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LOMA 280 practice questions

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Question 1Principles of Insurance

Which characteristic distinguishes insurance from a wagering contract?

  1. The policyholder must pay the full premium in a single payment.
  2. The insured must have an insurable interest in the subject of the contract. Correct answer.
  3. The contract must be written on a form approved by a regulator.
  4. The insurer must collect premiums before paying any claim.

Explanation

Insurance is a contract of indemnity in which the insured must stand to lose financially if a covered event occurs, which is the requirement of insurable interest. A wager creates risk for the parties where none existed before, while insurance transfers an existing risk of loss. Premium timing, form approval, and payment method are administrative details, not the defining distinction.

Question 2Principles of Insurance

An insurer pools the premiums of many policyholders and uses those funds to pay the losses of the few who suffer covered events. Which function of insurance does this describe?

  1. Sharing of risk Correct answer.
  2. Reduction of speculative risk
  3. Elimination of moral hazard
  4. Avoidance of risk

Explanation

Risk sharing, also called pooling, spreads the cost of losses across a large group so that no single member bears the full burden. Insurance transfers and shares risk; it does not eliminate the possibility of loss or remove hazards created by insureds' behavior. Speculative risk, such as business investment risk, is generally not insurable.

Question 3Principles of Insurance

Which risk is generally considered insurable by a private insurer?

  1. The chance that a specific factory will be damaged by fire Correct answer.
  2. The chance that a new product line will be unprofitable
  3. The chance that a company's stock price will decline
  4. The chance that a currency will strengthen against the dollar

Explanation

Insurable risks are typically pure risks, meaning there is a chance of loss or no loss but no chance of gain, and fire damage to property fits that description. Speculative risks involve the possibility of gain and are handled through other financial mechanisms. Losses from fire are also accidental, measurable, and definable, which supports insurability.

Question 4Principles of Insurance

A tenant signs a lease that requires the tenant to insure the landlord's building against fire. The tenant obtains a policy covering the building. What insurable interest does the tenant hold?

  1. A contractual interest arising from the lease obligation Correct answer.
  2. No insurable interest because the tenant does not own the building
  3. An ownership interest because the policy names the building
  4. A contingent interest that exists only after a fire occurs

Explanation

Insurable interest can arise from a legal or contractual relationship with the property, not only from ownership. A tenant bound by a lease to insure the premises has a recognized interest in protecting that property. The interest exists before any loss occurs, and it does not require the tenant to hold title.

Question 5Principles of Insurance

Which party makes the offer in the formation of an insurance contract under the common law approach?

  1. The beneficiary, by accepting the policy proceeds
  2. The applicant, by submitting the application and initial premium Correct answer.
  3. The agent, by soliciting the application
  4. The insurer, by issuing the policy

Explanation

Under the common law view, the applicant makes the offer when submitting the application, and the insurer accepts it by issuing the policy. The policy is therefore the insurer's acceptance rather than a counteroffer. The agent acts for the insurer in soliciting business and does not make the offer on the applicant's behalf.

Question 6Principles of Insurance

An applicant completes an application, pays the initial premium, and receives a conditional receipt. The applicant dies before the insurer issues the policy, and the insurer later determines the applicant was insurable under its rules. What is the usual result?

  1. The insurer returns the premium because no policy was ever issued.
  2. The insurer pays only the premium plus interest as a refund.
  3. The insurer pays a reduced amount equal to the premium paid.
  4. The insurer pays the death benefit because coverage was effective from the date of the receipt. Correct answer.

Explanation

A conditional receipt provides interim coverage that becomes effective retroactively to the date of application or medical examination if the proposed insured meets the insurer's underwriting requirements. Because the applicant was insurable, the condition is satisfied and the death benefit is payable even though no policy was delivered. If the applicant had not been insurable, the insurer would only return the premium.

Question 7Principles of Insurance

Which element must be present for an insurance contract to be legally enforceable?

