Insurance Broker Certification Practice Exam

What principle is violated when an insurer neglects to pay a legitimate claim covered under the terms of the policy?

1. Disclosure

2. Consideration

3. Indemnity

4. Conditions

The correct answer is: Consideration

The principle that is violated when an insurer neglects to pay a legitimate claim covered under the terms of the policy is consideration. Consideration is a fundamental principle in contract law that requires both parties in a contract to provide something of value. In the context of insurance, the insured provides premium payments, and in return, the insurer is obliged to provide coverage and pay legitimate claims when they arise. When an insurer fails to pay a legitimate claim, it is not fulfilling its end of the contractual agreement, thereby violating the consideration principle. This failure disrupts the trust that forms the basis of the insurance contract, as the insured party has honored their part of the bargain by paying premiums, expecting that they will receive protection and compensation in the event of a covered loss. Understanding this principle is crucial for insurance professionals, as it highlights the importance of fulfilling contractual obligations to maintain ethical standards and legal compliance in the insurance industry.