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NY Life & Health practice questions

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Question 1Insurance Regulation (New York licensing, agent responsibilities, market conduct, and state vs. federal regulation)

Under the McCarran-Ferguson Act, primary responsibility for regulating the business of insurance rests with:

  1. the individual states Correct answer.
  2. the federal government
  3. the U.S. Treasury Department
  4. the NAIC

Explanation

The McCarran-Ferguson Act of 1945 declared that continued regulation of insurance by the states is in the public interest and that Congress intended the states to occupy the field. Federal involvement is therefore the exception rather than the rule.

Question 2Insurance Regulation (New York licensing, agent responsibilities, market conduct, and state vs. federal regulation)

A federal statute of general applicability conflicts with a New York insurance law. Under the McCarran-Ferguson Act, the state law controls unless the federal statute:

  1. specifically relates to insurance Correct answer.
  2. is enforced by an independent federal agency
  3. was enacted before the state law took effect
  4. has been adopted by the NAIC as a model law

Explanation

McCarran-Ferguson works as a reverse-preemption rule: a federal law will not be construed to invalidate a state insurance law unless the federal statute specifically relates to the business of insurance. General federal statutes yield to state insurance regulation.

Question 3Insurance Regulation (New York licensing, agent responsibilities, market conduct, and state vs. federal regulation)

The agency responsible for administering and enforcing the New York Insurance Law is the:

  1. New York State Attorney General's Office
  2. New York State Department of Taxation and Finance
  3. Department of Financial Services Correct answer.
  4. National Association of Insurance Commissioners

Explanation

The New York Department of Financial Services, headed by the Superintendent of Financial Services, regulates both insurance and banking in New York. The Superintendent issues licenses, promulgates regulations, and conducts examinations.

Question 4Insurance Regulation (New York licensing, agent responsibilities, market conduct, and state vs. federal regulation)

Under New York law, a person must hold a New York insurance agent or broker license in order to:

  1. prepare actuarial tables for an insurer
  2. type correspondence in an insurer's home office
  3. solicit or sell insurance for a commission Correct answer.
  4. process claims as a salaried employee of an insurer

Explanation

Soliciting, negotiating, or selling insurance for compensation requires a license from the Department of Financial Services. Clerical and actuarial work performed for an insurer does not involve solicitation and does not require an agent or broker license.

Question 5Insurance Regulation (New York licensing, agent responsibilities, market conduct, and state vs. federal regulation)

Under New York law, the key distinction between an insurance agent and an insurance broker is that an agent:

  1. represents the insurer that appoints it Correct answer.
  2. must be licensed while a broker need not be
  3. may sell only property and casualty coverage
  4. may charge clients fees in addition to commissions

Explanation

An agent acts for the insurer and must be appointed by it, while a broker acts for the prospective insured in placing coverage. Both must hold a New York license.

Question 6Insurance Regulation (New York licensing, agent responsibilities, market conduct, and state vs. federal regulation)

An unlicensed office assistant in an agency quotes a premium for a term life policy and closes the sale, after which the agency splits the commission with the assistant. This arrangement is:

  1. prohibited only if the client later files a complaint
  2. permitted, because life commissions are lightly regulated
  3. permitted, because the assistant works under supervision
  4. prohibited, since commissions may go only to licensees Correct answer.

Explanation

New York prohibits paying any commission or other compensation to an unlicensed person for soliciting or selling insurance. Office supervision does not substitute for a license, and the violation exists whether or not a consumer complains.

Question 7Insurance Regulation (New York licensing, agent responsibilities, market conduct, and state vs. federal regulation)

Which practice is prohibited under New York Insurance Law when selling a life insurance policy?

  1. providing the applicant with the required buyer's guide
  2. giving the applicant a written illustration of projected values
  3. explaining the policy's surrender charge schedule
  4. using the agent's own money to reduce the first premium Correct answer.

Explanation

Rebating means offering an inducement not specified in the policy, such as the agent absorbing part of the premium, in order to make a sale. Providing required illustrations, disclosures, and explanations of policy terms is lawful.

Question 8Insurance Regulation (New York licensing, agent responsibilities, market conduct, and state vs. federal regulation)

An agent tells a client that her current insurer is about to go bankrupt so that she will surrender an existing policy and buy a new one. This conduct is best described as:

  1. coercion
  2. twisting Correct answer.
  3. commingling
  4. unfair discrimination

Explanation

Twisting is a misrepresentation made to induce a policyholder to lapse, surrender, or replace existing coverage. The false insolvency statement is the classic example of that practice.

