Tennessee Life Producer Practice Exam

What does the term "warranty" refer to in insurance?

1. A formal application for coverage.

2. A statement guaranteed to be true.

3. A promise to pay claims promptly.

4. A condition of the insurance contract.

The correct answer is: A statement guaranteed to be true.

In the context of insurance, the term "warranty" specifically refers to a statement or representation made by the policyholder that is guaranteed to be true. It is a crucial aspect of an insurance contract because it indicates that certain facts about the insured risk or the insured party are accurate and will remain so throughout the term of the policy. If a warranty is found to be false, it can lead to serious consequences, including the denial of coverage or cancellation of the policy. Warranties serve to protect the insurer by providing assurances about specific conditions that are deemed essential to the underwriting process. For instance, if a property owner warrants that their building has a functioning alarm system, failure to maintain that system could potentially result in the insurer being able to deny a claim related to theft. Understanding warranties is critical for both insurers and insureds, as they play a significant role in the terms and enforcement of insurance contracts.