CPCU 410 Module 3 Test Bank

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1. Which one of the following statements is correct regarding an offer as an intent to contract?

A. The offeror’s subjective intent is the most important factor in determining whether a communication is an offer.

B. An individual soliciting offers from other parties is free to accept or reject any offers the individual receives.

C. A general statement of intention can be considered an offer, even if the statement does not convey a promise.

D. Most advertisements are considered offers because they are direct communications spelling out the conditions of acceptance.

2. Which one of the following represents an essential term required for an offer to be valid?

A. The price of the goods or services being exchanged.

B. A determination of potential damages if the proposed contract is breached.

C. The subject matter of the proposed contract.

D. A time of performance of the proposed contract.

3. Which one of the following statements is correct regarding requirements of an offer?

A. Absent a specific expiration time, an offer will cease to be binding six months after the original offer.

B. An offeror can typically revoke an offer even if the offeror states the offer is irrevocable for a specific period of time.

C. If a law is enacted making it illegal to sell certain goods, a preexisting offer to sell those goods will be terminated due to a lack of intent to contract.

D. An offeree may reject an outstanding offer by remaining silent for three months.

4. Which one of the following statements is correct regarding the termination of an offer to contract?

A. If the offeror or offeree is declared insane before an offer is accepted, the offer will automatically terminate by operation of law.

B. An offeror can revoke an offer by simply refusing to honor it or by making a counteroffer to the offeree.

C. If an offeree rejects an offer, the offeree can later accept the offer provided the original offer has not lapsed.

D. A counteroffer is any communication from an offeree that rejects the original offer.

5. Fran approaches an insurance company and indicates she will purchase property insurance for a premium of $1,000,000. The insurance company then indicates that they will sell her the property insurance policy for a premium of $2,000,000. The premium requested by the insurance company is:

A. An offer.

B. Consideration.

C. A revocation.

D. A counteroffer.

6. Ronnie offered to sell Janet a home stereo system for $800. Janet replied to Ronnie’s offer by asking “Will you accept $700?” Which one of the following statements is correct regarding this exchange?

A. Janet has made a counteroffer to Ronnie, resulting in a rejection of Ronnie’s original offer.

B. Janet will be prohibited from accepting Ronnie’s original offer.

C. Janet has made a request for more information that does not represent a rejection of the offer.

D. Ronnie has not made a valid offer because there was no official intent to contract.

7. Sarah mentions to Brandon, “I am planning on selling my car for $7,000.” Brandon replies, “Great, I will pay you $7,000 for your car.” The contract between Sarah and Brandon is:

A. Not valid because the terms of the contract were unclear.

B. Valid because Brandon expressed an interest in purchasing the car based on Sarah’s terms.

C. Valid because Sarah made a valid offer and Brandon accepted the offer.

D. Not valid because Sarah made a general statement of intent that does not constitute a promise.

8. In order for an acceptance to be valid, the acceptance must be:

A. Made by the offeror.

B. Unconditional and unequivocal.

C. Communicated in writing.

D. Definite in its terms.

9. Which one of the following statements is correct regarding the acceptance of an offer to contract?

A. When an offer is made to a group, all members of the group must consent before the offer can be accepted.

B. The executor of a decedent’s estate can accept an offer made to the decedent before death.

C. An equivocal response from the offeree is not an acceptance, nor is it a rejection or a counteroffer.

D. If an acceptance deviates from the terms of the offer, the contract will be legally enforceable but voidable by the offeree.

10. Elizabeth made an offer to sell her car to Jordan for $3,000. Elizabeth told Jordan that she is going camping, so Jordan should mail the acceptance letter to the campsite within five days if he wants to purchase the car. At what point, if any, is Jordan considered to have accepted Elizabeth’s offer?

A. When Jordan places the letter in the mail.

B. When the letter is received by Elizabeth.

C. When Jordan tells his wife he accepted the offer to purchase the car from Elizabeth.

D. Jordan will not be considered to have accepted Elizabeth’s offer because the mailing of a letter to somewhere other than the offeror’s normal place of residence or work is not a valid acceptance.

