Question 1

Which of the following statements about subrogation is true?

Accepted Answer

Subrogation allows an insurer to step into the shoes of the insured and recover from third parties who may be responsible for losses or damages. If the insured interferes with the insurer’s subrogation rights after a loss occurs, the insured may forfeit its right to collect benefits. Therefore, option C is true. Options A, B, and D are incorrect because subrogation is not used primarily for losses paid under life insurance policies; the insurer cannot sue its own insured, who is negligent under subrogation but can sue third parties responsible for the loss; and the insurer is not required to exercise its subrogation rights.

Question 2

All of the following will support an insurable interest for purposes of purchasing property and liability insurance EXCEPT

Accepted Answer

A close family relationship does not create an insurable interest.

Question 3

When must an insurable interest legally exist in property insurance for an insured to receive payment for a loss from the insurer?

Accepted Answer

In property insurance, an insurable interest must exist at the time of the loss for the insured to receive payment. This ensures that the insured has a legitimate interest in the property at the time it is damaged or destroyed.

Question 4

When must an insurable interest legally exist in life insurance?

Accepted Answer

In life insurance, an insurable interest must legally exist at the inception of the policy. This means the policyholder must have a legitimate reason to insure the life of the insured at the time the policy is taken out, demonstrating that the policyholder would suffer a financial loss or certain types of personal loss if the insured were to die.

Question 5

Which of the following statements about a warranty in an insurance contract is (are)true?
I.It is part of the insurance contract.
II.Statements made by an insurance applicant are considered warranties rather than representations.

Accepted Answer

I is true because warranties are indeed part of the insurance contract, serving as conditions that must be met. II is incorrect because statements made by an insurance applicant are typically considered representations rather than warranties, with representations being statements believed to be true to the best of the applicant's knowledge, whereas warranties must be strictly true.

Question 6

Sam's furniture was destroyed by a fire.The furniture cost $1200 when it was purchased,but similar new furniture now costs $1800.Assuming the furniture was 50 percent depreciated,what is the actual cash value of Sam's loss?

Accepted Answer

Since the furniture was 50% depreciated, Sam had only lost 50% of the original value, which is $1200 x 0.5 = $600. Therefore, the actual cash value of Sam's loss is $600. Option B is the closest answer as it is just slightly less than the cost of the new furniture.

Question 7

A total loss under a valued policy is settled on the basis of the

Accepted Answer

Under a valued policy, a total loss is settled based on the amount of insurance specified in the policy, not on the market value, actual cash value, or replacement value of the loss.

Question 8

The principle of utmost good faith is supported by all of the following legal doctrines EXCEPT

Accepted Answer

The principle of utmost good faith is supported by representations, warranty, and concealment. Subrogation is a legal doctrine that allows an insurer to step into the shoes of its insured and pursue any rights or remedies that the insured may have against a third party that caused the loss. Subrogation does not directly relate to the principle of utmost good faith.

Question 9

What is the legal significance of a material concealment by an insurance applicant?

Accepted Answer

A material concealment by an insurance applicant makes the contract voidable at the insurer's option, rendering it unenforceable from its inception. The insurer may choose to cancel the policy, but it must return any premiums that the insured has already paid. The insurer cannot deny coverage for a claim that arises before the policy is canceled.

Question 10

Fundamental purposes of the principle of indemnity include which of the following?
I.To reduce physical hazards
II.To prevent the insured from profiting from insurance

Accepted Answer

The principle of indemnity in insurance is primarily designed to prevent the insured from profiting from insurance, ensuring that they are compensated only up to the actual value of the loss. It does not directly aim to reduce physical hazards.

Question 11

Which of the following is a fundamental purpose of the principle of indemnity?

Accepted Answer

The principle of indemnity exists to reduce moral hazard by ensuring that the insured party is only reimbursed for the actual monetary value of the loss they have incurred, and not for any additional profit or advantage. This prevents the insured party from acting recklessly, knowing that they will be fully compensated for any losses they may incur. The other options are not fundamental purposes of the principle of indemnity.

Question 12

Which of the following statements describes how losses will be settled if a property insurance policy is written on a replacement cost basis?

Accepted Answer

If a property insurance policy is written on a replacement cost basis, losses are settled without a deduction for depreciation. This means that the insurer will pay the amount needed to replace the damaged or destroyed property with similar new property, up to the policy limit, without subtracting any amount for depreciation. It is important to note that a deductible may still apply.

Question 13

Which of the following statements about an insurable interest in life insurance is (are)true?
I.It is required of any person named as beneficiary.
II.It may result from a pecuniary (financial)interest.

Accepted Answer

An insurable interest is not required for the beneficiary, only for the policy owner. It may result from a pecuniary (financial) interest in the insured person, such as a family member who relies on their income. Therefore, statement II is true but statement I is false.

