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Contract Law

Practice questions on contract law for the property exam, each with an answer and explanation.

Study questions and answers

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1. Which is NOT one of the four elements of a legal insurance contract?

  1. Offer and acceptance
  2. Consideration
  3. Legal purpose
  4. Insurable interest at policy delivery
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D. Insurable interest at policy delivery
The four elements are agreement (offer and acceptance), consideration, competent parties, and legal purpose.

2. Under the principle of indemnity, a property policy is designed to:

  1. Pay the insured a profit after a loss
  2. Pay the full policy limit for any covered loss
  3. Restore the insured to about the same financial position as before the loss
  4. Replace damaged property with new property in all cases
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C. Restore the insured to about the same financial position as before the loss
Indemnity means making the insured whole again, no better and no worse off than before the loss.

3. For property insurance, insurable interest must exist:

  1. Only when the policy is applied for
  2. At application and at every renewal only
  3. Only when the policy is renewed
  4. At the time of the loss
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D. At the time of the loss
A property owner must have a financial interest in the property when the loss happens in order to collect.

4. An insured pays a premium of $900 and suffers a $150,000 covered fire loss. Which contract characteristic does this illustrate?

  1. Aleatory
  2. Unilateral
  3. Adhesion
  4. Conditional
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A. Aleatory
An aleatory contract involves an unequal exchange of value that depends on an uncertain event.

5. Because the insurer writes the policy and the insured cannot negotiate its wording, any ambiguity is interpreted in favor of the insured. This is because the policy is a contract of:

  1. Indemnity
  2. Utmost good faith
  3. Adhesion
  4. Warranty
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C. Adhesion
In a contract of adhesion one party drafts the terms, so courts resolve unclear wording against that party.

6. An insured must give notice of a loss and cooperate with the insurer in order to collect. This makes the policy:

  1. Unilateral
  2. Conditional
  3. Aleatory
  4. Personal
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B. Conditional
A conditional contract requires certain conditions to be met before the insurer must pay a claim.

7. A statement on an application that is guaranteed to be true and becomes part of the contract is a:

  1. Warranty
  2. Representation
  3. Concealment
  4. Stipulation
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A. Warranty
A warranty is guaranteed true and any breach can void coverage. A representation only needs to be true to the best of the applicant's knowledge.

8. An insurer that knowingly accepts premiums despite a violation of a policy condition may be prevented from later denying coverage because of that violation. This is the doctrine of:

  1. Subrogation
  2. Parol evidence
  3. Indemnity
  4. Estoppel
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D. Estoppel
Waiver is giving up a known right. Estoppel keeps the insurer from asserting a right it has already given up through its conduct.

9. The rule that a written contract cannot be changed by earlier oral agreements is the:

  1. Parol evidence rule
  2. Doctrine of reasonable expectations
  3. Rule of adhesion
  4. Concealment rule
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A. Parol evidence rule
The parol evidence rule makes the written policy the final agreement. Prior or side oral statements cannot change its terms.

10. Authority that a reasonable customer would believe an agent has, based on the insurer's actions, is:

  1. Express authority
  2. Implied authority
  3. Apparent authority
  4. Binding authority
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C. Apparent authority
Apparent authority comes from what the insurer leads the public to believe. The insurer can be held to an agent's acts within that apparent authority.

11. A temporary agreement that gives immediate coverage until the policy is issued is called a:

  1. Binder
  2. Certificate
  3. Declaration
  4. Endorsement
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A. Binder
A binder provides coverage right away and is usually valid for a limited time until the policy is issued or the risk is declined.

12. A property policy cannot be transferred to the buyer of the home without the insurer's written consent. This reflects that property insurance is a:

  1. Personal contract
  2. Valued contract
  3. Contract of adhesion
  4. Bilateral contract
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A. Personal contract
Property insurance insures the person, not the property, so the insurer must approve any assignment of the policy.

13. Which of the following is generally required before a misrepresentation allows an insurer to void a property policy?

  1. The statement was made orally
  2. The agent wrote the statement
  3. The statement was material to the risk
  4. The policy was issued within 30 days
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C. The statement was material to the risk
A misrepresentation must be material, meaning it would have changed the insurer's decision to accept the risk or its premium.
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