Deck 27: Insurance Law

Question 1

Property insurance policies are indemnity contracts.

Answer 1

True
Explanation: Property insurance policies are indemnity contracts which means the insurance company must reimburse the insured individual for actual harm.

Question 2

Guy takes out a property insurance policy on his home,buying the policy from Ace Insurance.Guy's home was damaged when a contractor,building an addition to his neighbor's home,negligently swung a crane through Guy's dining room wall.Ace Insurance may force Guy to seek compensation from the contractor.

Answer 2

False
Explanation: Ace Insurance cannot force Guy to seek compensation but if it has the right of subrogation,then it may sue the contractor after it has paid Guy the insurance amount.

Question 3

Punitive damages are allowed when the insurer's breach of contract consisted of a good faith but erroneous denial of the insured's claim.

Answer 3

False
Explanation: Some states have statutes providing that insureds who successfully sue insurers are entitled to awards of attorney's fees.Punitive damages are not allowed,however,when the insurer's breach of contract consisted of a good faith (though erroneous)denial of the insured's claim.

Question 4

Under modern rules in all states,the insured's breach of warranty automatically relieves the insurer of the duty to perform,regardless of whether the breached warranty was actually material to the insurer's risk.

Question 5

As a general rule,liability insurance policies furnish the insured with coverage for his negligence and his intentional acts of a wrongful nature.

Question 6

Generally in business liability policies,if the insured is liable on respondeat superior grounds,then he will be covered by the policy.

Question 7

The insured is not entitled to recover under a property insurance policy if she had an insurable interest at the time the policy was purchased but did not have an insurable interest the time the loss occurred.

Question 8

Consideration on an insurance contract is the premium paid by the individual being insured and the promise by the insurer for future coverage in the event of a peril.

Question 9

The term for the person who receives insurance proceeds paid to them is the beneficiary.

Question 10

Most property insurance policies are open policies that allow the insured to recover the fair market value of the property,subject to the limits in the policy.

Question 11

If the insured misrepresented material facts in the application for insurance,the insurance policy becomes void.

Question 12

Courts will always grant reformation of a written insurance policy in order to make it conform to the coverage assumptions of a unilaterally mistaken insured.

Question 13

The insurance relationship is contractual.

Question 14

The damages recoverable by an insured for the insurer's breach of the insurance contract cannot exceed the dollar limits set forth in the insurance contract.

Question 15

When insurance policy provisions must be interpreted,a court will generally interpret them as they would be understood by an average person.

Question 16

A homeowner's policy typically will cover damage to real property and to personal property by a peril.

Question 17

Professional insurance is also called malpractice insurance.

Question 18

An insurance contract,though transferring existing risk,is a legally permissible and valid contract.

Question 19

If an insurance applicant sustains losses after submission of the application but before acceptance by the insurer,the rule in most states is that the insurer must nevertheless cover the losses.

Question 20

Under insurance policies (except life insurance),the insured and the beneficiary may be the same person.

Question 21

Which of the following is true of insurance contracts?

A)Some statutes require them to be in writing.
B)Contracts for property insurance are usually within the statute of frauds.
C)Once formed,insurance contracts cannot be amended or reformed.
D)Insurance contracts are governed by federal laws.

Question 22

Sarah entered into an auto insurance contract with ABC Insurance (ABC).On the application,Sarah stated that she had never been in an accident.In truth,Sarah had been in seven accidents in the last ten years.As a result,this contract is:

A)illegal.
B)voidable at ABC's option.
C)voidable at either Sarah's or ABC's option.
D)void.

Question 23

Since the relationship between the insurer and the insured is contractual in nature,the parties must fulfill all elements of:

A)a quasi-contract.
B)an indemnity.
C)a wager.
D)a binding contract.

Question 24

With an insurance contract who typically is the party that makes the offer?

A)The insurance company
B)The party seeking coverage
C)Neither,there is no initial offer
D)The government

Question 25

What is the express term in the insurance policy which serves as the conditions on which an insurer's liability is based?

