Registered Insurance Brokers of Ontario (RIBO) Practice Exam

In an insurance contract, what does the term 'consideration' refer to?

1. The guaranteed payout

2. The premium

3. The insured's liability

4. The duration of the policy

The correct answer is: The premium

'Consideration' in an insurance contract refers to something of value that is exchanged between the parties involved. In this context, it specifically signifies the payment of the premium by the insured. This premium is what the insurer receives in exchange for the promise to provide coverage. The concept of consideration is fundamental to contract law, as it establishes that both parties are entering into a mutual agreement where each has an obligation. The premium serves as the insured's contribution, which is essential for activating the coverage outlined in the policy. The other options, like the guaranteed payout, the insured's liability, and the duration of the policy, do not represent consideration; rather, they are terms and conditions of the insurance agreement itself. The guaranteed payout pertains to what the insurer promises to pay in the event of a covered loss, the insured's liability refers to potential obligations under the policy, and the duration of the policy indicates its effective time frame. These elements do not involve the exchange of value that defines 'consideration' in the agreement.