Chapter 51
Insurance
N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows.
N A question new to this edition of the Test Bank.
+ A question modified from the previous edition of the Test Bank.
= A question included in the previous edition of the Test Bank.
TRUE/FALSE QUESTIONS
B1. Insurance is classified according to the amount of the payment on a claim.
B2. A business firm may have an insurable interest in the life of any of its employees, except a
key employee.
B3. A person can insure anything in which he or she has an insurable interest.
B4. An insurable interest in property must exist when a policy is purchased.
B5. Credit insurance pays to a debtor the balance of a debt on his or her disability, death,
insolvency, or bankruptcy.
B6. Misstatements or misrepresentations in an application for insurance can void a policy.
B7. Insurance coverage is never effective until a formal written policy is issued.
B8. A broker is an agent of the insurance company.
B9. Under a coinsurance clause, a homeowner who insures a home for 80 percent of its
value can recover only 80 percent of the cost for damage to it.
B10. An incontestability clause prohibits an insured from entering a contest during the term of a
policy.
B11. A pro rata clause in a fire insurance policy requires that any loss be shared
proportionately by all insurers covering the same risk.
B12. If a provision in an insurance policy is ambiguous, the provision will be interpreted
against the insurance company.
B13. The words used in an insurance contract are given special meaning.
B14. An insurance company may cancel an insured’s policy if the insured appears as a
witness in a case against the company.
B15. An incorrect statement as to the age of the insured provides an insurance company with an
excuse to avoid payment on the insured’s death.
B16. An insurer has a duty to avoid paying a claim even if it means acting in bad faith.
B17. In defense against payment, an insurance company can raise any of the defenses that
would be valid in an ordinary action on a contract.
B18. Under a life insurance policy, in the absence of contractual exclusion, any cause of
death is one of the insurer’s risks.
B19. A fire insurance policy is assignable without the insurer’s consent because the policy
“runs” with the insured property.
B20. Comprehensive general liability insurance can encompass as many risks as the insurer
agrees to cover.
MULTIPLE CHOICE QUESTIONS
B1. Reno is the beneficiary of a life insurance policy on Sula’s life obtained from Thicket
Insurance Company. The insured of this policy is
a. Reno.
b. Sula.
c. Thicket.
d. the agent or broker through whom the policy was obtained.
B2. Feta is a partner in the game design firm GR8 Games, Inc., which obtains key-person
life insurance on Feta in the amount of $1 million from Halo Insurance Company. Feta
quits GR8 Games to join Icy Applications, Inc. Feta dies. Under the principle of
insurable interest, Halo must pay the $1 million to
a. Feta’s spouse Jo.
b. GR8 Games.
c. Icy Applications.
d. no one.
B3. Infinite Sales Corporation obtains an insurance policy that protects Infinite Sales in the
event of the death or disability of Jacqueline, Infinite’s executive sales manager. This is
a. casualty insurance.
b. fidelity or guaranty insurance.
c. key-person life insurance.
d. term life insurance.
B4. Beth obtains a life insurance policy from Consumers Insurance Company, naming her
spouse Don as the beneficiary. Beth and Don are divorced. There is no provision in the
policy about divorce. On Beth’s death, Consumers must
a. not pay because Don and Beth were divorced.
b. not pay because Don had no insurable interest on Beth’s death.
c. pay Don.
d. pay Beth’s estate.
B5. Erte applies for, and obtains, casualty insurance coverage from Friendly Insurance
Company for his business, Golf Club, Inc. The effective date of the policy is the date
a. Erte submits the application.
b. Friendly Insurance accepts the first premium.
c. Friendly Insurance issues the policy.
d. the application specifies as the effective date.
B6. Mena applies for a homeowners’ insurance policy on her house with Neighbors
Insurance Company through Obie, an agent who works for Neighbors. In this
transaction, Obie is
a. an agent for both parties.
b. Mena’s agent, and not Neighbors’s agent.
c. Neighbors’s agent, and not Mena’s agent.
d. not an agent.
B7. Felicity Cookware Company makes and sells kitchen products. To cover injuries to
consumers if the products prove defective, Felicity should obtain
a. group insurance.
b. health insurance.
c. liability insurance.
d. life insurance.
B8. Mila, who captains a commercial fishing boat, obtains a policy from North Coast
Insurance Company, which agrees to pay $500,000 to Mila’s beneficiary on Mila’s
death. This is
a. floater insurance.
b. life insurance.
c. major medical insurance.
d. marine insurance.