A)Guarantee
B)Warranty
C)Surety
D)Representation

Question 26

When a party with the power to terminate an insurance policy exercises that power,a(n)________ has occurred.

A)lapse
B)cancellation
C)reformation
D)rescission

Question 27

Mary submitted an application for life insurance and named her husband Bob as the beneficiary of the $250,000 death benefit that would pay out after her death.Before the application was approved,Mary passed away.Does Bob receive the $250,000?

A)Yes,because Mary had submitted the application already.
B)Yes,but only if Mary was pre-approved for the life insurance policy.
C)Yes,but only if the policy was a guaranteed-issue life insurance policy.
D)No.If an insurance applicant sustains losses after submission of the application but before it is accepted,the insured must bear the losses.

Question 28

What does it mean when reformation occurs?

A)An insurer and a policy holder renegotiate the terms of an insurance contract because the risk of providing insurance to the policyholder has changed.
B)A court changes a written insurance policy when there was a mutual mistake or fraud on the part of the insurer so it conforms to the parties' supposed actual agreement
C)An insurance policy holder changes the beneficiary on an insurance policy and the insurer revises the policy contract.
D)An insurance contract is voluntarily reformed or modified by an insurer because of a unilateral mistake on the part of the insured.

Question 29

How does an insurance company fully perform on an insurance contract?

A)Pay out the amount specified in the contract when an event occurs
B)Accept the insured premium payment
C)Notify the State of the contract
D)File the insurance contract with the court

Question 30

A means by which insurance law separates insurance contracts from wagering contracts is the typical requirement that the party who purchases a policy of property or life insurance must possess a(n)________ in the property or life being insured.

A)warranty
B)codicil
C)reformation
D)insurable interest

Question 31

Fred's homeowner's insurance policy requires Fred to have a working sprinkler system.Fred's sprinkler system breaks.Before he can get it fixed,there is a fire.Who is responsible for Fred's losses?

A)Fred
B)The insurer
C)It depends upon whether Fred was at fault for the sprinkler breaking.
D)Each pays 50-50 because Fred must share liability since he failed to follow policy conditions.

Question 32

Which of the following agreements provides temporary insurance coverage until the time the insurer decides to accept or reject the applicant's application?

A)Co-insurance agreement
B)Binder agreement
C)Indemnity agreement
D)Guaranty agreement

Question 33

Generally courts interpret ambiguities in the insurance clauses against the:

A)insurer.
B)insured.
C)owner.
D)lesser.

Question 34

When does an insurer's contractual obligations to the insured commence?

A)When the insurance contract is drafted.
B)When the insurance application is dispatched.
C)When the insured receives the insurance application.
D)When the insurer accepts the insurance contract.

Question 35

Caroline is buying homeowner's insurance.She knows it will take time between the submission of her application and the application's approval but she wants to get covered immediately.What does she need?

A)A binder
B)A short-term indemnity policy
C)Interim home damage coverage
D)Nothing,she is always covered as soon as her application is submitted.

Question 36

Kyle buys life insurance and specifies his wife Ann will receive the death benefit if Kyle passes away.Ann is the ________.

A)policyholder
B)insured
C)co-insurer
D)beneficiary

Question 37

Which of the following terminates the insurer's duty to perform under the policy?

A)The insured's breach of warranty
B)An increase in the value of the insured property
C)A decrease in the value of the insured property
D)A case of innocent misrepresentation by the insured

Question 38

The difference between a wagering contract and an insurance contract is that the insurance contract:

A)is commercial in nature.
B)transfers an existing risk.
C)does not contain an insurable interest.
D)is between two interested parties.

Question 39

The person who receives the insurance proceeds in a life insurance is the:

A)insurer.
B)insured.
C)trustee.
D)beneficiary.

Question 40

Which of the following is a sufficient condition for courts to allow reformation in a written insurance policy?

A)The insurer's misunderstanding about a contract term
B)The insured's misunderstanding about a contract term
C)A fraud committed by the insurer
D)An increase in the market value of the insured property

Question 41

Automobile insurance is what type of insurance?