Question 14

A false material statement made by an applicant for insurance is an example of

Accepted Answer

A false material statement made by an applicant for insurance is an example of misrepresentation. Misrepresentation is defined as a false statement of a material fact that relates to the insurance in question and that induces the insurer to issue the policy. The insurer may void the policy or deny a claim based on misrepresentation.

Question 15

Under which of the following rules is actual cash value determined by taking into consideration all relevant factors an expert would use to determine the value of the property?

Accepted Answer

The broad evidence rule is the only rule listed that considers all relevant factors an expert would use to determine the value of the property. The circumstantial evidence rule is used to prove a fact indirectly, the property indemnity rule deals with the amount of coverage available under an insurance policy, and the objective value rule is based on the cost to replace the property without considering depreciation or other factors.

Question 16

Sue's office building was damaged by a fire caused by a careless tenant.After paying Sue for the loss,the insurance company sued the tenant to recover its loss.This suit is based on the principle of

Accepted Answer

The principle being referred to in this scenario is subrogation, which is the right of an insurer to sue a third party responsible for a loss incurred by the insured. In this case, the insurance company paid Sue for the loss caused by the tenant's carelessness and is now suing the tenant to recover the amount it had to pay Sue. This is a common practice in insurance and is based on the principle of subrogation.

Question 17

Which of the following statements about subrogation is true?

Accepted Answer

Subrogation helps to hold down the cost of insurance by allowing the insurer to recover the cost of claims paid from a negligent third party, rather than absorbing the cost themselves and passing it on to other policyholders through increased premiums.

Question 18

What is the legal significance of a material misrepresentation in an insurance application?

Accepted Answer

A material misrepresentation in an insurance application gives the insurer the option to void the contract if it chooses to do so. This means that the contract is voidable at the insurer's option. However, if the insurer chooses to keep the contract in force, it may adjust the premium or reduce loss payments to reflect the increased risk posed by the misrepresentation. Therefore, options A, C, and D are incorrect.

Question 19

Which of the following statements about the principle of insurable interest is (are)true?
I.It makes it difficult to measure the amount of an insured's loss.
II.It reduces moral hazard.

Accepted Answer

The principle of insurable interest is the requirement that an insured person must have a stake in the value of the property or person being insured. Insurable interest reduces the inclination for someone to intentionally damage or destroy the insured property or person, thus reducing moral hazard. It does not necessarily make it difficult to measure the amount of an insured loss.

Question 20

The loss settlement under which of the following supports the principle of indemnity?

Accepted Answer

Actual cash value property insurance supports the principle of indemnity because the insurer only pays for the actual value of the property at the time of loss, taking into account depreciation and wear and tear. This ensures that the insured is not overcompensated and is restored to their pre-loss financial position.

Quiz 9: Fundamental Legal Principles

Which of the following statements about subrogation is true?

All of the following will support an insurable interest for purposes of purchasing property and liability insurance EXCEPT

When must an insurable interest legally exist in property insurance for an insured to receive payment for a loss from the insurer?

When must an insurable interest legally exist in life insurance?

Which of the following statements about a warranty in an insurance contract is (are) true? I.It is part of the insurance contract. II.Statements made by an insurance applicant are considered warranties rather than representations.

Sam's furniture was destroyed by a fire.The furniture cost $1200 when it was purchased,but similar new furniture now costs $1800.Assuming the furniture was 50 percent depreciated,what is the actual cash value of Sam's loss?

A total loss under a valued policy is settled on the basis of the

The principle of utmost good faith is supported by all of the following legal doctrines EXCEPT

What is the legal significance of a material concealment by an insurance applicant?

Fundamental purposes of the principle of indemnity include which of the following? I.To reduce physical hazards II.To prevent the insured from profiting from insurance

Which of the following is a fundamental purpose of the principle of indemnity?

Which of the following statements describes how losses will be settled if a property insurance policy is written on a replacement cost basis?

Which of the following statements about an insurable interest in life insurance is (are) true? I.It is required of any person named as beneficiary. II.It may result from a pecuniary (financial) interest.

A false material statement made by an applicant for insurance is an example of

Under which of the following rules is actual cash value determined by taking into consideration all relevant factors an expert would use to determine the value of the property?

Sue's office building was damaged by a fire caused by a careless tenant.After paying Sue for the loss,the insurance company sued the tenant to recover its loss.This suit is based on the principle of

Which of the following statements about subrogation is true?

What is the legal significance of a material misrepresentation in an insurance application?

Which of the following statements about the principle of insurable interest is (are) true? I.It makes it difficult to measure the amount of an insured's loss. II.It reduces moral hazard.

The loss settlement under which of the following supports the principle of indemnity?