  1. Consideration exchanged by both parties Correct answer.
  2. Approval of the contract by the beneficiary
  3. A witness signature on the application
  4. Notarization of the policy by a public official

Explanation

A valid contract requires offer, acceptance, consideration, and legal purpose, and in insurance the consideration is the premium paid by the insured and the promise to pay claims made by the insurer. Witness signatures, notarization, and beneficiary approval are not general requirements for enforceability. The elements of a valid contract apply to insurance just as they do to other contracts.

Question 8Principles of Insurance

An insurer issues a policy that gives the insurer the right to cancel at any time with written notice, while the policyholder may cancel only during a stated period. This contract is best described as which type?

  1. Contract of adhesion
  2. Unilateral contract Correct answer.
  3. Aleatory contract
  4. Conditional contract

Explanation

A unilateral contract is one in which only one party makes a legally enforceable promise; the insured pays premium and the insurer promises to pay covered claims, but the insured does not promise to keep the policy in force. The unequal cancellation rights illustrate that only the insurer has made a continuing promise. Aleatory refers to unequal exchange of value, adhesion refers to the insurer drafting the terms, and conditional refers to duties contingent on certain events.

Question 9Principles of Insurance

Because the insurer drafts the policy language and the applicant generally must accept it as written, insurance policies are classified as which of the following?

  1. Contracts of indemnity
  2. Contracts of adhesion Correct answer.
  3. Aleatory contracts
  4. Voidable contracts

Explanation

A contract of adhesion is prepared by one party and offered to the other on a take-it-or-leave-it basis, which describes the insurer-drafted policy. Because of this inequality, courts generally interpret ambiguities against the drafter. Indemnity concerns restoration of loss, aleatory concerns unequal exchange, and voidable concerns the right of a party to avoid the contract.

Question 10Principles of Insurance

An applicant for life insurance knowingly leaves out a serious medical condition on the application. The insurer issues the policy and later discovers the omission while the contestable period is still running. What remedy is typically available to the insurer?

  1. Reduce the death benefit by the amount of unpaid premium
  2. Rescind the policy and refund the premium Correct answer.
  3. Enforce the policy but raise the premium retroactively
  4. Cancel the policy and keep the premiums paid

Explanation

A material misrepresentation on the application gives the insurer the right to rescind the contract during the contestable period, which generally means returning the premium and denying the claim. Retention of premiums would amount to a penalty not ordinarily permitted. After the contestable period expires, the insurer usually cannot rescind for misrepresentation made on the application.

Question 11Principles of Insurance

An insured conceals a material fact from the insurer with the intent to deceive, and the insurer issues the policy in reliance on the incomplete information. This conduct is best described as which of the following?

  1. Innocent misrepresentation
  2. Fraudulent misrepresentation Correct answer.
  3. Estoppel
  4. Waiver

Explanation

Fraudulent misrepresentation requires a false statement or concealment of a material fact, knowledge of falsity, intent to deceive, and reliance by the insurer. Innocent misrepresentation lacks intent to deceive. Waiver is the voluntary surrender of a known right, and estoppel prevents a party from asserting a right after conduct that induced reliance.

Question 12Principles of Insurance

An insurer's agent knows that an applicant has a disqualifying medical history but issues the policy anyway without noting the condition. The insurer later tries to rescind the policy for that condition. Which doctrine most likely prevents the rescission?

  1. Subrogation
  2. Waiver Correct answer.
  3. Utmost good faith
  4. Indemnity

Explanation

Waiver is the voluntary relinquishment of a known right, and an insurer that knows of a ground for rescission but issues the policy may be treated as having waived that ground. Because the agent's knowledge is imputed to the insurer, the insurer cannot later rely on the known condition. Subrogation, indemnity, and utmost good faith address different aspects of insurance.

Question 13Principles of Insurance

Which statement best describes the principle of indemnity in property insurance?

  1. The insured should be allowed to profit from a loss if premiums were paid.
  2. The insured should receive new replacement property of greater value than the old.
  3. The insured should be restored to approximately the same financial position held before the loss. Correct answer.
  4. The insurer should pay the full policy limit regardless of the actual loss.

Explanation

Indemnity means the insured is restored to the approximate financial position occupied before the loss, no better and no worse. This principle prevents the insured from profiting from an insured event, which would create a moral hazard. Policy limits, deductibles, and valuation methods are mechanisms used to apply indemnity in practice.