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11. On December 8, Matthew mailed to Christopher a written acceptance of Christopher’s offer. Unfortunately, Matthew incorrectly addressed the envelope, causing the post office to return the acceptance to Matthew on December 12. Matthew corrected the address and placed the acceptance in the mail on December 15. Christopher received the acceptance on December 17. The acceptance of the offer was effective:

A. December 8.

B. December 12.

C. December 15.

D. December 17.

12. Pete’s house was recently burglarized. He offered a reward of $500 for any information leading to the burglar’s conviction. Before learning about the reward, Jay, one of Pete’s neighbors, had already begun investigating the burglary and determined that Sophie was the burglar. Jay then learned about the reward, after which time he reported Sophie to the police. Sophie was convicted of the burglary. Which one of the following statements is correct?

A. Jay will not be able to collect the reward because he could not accept an offer of which he had no knowledge.

B. Jay will not be able to collect the reward because the offer was not specified in definite terms.

C. Jay will be able to collect the reward because Jay knew of the offer when he reported Sophie to the police.

D. Jay will be able to collect the reward because there was an equivocal acceptance of the offer.

13. Assume the following facts for the sale of a doll collection:
• January 10 – Julie sent a letter to Tonya offering to sell Tonya her doll collection and requesting an answer by mail.
• January 11 – Tonya received the offer from Julie.
• January 12 – Julie mailed a revocation of her offer to TonyA.A.
• January 13 – Tonya mailed her acceptance of the offer to Julie.
• January 14 – Tonya received the revocation letter from Julie.
Which one of the following statements is correct regarding this arrangement?

A. The contract is not valid because the revocation was mailed before Tonya accepted the offer.

B. The contract is not valid because Julie reserved the right to cancel the offer at any time before receiving the acceptance.

C. The contract is valid because the revocation did not contain a counteroffer.

D. The contract is valid because the acceptance was mailed before Tonya received the revocation letter.

14. Haley sent an offer letter to Raymond offering to sell Raymond an autographed football for $200. Haley included the following language in the letter:

“Unless I hear otherwise from you by next Wednesday, I will assume that you accept this offer”

Raymond, who had never purchase memorabilia from Haley in the past, never responded to Haley’s offer. A legally enforceable contract:

A. Has been created because courts rule in favor of the offeror when the offeree is silent with respect to an acceptance.

B. Has been created because Raymond did not contact Haley to reject the offer.

C. Has not been created because silence by an offeree is not a valid acceptance.

D. Has not been created because acceptance can only occur in writing because the offer was made in writing.

15. Saied has performed home remodeling for Scott. Scott sent Saied a letter offering to pay Saied $1,000 to repair Scott’s fence in the back yard. Saied never responds to Scott’s letter, but he stopped by Scott’s home and began repairing the fence. Scott came home from work one day, and saw Saied repairing the fence. The contract is:

A. Valid because Scott did not specifically indicate that Saied had to respond to his offer.

B. Valid because Saied chose to repair Scott’s fence and Scott was aware that work had begun.

C. Not valid because the terms of the contract were ambiguous, and Saied’s acceptance was equivocal.

D. Not valid because Saied never officially accepted Scott’s offer.

16. An agent makes an offer to a customer for health insurance for a certain premium amount. The customer fills out the application, and the agent sends it in. The insurance company sends a policy back with coverage and premiums that are different than the original offer. The customer accepts the policy without looking at it and pays the premium. Which one of the following statements is correct?

A. The agent soliciting the policy was the offer, and the customer filling out the application was the acceptance.

B. The agent soliciting the policy was the offer, and the insurance company sending the policy back was the counteroffer.

C. The insurance company sending the policy back was the offer, and the customer paying the premium was the acceptance.

D. The customer filling out the application was the offer, and the insurance company sending the policy back was the acceptance.

17. In order to support a valid contract, what type of consideration is necessary?

A. Past consideration.

B. Good consideration.

C. Valuable consideration.

D. Promise to perform an existing obligation.

18. A contract may be unenforceable if either party has not given genuine asset to contract. Which one of the following statements is correct regarding factors that could lead to a lack of genuine assent?