A)Insurance for personal property
B)Corporate insurance protection
C)Professional insurance
D)Insurance rider

Question 42

In 2001,Tom purchased a home with a fair market value of $100,000.At the same time,he also purchased a valued policy with a face amount of $100,000 to insure the house against various risks,including fire.In 2002,the house was destroyed by fire.The fair market value of the house at the time of the fire was $150,000.What is Tom entitled to under the policy?

A)$100,000
B)$150,000
C)$250,000
D)Nothing

Question 43

The insurable interest requirement with regard to property insurance:

A)may be waived by a writing signed by the insured and insurer.
B)may be satisfied by a person other than the legal owner of the property.
C)must be satisfied at the time the policy is issued.
D)must be satisfied by the insured's legal title to the property at the time of loss.

Question 44

Which of the following is true of the coinsurance feature of property insurance?

A)It prevents the insured from insuring for a minimal amount and recovering in full for such losses.
B)It precludes the insured from insuring for less than the coinsurance percentage.
C)It is an additional refinement of the insurable interest requirement.
D)It helps the insured to recover full damages for any loss.

Question 45

To recover under a property insurance policy,an insurable interest must exist:

A)When the policy is purchased and at the time of loss
B)When the policy is purchased,but not at the time of loss
C)Not when the policy is purchased but at the time of loss.
D)Neither when the policy is purchased nor at the time of loss.

Question 46

West is seeking to collect on a property insurance policy covering certain described property which was destroyed.The insurer has denied recovery based upon West's alleged lack of an insurable interest in the property.In which of the situations described below will the insurance company prevail?

A)West is not the owner of the insured property but a long-term lessee.
B)The insured property belongs to someone else,but West holds the mortgage on it.
C)The insured property does not belong to West,but instead to a corporation which he controls.
D)The property has been willed to West's father for life,and upon his father's death,to West as the remainderman.

Question 47

A clause that apportions losses among insurance companies when a policyholder purchases insurance from more than one insurer is called a ________.

A)co-insurance clause
B)subrogation clause
C)indemnity clause
D)pro rata clause

Question 48

Elvisco,Inc.owns the building that houses its business.Elvisco obtained a property insurance policy on the building from Graceland Mutual Insurance Co.The policy,whose face amount was $200,000,contained a 75 percent coinsurance clause.The building had a fair market value of $400,000.While the policy was in effect,the covered peril of fire caused $90,000 of damage to the building.Elvisco has filed a claim and proof of loss with Graceland Mutual.How much is Graceland Mutual obligated to pay Elvisco?

A)$90,000
B)$60,000
C)$30,000
D)Nothing

Question 49

Which of the following characterizes a coinsurance clause with regard to property insurance?

A)It prohibits the insured from obtaining an amount of insurance which would be less than the coinsurance percentage multiplied by the fair market value of the property.
B)It encourages the insured to be more careful in preventing losses since the insured is always at least partially at risk when a loss occurs.
C)It permits the insured to receive an amount in excess of the policy amount when there has been a total loss and the insured carried the required coverage under the coinsurance clause.
D)It will result in the insured sharing in partial losses when the insured has failed to carry the required coverage under the coinsurance clause.

Question 50

Property insurance policies are in the nature of:

A)partnership contracts.
B)negotiation contracts.
C)indemnity contracts.
D)lease contracts.

Question 51

The extent of a person's insurable interest in property is limited:

A)to the value of that interest.
B)to the market value of the property.
C)to the maximum value of the property.
D)the reasonable value of the property.

Question 52

Joe's homeowner's insurance denied a claim for damage to his floors because the insurer reasonably believed that the damage came from a flood,which was not covered.It later turned out the problem was caused by wind damage,which was covered.Is Joe entitled to punitive damages due to the initial denial of his claim?

A)Yes,because a proper claim was denied.
B)It depends upon the terms of Joe's insurance policy.
C)No,because the insurer acted in good faith.
D)No,because an insurer never has to pay punitive damages under any circumstances.

Question 53

Which types of losses are least likely to be covered by fire insurance policies?