Question 14Principles of Insurance

An insured's home is damaged by a fire caused by a neighbor's negligence. The insurer pays the claim and then pursues the neighbor for reimbursement. Which principle allows the insurer to do this?

  1. Reinsurance
  2. Adhesion
  3. Subrogation Correct answer.
  4. Coinsurance

Explanation

Subrogation transfers to the insurer the insured's right to recover from a third party who caused the loss, after the insurer has paid the claim. This supports the principle of indemnity by preventing the insured from collecting twice. The insurer's recovery is generally limited to the amount it paid.

Question 15Principles of Insurance

An insured carries a property policy with a coinsurance clause requiring coverage equal to at least 80 percent of the property value. The building is valued at 500,000, the insured carries 300,000, and a covered loss of 100,000 occurs. Applying the coinsurance formula, what amount does the insurer pay, assuming no deductible?

  1. 100,000
  2. 75,000 Correct answer.
  3. 60,000
  4. 80,000

Explanation

The coinsurance formula is insurance carried divided by insurance required, multiplied by the loss. The required amount is 80 percent of 500,000, or 400,000; 300,000 divided by 400,000 equals 0.75, and 0.75 times the 100,000 loss equals 75,000. The insured bears the remaining 25,000 as a penalty for underinsurance.

Question 16Principles of Insurance

Which duty does the principle of utmost good faith place on an insurance applicant?

  1. To renew the policy for at least five years
  2. To purchase the maximum coverage the insurer offers
  3. To read the entire policy aloud to a witness
  4. To disclose all material facts the insurer needs to evaluate the risk Correct answer.

Explanation

Utmost good faith requires both parties to deal fairly, and it places on the applicant a duty to disclose material facts the insurer needs to underwrite the risk. Material facts are those that would affect the insurer's decision to accept the risk or the terms it would offer. The duty does not require buying maximum coverage, reading the policy aloud, or committing to a multi-year term.

Question 17Principles of Insurance

Which party is generally required to have an insurable interest in a life insurance policy at the time the policy is issued?

  1. The beneficiary in the life of the policyowner
  2. The insurer in the life of the beneficiary
  3. The agent in the life of the applicant
  4. The policyowner in the life of the insured Correct answer.

Explanation

For life insurance, insurable interest must exist at the time the policy is issued, and it is the policyowner who must have an interest in the continued life of the insured. The interest need not continue after the policy is issued, which is why a policyowner may later name a different beneficiary. The insurer and agent do not need an insurable interest in the insured.

Question 18Principles of Insurance

An insurer's promise to pay covered claims is conditioned on the insured's payment of premiums and provision of proof of loss. This characteristic makes an insurance policy which type of contract?

  1. Personal
  2. Unilateral
  3. Aleatory
  4. Conditional Correct answer.

Explanation

A conditional contract is one in which the parties' obligations depend on the occurrence of specified events or performance of specified acts. The insurer's duty to pay arises only if the insured has paid premiums and complied with claim requirements. Unilateral, aleatory, and personal describe other characteristics of insurance contracts.

Question 19Principles of Insurance

Which concept explains why an insurance contract is said to be personal even when it covers property?

  1. The contract pays benefits only to the person who signed the application.
  2. The contract must name a human being as the insured.
  3. The contract can be transferred to another person without restriction.
  4. The contract insures the person's interest in the property rather than the property itself. Correct answer.

Explanation

Property insurance is personal in the sense that it protects the insured's financial interest in the property, not the property itself. This is why insurable interest matters and why a policy generally does not follow the property when ownership changes. It does not mean the insured must be a natural person or that benefits go only to the applicant.

Question 20Principles of Insurance

Under the law of agency, which action by an insurance agent generally binds the insurer?

  1. Waiving a policy condition without authority
  2. Promising coverage the insurer has not authorized
  3. Issuing a policy on terms the insurer has not approved
  4. Accepting a premium payment within the scope of the agent's authority Correct answer.

