PSI Insurance and Risk Management 4

Question 1

Which of the following is NOT one of the four elements required for a valid insurance contract?

Accepted Answer

Subrogation rights

Answer

Valid contracts require offer and acceptance, consideration, competent parties, and legal purpose — subrogation is a policy provision, not a contract element.

Question 2

What is the primary purpose of reinsurance?

Accepted Answer

To allow insurers to transfer portions of risk to other insurers

Answer

Reinsurance allows a primary insurer (ceding company) to transfer a portion of its risk to another insurer (reinsurer) to manage large exposures.

Question 3

Under the doctrine of 'reasonable expectations,' courts will interpret policy language in favor of:

Accepted Answer

The insured's reasonable understanding of coverage

Answer

The reasonable expectations doctrine holds that coverage should align with what an average insured would reasonably expect the policy to provide.

Question 4

A 'warranty' in an insurance policy is best described as:

Accepted Answer

A statement by the insured that is guaranteed to be true, breach of which may void the policy

Answer

A warranty is an absolute guarantee by the insured; breach of a warranty — even if unrelated to a loss — may give the insurer grounds to void the policy.

Question 5

Which of the following describes a 'named perils' property policy?

Accepted Answer

Covers only the causes of loss that are specifically listed in the policy

Answer

A named perils policy covers only those specific causes of loss (perils) that are explicitly listed in the policy.

PSI - Exams Practice Test

PSI - Exams Practice Test

PSI Insurance and Risk Management 4