Question 9Insurance Regulation (New York licensing, agent responsibilities, market conduct, and state vs. federal regulation)

An agent collects a $2,000 initial premium and deposits it in the agency's general operating account, using part of it to pay office expenses. This conduct:

  1. violates the agent's fiduciary duty to segregate premiums Correct answer.
  2. violates the law only if the insurer objects in writing
  3. is acceptable if the premium is remitted within 60 days
  4. is acceptable because the agent earned a commission

Explanation

Premiums collected on an insurer's behalf are trust funds that must be kept separate and identifiable; commingling with agency operating money is prohibited. The duty is breached at the moment of commingling, regardless of eventual remittance.

Question 10Insurance Regulation (New York licensing, agent responsibilities, market conduct, and state vs. federal regulation)

New York's continuing education requirement for licensed life and health agents calls for:

  1. 24 credit hours every two years, including ethics Correct answer.
  2. 8 credit hours annually, with no ethics component
  3. 40 credit hours every two years, plus an exam
  4. 12 credit hours every year, all in insurance law

Explanation

New York requires licensees to complete 24 credit hours of approved continuing education during each two-year license period, and a portion must consist of ethics instruction. Completion is a condition of timely renewal.

Question 11Insurance Regulation (New York licensing, agent responsibilities, market conduct, and state vs. federal regulation)

A New York resident holds a current life insurance agent license, but the sponsoring insurer has never filed an appointment for her. She submits a life application on that insurer's behalf. Under New York law this is:

  1. permitted, because appointments are only for brokers
  2. a violation, because the insurer must appoint the agent first Correct answer.
  3. permitted, if the insurer accepts the application
  4. permitted, because a license authorizes sales for any insurer

Explanation

A license establishes the agent's qualification, but the agent may act only for insurers that have appointed her and filed the appointment with the Superintendent. Selling for a non-appointing insurer is a licensing violation.

Question 12Insurance Regulation (New York licensing, agent responsibilities, market conduct, and state vs. federal regulation)

Which act by an insurer constitutes an unfair claim settlement practice under New York's claims regulation?

  1. investigating a claim that appears fraudulent
  2. requiring a signed proof of loss before payment
  3. unreasonably delaying acknowledgment of a claim Correct answer.
  4. denying a claim in writing with the reasons stated

Explanation

New York's claim regulation establishes mandatory time frames for acknowledging, investigating, and resolving claims. Failing to acknowledge a claim promptly is an unfair claim settlement practice, while reasonable investigation and reasoned written denials are permitted.

Question 13Insurance Regulation (New York licensing, agent responsibilities, market conduct, and state vs. federal regulation)

A New York market conduct examination of an insurer is primarily designed to:

  1. reviewing the insurer's practices for legal compliance Correct answer.
  2. auditing the insurer's federal income tax returns
  3. setting the premium rates the insurer may charge
  4. deciding whether the insurer should be liquidated

Explanation

Market conduct examinations review how an insurer actually treats policyholders, including sales, advertising, underwriting, rating, and claim handling, to determine compliance with the Insurance Law and regulations. They are not rate-setting, tax, or rehabilitation proceedings.

Question 14Insurance Regulation (New York licensing, agent responsibilities, market conduct, and state vs. federal regulation)

Under New York Insurance Law, misrepresenting the terms of a policy to a prospective buyer is classified as:

  1. an unfair or deceptive act or practice Correct answer.
  2. a permissible replacement practice
  3. a lawful sales technique
  4. an exempt transaction

Explanation

Article 24 of the Insurance Law prohibits unfair methods of competition and unfair or deceptive acts, and includes misrepresenting policy terms or benefits. Such conduct exposes the licensee to discipline by the Superintendent.

Question 15Insurance Regulation (New York licensing, agent responsibilities, market conduct, and state vs. federal regulation)

An agent replacing a client's existing life policy must:

  1. obtain the prior insurer's written consent first
  2. submit a replacement notice with the application Correct answer.
  3. wait at least 12 months after the old policy lapses
  4. avoid giving the client written notice to prevent confusion

Explanation

New York's replacement regulation requires the agent to present the prescribed notice regarding replacement and submit it with the application so the replacing insurer can send required disclosures to the applicant. The client must be able to compare the old and new coverage.