Explanation

An agent acts on behalf of the principal, and acts within the agent's actual or apparent authority bind the insurer. Accepting premiums is a routine act within the scope of most agents' authority. An agent cannot bind the insurer by exceeding that authority, such as by promising unauthorized coverage or waiving conditions without power to do so.

Question 21Principles of Insurance

A person who is not a party to the insurance contract but who may receive policy proceeds upon the insured's death is known as which of the following?

  1. A conditional receipt holder
  2. A fiduciary insurer
  3. A reinsurer
  4. A third-party beneficiary Correct answer.

Explanation

A beneficiary named in a life insurance policy is a third-party beneficiary because the beneficiary did not enter into the contract but is entitled to enforce it and receive proceeds. The beneficiary is not a party to the original agreement. Reinsurers and holders of conditional receipts are unrelated to this role.

Question 22Principles of Insurance

Which statement describes the doctrine of reasonable expectations?

  1. An insured must accept whatever the insurer decides on a claim.
  2. An insured is bound by the literal policy language regardless of the circumstances of sale.
  3. An insured may enforce coverage expectations that a reasonable person would have from the policy language and sales materials. Correct answer.
  4. An insurer may deny coverage whenever the language is technically ambiguous.

Explanation

The reasonable expectations doctrine holds that an insured is entitled to coverage that a reasonable person in the insured's position would expect from the policy language and the sales representations made. It is often applied when policy language is ambiguous or when marketing materials create expectations inconsistent with the fine print. It does not give the insurer discretion to deny claims or require the insured to accept any decision.

Question 23Principles of Insurance

Which of the following is an example of a representation made by an applicant in an insurance transaction?

  1. A policy provision that the insurer may cancel for nonpayment
  2. A warranty that the insured will maintain the building in good repair
  3. A statement on the application that the applicant has never had a heart attack Correct answer.
  4. A promise in the policy that the insured will install a sprinkler system

Explanation

A representation is a statement of fact made by the applicant that the applicant believes to be true, such as a medical history statement on the application. A promise that something will be done in the future, like installing a sprinkler system, is a warranty or condition. Policy provisions written by the insurer are not applicant representations.

Question 24Principles of Insurance

An insured fails to submit proof of loss within the time required by the policy. The insurer denies the claim. Which policy characteristic is most directly involved in this denial?

  1. The conditional nature of the contract Correct answer.
  2. The adhesive nature of the contract
  3. The personal nature of the contract
  4. The aleatory nature of the contract

Explanation

Because the insurance contract is conditional, the insurer's duty to pay depends on the insured's compliance with specified conditions, including timely proof of loss. Failure to satisfy a condition can relieve the insurer of its obligation. Aleatory, adhesion, and personal describe other characteristics and do not explain the effect of a missed condition.

Question 25Principles of Insurance

Which of the following best describes the purpose of the entire contract provision in an insurance policy?

  1. It requires the insured to accept all future amendments to the policy.
  2. It permits the agent to modify the policy orally after delivery.
  3. It allows the insurer to change policy terms without notifying the insured.
  4. It states that the policy and the attached application constitute the complete agreement between the parties. Correct answer.

Explanation

The entire contract provision limits the agreement to the policy and any attached copy of the application, which prevents the insurer from relying on outside documents the insured has not seen. It also generally prevents oral modifications by agents after the policy is issued. The provision protects the insured by defining exactly what the contract includes.

Question 26Principles of Insurance

Which characteristic of insurance allows a large group of people to share the financial losses of the few who actually experience a loss?

  1. Adverse selection
  2. Pooling of risks Correct answer.
  3. Moral hazard
  4. Reinsurance

Explanation

Pooling of risks is the core mechanism of insurance, in which many exposure units contribute premiums so that the losses suffered by a small number of them are spread across the whole group. This makes individual losses more predictable and affordable in the aggregate.

Question 27Principles of Insurance

An individual faces a possible financial loss from damage to a rental property. Which risk-management technique is being used when the owner purchases an insurance policy to cover that exposure?

  1. Loss prevention
  2. Risk transfer Correct answer.
  3. Risk avoidance
  4. Risk retention

Explanation

Buying insurance transfers the financial consequences of a specified loss exposure to the insurer in exchange for a premium. Avoidance would mean never owning the property, retention would mean bearing the loss personally, and prevention would mean reducing the chance of loss.

