Which arrangement best fits the definition of insurance under California Insurance Code Section 22?
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Answer & full 3-part explanation (select an option above, or peek)
Why C is correct
Section 22 defines insurance as a contract whereby one party undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event. The warehouse agreement fits this definition: the fire is a contingent or unknown event, the business owner suffers a potential financial loss, and the indemnifier promises to restore the loss for an annual fee. The other choices are not insurance in this sense: a car dealer's warranty guaranteeing the performance of goods falls within a recognized statutory exception, a bank's deposit guarantee is a banking product, and a guaranteed-return savings plan is an investment arrangement rather than an indemnity against a contingent event.
Why the other options are wrong
- D) A warranty guaranteeing the performance of goods is generally not insurance in this context. The law recognizes an exception for goods-performance guarantees, so this is not the insurance arrangement described.
- A) A bank's guarantee of a certificate of deposit principal is a banking product. It does not indemnify against a contingent or unknown event and is not insurance. This option reflects a different rule and does not match the law that governs the transaction.
- B) A savings plan that guarantees a fixed return is an investment arrangement. It does not indemnify against a contingent or unknown loss and is not insurance. Accordingly, this plausible-sounding answer is one that examiners expect candidates to eliminate.
Memory hook
Insurance indemnifies against an uncertain event. A warranty fixes goods; a CD fixes money; only the fee-for-indemnity is insurance.