Question 16Insurance Regulation (New York licensing, agent responsibilities, market conduct, and state vs. federal regulation)

New York agent and broker licenses are issued for a term of:

  1. three years
  2. one year
  3. five years
  4. two years Correct answer.

Explanation

New York insurance licenses run on a two-year cycle and must be renewed, with continuing education completed, to remain in force. Acting on an expired license is a violation.

Question 17Insurance Regulation (New York licensing, agent responsibilities, market conduct, and state vs. federal regulation)

A licensed agent from another state wants to sell insurance in New York. New York generally requires the person to:

  1. maintain a physical office in New York County
  2. apply to the NAIC instead of the state
  3. retake the New York licensing exam in all cases
  4. obtain a New York nonresident license Correct answer.

Explanation

New York issues nonresident licenses to individuals who are licensed and in good standing in another state and who file the required application with the Department of Financial Services. The license is issued by the state, not by any multistate body.

Question 18Insurance Regulation (New York licensing, agent responsibilities, market conduct, and state vs. federal regulation)

Under the Gramm-Leach-Bliley Act, privacy of consumers' nonpublic financial information held by an insurer is enforced by:

  1. the Consumer Financial Protection Bureau
  2. the Federal Trade Commission
  3. the Securities and Exchange Commission
  4. the state insurance regulators Correct answer.

Explanation

Gramm-Leach-Bliley preserved the state system of insurance regulation and assigned enforcement of its privacy provisions for insurers to state insurance authorities. Insurers must give privacy notices and honor opt-out rights under rules their state regulator enforces.

Question 19Insurance Regulation (New York licensing, agent responsibilities, market conduct, and state vs. federal regulation)

The Federal Insurance Office created by the Dodd-Frank Act:

  1. licenses and supervises insurers nationwide
  2. monitors the industry but grants no licenses Correct answer.
  3. sets solvency standards that bind the states
  4. has replaced the state guaranty associations

Explanation

The Federal Insurance Office gathers information, monitors the insurance sector, and advises on federal policy, but it does not charter or license insurers and does not displace state supervision. State regulators remain the operational supervisors.

Question 20Insurance Regulation (New York licensing, agent responsibilities, market conduct, and state vs. federal regulation)

NAIC model laws and regulations take effect in New York when they are:

  1. published in the Federal Register
  2. adopted by the New York Superintendent Correct answer.
  3. approved by a formal vote of the NAIC members
  4. certified by the U.S. Department of Commerce

Explanation

The NAIC is a voluntary association that drafts model legislation and regulations for states to consider; its models have no independent legal force. A model becomes binding in New York only when the Superintendent or the Legislature adopts it through the state process.

Question 21Insurance Regulation (New York licensing, agent responsibilities, market conduct, and state vs. federal regulation)

Which action may the New York Superintendent of Financial Services take against an agent who misappropriated premium funds?

  1. order the agent's insurer to absorb the loss
  2. impose a criminal sentence of imprisonment
  3. refer the matter exclusively to the NAIC
  4. revoke or suspend the agent's license Correct answer.

Explanation

The Superintendent may suspend or revoke a license, impose fines, or take other administrative action after notice and an opportunity to be heard. Criminal sentencing is reserved to the courts, and the NAIC has no disciplinary authority.

Question 22Insurance Regulation (New York licensing, agent responsibilities, market conduct, and state vs. federal regulation)

Charging two applicants of the same class and expected mortality different premium rates for identical life coverage is:

  1. permitted for the first policy year only
  2. permitted if both applicants consent
  3. permitted if the agent documents a reason
  4. unfair discrimination prohibited by law Correct answer.

Explanation

Rates for individuals of the same class and expected mortality must be applied uniformly; a licensee may not single out an applicant for different treatment. Consent or informal documentation does not make the disparity lawful.

Question 23Insurance Regulation (New York licensing, agent responsibilities, market conduct, and state vs. federal regulation)

With respect to examining an insurer's books and records, the New York Superintendent may act:

  1. at the Superintendent's discretion Correct answer.
  2. only when the insurer gives written consent
  3. only during the first five years of licensure
  4. only after a court issues a warrant

Explanation

The Superintendent has broad authority to examine the affairs of licensed insurers and may do so whenever it is deemed necessary, with examination costs borne by the examined insurer. Consent, a warrant, or an age limit on the license is not required.

