California contract law: concealment, representations and warranties

California's exam objectives name specific Insurance Code sections for contract law, and the questions follow them closely. Learn what each section says and the questions become recognition.

Questions and answers, explained

All 12 questions above, with the correct answer and why it is correct. Everything here is on california contract law: concealment, representations and warranties.

1. Under California Insurance Code section 331, what is the effect of concealment by an applicant?

   • AOnly intentional concealment that is proven in criminal court lets the insurer cancel the contract
   • BIt reduces the benefit by 10 percent
   • CIt has no effect after the policy is delivered
   • DIntentional or unintentional, it entitles the injured party to rescind the contractCorrect

   Why: Section 331 provides that concealment, whether intentional or unintentional, entitles the injured party to rescind the insurance contract. Section 332 requires each party to disclose in good faith all facts within its knowledge that are material to the contract.

   Reference Cal. Ins. Code 331, 332 — CA objectives I.B.6.a

2. Under Insurance Code section 35, 'transact' as applied to insurance includes all of the following EXCEPT:

   • ASolicitation
   • BTeaching a general consumer class about how insurance worksCorrect
   • CTransacting matters after the contract is executed
   • DNegotiations preliminary to executing a contract

   Why: Section 35 defines transact to include solicitation, negotiations preliminary to execution, execution of a contract of insurance, and transaction of matters subsequent to execution and arising out of it. General education is not transacting.

   Reference Cal. Ins. Code 35 — CA objectives I.C2.4

3. Under California Insurance Code section 333, which information does a party NOT have to volunteer unless asked?

   • AA material fact that would change the premium
   • BA serious heart condition the applicant was diagnosed with last month and is now treating
   • CInformation the other party already knows or ought to knowCorrect
   • DAny fact the agent considers embarrassing

   Why: Section 333 excuses volunteering, absent inquiry, facts the other party knows, facts it ought to know in the exercise of ordinary care, facts whose communication it waives, and facts that relate only to a risk excluded by a warranty or excepted from coverage and are not otherwise material.

   Reference Cal. Ins. Code 333 — CA objectives I.B.5.a

4. Under California Insurance Code section 339, which information is neither party bound to communicate, even when asked?

   • AFacts about its medical history that the insurer specifically asks about on the application
   • BIts own judgment on the matters in questionCorrect
   • CIts occupation
   • DOther insurance in force

   Why: Section 339 provides that neither party is bound to communicate, even upon inquiry, information of its own judgment upon the matters in question. Facts must be disclosed; opinions need not be.

   Reference Cal. Ins. Code 339 — CA objectives I.B.5.a.i.6

5. Under California Insurance Code section 334, how is the materiality of a fact determined?

   • ABy its probable and reasonable influence on the party receiving it, not by the eventCorrect
   • BBy a jury after every claim
   • CBy whether the fact turned out to be connected to the cause of the eventual loss or death
   • DBy the agent's opinion at the time of sale

   Why: Section 334 says materiality is determined not by the event but solely by the probable and reasonable influence of the facts on the party to whom the communication is due, in forming its estimate of the risk or in making inquiries.

   Reference Cal. Ins. Code 334 — CA objectives I.B.5.e

6. Under California Insurance Code section 355, when may an applicant alter or withdraw a representation?

   • AOnly with a court's permission
   • BAt any time during the first two years of the policy, before it becomes incontestable
   • CNever, once the application is signed
   • DBefore the insurance is effected, but not afterwardCorrect

   Why: Section 355 allows a representation to be altered or withdrawn before the insurance is effected, but not afterward. Section 358 makes a representation false when the facts fail to correspond with its assertions.

   Reference Cal. Ins. Code 355, 358 — CA objectives I.B.5.c

7. Under California Insurance Code section 354, a representation:

   • AIs binding only on the agent
   • BHas the same legal effect as a warranty
   • CCannot qualify an express provision of the policy, but may qualify an implied warrantyCorrect
   • DOverrides any express provision of the policy with which it conflicts, as long as it is in writing

   Why: Section 354 provides that a representation cannot qualify an express provision in a contract of insurance, but it may qualify an implied warranty.

   Reference Cal. Ins. Code 354 — CA objectives I.B.5.c.iii

8. An applicant's representation is false in a material point. Under California Insurance Code section 359, the insurer may rescind the contract:

   • AOnly if the applicant was convicted of fraud
   • BOnly after the policy has been in force for two full years and a claim has been filed
   • CFrom the time the representation becomes falseCorrect
   • DNever; false representations only reduce benefits

   Why: Section 359 entitles the injured party to rescind from the time a representation becomes false, if it is false in a material point, whether affirmative or promissory.

   Reference Cal. Ins. Code 359 — CA objectives I.B.6

9. Under the California Insurance Code, what happens when a material warranty in an insurance contract is violated?

   • AThe agent must pay the claim
   • BThe other party may rescind the contractCorrect
   • CThe premium automatically doubles
   • DNothing, because warranties are only statements of opinion that never affect coverage

   Why: A warranty may be express or implied, and violation of a material warranty entitles the other party to rescind the contract (Cal. Ins. Code 440-445, 447). A warranty is a stricter promise than a representation.

   Reference Cal. Ins. Code 440-447 — CA objectives I.B.5.b

10. An insurer discovers that an applicant unintentionally failed to disclose a material medical condition. Under California law the insurer may:

    • ASue the agent for the full face amount
    • BDo nothing, because only intentional concealment that the applicant admits to allows any remedy
    • CRescind the contract, because even unintentional concealment allows rescissionCorrect
    • DRaise the premium tenfold

    Why: Under section 331 concealment, intentional or unintentional, entitles the injured party to rescind. Rescission voids the contract from the start and the premiums are returned. In life insurance the incontestable clause limits this after two years.

    Reference Cal. Ins. Code 331 — CA objectives I.B.6

11. An agent tells a prospect that a term policy builds cash value, which it does not. Under California Insurance Code sections 780-784, this is:

    • AConcealment by the applicant
    • BA warranty
    • CAcceptable sales talk, as long as the policy summary delivered later is accurate
    • DA prohibited misrepresentation of the policy's termsCorrect

    Why: Sections 780-784 prohibit misrepresenting the terms, benefits or advantages of a policy, or making misleading comparisons to induce a sale or lapse. Misrepresentation by an agent is also an unfair practice under section 790.03.

    Reference Cal. Ins. Code 780-784 — CA objectives I.B.5.d

12. An applicant deliberately says nothing about a serious condition his doctor diagnosed last month, even though the application asks about recent diagnoses. This is BEST described as

    • AconcealmentCorrect
    • Ba warranty
    • Cwaiver
    • Destoppel

    Why: Concealment is the intentional withholding of a material fact the applicant has a duty to disclose, and it can void the contract. A misrepresentation, by contrast, is an untrue statement actually made; a warranty is a statement guaranteed to be true and made part of the contract, while waiver and estoppel concern the voluntary surrender or the loss of a known right.

    Reference CA Life and A&H objectives I.A-I.B (Basic insurance concepts and principles; contract law)

Drill the whole domain

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