Question 28Principles of Insurance

Which type of risk is generally considered insurable because it affects a large number of people and is not the result of a deliberate act by the insured?

  1. Market risk
  2. Investment risk
  3. Pure risk Correct answer.
  4. Speculative risk

Explanation

Pure risk involves only the chance of loss or no loss and is the type insurers typically cover, such as fire damage or premature death. Speculative risk includes the possibility of gain and is generally not insurable.

Question 29Principles of Insurance

Which element distinguishes an insurance contract from most ordinary commercial contracts in terms of enforceability?

  1. The contract must be signed by a notary
  2. The contract must be recorded with a government agency
  3. Consideration must be exchanged by both parties
  4. The contract must be supported by an insurable interest Correct answer.

Explanation

For an insurance contract to be legally enforceable, the policyholder must have an insurable interest in the subject of the insurance, such as a financial interest in property or a relationship with a life insured. This requirement prevents insurance from being used as a wagering vehicle.

Question 30Principles of Insurance

An insurer that is owned by its policyholders and operated for their benefit is best described as which type of insurer?

  1. A reciprocal insurer
  2. A fraternal insurer
  3. A stock insurer
  4. A mutual insurer Correct answer.

Explanation

A mutual insurer is owned by its policyholders, who may receive dividends from favorable operating results. A stock insurer, by contrast, is owned by shareholders who seek a return on their investment.

Question 31Principles of Insurance

Which party typically has the authority to bind an insurer to coverage when acting within the scope of an agency relationship?

  1. The state insurance department
  2. The beneficiary
  3. The insurer's appointed agent Correct answer.
  4. The insured

Explanation

Under the law of agency, an insurer is generally bound by the acts of its appointed agents when they act within the authority granted to them. This allows the agent to create rights and obligations on behalf of the principal insurer.

Question 32Principles of Insurance

Which term describes the amount an insured must pay out of pocket before an insurer begins paying on a covered claim?

  1. Coinsurance
  2. Face amount
  3. Deductible Correct answer.
  4. Premium

Explanation

A deductible is the portion of a covered loss that the insured bears before the insurer pays, which reduces small claims and lowers premiums. Coinsurance is a sharing arrangement expressed as a percentage, and the premium is the price of coverage.

Question 33Principles of Insurance

Which statement best describes the role of the state in regulating the business of insurance?

  1. Insurance is regulated primarily by the federal government through a single national statute
  2. Insurance is regulated only by local municipalities
  3. Insurance is regulated primarily by the states through insurance departments headed by a commissioner Correct answer.
  4. Insurance is unregulated because it is a private contract

Explanation

Insurance regulation in the United States is primarily a state function carried out by state insurance departments, typically led by an insurance commissioner. The McCarran-Ferguson Act recognized state authority over the business of insurance.

Question 34Principles of Insurance

An applicant for a life insurance policy is asked on the application whether she has ever been treated for heart disease. She answers truthfully that she has not. Later the insurer discovers that she had been treated for heart disease two years earlier. Which concept is most directly involved?

  1. Estoppel
  2. Waiver
  3. Representation Correct answer.
  4. Subrogation

Explanation

Statements made by an applicant on an insurance application are representations, and a material misrepresentation can give the insurer grounds to rescind the policy. Because the answer was false and concerned a serious medical condition, the insurer may have a basis to contest the coverage.

Question 35Principles of Insurance

An insured's building is damaged by a fire that spread from a neighboring property. The insurer pays the insured for the loss and then seeks recovery from the neighbor who caused the fire. Which right is the insurer exercising?

  1. Contribution
  2. Reinsurance
  3. Subrogation Correct answer.
  4. Salvage

Explanation

Subrogation allows an insurer that has paid a covered loss to step into the insured's shoes and pursue recovery from the party responsible for the loss. This supports the principle of indemnity by preventing the insured from recovering twice.

