PSI Life Exam Practice Test

Which of the following statements is CORRECT about an insurance company that discovers collusion between a policyholder and an intermediary?

1. the company must pay a partial claim

2. the company is relieved of its obligation to pay a claim

3. the policyholder loses all benefits

4. the claim is automatically approved

The correct answer is: the company is relieved of its obligation to pay a claim

When an insurance company discovers collusion between a policyholder and an intermediary, it is typically relieved of its obligation to pay a claim. This situation arises because collusion often indicates fraudulent behavior, which violates the terms and conditions of the insurance contract. In essence, if a policyholder is found to have engaged in deceptive practices or worked with an intermediary to manipulate circumstances to benefit financially from a claim, the insurer has strong grounds to deny the claim as it undermines the integrity of the insurance process. Such fraud can take many forms, from inflating claims to staging incidents, and it has serious implications. The discovery of collusion reflects an essential principle of insurance — that coverage is predicated on honest dealings and disclosure. Therefore, when collusion is evident, the insurance company has the legal right to reject the claim altogether, protecting itself from financial loss due to unethical behavior. The other options do not accurately capture the insurer's position in this circumstance. Partial payment, loss of all benefits, or automatic claim approval all imply some level of obligation on the insurer’s part, which is typically not the case when collusion is confirmed.