26 Questions
Which characteristic of insurance contracts requires potential insureds to provide accurate and complete information for the underwriter?
Based on Utmost Good Faith
In what type of contracts is it generally assumed that each party has equal knowledge and access to the facts?
Contracts of Adhesion
In eighteenth-century ocean marine insurance contracts, what was the consequence of departing from utmost good faith?
No coverage when a loss occurred
Which of the following is an example of a situation that constitutes an insurable interest?
Ownership of property
When must insurable interest exist in property insurance?
At the time of loss
What is the purpose of the principle of insurable interest?
To implement the doctrine of indemnity
Why is it important for insureds to be familiar with what constitutes an insurable interest?
To understand policy limitations
Which type of insurance policy promises to make cash payments under specified circumstances?
Health insurance policy
What is the purpose of an insurable interest in a life insurance contract?
To make the contract enforceable
Why may overinsurance lead to poor underwriting experience for life and health insurance companies?
Because the loss caused by death or illness cannot be measured precisely
Which term refers to statements made by individuals seeking insurance coverage, for the purpose of inducing insurers to enter into contracts?
Representations
What must an insurer prove in order to void a contract based on a material misrepresentation?
That the misrepresentation influenced the underwriter's decision
Which of the following scenarios would likely result in the insurer voiding the policy?
Misrepresenting one's good health when diagnosed with a severe heart ailment
What is the term for intentionally withholding a material fact from an insurance application?
Concealment
Which type of insurance requires an insurable interest only at the inception of the contract?
Life insurance
If a person transfers unencumbered title to their house to another person before the house is damaged, can they collect from the insurer?
No, they cannot collect from the insurer
What type of companies buy life insurance policies from senior citizens for a percentage of the value of the death benefits?
Life-settlement companies
What happened to viatical settlement companies after new drug regimens extended the lives of AIDS patients?
They went out of business
According to the text, insurance policies are considered contracts of adhesion because
insureds have no input in the design of a policy’s terms
According to the text, when the terms of an insurance policy are ambiguous, the courts generally
favor the insured
According to the text, the indemnity principle in insurance contracts means that
the insurer agrees to pay no more (and no less) than the actual loss suffered by the insured
According to the text, the courts interpret insurance policies based on
the insured’s own level of expertise and situation
Which one of the following is true about insurable interest in life insurance contracts?
Insurable interest is required throughout the duration of the contract
What is an example of a situation where a firm may continue a life insurance policy even after the insured person leaves the firm?
The firm has an insurable interest in the key person's life
What did the Wall Street Journal story reveal about the life insurance policies purchased by banks and large employers?
The policies were purchased without informing the employees or their families
What is the purpose of valued policy laws in some states?
To discourage insurers from selling too much coverage
Study Notes
Insurance Contracts and Insurable Interest
- Utmost good faith is a characteristic of insurance contracts that requires potential insureds to provide accurate and complete information for the underwriter.
- In insurance contracts, it is assumed that the insurer has superior knowledge and access to the facts, unlike in aleatoric contracts where each party has equal knowledge and access to facts.
- In 18th-century ocean marine insurance contracts, departing from utmost good faith would lead to the contract being voidable.
Insurable Interest
- An insurable interest exists when a person or entity stands to benefit from the continued existence of a person or property, and would suffer a financial loss if they were to be injured or damaged.
- Insurable interest must exist at the inception of the contract in property insurance.
- The purpose of the principle of insurable interest is to prevent wagering or speculative contracts and ensure that the insured has a legitimate interest in the subject matter of the insurance.
Life Insurance and Insurable Interest
- In life insurance contracts, an insurable interest exists when the beneficiary would suffer a financial loss if the insured person were to die.
- An employer may continue a life insurance policy even after an employee leaves the firm, for example, if the employer is a beneficiary of the policy.
- Insurable interest in life insurance contracts is only required at the inception of the contract.
Material Misrepresentation and Policy Voidance
- Material misrepresentation occurs when an individual seeking insurance coverage makes a false statement or withholds a material fact from the insurer.
- An insurer can void a policy if it can prove that a material misrepresentation was made, and the misrepresented fact was significant enough to affect the insurer's decision to issue the policy.
Policy Types and Companies
- Indemnity policies promise to make cash payments under specified circumstances.
- Viatical settlement companies buy life insurance policies from senior citizens for a percentage of the value of the death benefits.
Legal Aspects of Insurance Policies
- Insurance policies are considered contracts of adhesion because the insurer prepares the contract, and the insured has little or no opportunity to negotiate the terms.
- In cases of ambiguous policy terms, courts generally interpret the policy in favor of the insured.
- Courts interpret insurance policies based on the principle of contra proferentem, which means that ambiguities are resolved against the drafter of the contract.
- Valued policy laws in some states require insurers to pay the full policy limits if the insurer is found to have undervalued the property.
Test your knowledge on the concept of insurable interest in life insurance contracts. Learn about the legal requirements and how they can affect policy payouts. Explore scenarios where insurable interest may cease, such as when a key person in a firm is insured.
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