A)Losses from friendly fires
B)Losses from hostile fires
C)Losses from fires that started outside the property
D)Losses from smoke and heat that cause indirect damage

Question 54

With respect to property insurance,the insurable interest requirement:

A)need only be satisfied at the time the policy is issued.
B)must be satisfied both at the time the policy is issued and at the time of the loss.
C)will be satisfied only if the insured owns the property in fee simple absolute.
D)will be satisfied by an insured who possesses a lienhold interest in the property.

Question 55

Homeowners Les and Linda Wheiler live in Missouri.Working with Magnanimous Insurance Co.agent Dell,the Wheilers submitted an application for property insurance on their home.At the time they submitted their application,the Wheilers assumed that when Magnanimous issued them a policy,the policy would furnish coverage for losses stemming from floods.Magnanimous approved the Wheilers' application and issued them a written policy covering their house.The written policy's terms excluded coverage for flood-related losses.Three months after they received their policy from Magnanimous,the Wheilers' house sustained damage as a result of a flood.When the Wheilers submitted a claim to Magnanimous,the insurance company denied the claim because flood coverage was not provided by the policy.The Wheilers have sued Magnanimous in an effort to obtain reformation of the written policy (so that it would provide flood coverage).Under which of the following alternative scenarios would the Wheilers stand the best chance of obtaining a court order of reformation?

A)If Dell informed the Wheilers,after the loss but before submission of their formal claim to Magnanimous,that the policy did not furnish flood coverage,but urged the Wheilers to submit their claim anyway.
B)If the Wheilers' assumption that the policy would furnish flood coverage stemmed from the fact that floods have occurred every few years in the Missouri area.
C)If Dell told the Wheilers at the time of the application that the policy would furnish flood coverage.
D)If the Wheilers did not read their policy after receiving it from Magnanimous and therefore first learned that their policy did not provide flood coverage when their claim was denied by Magnanimous.

Question 56

Ruth purchased a property insurance policy from ABC Insurance (ABC).This policy covered Ruth's airplane and the policy limits were $300,000.A fire broke out on January 1,2006,when the airplane was stored in its hangar,completely destroying the airplane.There was suspicious evidence that the fire had been deliberately set,and ABC honestly believed that Ruth had set the fire.ABC refused to pay on this policy.However,Ruth was completely innocent,and she sued to enforce the policy.The lawsuit,which ended on January 1,2007,determined that Ruth had nothing to do with the fire.Because Ruth needed to use a private airplane to visit clients in remote areas,she rented an airplane during the calendar year 2006.This cost her $50,000.ABC was aware that Ruth needed an airplane to reach her clients when it issued the policy.Ruth would have used the policy limits of $300,000 to purchase another airplane in 2006,but for ABC's refusal to pay on its policy.Under these circumstances,Ruth is entitled to a judgment in the amount of:

A)$300,000 (the policy limits).
B)$300,000 (the policy limits)and also $50,000 consequential damages.
C)$300,000 (the policy limits),$50,000 consequential damages and also punitive damages.
D)$300,000 (the policy limits),$50,000 consequential damages,statutory damages and also punitive damages.

Question 57

Which of the following is an accurate statement about property insurance policies?

A)They are less likely to provide coverage for flood-related losses than for lightning-related losses.
B)They are more likely to provide coverage for losses resulting from friendly fires than for losses resulting from hostile fires.
C)They do not provide coverage for losses resulting from fires that were intentionally caused by persons having no connection with the insured.
D)Requisite insurable interest must generally exist at the time of the entering into the policy.

Question 58

Which of the following is an inaccurate statement about the insurable interest requirement?

A)The beneficiary named in a life insurance policy may recover under the policy if she possessed an insurable interest in the relevant person's life at the time she (the named beneficiary)procured the policy but no longer possessed the insurable interest at the time the relevant person died.
B)When an equitable interest in a property translates into a legal interest,it is considered to be an insurable interest.
C)Persons who are business partners are generally held to possess insurable interests in each other's lives.
D)A policy owner may recover under a property insurance policy if he possessed an insurable interest in the relevant property at the time he procured the policy but no longer possessed the property.

