PSI Ohio Insurance Practice Exam

Which principle holds that the insurer relies on the truthfulness of the applicant and in return promises and has the ability to pay claims?

1. Good faith

2. Indemnity

3. Utmost good faith

4. Material misrepresentation

The correct answer is: Good faith

The principle that states the insurer relies on the truthfulness of the applicant and promises to have the ability to pay claims aligns with the concept of utmost good faith. This principle underlines the importance of honesty and transparency between the insurer and the insured. It establishes that both parties must act fairly and honestly in the insurance contract to maintain trust; the insurer promises coverage based on the information provided by the applicant. If an applicant presents false information or omits crucial details, it can significantly affect the insurer's ability to assess risk and might lead to claim denial. In this context, good faith is a broader term that encompasses general honesty and fair dealing but does not specifically convey the same depth of expectation related to the truthfulness of the applicant as utmost good faith does. Indemnity refers to the principle ensuring that an insured person is compensated for their loss, recovering no more than what was lost, and material misrepresentation refers to the act of providing false information that affects the insurer's decision to provide coverage. Thus, the specific principle that captures this reliance and the reciprocal obligation of truthfulness is utmost good faith.