A. Undue influence represents the threat of physical harm.

B. A victim of innocent misrepresentation can avoid a contract by asking the courts to rescind the contract.

C. Duress represents the use of improper power to deprive a person of their free will.

D. A bilateral mistake of facts that are not material will still lead to a contract being voidable.

19. Which one of the following statements would most likely be deemed consideration for purposes of forming a contract?

A. I hereby transfer my property in consideration of love and affection.

B. I’ll do this if you do that.

C. Since I am a police officer, I promise to arrest a criminal.

D. Here is something I have for you.

20. Which one of the following represents the best description of the concept of consideration?

A. An administrative agency’s final conclusion of any material private right of a party.

B. Something of value or bargained for and exchanged by the parties to a contract.

C. The relationship that exists between the parties to a contract.

D. A proposal an offeree makes to an offeror that results in a rejection of the original offer.

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21. Stacy loaned Kevin $5,000 last year, expecting Kevin to pay back the entire $5,000 in cash. Instead of paying back the $5,000 loan in cash, Kevin offers to give Stacy $3,000 in cash plus his stamp collection. Stacy agrees to accept Kevin’s offer. This arrangement is referred to as:

A. Charitable subscription.

B. Forbearance.

C. Gratuitous promise.

D. Accord and satisfaction.

22. Which one of the following statements is correct regarding consideration?

A. Either promises or opinions can be considered valid consideration.

B. Cash provided by a buyer to a seller to satisfy the terms of the contract is good consideration.

C. A new promise to pay debt previously unpaid due to bankruptcy is enforceable without additional consideration.

D. If a person has no cause of action, a promise to forbear from suing represents valid consideration.

23. Which one of the following represents a type of consideration that is sufficient to form an enforceable contract?

A. Compromise and release of claims.

B. Future consideration.

C. Past consideration.

D. Promises to perform existing obligations.

24. Which one of the following situations represents valid consideration?

A. A police officer promises the public he will arrest a criminal.

B. A father promises to give his son a bicycle if his son passes his eighth-grade science class.

C. An injured party promises not to sue the person at fault if the person at fault pays him $500.

D. A homeowner subsequently agrees to pay a neighborhood kid $125 because the kid painted the homeowner’s fence without his knowledge.

25. Alexa, who lives in Dallas, interviewed for a job in Oregon with Susan, who owns a clothing company. After the interview, Susan offered Alexa a job, and she accepted. Alexa incurred considerable costs in moving her household goods to Oregon. When she arrived at the clothing company, Susan reneged on her job offer. Can Alexa sue for damages?

A. Yes, she can sue under the principle of promissory estoppel.

B. Yes, she can sue based on the binding promise principle.

C. No, she cannot sue because future promises are not valid consideration.

D. No, she cannot sue because Susan’s promise was not in writing.

26. A grandfather signs the following written promise for his 22-year old granddaughter:

“In the consideration of affection for my granddaughter, I will transfer my investments to her in six months.”

Which one of the following statements is correct regarding this promise?

A. The grandfather is considered to have given a gift at the time the promise was made.

B. An enforceable contract exists because the granddaughter is not a minor.

C. The promise represents good consideration and does not create a contract.

D. Inadequate consideration exists because the grandfather has merely promised to perform an existing obligation.

27. Kevin, who lives on the same block as Karina, mowed Karina’s lawn without Karina’s knowledge or consent. When Karina arrived home from work, she saw Kevin packing up his lawn mower and confronted him. She promised to pay him $75 to compensate him for mowing the lawn. The arrangement between Kevin and Karina represents an:

A. Enforceable contract because Karina made a binding promise to Kevin for services he performed.

B. Enforceable contract because the promise to pay $75 represents valuable consideration.

C. Unenforceable contract because a promise to perform an existing obligation is not sufficient to bind a contract.

D. Unenforceable contract because past consideration is insufficient to support a contract.

28. Leann was in a car accident that was her fault. She ran a red light and crashed her car into Jake’s car that was passing through the intersection. Jake agreed not to sue Leann in return for $10,000 paid to Jake from Leann’s insurance company. Which one of the following represents Jake’s consideration making this a valid contract?

