CIA Legal & Regulatory Compliance in Insurance 3 — Questions and Answers
Question 1: Under the principle of utmost good faith (uberrimae fidei), which party has the greatest duty to disclose all material facts?
- The insurance agent only
- The insured, since the insurer relies on the application (Correct answer)
- The insurer, since it sets premiums
- The state insurance department
Correct answer: The insured, since the insurer relies on the application
The doctrine of utmost good faith requires the insured to voluntarily disclose all material facts to the insurer, even if not specifically asked, because the insurer cannot independently verify all information.
Question 2: A 'twisting' violation in insurance occurs when a producer:
- Charges premiums above the filed rates
- Induces a policyholder to lapse one policy and replace it with another through misrepresentation (Correct answer)
- Sells insurance across state lines without licensure
- Fails to remit premiums to the insurer
Correct answer: Induces a policyholder to lapse one policy and replace it with another through misrepresentation
Twisting is an unfair trade practice where a producer uses misrepresentation or incomplete comparisons to persuade a policyholder to replace an existing policy to the policyholder's detriment.
Question 3: Which legal concept prevents an insurer from denying a claim based on a policy condition when the insurer's own conduct led the insured to reasonably believe the condition was waived?
- Subrogation
- Estoppel (Correct answer)
- Indemnity
- Adhesion
Correct answer: Estoppel
Estoppel prevents a party from asserting a right or condition when its previous conduct caused another party to reasonably rely on the opposite expectation to their detriment.
Question 4: ERISA preemption most significantly affects state insurance regulation by:
- Preventing states from regulating individual health insurance policies
- Exempting self-funded employer health plans from most state insurance laws (Correct answer)
- Requiring all employers to offer health insurance
- Mandating minimum benefit levels for all group insurance
Correct answer: Exempting self-funded employer health plans from most state insurance laws
ERISA preempts state insurance laws as applied to self-funded employer health benefit plans, meaning those plans are not subject to state mandated benefit laws or premium taxes.
Question 5: What does 'redlining' mean in the context of insurance regulatory compliance?
- Setting premiums above the maximum filed rates
- Illegally refusing to issue or limiting coverage in geographic areas based on protected characteristics (Correct answer)
- Canceling policies mid-term without proper notice
- Charging different rates for the same risk class
Correct answer: Illegally refusing to issue or limiting coverage in geographic areas based on protected characteristics
Redlining is an illegal discriminatory practice where insurers refuse to write or severely restrict coverage in certain geographic areas based on racial or ethnic composition rather than actuarial risk.
Question 6: An insurance company domiciled in another country but licensed to operate in the U.S. is classified as a/an:
- Domestic insurer
- Foreign insurer
- Alien insurer (Correct answer)
- Surplus lines insurer
Correct answer: Alien insurer
An alien insurer is one organized and domiciled in a country other than the United States; a foreign insurer is one domiciled in a different U.S. state than where it is operating.
Question 7: The Risk-Based Capital (RBC) system for insurance companies is designed to:
- Standardize premium rates across all states
- Ensure insurers hold sufficient capital relative to the risks they underwrite (Correct answer)
- Regulate agent commissions
- Set minimum policy limits for commercial lines
Correct answer: Ensure insurers hold sufficient capital relative to the risks they underwrite
The RBC system requires insurers to maintain capital levels proportional to the types and amounts of risk they carry, triggering regulatory action when capital falls below prescribed thresholds.
CIA Legal & Regulatory Compliance in Insurance 3
Under the principle of utmost good faith (uberrimae fidei), which party has the greatest duty to disclose all material facts?