantor can also be a factor as it can make it difficult to prove the existence and terms of the guarantee.

Question 19

Nancy missed a payment on her signature loan to Pacific Bank.The bank threatened to bring her to court unless she could pledge some assets or find someone to be a guarantor.Nancy's friend Lynn agreed to sign as guarantor provided Nancy wouldn't tell Lynn's husband.In response to Lynn's promise,what is the necessary consideration for the guarantee?

Accepted Answer

The necessary consideration for Lynn's guarantee is the bank's act of forbearance, which means the bank is refraining from taking legal action against Nancy as long as Lynn guarantees the loan. Nancy not telling Lynn's husband and Lynn signing under seal are not part of the consideration for the guarantee. Nancy's endearment to a friend is not a legal consideration.

Question 20

Key Bank would not give Tony a business loan without a suitable guarantor.So Tony's father signed as a guarantor.He must make the loan payments when

Accepted Answer

A guarantor is legally responsible for making loan payments if the primary borrower, in this case Tony, defaults on the loan. Therefore, Tony's father would need to make the loan payments if Tony defaults, regardless of any other notifications or requests.

Quiz 16: Insurance and Guarantee