PSI Life Exam Practice Test

What typically happens if an issuer discovers fraud in an insurance application?

1. The policy is automatically canceled

2. The claim is still paid out

3. The issuer can deny a claim based on the fraud

4. The insured receives a refund

The correct answer is: The issuer can deny a claim based on the fraud

When an issuer discovers fraud in an insurance application, one of the key actions they can take is to deny a claim based on the fraudulent information provided. Insurance companies rely heavily on the accuracy and honesty of the information that applicants submit when applying for coverage. When fraud is detected, it undermines the integrity of the insurance contract, giving the issuer grounds to reject any future claims related to that policy. This denial serves to protect the insurer from financial loss caused by fraudulent activities and ensures that resources are allocated correctly to legitimate claims. The presence of fraud can also lead the issuer to investigate further, which could have implications for the entire policy—not just individual claims. Other choices do not accurately reflect industry practices; for instance, simply canceling the policy automatically might not be the immediate response, as fraud needs to be legally established first. Paying out a claim in the presence of fraud runs counter to the principles of risk management in insurance. While a refund could result from a cancellation due to fraud, it is not the primary or guaranteed outcome when fraud is discovered.