Question 59

Which of the following is usually a covered peril under most property insurance policies?

A)Vandalism
B)Earthquake damage
C)Nuclear contamination
D)Radiation

Question 60

Joe's home is damaged both by a forest fire and by water from the fire hoses.What is likely to be covered?

A)Neither the fire nor water damage because the fire was a friendly fire.
B)Just the fire but not the water damage.
C)Only the water damage,but not the fire because it was a friendly fire.
D)Both the fire and water damage.

Question 61

Mr.White is a doctor and purchases insurance on him professionally making a mistake.This form of insurance is called:

A)real property insurance.
B)professional insurance (malpractice).
C)personal property insurance.
D)insurance rider.

Question 62

Sometimes,an insurer may retain an attorney to defend the insured in a liability case but can conclude later on,based on additional information,that it does not have the obligation to pay any damages that may be assessed against the insured as a result of the third party's claim.It can do so through a(n):

A)equity of redemption.
B)advance directive.
C)reservation of rights notice.
D)declaratory judgment.

Question 63

On April 2,1987,Ritz Corp.purchased a warehouse that it insured for $500,000.The policy contained a 75% coinsurance clause.On April 25,1988,a fire caused $900,000 damage to the warehouse.The fair market value of the warehouse was $800,000 on April 2,1987,and $1 million on April 25,1988.Ritz is entitled to receive insurance proceeds of,at most,

A)$375,000
B)$500,000
C)$600,000
D)$750,000

Question 64

How is occurrence commonly defined in a property damage liability policy?

A)As a fire or flood
B)As an accident resulting in bodily injury or property damage.
C)As an event that triggers a subrogation clause
D)As an injury to the property owner occurring in the home

Question 65

Jake,a surgeon,kills a patient on the operating table.The insurer is not clear if Jake's actions were negligent or if Jake deliberately did something wrong.How can the insurer determine if it has a duty to defend Jake in the lawsuit brought by the patient's family?

A)Review the terms of the insurance policy.
B)Ask the court to issue a declaratory judgment.
C)It must defend Jake and then ask for subrogation later if the patient's family prevails.
D)The insurer does not need to defend Jake because malpractice policies do not cover instances where the policyholder causes death.

Question 66

What lawsuit should an insurer file to resolve uncertainty over whether it must defend a policyholder under the scope of a liability policy?

A)A subrogation action
B)A declaratory judgment action
C)An indemnity action
D)A reservation of rights action

Question 67

An insurer's "duty to defend" the insured requires:

A)paying the insured any compensatory damages incurred.
B)ensuring that there is no breach in bad faith.
C)furnishing the insured with an attorney for a liability case.
D)accepting any punitive damages on behalf of the insured.

Question 68

Which of the following accurately states the legal effect of the insured's violation of an increase of hazard clause in a property insurance policy?

A)An increase of hazard clause provides that the insurer's liability will be terminated if the insured takes any action materially increasing the insurer's risk.
B)The insurer acquires the right of subrogation.
C)The insurer cannot avoid having to pay the insured for a loss unless the loss resulted from the condition that constituted a violation of the increase of hazard clause.
D)The insured becomes obligated to pay punitive damages to the insurer.

Question 69

Hans purchased an auto insurance policy from ABC Insurance (ABC)which had a liability provision.Hans was involved in a collision with Beth,caused by negligence of both Beth and Hans.Both were injured.Who would be entitled to collect money under the liability provision of Hans' policy?

A)Beth only
B)Hans only
C)Both Beth and Hans
D)Neither Beth nor Hans

Question 70

Gridco,Inc.owns the building in which its offices are located.On April 1,Gridco insured the building with Olden Days Insurance Co. ,which issued a $200,000 face amount policy.The Olden Days policy contained a pro rata clause.Keeping that policy in force,Gridco procured an additional policy on the building on June 15.This policy,had a $600,000 face amount and contained a pro rata clause,was issued by Big City Insurance Corp.On August 10,while both policies were in force,lightning (a covered peril under each policy)struck the Gridco building.This sparked a fire that resulted in $72,000 of damage to the warehouse.Gridco has filed claims and proofs of loss with Olden Days and Big City.Which of the following correctly sets forth the amounts the respective insurers must pay Gridco?

