Life & Health Insurance Practice Exam

What must an insurance contract have to ensure it is enforceable?

1. Legal purpose

2. Material misrepresentation

3. Parol evidence rule

4. Subrogation rights

The correct answer is: Legal purpose

An insurance contract must have legal purpose to ensure it is enforceable. This means that the contract’s objectives must be lawful and not against public policy. An insurance policy that is intended to insure an illegal activity, for example, would be deemed void and unenforceable in a court of law. The concept of legal purpose ensures that the agreement does not facilitate illegal activities or harm society at large. Without legal purpose, even if other components of the contract are present, it cannot hold up in legal settings, as it goes against the fundamental principles governing contracts. The other options presented relate to different aspects of insurance and legal principles. Material misrepresentation refers to providing false information that could influence the underwriting of the policy, which can impact coverage but does not serve as a basis for enforceability. The parol evidence rule deals with the admissibility of external evidence in interpreting written contracts, not the validity of the contract itself. Subrogation rights involve the ability of the insurer to pursue recovery from third parties after a claim, which is a contractual feature but does not determine enforceability. Thus, having a legal purpose is essential for an insurance contract to be recognized and enforced under the law.