Question 36Principles of Insurance

An insured carries a property policy with an 80 percent coinsurance clause and insures a building valued at 500,000 dollars for only 300,000 dollars. A covered loss of 100,000 dollars occurs. Assuming no deductible, what amount will the insurer pay under the coinsurance formula?

  1. 300,000 dollars
  2. 75,000 dollars Correct answer.
  3. 100,000 dollars
  4. 80,000 dollars

Explanation

The coinsurance formula multiplies the loss by the ratio of the amount carried to the amount required, which is 300,000 divided by 400,000, or 0.75. Applying that ratio to the 100,000 dollar loss yields a payment of 75,000 dollars.

Question 37Principles of Insurance

Which provision in a life insurance policy gives the policyowner the right to change the beneficiary without the consent of the current beneficiary?

  1. An irrevocable beneficiary designation
  2. A facility of payment provision
  3. A spendthrift clause
  4. A revocable beneficiary designation Correct answer.

Explanation

When the beneficiary designation is revocable, the policyowner retains the right to change the beneficiary at any time. An irrevocable designation, by contrast, generally requires the beneficiary's consent to be changed.

Question 38Principles of Insurance

An insured dies while the policy is in force and all premiums have been paid. The insurer pays the death benefit to the named beneficiary. Which characteristic of life insurance is illustrated by the insurer's payment?

  1. The policy is a unilateral contract that binds only the insured
  2. The policy is an aleatory contract with no stated benefit
  3. The policy is a contract of indemnity that reimburses actual loss
  4. The policy is a valued contract that pays a stated sum Correct answer.

Explanation

Life insurance is generally treated as a valued contract because the insurer promises to pay a stated face amount upon death rather than reimbursing a measured financial loss. This distinguishes it from property insurance, which is typically a contract of indemnity.

Question 39Principles of Insurance

An applicant submits an application and pays the first premium, and the agent gives the applicant a conditional receipt. Before the insurer issues the policy, the applicant dies in an accident. Under the typical conditional receipt, what determines whether the insurer pays?

  1. Whether the beneficiary submitted a claim within thirty days of the death
  2. Whether the applicant had paid the full annual premium rather than a partial payment
  3. Whether the agent had previously sold policies for the insurer
  4. Whether the applicant was insurable under the insurer's underwriting standards on the date of the application Correct answer.

Explanation

A conditional receipt generally provides coverage only if the proposed insured met the insurer's underwriting requirements on the date the application and premium were submitted. If the applicant was insurable at that time, the death benefit is payable even though the policy had not yet been issued.

Question 40Principles of Insurance

Which statement accurately describes the difference between a warranty and a representation in insurance?

  1. A warranty is always oral, while a representation is always written
  2. A warranty is a statement guaranteed to be true, while a representation is a statement believed to be true Correct answer.
  3. A warranty is made by the insurer, while a representation is made by the beneficiary
  4. A warranty applies only to property insurance, while a representation applies only to life insurance

Explanation

A warranty is a statement that the applicant guarantees to be true, and a breach may allow the insurer to avoid the contract. A representation is a statement the applicant believes to be true, and the insurer must generally show materiality to rescind.

Question 41Principles of Insurance

An insured intentionally sets fire to his own building to collect insurance money. Which defense would most likely allow the insurer to deny the claim?

  1. The insured breached the duty of utmost good faith through fraud Correct answer.
  2. The insurer had already paid a prior claim
  3. The insured failed to provide a proof of loss
  4. The insured did not have a coinsurance clause

Explanation

Intentional destruction of insured property to collect insurance is fraud, which violates the insured's duty of utmost good faith and is generally excluded from coverage. The insurer may deny the claim and may also seek to rescind the policy.

Question 42Principles of Insurance

Which principle holds that an insured should be restored to approximately the same financial position after a loss as before the loss, without profiting from it?

  1. Aleatory
  2. Adhesion
  3. Indemnity Correct answer.
  4. Utmost good faith

Explanation

The principle of indemnity holds that insurance should restore the insured to the pre-loss financial position, no better and no worse. This prevents insureds from profiting from losses and supports limits such as actual cash value.

Question 43Principles of Insurance

An insured suffers a covered loss and the insurer pays the claim promptly. Later the insurer discovers that the insured had concealed a material fact at the time of application. Which remedy is generally available to the insurer?

