Preview Extract
CHAPTER 32-INSURANCE
TRUE/FALSE
1. In purchasing life insurance, Kelsey concealed the fact that she has a muscular disease. The
insurance company can void the policy if the muscular disease is found to be a material fact.
Answer: True
2. Victor purchased $1 million of insurance on his home even though the house was only
worth $500,000. Victor's house was destroyed by lightning. Under the insurance policy,
Victor will be able to recover $1 million.
Answer: False
3. April purchased a life insurance policy on herself. On her death, the proceeds of the
insurance were to be paid to her minor child, Ryan. Ryan is the beneficiary.
Answer: True
4. Bob issued a "binder" on behalf of his company, All Faith Insurance Co., to Ian to insure
his house. This binder constitutes final acceptance of Ian's application.
Answer: False
5. Crown Bakeries, Inc. has an insurable interest in Brian, its head pastry chef.
Answer: True
6. Universal life insurance is the same thing as whole life insurance.
Answer: False
7. Term life insurance premiums are paid only for a certain length of time, or “term’ but the
coverage lasts for the insured’s entire life.
Answer: False
8. The simplest, cheapest life insurance option is whole or straight life.
Answer: False
9. Disability insurance is important because the average person is seven times more likely to
be disabled for at least 90 days than to die before age 65.
Answer: True
10. The owner, the insured and the beneficiary are all the same person in an insurance
contract.
Answer: False
11. An insurance policy must meet all the common law requirements for a contract.
Answer: True
12. Jose and Juanita are first cousins. Jose lives in San Francisco, California; Juanita lives in
Toronto, Canada. The two have met only once in life, and may never meet again.
Nonetheless, because they are blood relatives, Juanita has an insurable interest in Jose's life.
Answer: False
13. Insurance contracts are not required to be in writing because they can be fulfilled in less
than one year.
Answer: False
14. A person always has an insurable interest in his own life.
Answer: True
15. A lie on an insurance application will make the policy void even if the lie does not relate
to the actual loss insured against.
Answer: True
MULTIPLE CHOICE
1. Insurance obtained by a limited partnership on the life of the general partner would be:
a. double indemnity insurance, because both the limited partnership and the general partner
are insured.
b. key-person insurance, because the general partner is a key person, contributing a great deal
to making the business successful.
c. a co-insurance policy because both the limited partnership and the general partner are
insured.
d. whole life or straight life insurance which builds a cash value.
Answer: B
2. Which of the following is generally covered under casualty insurance?
a. Employee theft or embezzlement.
b. Disability.
c. Transportation insurance.
d. Vandalism.
Answer: D
3. An insurance policy must meet which of the following?
a. State statutory requirements for tort law.
b. Federal statutory requirements for tort law.
c. Common law requirements for contracts.
d. Common law requirements for tort law.
Answer: C
4. Sarah has car insurance. While driving her automobile, Sarah negligently ran a red light
and hit Vi's car. Which type of coverage will pay for the damage done to Vi's car?
a. Liability insurance.
b. Comprehensive insurance.
c. Collision insurance.
d. Uninsured motorist insurance.
Answer: A
5. Abraham has just purchased his first car. His bank, First State Bank, loaned him the money
to buy the car and has required him to purchase insurance to protect the car as the collateral
for the loan. Which basic types of coverage should Abraham buy to satisfy the bank
requirement and to protect himself from the risks of operating an automobile?
a. Collision coverage only.
b. Collision and comprehensive coverage only.
c. Collision, uninsured motorist, and comprehensive coverage.
d. Collision, uninsured motorist, comprehensive, and liability coverage.
Answer: D
6. Pamela applies for a life insurance policy with Forever Young Insurance Company. When
completing the application form about past surgeries, Pamela forgot about a past outpatient
surgery when she had an infected hang-nail removed and her toe treated. One year after
issuing the policy, Pamela died suddenly from a brain aneurysm. Forever Young denies
payment under the policy based on misrepresentation. If Pamela's sister, Paula, sues Forever
Young, she will:
a. win, because once an application has been accepted, an insurer may not use a
misrepresentation on the application to avoid liability.
b. win, because Pamela's misrepresentation was not a material fact and did not increase
Forever Young's risk in insuring Pamela's life.
c. lose, because Pamela's application contained a misrepresentation of material fact.
d. lose, because an insurer can always use any misrepresentation on an application to avoid
paying.
Answer: B
7. Under which of the following does the insurer promise to pay the insured a fixed yearly
amount, as guaranteed income, after the insured attains a specified age?
a. Straight life policy.
b. Whole life policy.
c. Universal life policy.
d. Annuity contract.
Answer: D
8. Darcy buys a life insurance policy on her own life, under which she pays the annual
premiums. The insurance is issued for a specific period, but is renewable for similar periods.
Darcy is covered only as long as she makes the payments. There is no cash value portion to
the policy. Darcy probably owns:
a. whole life insurance.
b. key-person life insurance.
c. term life insurance.
d. an annuity.
Answer: C
9. Which of the following insurance policies continue for a stated period of time with the
premiums increasing with the age of the insured?
a. Double indemnity.
b. Term insurance.
c. Annuity contract.
d. Term insurance.
