1
Chapter 50
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. Businesses typically protect their financial interests by obtaining insurance.
B2. A business organization cannot obtain insurance on the life of a person, even on the
life of an individual who is important to that organization.
B3. For an insurance contract to be binding, consideration in the form of a premium
must be given.
B4. Employer’s liability insurance insures an employer against liability for injuries or
losses sustained by employees during the course of their employment.
2 TEST BANK B—UNIT TEN: PROPERTY AND ITS PROTECTION
B5. For property insurance, the insurable interest must exist when a policy is
purchased.
B6. Misstatements or misrepresentations in an application for insurance can affect
the amount of a premium but cannot void a policy.
B7. A broker is not an agent of the insurance company or the applicant.
B8. A person who is obtaining insurance from an insurance company’s agent is not
usually protected until a formal written policy is issued.
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 insurer from contesting statements made in
an insurance application until a specified time has elapsed.
B11. A pro rata clause requires that all carriers proportionately share in any loss.
B12. When there is an ambiguity in an insurance policy, the provision generally is
interpreted against the insurance company.
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B13. The words used in an insurance contract are given their ordinary meanings in light
of the nature of the coverage involved.
B14. An insurance company may cancel an insured’s policy for any reason and at
any time.
B15. An insurance company may require an applicant to give the company permission to
access the applicant’s private medical records and credit ratings, for the purpose of
evaluating the risk.
B16. An insurer has a duty to avoid paying a claim even if it means acting in bad
faith.
B17. An absolute defense against payment exists if the insurer can show that the
insured lacked an insurable interest.
B18. Under a life insurance policy, in the absence of contractual exclusion, any
cause of death is one of the insurer’s risks.
B19. Before a loss has occurred, a fire insurance policy is assignable without the
consent of the insurer.
4 TEST BANK B—UNIT TEN: PROPERTY AND ITS PROTECTION
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
Traditional Insurance Company. The underwriter of this policy is
a. Reno.
b. Sula.
c. Traditional Insurance.
d. the agent or broker through whom the policy was obtained.
B2. Bev is an employee of the accounting firm Catz & Douglas, which obtains key-
person life insurance on Bev in the amount of $1 million from Equity Insurance
Company. Bev quits Catz & Douglas to join Financial Analysis, LLC. Bev dies.
Under the principle of insurable interest, Equity Insurance must pay the $1
million to
a. Bev’s spouse Grant.
b. Catz & Douglas.
c. Financial Analysis.
d. no one.
B3. Ethel obtains a life insurance policy from Fidelity Insurance Company, naming
her spouse Grover as the beneficiary. Ethel and Grover are divorced. There is
no provision in the policy about divorce. On Ethel’s death, Fidelity must pay
a. no one because Ethel and Grover are divorced.
b. Ethel’s estate and Grover jointly.
c. Grover.
d. Ethel’s estate.
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B4. WeatherGuard Roofing Corporation obtains an insurance policy that protects
WeatherGuard against liability in the event of injuries or losses sustained by its
employees during the course of their employment that are not covered under
workers’ compensation insurance. This is
a. casualty insurance.
b. employer’s liability insurance.
c. key-person life insurance.
d. term life insurance.
B5. Grid Tool Company makes and sells tools and other hardware supplies. To
cover injuries to consumers if the products prove defective, Grid Tool should
obtain
a. disability insurance.
b. health insurance.
c. liability insurance.
d. life insurance.
B6. Estelle, who owns and operates a commercial dairy farm, obtains a policy from
Farm & Ranch Insurance Company, which agrees to pay $500,000 to Gabe,
Estelle’s son and beneficiary, on her death. This is
a. disability insurance.
b. health insurance.
c. liability insurance.
d. life insurance.
B7. Grace applies for a homeowners’ insurance policy on her house with Heroic
Insurance Company through Ian, a broker. In this transaction, Ian is
a. an agent for both parties.
6 TEST BANK B—UNIT TEN: PROPERTY AND ITS PROTECTION
b. Grace’s agent, and not Heroic’s agent.
c. Heroic’s agent, and not Grace’s agent.
d. not an agent for either party.
B8. Gwen applies for a homeowners’ insurance policy on her house with Home &
Life Insurance Company through Ivy, an agent who works for Home & Life. In
this transaction, Ivy is
a. an agent for both parties.
b. Gwen’s agent, and not Home & Life’s agent.
c. Home & Life’s agent, and not Gwen’s agent.
d. not an agent for either party.
