David owns a liquor store in a high-crime area. In order to obtain a reduced insurance premium, David promised to have a burglar alarm operating at the store when the store was closed. This agreement, which was incorporated into the insurance contract, is an example of a
A rider.
B binder.
C representation.
D warranty.
The correct answer and explanation is:
Correct Answer: D) Warranty
A warranty in insurance is a promise made by the insured party that certain conditions will be met or certain actions will be taken, either before or during the policy period. If a warranty is breached, the insurer may be entitled to deny coverage, even if the breach had no direct connection to the loss.
In the case of David, he agreed to keep a burglar alarm active at his liquor store during closing hours. This promise was not merely a statement made during the application process; it was explicitly written into the insurance contract. That makes it more than a simple representation. It becomes a warranty, because it is a condition that directly affects the terms under which the insurer agreed to provide coverage, especially at a reduced premium.
Unlike a representation, which refers to statements made during the application process that are assumed to be true, a warranty is a contractual obligation. If David fails to have the alarm functioning as promised and a burglary occurs, the insurer may legally deny the claim, even if the alarm would not have prevented the crime. This strict nature of warranties is what makes them significant in insurance contracts.
The other choices are not appropriate:
- A rider is an amendment or addition to a policy that modifies the coverage terms.
- A binder is a temporary insurance agreement providing coverage until a formal policy is issued.
- A representation is a statement made to the insurer during application, which does not carry the same legal weight as a warranty.
Therefore, since David’s promise was part of the contract and involved a continuing obligation that influenced the insurer’s decision to lower the premium, the correct answer is D) Warranty.