A. Future consideration.

B. Binding promise.

C. Forbearance.

D. Compromise and release of claims.

29. Scott promised Carol that he would hire her to do all of his marketing for his small business. Based on this promise, Carol purchased a new computer, design software, and a color printer. If Scott reneged on his promise to hire Carol, she could probably sue Scott under the theory of:

A. Charitable subscription.

B. Promissory estoppel.

C. Future consideration.

D. Forbearance.

30. After a property and liability insurance policy is in effect, an insured may not transfer the policy. The policy is non-transferable because:

A. The identities of the persons or organizations insured are extremely important to the insurer.

B. Policies require complete disclosure of all facts and honesty on the part of both the insurer and the insured.

C. The insurer is not on an equal basis with the insured if a dispute arises with respect to the meaning of certain policy terms.

D. The insurer agrees to pay an amount directly related to the amount of a covered loss.

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31. Which of the following best describes a contract of adhesion?

A. The insurer agrees under the contract to pay an amount directly related to the loss.

B. If the wording in the contract is ambiguous, the courts will usually apply the interpretation that favors the insured.

C. The insured must fulfill certain duties before the insurer will pay the claim.

D. Both parties to the contract are expected to be forthcoming in their dealings with each other.

32. Which one of the following statements is correct regarding the special characteristics of an insurance contract?

A. The reason an insurance policy is a contract of indemnity is because the insured must complete certain duties before a claim is paid.

B. If the insured has made a misrepresentation of any fact requested by the insurer, the insurer can deny the claim.

C. In order for an insurance contract to be valid, the insured and the insurance company must exchange equal amounts under the contract.

D. The premium paid for an insurance contract should represent the insured’s share of the estimated losses that the insurer must pay.

33. Which one of the following statements is correct regarding an insurance policy as a contract of utmost good faith?

A. Insurers must prove that a misrepresentation was intentional before an insurance contract can be voided.

B. Misrepresentation of a material fact by the insurance applicant will void the contract.

C. Concealment reflects an active intent to deceive by the insured by including false information on a policy application.

D. Misrepresentations are considered material if they induced the insurer to enter into the contract it otherwise would not have entered into.

34. Which one of the following statements is correct regarding the characteristics of an insurance policy?

A. If there is an ambiguous clause in the contract, the courts will typically interpret the clause in favor of the insurance company.

B. If an individual purchases property insurance and later sells the property, the insurer will reimburse the purchaser if the property is subsequently stolen.

C. Life insurance policies are freely assignable by policyowners without the approval of the insurance company.

D. Insurance contracts are contracts of adhesion, meaning the parties to the contract negotiate the terms of the contract.

35. Which one of the following represents a life insurance contract that agrees to pay the beneficiary $100,000 upon the death of the insured?

A. An invalid contract.

B. A valued contract.

C. A contract of indemnity.

D. A bilateral contract.

36. Which one of the following statements is correct regarding the incontestable clause found in an insurance contract?

A. It is inconsistent with the principle of indemnity.

B. It usually begins running on the policy date and cannot exceed two years.

C. The beneficiary will not be protected by the incontestable clause if the application contains a fraudulent misrepresentation.

D. It is required in approximately one-half of all states.

37. Which of the following statements is correct regarding the characteristics of an insurance contract?

A. Unlike property and casualty insurance contracts, a life insurance contract is a contract of indemnity.

B. The contract is nontransferable, reflecting the idea that the insurer should be able to select those who will be insured.

