Insurance Principles and Contracts

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Questions and Answers

A producer who is acting as an agent is representing:

Always the insured

Always the insurer (correct)

The insured, the applicant and the beneficiary

The insured and the insurer

In order to be valid, a contract must be between individuals considered legally able to enter into an agreement. This principle is known as:

Agreement

Considerations

Competent parties (correct)

Restricted persons

A company that is licensed to sell insurance in a particular state is:

A nonadmitted company

A domiciled company

A foreign company

An authorized company (correct)

An insurance contract is an aleatory contract. This means:

Equal value is not given by both parties to the contract Signup and view all the answers

Which of the following would be considered a speculative risk?

The possibility the painting you bought might be a long-lost masterpiece Signup and view all the answers

Which is the proper term for a company owned by its policyowners?

A mutual insurance company Signup and view all the answers

All of the following are elements of a contract, except:

Authority Signup and view all the answers

Each of the following would be an element in the definition of fraud, except:

An individual warrants a fact stated on the application Signup and view all the answers

Legally speaking, a producer has a __________ duty when handling life insurance premiums and applications for an insurer.

fiduciary Signup and view all the answers

_________ refers to the jurisdiction where an insurer was formed or incorporated.

Domicile Signup and view all the answers

To address adverse selection what can an insurer legally do?

Establish and enforce sound underwriting practices Signup and view all the answers

The relationship of a person who acts on behalf of a company whereby the person's actions can bind the company is known as:

The law of agency Signup and view all the answers

_____________ consists of groups of underwriters called syndicates, each of which specializes in insuring a particular type of risk.

Lloyds of London Signup and view all the answers

The insurance industry is primarily regulated at the _________ level.

State Signup and view all the answers

Which of the following is NOT considered one of the essential elements of a contract?

Conditions Signup and view all the answers

The most effective way to ensure that the applicant will accept the policy when it is issued is:

To have the applicant pay the initial premium at the time of application Signup and view all the answers

Which of the following is NOT a characteristic of life insurance as property?

It requires a fund portfolio manager Signup and view all the answers

Which of the following statements about the average number of people who die each year is true?

It is called the mortality rate Signup and view all the answers

Study Notes

Insurance Producers and Agents

Producers acting as agents represent the insured and the insurer, but primarily the insurer.

Contract Validity

Valid contracts must involve parties who possess legal capacity, referred to as competent parties.

Licensed Insurance Companies

Companies licensed to sell insurance in a state are called authorized companies.

Nature of Insurance Contracts

Insurance contracts are aleatory, meaning unequal values are exchanged—one party pays premiums, while the insurer pays claims.

Speculative Risks

Speculative risks involve uncertainty of profit or loss, such as purchasing a painting that might be valuable.

Ownership of Insurance Companies

Mutual insurance companies are owned by policyholders, contrasting with other types of insurance organizations.

Elements of a Contract

Essential elements of a contract include offer and acceptance, legal purpose, and consideration; authority is not required.

Definition of Fraud

Fraud in insurance includes false statements on applications, withholding material facts, and intentional misrepresentation; a warranty on an application is not classified as fraud.

Producer's Duties

Producers hold a fiduciary duty regarding handling premiums and applications for the insurer, emphasizing trust and responsibility.

Jurisdiction of Insurers

The term domicile indicates the jurisdiction where an insurer was formed or incorporated.

Adverse Selection Mitigation

Insurers combat adverse selection by establishing sound underwriting practices, ensuring they only accept insurable risks.

Agency Law

The law of agency defines the relationship where a producer acts on behalf of an insurer, binding the company to the actions taken.

Lloyds of London

Lloyds of London is an example of a syndicate organization where groups of underwriters specialize in particular risks.

Insurance Regulation

The insurance industry is mainly regulated at the state level, ensuring compliance with local laws and standards.

Non-essential Contract Elements

Conditions are not considered essential elements of a contract; key components include competent parties, legal purpose, and offer and acceptance.

Premium Acceptance Strategy

Collecting the initial premium at policy delivery is an effective way to increase the likelihood of policy acceptance.

Characteristics of Life Insurance

Life insurance does not require a fund portfolio manager, distinguishing it from other financial investments.

Mortality Rate

The mortality rate refers to the average number of deaths in a population each year, a fundamental concept in life insurance.

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Description

Test your understanding of key concepts in insurance, including the roles of producers and agents, the validity of contracts, and the nature of insurance agreements. Explore topics like speculative risks and mutual insurance ownership to solidify your knowledge of insurance fundamentals.