Alabama Insurance Adjuster Practice Exam

Which statement accurately describes the principle of estoppel?

1. It prevents insurers from denying claims based on late payments.

2. It protects insured parties from coverage denial after repair payments.

3. It allows insurers to change policies at will.

4. It eliminates the need for disclosures during underwriting.

The correct answer is: It protects insured parties from coverage denial after repair payments.

The principle of estoppel plays a crucial role in insurance law, specifically in preventing insurers from denying claims based on prior actions or representations. When a party (typically the insurer) acts in a way that leads another party (often the insured) to believe a certain fact is true, and the latter relies on that belief to their detriment, estoppel may come into effect. The correct statement reflects how estoppel provides protection to insured parties after repair payments have been made, ensuring that if the insurer has acted in a way that would lead the insured to reasonably believe they have coverage, the insurer may be prevented from later denying that coverage. This principle is designed to uphold fairness and protect the interests of insured parties, as they must be able to rely on their insurer's commitments and conduct without fear that the insurer can arbitrarily deny claims after a financial commitment has been made. The other options do not accurately describe the principle of estoppel. For instance, estoppel does not concern itself with managing late payments or altering policies at will; it’s about maintaining fairness based on established conduct and indications of coverage. Similarly, it does not remove the requirement for disclosures during underwriting since transparency is essential in the establishment of the insurance contract itself.