Question 24Insurance Regulation (New York licensing, agent responsibilities, market conduct, and state vs. federal regulation)

Under New York law, an insurer or licensed agent who believes a claim is fraudulent must:

  1. sue the claimant before reporting it
  2. notify only the local police department
  3. report it to the Insurance Frauds Bureau Correct answer.
  4. keep the suspicion confidential to avoid defamation claims

Explanation

New York requires suspected fraudulent insurance acts to be reported to the Insurance Frauds Bureau within the Department of Financial Services. Good-faith reporting is protected, so licensees need not fear defamation liability for complying.

Question 25Insurance Regulation (New York licensing, agent responsibilities, market conduct, and state vs. federal regulation)

Which activity is regulated primarily by the State of New York rather than by the federal government?

  1. safety standards for commercial airlines
  2. lending practices of national banks
  3. marketing of variable annuities as securities
  4. licensing of insurance agents Correct answer.

Explanation

Under the McCarran-Ferguson framework, the licensing and conduct of insurance agents and brokers is a matter of state law. Federal agencies regulate securities offerings, national bank lending, and aviation safety.

Question 26General Insurance Concepts (risk, insurable interest, indemnity, contract characteristics)

In insurance terminology, what does the term risk refer to?

  1. Uncertainty about whether a loss will occur Correct answer.
  2. The amount charged for coverage
  3. The cause of a loss
  4. A condition that increases the chance of loss

Explanation

Risk is the uncertainty or chance of loss; it is the reason insurance exists, because insurers pool many similar uncertainties. The cause of a loss is a peril, and a condition increasing the chance of loss is a hazard.

Question 27General Insurance Concepts (risk, insurable interest, indemnity, contract characteristics)

Gambling and stock speculation are examples of which type of risk?

  1. Pure risk
  2. Static risk
  3. Speculative risk Correct answer.
  4. Fundamental risk

Explanation

Speculative risk involves the chance of either gain or loss and is generally not insurable. Pure risk involves only the chance of loss or no loss and is the type insurers accept.

Question 28General Insurance Concepts (risk, insurable interest, indemnity, contract characteristics)

A tornado that destroys a warehouse is best described as:

  1. A moral hazard
  2. A risk retention
  3. A peril Correct answer.
  4. A hazard

Explanation

A peril is the actual cause of a loss, such as fire, wind, or tornado. Hazards are conditions that increase the likelihood or severity of a loss caused by a peril.

Question 29General Insurance Concepts (risk, insurable interest, indemnity, contract characteristics)

The principle of utmost good faith requires each party to an insurance contract to:

  1. Inspect the insured property annually
  2. Disclose all material facts truthfully Correct answer.
  3. Share underwriting profits with policyholders
  4. Pay all premiums when due

Explanation

Utmost good faith obligates both parties, especially the applicant, to reveal all facts that would influence the insurer's decision to accept or rate the risk. Breach of this duty can allow the insurer to rescind the contract.

Question 30General Insurance Concepts (risk, insurable interest, indemnity, contract characteristics)

The principle of indemnity is intended to:

  1. Guarantee payment of the full face amount
  2. Permit the insured to profit from a loss
  3. Restore the insured's pre-loss position Correct answer.
  4. Punish the party responsible for the loss

Explanation

Indemnity means the insured is restored to approximately the same financial position held before the loss, no better and no worse. This prevents recovery that exceeds the actual loss.

Question 31General Insurance Concepts (risk, insurable interest, indemnity, contract characteristics)

An insurance contract is aleatory because:

  1. The insured must accept the contract as written
  2. The amounts exchanged may be unequal depending on chance Correct answer.
  3. The insurer's duty to pay depends on policy conditions
  4. Only the insurer makes a legally enforceable promise

Explanation

Aleatory means the values exchanged are not necessarily equal; a small premium may produce a large claim payment, or no payment at all. The unequal exchange depends on an uncertain event.

Question 32General Insurance Concepts (risk, insurable interest, indemnity, contract characteristics)

Because an insurer drafts a policy and offers it on a take-it-or-leave-it basis, the policy is classified as a:

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

Explanation

A contract of adhesion is prepared by one party, the insurer, and accepted or rejected by the other as written. For this reason ambiguities are generally construed against the drafter.