Answer: B
10. Liability policies, such as personal liability, professional malpractice, or business liability
insurance, do not protect the insured against:
a. a personal injury on the insured's property, such as the mail carrier who slips and falls on
the owner's sidewalk.
b. intentional torts.
c. a negligent act or omission by the property owner.
d. someone injured by the insured away from home or business.
Answer: B
11. A policy that makes payments to the owner monthly for her entire life is called:
a. whole life insurance
b. universal life insurance
c. an annuity
d. disability insurance
Answer: C
12. Health insurance plans that specify that the patient can be treated only by doctors in the
organization are called:
a. Health Maintenance Organizations
b. Health Managment Options
c. Pay for Service Plans
d. Point Source Plans
Answer: A
13. Insurance experts recommend that workers carry disability insurance to replace of their
income.
a. 50%
b. between 60% and 75%
c. 100%
d. between 75% and 95%
Answer: B
14. Liability insurance would cover:
a. injuries sustained in a fight on your property
b. damage done by a drunk driver
c. intentional poisoning committed on your property
d. an injury to a guest on your property caused by a tree limb falling on them
Answer: D
15. Which of the following is NOT a type of coverage in automobile insurance?
a. Collision
b. Comparative
c. Liability
d. Uninsured motorist
Answer: B
ESSAY
1. Insurance policies often contain a covenant of good faith and fair dealing. Even if the
clause is not in the policy, often courts will imply it. Explain the covenant of good faith and
fair dealing and provide an example illustrating when an insurance company might breach
this covenant.
Answer: This covenant requires the insurance company to act in good faith in investigating,
representing, and paying legitimate claims on behalf of its client, the insured. If a court
determines that the covenant is intentionally breached, the court may order punitive damages
in addition to compensatory damages. Examples include refusing to pay a valid claim or "low
balling" with an unreasonably low offer to settle. An insurer might also breach this covenant
by wrongfully refusing to settle a claim of a third party. If the rejection of a reasonable offer
to settle means that the insured ends up paying much more than the limits of the policy, the
insurer may have some liability for a breach of good faith and fair dealing. Fraudulently
inducing someone to buy a policy is another example of breach of the covenant of good faith
and fair dealing.
2. Most Americans spend a considerable percentage of their disposable income on insurance.
What can you do to reduce this expense?
Answer: • Do not insure against every risk. If you can afford the loss yourself, it is better not
to purchase insurance.
• Do not buy “special occasion” insurance. After a major plane crash, sales of flight accident
insurance jump. If you need life insurance, you should have it, no matter how you die. Your
family does not need more money because you die in a plane crash rather than a car accident.
The same rule holds true for other special occasion policies such as cancer insurance. You
need health insurance regardless of your illness.
• Select as high a deductible as you can afford. The higher the deductible, the lower the
premium. Over the lifetime of your house or car, you can save thousands of dollars by selfinsuring the small losses and buying insurance to protect only against major catastrophes.
• Shop for the best price. The lowest-cost company may charge as little as two thirds as much
as its highest-price competitor. The Internet offers a great opportunity to compare prices for
different types of insurance.
• Shop for quality. An insurance company can fail as easily as any other business. What a
disaster to pay premiums, only to discover later that you are not in safe hands after all.
3. 3Discuss the pros and cons of whole life (or straight life) insurance.
Answer: Whole life or straight life insurance is designed to cover the insured for his entire
life. A portion of the premiums pays for insurance, and the remainder goes into savings. This
savings portion is called the cash value of the policy. The company pays dividends on this
cash value and typically, after some years, the dividends are large enough to cover the
premium so that the owner does not have to pay any more. The cash value accrues without
being taxed until the policy is cashed in. The owner can borrow against the cash value, in
many cases at a below-market rate. In addition, if the owner cancels the policy, the insurance
company will pay her the policy’s cash value. When the owner purchases the policy, the
company typically sets a premium that stays constant over the life of the policy. The
advantage of a whole life policy is that it forces people to save. It also has some significant
disadvantages:
• The investment returns from the savings portion of whole life insurance have traditionally
been mediocre. Mutual funds may offer better investment opportunities.
• A significant portion of the premium for the first year goes to pay overhead and
commissions. Agents have a great incentive to sell whole life policies, rather than term,
because their commissions are much higher.
• Unless the customer holds a policy for about 20 years, it will typically generate little cash
value. Half of all whole life policyholders drop their policies in the first seven or eight years.
At that point, the policy has generated little more than commissions for the agent.
• Whole life insurance provides the same amount of insurance throughout the insured’s life.
In contrast, most people need more insurance when they have young children and less as they
approach retirement age.
4. Discuss the rules for insurable interests.
Answer: These are the rules on insurable interest:
• Definition. A person has an insurable interest if she would be harmed by the danger that she
has insured against. .
• Amount of loss. The insurable interest can be no greater than the actual amount of loss
suffered.
• Life insurance. A person always has an insurable interest in his own life and the life of his
spouse or fiancée. Parents and minor children also have an insurable interest in each other.
Creditors have a legitimate interest in someone who owes them money. For some states, the
standard is that you have an insurable interest in someone if the person is worth more to you
alive than dead.
• Work relationships. Business partners, employers, and employees have an insurable interest
in each other if they would suffer some financial harm from the death of the insured. For
example, companies sometimes buy key person life insurance on their officers to compensate
if they were to die.
Test Bank For Introduction to Business Law
Jeffrey F. Beatty, Susan S. Samuelson
9781133188155