C. Courts typically construe ambiguous life insurance policy provisions against the insured.

D. Subrogation is the right of an insurer to recover damages from the injured insured.

38. Which one of the following statements is correct regarding the characteristics of an insurance policy?

A. Courts may invalidate the incontestable clause if the insured committed a particularly vicious fraud.

B. An insured may not transfer or assign an insurance contract under any circumstances.

C. Valued policies are based on the principle of indemnity.

D. The concept of insurable interest is particularly important in the area of liability insurance.

39. Which one of the following represents the reason insurance contracts involve the exchange of unequal amounts?

A. The contract must only be performed if certain conditions have been satisfied.

B. Once in effect, an insurance contract cannot be transferred or assigned by the insured to another party.

C. There is a possibility the insurer’s obligation may be much greater than the insured’s obligation.

D. The wording in the insurance contract is drafted by the insurer and cannot be changed by the insured.

40. To be effective, an insurance agreement, whether oral or written, must have which one of the following components?

A. The agent’s name.

B. The amount of insurance.

C. The insurer’s state of domicile.

D. The annual premium.

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41. Tommy entered into a life insurance contract that contained a one-year incontestable clause and a two-year suicide clause. Tommy committed suicide during the second year of the policy. Which of the following statements is correct?

A. This contract is not valid because the incontestable clause and the suicide clause must be of the same duration.

B. The insurer must pay the policy proceeds because the policy is no longer contestable.

C. The insurer may deny coverage and is not required to refund the premiums.

D. The insurer may deny coverage but will be required to refund the premiums.

42. Ralph is insured under a standard homeowners policy. A fire in his home caused some damage to one of the bedrooms. Although Ralph’s policy covered fire damage, he waited 18 months to report the damage, resulting in the insurance company denying his claim. Ralph’s claim was denied because the insurance contract is a:

A. Contract involving fortuitous events.

B. Conditional contract.

C. Contract of utmost good faith.

D. Nontransferable contract.

43. When Stacy applied for a property insurance policy, she included false information on the application. Based on her false statements, the insurance company provided coverage. If Stacy incurs a loss, the insurance company may be able to deny coverage because an insurance policy is a(n):

A. Contract of utmost good faith.

B. Conditional contract.

C. Aleatory contract.

D. Nontransferable contract.

44. Barbara recently applied for a life insurance policy on her life. Although she smokes two packs of cigarettes per day, on the insurance application, she indicated that she does not smoke. The type of behavior that Barbara has exhibited is referred to as:

A. Bad faith.

B. Adhesion.

C. Nondisclosure.

D. Concealment.

45. Dave gifted his 10-year old car to his cousin, Lisa. Dave’s auto insurance policy had four months of coverage remaining at the time of the gift, so Dave also gifted the policy to Lisa. Which one of the following statements is correct regarding this scenario?

A. Lisa does not have a valid insurance policy because she did not pay for the car.

B. Lisa has a valid insurance policy because auto insurance remains with the car even if it is gifted or sold.

C. Lisa does not have a valid insurance policy because property insurance policies are generally nontransferable.

D. Lisa has a valid insurance policy because the coverage was paid up, and the gift was complete.

46. Which one of the following statements is correct regarding the offer and acceptance of an insurance contract?

A. If an applicant has not decided to purchase insurance but submits an application anyway to determine if the insurer will assume the risk, an offer has been made.

B. When a producer contacts a prospective customer to explain the application process and sell a policy, the producer has made an offer.

C. A signed insurance application, sent by the producer to the insurance company, represents an acceptance of the insurance contract.

D. If an insurer issues a policy that does not conform to the signed application, the policy is a counteroffer requiring the applicant’s acceptance.

47. Which one of the following statements is correct regarding the formation of an insurance contract?

A. Many states require a property-casualty policy owner be given a 120-day free look after delivery of the policy.

B. A property-casualty insurance policy must be written in order to be binding.

C. An insurer’s silence will not bind it to a contract of insurance unless the insurer fails to act within a reasonable time.

D. The effective date of a property-casualty insurance policy is typically based on conditional receipt.

48. Which one of the following statements is correct regarding the formation of an insurance contract?

A. Conditional receipt makes life insurance coverage effective at the time of the application, provided the applicant is found to be insurable.

B. When determining if an insurer’s silence in responding to an application constitutes an unreasonable delay, the type of insurance coverage involved is irrelevant to the courts.

C. Binders typically provide temporary coverage for seven days, pending issuance of the policy.

D. When an insured does not reply to a renewal request for an existing policy, their silence is sufficient to infer acceptance of the renewal even if there is no prior course of dealing indicating this.