Question 33General Insurance Concepts (risk, insurable interest, indemnity, contract characteristics)

In property insurance, insurable interest must exist:

  1. When the policy is delivered
  2. Continuously from application to loss
  3. When the application is signed
  4. At the time of the loss Correct answer.

Explanation

For property coverage, insurable interest is measured at the time of loss, because that is when indemnity is owed. A person who has sold the property before the loss has no recoverable interest.

Question 34General Insurance Concepts (risk, insurable interest, indemnity, contract characteristics)

An applicant conceals a plan to set fire to the insured building in order to collect the proceeds. This is an example of:

  1. A moral hazard Correct answer.
  2. A speculative risk
  3. A physical hazard
  4. A morale hazard

Explanation

Moral hazard is a dishonest tendency in the insured, such as an intent to cause a loss for profit. Insurers screen for it through underwriting and application questions.

Question 35General Insurance Concepts (risk, insurable interest, indemnity, contract characteristics)

The tendency of people with the greatest likelihood of loss to seek insurance most actively is called:

  1. Risk pooling
  2. Subrogation
  3. Adverse selection Correct answer.
  4. Contributory negligence

Explanation

Adverse selection is the concentration of poorer-than-average risks in an insured pool. Insurers counter it through underwriting, exclusions, and appropriate premium rating.

Question 36General Insurance Concepts (risk, insurable interest, indemnity, contract characteristics)

After paying a covered loss caused by a negligent third party, an insurer may pursue that third party to recover the amount paid. This right is known as:

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

Explanation

Subrogation lets the insurer stand in the insured's shoes against the party that caused the loss, which helps hold down premiums and prevents double recovery. The insurer can recover only what it paid.

Question 37General Insurance Concepts (risk, insurable interest, indemnity, contract characteristics)

A policy statement in which the insured promises that a specified fact is true, and whose breach may allow the insurer to deny coverage, is a:

  1. Representation
  2. Warranty Correct answer.
  3. Waiver
  4. Concealment

Explanation

A warranty is a promise or affirmative statement that becomes part of the contract, and a material breach can defeat coverage. A representation is a statement of belief made during underwriting that merely must be substantially true.

Question 38General Insurance Concepts (risk, insurable interest, indemnity, contract characteristics)

A false statement of material fact on an application that induces the insurer to issue a policy is called a:

  1. Warranty
  2. Waiver
  3. Misrepresentation Correct answer.
  4. Condition precedent

Explanation

A misrepresentation is a false statement of fact made in connection with the application. If it is material, meaning it would have affected the insurer's decision, the insurer may generally rescind the policy.

Question 39General Insurance Concepts (risk, insurable interest, indemnity, contract characteristics)

Intentional failure to disclose a material fact that the insurer could not reasonably have discovered is known as:

  1. Concealment Correct answer.
  2. Adhesion
  3. Estoppel
  4. Subrogation

Explanation

Concealment is the deliberate withholding of information the insurer needs to evaluate the risk. Like material misrepresentation, it breaches the duty of utmost good faith and may support rescission.

Question 40General Insurance Concepts (risk, insurable interest, indemnity, contract characteristics)

An insurance contract is conditional because:

  1. It is offered to the insured on a take-it-or-leave-it basis
  2. The amounts exchanged are unequal
  3. It transfers the risk of loss from the insured to the insurer
  4. Payment depends on the insured meeting policy conditions Correct answer.

Explanation

A conditional contract requires the insured to satisfy stated duties, such as prompt notice and proof of loss, before the insurer must pay. Failure to meet a condition can justify denial of the claim.

Question 41General Insurance Concepts (risk, insurable interest, indemnity, contract characteristics)

An insurance contract is unilateral. This means that:

  1. Either party may cancel the policy at any time
  2. Both parties exchange promises of equal value
  3. Only the insurer makes an enforceable promise to pay Correct answer.
  4. The insured may enforce the contract but the insurer may not

Explanation

In a unilateral contract only the insurer makes a legally enforceable promise; the insured makes no promise to pay future premiums but must comply with conditions to collect. The insured's payment of premium is the consideration that keeps the insurer's promise in force.

