Insurance Insurance Contracts & Policy Interpretation 1 — Questions and Answers
Question 1: What is the principle of 'utmost good faith' (uberrimae fidei) in insurance contracts?
- It requires both parties to disclose all material facts relevant to the insurance contract (Correct answer)
- It requires the insurer to pay all claims without investigation
- It limits the insured's liability to the policy premium
- It guarantees the insured will receive payment for all losses
Correct answer: It requires both parties to disclose all material facts relevant to the insurance contract
Utmost good faith requires both the insurer and insured to honestly disclose all material facts that could affect the contract terms.
Question 2: Which element is NOT required for a valid insurance contract?
- An offer and acceptance
- A government-issued license number for the insured (Correct answer)
- Consideration
- Legal purpose
Correct answer: A government-issued license number for the insured
Valid insurance contracts require offer/acceptance, consideration, legal purpose, and competent parties — a government-issued license number is not a required contract element.
Question 3: After paying a claim, what does 'subrogation' allow an insurer to do?
- Cancel the insured's policy without a refund
- Pursue recovery from a third party responsible for the loss (Correct answer)
- Increase the insured's premiums retroactively
- Require the insured to pay an additional deductible
Correct answer: Pursue recovery from a third party responsible for the loss
Subrogation gives the insurer the legal right to step into the insured's shoes and seek reimbursement from the at-fault third party.
Question 4: A policy that covers claims arising from incidents that occurred during the policy period, regardless of when the claim is filed, is known as a:
- Claims-made policy
- Occurrence policy (Correct answer)
- Open-perils policy
- Blanket policy
Correct answer: Occurrence policy
An occurrence policy covers losses that happen during the policy period, even if the claim is submitted years after expiration.
Question 5: What is an 'endorsement' in an insurance policy?
- A written modification that changes the terms of the original policy (Correct answer)
- The insured's signature on the application form
- The insurer's guarantee of timely claim payment
- A standard exclusion included in all policies by law
Correct answer: A written modification that changes the terms of the original policy
An endorsement (also called a rider) is a written amendment attached to the policy that modifies its terms, coverage, or conditions.
Question 6: Which provision outlines the conditions under which an insurer has the right to terminate coverage?
- Subrogation clause
- Cancellation and nonrenewal provision (Correct answer)
- Insuring agreement
- Coinsurance clause
Correct answer: Cancellation and nonrenewal provision
The cancellation and nonrenewal provision specifies the conditions, notice requirements, and procedures for terminating the policy.
Question 7: What does 'pro-rata cancellation' of an insurance policy mean?
- The insurer retains a short-rate penalty and refunds the remainder
- The insured receives a full refund of all premiums paid
- The unearned premium is refunded based on the exact unused days of the policy period (Correct answer)
- The policy is renewed at a prorated lower premium rate
Correct answer: The unearned premium is refunded based on the exact unused days of the policy period
Pro-rata cancellation refunds the unearned premium calculated exactly based on the remaining days of coverage without any penalty charge.
Insurance Insurance Contracts & Policy Interpretation 1
What is the principle of 'utmost good faith' (uberrimae fidei) in insurance contracts?