  1. The insurer must pay all future claims regardless of the concealment
  2. The insurer must refer the matter to the beneficiary for resolution
  3. The insurer may rescind the policy and seek recovery of the amount paid Correct answer.
  4. The insurer may only raise the premium for future renewals

Explanation

Material concealment with intent to deceive gives the insurer the right to rescind the contract, which generally allows it to treat the policy as void and recover benefits paid. The remedy addresses the violation of utmost good faith.

Question 44Principles of Insurance

Which document typically contains the insuring agreement, conditions, and exclusions of an insurance policy and is incorporated by reference into the contract?

  1. The policy itself Correct answer.
  2. The application
  3. The certificate of authority
  4. The buyer's guide

Explanation

The policy is the formal contract document that contains the insuring agreement, conditions, exclusions, and definitions. The application may be attached and made part of the contract, but the policy is the primary document.

Question 45Principles of Insurance

An insured's policy contains a provision stating that the insurer will not be liable for loss caused by war. Which type of policy provision is this?

  1. A declaration
  2. An exclusion Correct answer.
  3. An insuring agreement
  4. A condition

Explanation

An exclusion describes a loss or circumstance for which the insurer will not provide coverage. War is a common excluded peril because it can produce catastrophic and widespread losses that are difficult to underwrite.

Question 46Principles of Insurance

An insurer's agent tells an applicant that a particular medical condition will not affect coverage, even though the policy excludes it. The applicant relies on the statement and purchases the policy. Which doctrine may prevent the insurer from enforcing the exclusion?

  1. Assignment
  2. Estoppel Correct answer.
  3. Coinsurance
  4. Subrogation

Explanation

Estoppel may prevent an insurer from denying coverage when its agent made a misleading statement on which the applicant reasonably relied. The insurer is generally bound by the agent's representations made within the scope of authority.

Question 47Principles of Insurance

Which statement best explains why courts often construe ambiguities in an insurance policy against the insurer?

  1. The policy is a contract of adhesion drafted by the insurer Correct answer.
  2. The policy is required by state law
  3. The insurer is always the larger party in litigation
  4. The insured pays the premium in advance

Explanation

Because insurance policies are contracts of adhesion drafted by the insurer and offered to the applicant on a take-it-or-leave-it basis, courts generally resolve ambiguous language in favor of the insured. This rule balances the insurer's control over the wording.

Question 48Principles of Insurance

A policyowner borrows against the cash value of a whole life policy. Which statement describes the effect of the loan on the policy?

  1. The loan reduces the death benefit if it is not repaid before death Correct answer.
  2. The loan increases the face amount of the policy
  3. The loan cancels the policy immediately
  4. The loan eliminates the need to pay future premiums

Explanation

A policy loan is secured by the cash value, and any unpaid loan balance plus interest is deducted from the death benefit or cash surrender value. The policy remains in force as long as the loan and interest do not exceed the available cash value.

Question 49Principles of Insurance

An insured owns a policy with a waiver of premium rider. The insured becomes totally disabled and remains disabled for six months. What is the typical effect of the rider?

  1. The insurer converts the policy to term insurance
  2. The insurer waives premiums during the period of qualifying disability and keeps the policy in force Correct answer.
  3. The insurer refunds all premiums paid since the policy was issued
  4. The insurer pays the death benefit immediately

Explanation

A waiver of premium rider generally waives premium payments after the insured has been totally disabled for a specified waiting period, typically six months, while the policy remains in force. The death benefit and cash value continue as though premiums were paid.

Question 50Principles of Insurance

An insured owns two property policies that both cover the same loss on a primary basis. The insured suffers a covered loss and one insurer pays the full amount. Which right allows that insurer to seek a share of the loss from the other insurer?

  1. Reformation
  2. Salvage
  3. Contribution Correct answer.
  4. Subrogation

Explanation

Contribution is the right of an insurer that has paid more than its share of a loss to recover proportionate amounts from other insurers covering the same interest. It prevents the insured from collecting twice and allocates the loss fairly among insurers.