Question 42General Insurance Concepts (risk, insurable interest, indemnity, contract characteristics)

Insurable interest requires that the insured:

  1. Has named a beneficiary who will receive the proceeds
  2. Has paid premiums on the policy for at least one year
  3. Stands to lose financially if the property is damaged Correct answer.
  4. Holds legal title to the insured property in every case

Explanation

Insurable interest is a financial relationship such that the insured benefits from the property's continued existence and suffers loss from its destruction. Legal title is one way to show it, but custody, leasehold, or a secured debt can also create an interest.

Question 43General Insurance Concepts (risk, insurable interest, indemnity, contract characteristics)

An insurer's agent knowingly accepts a late premium, and the insurer later denies coverage on the ground of late payment. A court may bar the insurer from denying coverage under the doctrine of:

  1. Reformation
  2. Estoppel Correct answer.
  3. Subrogation
  4. Indemnity

Explanation

Estoppel prevents a party from asserting a right after its own conduct led another party to rely on that conduct to their detriment. The insurer's knowing acceptance of the late premium is treated as a waiver of the timeliness requirement.

Question 44General Insurance Concepts (risk, insurable interest, indemnity, contract characteristics)

The principle that lets insurers predict losses more accurately as the number of similar exposure units increases is the:

  1. Doctrine of adhesion
  2. Law of large numbers Correct answer.
  3. Principle of indemnity
  4. Rule of utmost good faith

Explanation

The law of large numbers holds that observed results approach expected results as the sample grows, so a large pool of similar risks makes future losses more predictable. This predictability underlies ratemaking and the viability of pooling.

Question 45General Insurance Concepts (risk, insurable interest, indemnity, contract characteristics)

Installing a fire sprinkler system in a warehouse is best classified as which risk-management technique?

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

Explanation

Loss reduction is a risk-control technique that lessens the severity of a loss once it occurs, and sprinklers limit fire damage. Avoidance would mean eliminating the exposure entirely, and transfer would mean shifting it to an insurer.

Question 46General Insurance Concepts (risk, insurable interest, indemnity, contract characteristics)

A property policy that specifies the amount the insurer will pay for a total loss without regard to actual cash value is a:

  1. Reporting form policy
  2. Valued policy Correct answer.
  3. Coinsurance policy
  4. Replacement cost policy

Explanation

A valued policy states a fixed value for the insured property and pays that amount on a total loss, which is an exception to strict indemnity. Replacement cost policies instead pay the cost to replace, subject to policy limits.

Question 47General Insurance Concepts (risk, insurable interest, indemnity, contract characteristics)

Which statement best describes insurable interest in life insurance?

  1. It must be present at the time of the insured's death
  2. It must exist when the policy is issued, but not afterward Correct answer.
  3. It may be created after the policy is delivered
  4. It is presumed to exist between any two adults

Explanation

For life insurance, insurable interest is tested when the contract is formed, which guards against wagering on a life. It need not continue afterward, so a policy remains valid if the relationship later ends, such as after a divorce.

Question 48General Insurance Concepts (risk, insurable interest, indemnity, contract characteristics)

When the wording of an insurance policy is genuinely ambiguous, courts generally:

  1. Refer the dispute to the state insurance department
  2. Apply the reading most favorable to the insurer
  3. Construe the ambiguity against the insurer Correct answer.
  4. Void the entire policy

Explanation

Because the insurer drafts the contract of adhesion, ambiguity is construed against the drafter and in favor of the insured. This rule gives the insurer an incentive to write clear policy language.

Question 49General Insurance Concepts (risk, insurable interest, indemnity, contract characteristics)

An applicant gives incorrect information on a health question without any intent to deceive. This is best described as:

  1. Concealment
  2. An innocent misrepresentation Correct answer.
  3. Estoppel
  4. Waiver

Explanation

Misrepresentation may be innocent, negligent, or fraudulent; an unintentional error is an innocent misrepresentation. The insurer's remedy still depends on whether the statement was material to its decision.

Question 50General Insurance Concepts (risk, insurable interest, indemnity, contract characteristics)

An insurer discovers that an applicant concealed a material fact that would have caused the application to be rejected. The insurer may generally:

  1. Take no action because the policy has already been delivered
  2. Cancel coverage only prospectively with notice
  3. Reduce the benefit by the amount of premium owed
  4. Rescind the policy and refund the premiums Correct answer.

Explanation

A material concealment or misrepresentation breaches utmost good faith and allows the insurer to rescind the contract as though it never existed, returning premiums paid. Prospective cancellation is the remedy for ordinary termination, not for material misrepresentation.