B9. Donald applies for a life insurance policy with Equity Insurance Company through
Fletch, an agent who works for Equity. Donald pays the initial premium. Fletch writes
a binder, which
a. acknowledges the application and promises to consider it.
b. attests to the truth of each statement in the application
c. evidences receipt of the payment of the initial premium.
d. indicates that a policy is pending and states its essential terms.
B10. Regular Business, Inc. (RBI), obtains a fire insurance policy from Statistical Insurance
Company on a $400,000 warehouse. The policy includes an 80-percent coinsurance
clause. RBI insures the property for $320,000. In a fire, the warehouse suffers
$200,000 in damage. RBI can recover
a. $400,000.
b. $320,000.
c. $200,000.
d. $80,000.
B11. Peg obtains from QT Insurance Company a policy that provides that after it has been
in force for a certain time, QT cannot question statements made in the application.
This is
a. an antilapse clause.
b. an arbitration clause.
c. an appraisal clause.
d. an incontestability clause.
B12. Cathy obtains from Depend Insurance Company a policy that provides if a dispute
arises between the parties concerning the settlement of a claim, the dispute must be
submitted to an impartial third party, not a court, for resolution. This is
a. an antilapse clause.
b. an arbitration clause.
c. an appraisal clause.
d. an incontestability clause.
B13. Isabel obtains a fire insurance policy on her home from Justice Insurance Company.
The home is lost in a fire, but the parties dispute the amount of Justice’s liability under
an ambiguous clause in the policy. A court would most likely
a. interpret the clause against Isabel.
b. interpret the clause against Justice.
c. rewrite the clause and apply it as rewritten.
d. strike the clause from the policy.
B14. Haya obtains an insurance policy from Inviolable Insurance Corporation (IIC). IIC may
cancel, or refuse to renew, the policy because of
a. Haya’s appearance as a witness against IIC.
b. Haya’s gender.
c. Haya’s national origin.
d. none of the choices.
B15. Trustworthy Insurance, Inc., has a valid reason to cancel a policy issued to USA Sales
Company. In most states, Trustworthy could cancel the policy on
a. advance oral notice.
b. oral or written notice, advance or contemporaneous.
c. without notice.
d. advance written notice.
B16. Kelsy obtains a business liability insurance policy from Luminous Insurance Company
for Kelsy’s Framing & Art Supplies store. When an event occurs that gives rise to a
claim, each party has a duty to
a. cooperate in an investigation to determine the facts.
b. file a suit against the other so that a court can settle the claim.
c. find a third party on whom to impose liability.
d. pay any outstanding premium or refund any unearned amount.
B17. Shelley obtains a life insurance policy with no cash surrender value or cash value, and
names her son Thad as the beneficiary. This is
a. limited-payment life insurance.
b. term insurance.
c. universal insurance.
d. whole life insurance.
B18. Fred misstates his age in applying for a life insurance policy with Gamma Insurance
Company. Due to this “error,” Gamma can
a. adjust the amount of the premium or the benefits.
b. cancel the policy.
c. file criminal charges against Fred for fraud.
d. “misstate” the amount payable to the policy’s beneficiary.
B19. Trina pays a premium to Unity Insurance Corporation for fire insurance against the
loss of her Viewpoint Office Building. After Trina sells the building to Wade, it burns
down. Under the policy, Unity must pay
a. neither Trina nor Wade.
b. Trina and Wade.
c. Trina only.
d. Wade only.
B20. Doctors Medical Associates obtains an insurance policy that protects its members
against negligence claims by their patients. This is
a. casualty insurance.
b. fidelity or guaranty insurance.
c. malpractice insurance.
d. workers’ compensation insurance.
ESSAY QUESTIONS
B1. Patty, who is divorced, owns a house. She has no reasonable expectation of benefit
from the life of Quinn, her ex-spouse, but she applies for insurance on his life anyway.
She also obtains a fire insurance policy on the house, which she later sells. Five years
later, Quinn dies and the house is destroyed in a fire. Can Patty obtain payment on
either the death of Quinn or the loss of the house? Explain.
B2. Computer Electronics Corporation (CEC) discovers a defect in its newly developed,
recently marketed hard drives. CEC decides to recall the product and replace it with
another. CEC’s insurance policy with Delta Business Insurance Company will cover any
harm to customers that occurs before the drives are returned. Is it likely that the
policy will also pay for the recall and replacement? If so, what type of policy does CEC
have?