PSI Life Exam Practice Test

What is an insurance policy characterized by?

1. A contract of utmost good faith

2. A contract that allows for misrepresentation

3. A guarantee of profit

4. A simple agreement without obligations

The correct answer is: A contract of utmost good faith

An insurance policy is characterized by being a contract of utmost good faith, which is also known as "uberrima fides." This principle requires both parties—the insurer and the insured—to act honestly and disclose all relevant information when entering into the contract. This is crucial because the insurance company relies on the information provided by the insured to assess risk and determine coverage terms. Failure to disclose important facts can lead to disputes and invalidate the policy. In contrast, other choices do not align with the fundamental nature of insurance contracts. Misrepresentation is detrimental to the insurer's ability to assess risk accurately, so allowing for it contradicts the essence of good faith. A guarantee of profit does not apply to insurance policies, as they are designed to provide financial protection rather than assure profit. Lastly, an insurance policy is much more than a simple agreement; it involves specific obligations and rights that both parties must uphold, solidifying the contractual nature of the relationship.