A)Olden Days: $72,000;Big City: 0.
B)Olden Days: $18,000;Big City: $54,000.
C)Olden Days: 0;Big City: $72,000.
D)Olden Days: $24,000;Big City: $48,000.

Question 71

Settlements in liability cases occur only when:

A)the insurer issues a declaratory judgment.
B)the third party gives up the legal right to litigate.
C)the third party demands prelitigation payment.
D)the third party institutes litigation.

Question 72

Which of the following costs does an insurer agree to pay in a liability policy?

A)Sums an insured becomes legally obligated to pay to another party.
B)Sums an insured loses because he experiences damages to his personal property.
C)Sums an insured loses because he experiences damage to his personal property.
D)Sums an insured loses because of coinsurance costs after an accident.

Question 73

Tim has a property insurance policy.He gets a job in a lab and brings his work materials home to do experiments,which require highly-explosive chemicals to be kept on the premises.Does the insurer have to cover an explosion?

A)Yes,unless the policy excluded damages caused by an explosion.
B)Yes,as long as Tim's behavior was not illegal.
C)Yes,under all circumstances.
D)No,if the policy had an increase of hazard provision.

Question 74

A reservation of rights is issued by an insurance company when?

A)When it needs to defend the insured but wants to have an opportunity later to decide if the accident is beyond coverage of insurance policy
B)When the amount of injury exceed the policy limit
C)When there is a third party involved from a different state
D)When an insured misses payment on a premium

Question 75

When the insurer asks the court to determine whether the insurer owes obligations to the insured under the policy in connection with the particular liability claim made against the insured by the injured third party,it is filing a(n):

A)equity of redemption.
B)advance directive.
C)reservation of rights notice.
D)declaratory judgment.

Question 76

Yuki invites Penny over to her home.She later gets angry with Penny and pushes her down the stairs.Penny hurts herself and sues Yuki.Is it likely that Yuki's insurance will cover Penny's losses?

A)Yes,if Yuki had a liability policy.
B)Yes,if Yuki had homeowner's insurance.
C)No,because you cannot insure for injuries incurred in a private home.
D)No,because liability policies commonly exclude coverage for an insured's liability stemming from deliberate wrongful acts.

Question 77

Which of the following would normally not be covered in a professional liability policy.

A)Tortious conduct in the practice of a profession
B)Negligent professional conduct causing harm to a third party
C)Intentional wrongful professional conduct
D)Bodily injury in a medical malpractice claim

Question 78

Which of the following is an accurate statement about liability insurance policies?

A)They cover bodily injury or property damage that result from the insured's business or professional pursuits.
B)They typically provide the insured with coverage for punitive damages liability he may face.
C)They typically do not provide the insured with coverage for the consequences stemming from his negligent acts.
D)They may be used by the insured as a way of transferring risks associated with certain tort liability he may face.

Question 79

Bailey is sued for causing an accident and is found to be liable for $50,000 in compensatory damages,$50,000 in court costs and $250,000 in punitive damages.His policy limits are $300,000 and the most common rules apply regarding an insurer's obligations to pay damages incurred by the insured.How much does the insurer have to pay?

A)$50,000.00
B)$100,000.00
C)$300,000.00
D)$350,000.00

Question 80

Martha had a property insurance policy on her home with a subrogation clause.A fire started because of a faulty stove.Martha made a claim and received $100,000 from her homeowners' insurer for fire damages totaling $100,000.The stove manufacturer was clearly responsible for the fire starting and has admitted its stove was faulty.Can the stove manufacturer be sued?

A)Yes,by Martha.
B)Yes,by the insurance company.
C)No,because the insurance company already covered losses.
D)No,because Martha chose to make an insurance claim and thus waived the right to sue.