B9. EquipLease Company pays a premium to Federated Insurance Inc. for fire
insurance against the loss of EquipLease’s offices, warehouse, and storage
center. After EquipLease sells the facilities to Great State Trucking, Inc., the
warehouse is lost in a fire. Under the policy, Federated must pay
a. neither EquipLease nor Great State.
b. EquipLease and Great State proportionately.
c. EquipLease only.
d. Great State only.
B10. Dental Clinic obtains an insurance policy that protects its members against
negligence claims by their patients. This is
a. casualty insurance.
b. employer’s liability insurance.
c. malpractice insurance.
d. workers’ compensation insurance.
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B11. Lamont applies for a health insurance policy with MedInsure, Inc., an insurance
company, through Netta, an agent who works for MedInsure. Lamont pays the
initial premium. Netta 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.
B12. Root & Branch Lumber Company obtains a fire insurance policy from Security
Insurance, Inc., on a $400,000 warehouse. The policy includes an 80-percent
coinsurance clause. Root & Branch insures the property for $320,000. In a fire,
the warehouse suffers $200,000 in damage. Root & Branch can recover
a. $400,000.
b. $320,000.
c. $200,000.
d. $80,000.
B13. Ollie obtains a health-insurance policy for his family from Protection Insurance
Company. The policy includes an incontestability clause. Under such a clause,
after a policy has been in force for a specified period or time, such as two or
three years
a. Ollie cannot contest Protection’s insurable interest.
b. Ollie cannot contest Protection’s refusal to pay a claim.
c. Protection cannot contest Ollie’s eligibility for continued coverage.
d. Protection cannot contest Ollie’s statements in the application.
B14. The Fish House, a seafood restaurant, obtains from Guaranty 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.
8 TEST BANK B—UNIT TEN: PROPERTY AND ITS PROTECTION
b. an arbitration clause.
c. an appraisal clause.
d. an incontestability clause.
B15. Rafe obtains a fire insurance policy on his vacation cabin near Smoky
Mountain from Torchlight Insurance Company. The cabin is lost in a fire, but
the parties dispute the amount of Torchlight’s liability under an ambiguous
clause in the policy. A court would most likely
a. interpret the clause against Rafe.
b. interpret the clause against Torchlight.
c. rewrite the clause and apply it as rewritten.
d. strike the clause from the policy.
B16. Myles obtains a property insurance policy from Nova Insurance Company for
Myles’s restored 1957 Chevy. Nova can cancel the policy
a. if Myles increases the risk assumed by the Nova.
b. if Myles files a claim under the policy.
c. if Myles appears as a witness in a case brought against Nova.
d. under no circumstances.
B17. Commerce & Business Insurance, Inc., has a valid reason to cancel a policy
issued to DIY Auto & Truck Parts Company. In most states, Commerce &
Business could cancel the policy
a. on advance oral or written notice.
b. on oral or written notice but only after arbitration.
c. without notice.
d. on advance written—not oral—notice.
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B18. Anna obtains a business liability insurance policy for her Brew & Bagels Coffee
Shop from ChoiceFirst Insurance Company. 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.
B19. Shipping Corporation applies to TransInsurance Company for a fire insurance
policy on Shipping’s warehouse. On the application, Shipping understates the
age of the property to obtain a lower premium. When a fire destroys the ware–
house, TransInsurance can
a. deny payment, because a fire destroyed the warehouse.
b. deny payment, because of fraud in the application.
c. not deny payment, because a fire destroyed the warehouse.
d. not deny payment, because the application is not part of the policy.
B20. Durant obtains a life insurance policy with no cash surrender value or cash
value, and names his daughter Elise as the beneficiary. This is
a. limited-payment life insurance.
b. term insurance.
c. universal insurance.
d. whole life insurance.
ESSAY QUESTIONS
B1. Francesca, who is divorced, owns a house. She has no reasonable expectation
of benefit from the life of Gordo, 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, Gordo dies and the house is destroyed in a fire.
10 TEST BANK B—UNIT TEN: PROPERTY AND ITS PROTECTION
Can Francesca obtain payment on either the death of Gordo or the loss of the
house? Explain.
B2. eDigital Enterprise Corporation discovers a defect in its newly developed,
recently marketed tablets. eDigital decides to recall the product and replace it
with another. eDigital’s insurance policy with Finance & Business Insurance
Company will cover any harm to customers that occurs before the tablets are
returned. Is it likely that the policy will also pay for the recall and replacement?
If so, what type of policy does eDigital have?