49. To be effective, an insurance agreement must have all of the following components, EXCEPT:

A. The object being insured.

B. The name of the insured.

C. The amount of premium.

D. The duration of coverage.

50. A party’s silence or delay in a contract is usually interpreted by common-law courts as:

A. An unequivocal indication of assent.

B. Assent to the contract if not rejected within 30 days.

C. Complete rejection of the contract.

D. Insufficient acceptance to form a contract.

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51. Which one of the following statements is correct regarding insurance contracts?

A. Oral insurance contracts are invalid.

B. An insurer can be liable if it delays action on an application beyond a reasonable time.

C. The preliminary version of an insurance contract is the policy form.

D. A commercial insurance contract rarely involves negotiations.

52. Janet, an insurance agent, has for many years handled insurance on Steve’s property under annual policies. Consistent with prior years, Janet sends Steve a renewal policy and a bill for the premium at the expiration of the previous policy. This year, Steve holds the policy for three months and remains silent. Steve then refuses to pay the premium on demand. Which of the following statements is correct regarding this situation?

A. Steve is required to pay the premium in full.

B. Steve’s silence is not sufficient to infer acceptance.

C. The contract is void because genuine assent did not exist as a result of Steve’s silence.

D. Steve is liable for the premium that accrued during the three months before his rejection.

53. Jay called his insurance agent Mary and indicated that he wanted automobile insurance. Mary told Jay she would provide the coverage. Jay owns four automobiles. Which one of the following represents the most likely reason that Jay will not have coverage?

A. Insurance agents cannot bind coverage.

B. The key terms of the agreement were not specified.

C. The agreement was not in writing.

D. A check for the first premium was not cashed promptly by the insurance company.

54. Tanya called her insurance agent, asking him to increase the limits on her existing auto insurance policy. The agent told Tanya that he would increase the limits and send her a revised policy in the mail. Prior to receiving the policy, Tanya was in an auto accident, and she suffered a loss that exceeded the previous limits of her policy. Which one of the following statements is correct regarding this scenario?

A. Tanya will be able to hold the insurer responsible for the higher coverage limits because the insurer’s silence was unreasonable.

B. Tanya will not be able to hold the insurer responsible for the higher coverage limits because she did not receive a written binding receipt prior to the accident.

C. Tanya will be able to hold the insurer responsible for the higher coverage limits because the agent’s oral promise is binding.

D. Tanya will not be able to hold the insurer responsible for the higher coverage limits because the revised policy was not received before the accident.

55. Tommy historically has purchased all of his property insurance from Status Insurance Company through Sally’s agency. Sally, who represents four different insurers, learned that Tommy recently purchased a yacht. Sally mailed a letter to Tommy encouraging him to obtain $120,000 of coverage for the yacht and quoting a premium. Before receiving the letter from Sally, Tommy wrote a letter to Sally requesting $120,000 of coverage and offering to pay whatever the premium may be. Before either letter was received, Tommy’s yacht sustained fire damage. Which one of the following statements is correct regarding coverage of the damage to the yacht?

A. Tommy’s loss will be covered because his letter to Sally constitutes acceptance of her offer.

B. Tommy’s loss will not be covered because Sally represented four insurance companies, and it is not clear which company will provide coverage.

C. Tommy’s loss will not be covered because the required elements of a contract were not present.

D. Tommy’s loss will not be covered because the loss occurred before the first premium was determined.

56. Scott visited his insurance agent Matt to determine his insurance needs. After their discussion, Scott agreed to purchase a property insurance policy based on Matt’s suggestion. Scott completed and signed the insurance application while in Matt’s office and then wrote a check for the first premium. Matt sent the application and check to ABC Insurance Company, who cashed the check, issued the policy, and mailed it to Scott. Which one of the following statements is correct regarding this arrangement?

A. Scott’s actions represented a counteroffer.

B. ABC Insurance Company’s actions represented an acceptance.

C. ABC Insurance Company’s actions represented an offer.

D. Scott’s actions represented a solicitation of an offer.

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