Chapter 4 Quiz
Twenty questions to check your grasp of the legal frame: fifteen multiple-choice and five short-answer. Try them closed-book first; the answer key is in the collapsed block at the bottom. Section references point you back to the chapter.
Multiple choice
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An insurance policy's ambiguous clause is generally construed against the insurer. This rule follows most directly from which feature of the insurance contract? - A. It is aleatory. - B. It is a contract of adhesion. - C. It is unilateral. - D. It is conditional.
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The principle that both parties to an insurance contract owe a higher duty of honesty and disclosure than parties to an ordinary bargain is called: - A. indemnity. - B. subrogation. - C. utmost good faith (uberrimae fidei). - D. insurable interest.
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In property insurance, the insurable interest must exist: - A. only at the inception of the policy. - B. at the time of the loss. - C. both at inception and continuously thereafter. - D. at no particular time; property insurance has no interest requirement.
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The doctrine that restores the insured to their pre-loss financial position — no worse, but no better — is: - A. insurable interest. - B. subrogation. - C. utmost good faith. - D. indemnity.
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A statement on the application that induces the insurer to enter the contract, and is tested for materiality and substantial truth, is a: - A. warranty. - B. representation. - C. condition precedent. - D. concealment.
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At strict common law, a warranty in an insurance contract must be: - A. substantially true to the best of the insured's knowledge. - B. material to the loss before it affects coverage. - C. literally and exactly true (or exactly performed). - D. disclosed only if the insurer asks about it.
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The silent withholding of a material fact the applicant knows and the insurer does not is: - A. a warranty. - B. an immaterial misrepresentation. - C. concealment. - D. subrogation.
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After paying a covered loss caused by a negligent third party, the insurer's right to step into the insured's shoes and recover from that third party is: - A. contribution. - B. subrogation. - C. salvage. - D. rebating.
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Subrogation serves two purposes. They are best stated as: - A. raising premiums and reducing reserves. - B. preventing double recovery and keeping the cost of loss on the party at fault. - C. increasing the insured's recovery and waiving the deductible. - D. exempting insurers from antitrust and harmonizing the states.
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The 1944 Supreme Court decision that held interstate insurance was subject to federal antitrust law, prompting Congress to act, was:
- A. Carter v. Boehm.
- B. United States v. South-Eastern Underwriters Association.
- C. Paul v. Virginia.
- D. the Sherman Antitrust case.
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The McCarran-Ferguson Act (1945) is best described as the statute that:
- A. created a federal insurance regulator.
- B. returned regulation of the business of insurance to the states and exempted it from most federal law to the extent state law regulates it.
- C. abolished state insurance departments.
- D. required all insurers to file rates federally.
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Under a prior-approval rate-regulation system, an insurer:
- A. may use new rates immediately and file them later.
- B. need not file rates at all; the market disciplines price.
- C. must file rates and wait for the regulator's affirmative approval before using them.
- D. may use rates first but must obtain approval within 30 days.
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The three-part legal standard for an insurance rate is that it must not be:
- A. filed, approved, or competitive.
- B. excessive, inadequate, or unfairly discriminatory.
- C. aleatory, unilateral, or conditional.
- D. admitted, surplus, or rebated.
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Using a facially neutral, legitimately predictive factor that functions as a stand-in for a prohibited characteristic (such as race) is called:
- A. fair discrimination.
- B. proxy discrimination.
- C. anti-rebating.
- D. open competition.
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A risk placed in the surplus-lines market is generally:
- A. backed by the state guaranty fund and written on filed forms.
- B. written by an admitted insurer at filed rates.
- C. written by a non-admitted insurer on freedom-of-rate-and-form terms and not backed by the state guaranty fund.
- D. prohibited from being written at all.
Short answer
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Explain why an insurance policy is described as an aleatory contract, and how that feature relates to the doctrines (insurable interest and indemnity) that keep it from being a wager. (§4.1, §4.2)
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A homeowner sells her house, keeps the unexpired fire policy, and the house burns a week later. She tries to collect. Which doctrine defeats the claim, and what specifically does the property-insurance timing rule require? (§4.2)
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Distinguish a material misrepresentation from an immaterial one, and state the practical test an underwriter uses to tell them apart. What remedy may a material misrepresentation support? (§4.3)
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The chapter says state regulation has two primary missions that "sometimes pull against each other." Name the two missions, and give one example of how an underwriter must serve both at once. (§4.5)
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State the central paradox of fair vs. unfair discrimination: why must insurance discriminate to function, and where does that legitimate discrimination cross the line into the unfair kind? Name one classification that is off the table entirely. (§4.7)