North Carolina Adjuster Practice Exam

For what reason might an insurance company terminate a policy after a fraudulent claim?

1. It is company policy

2. To update the insurance policy

3. To prevent further fraudulent activity

4. To lower premiums for other policyholders

The correct answer is: To prevent further fraudulent activity

An insurance company may terminate a policy after a fraudulent claim primarily to prevent further fraudulent activity. Engaging in fraud undermines the trust and integrity of the entire insurance system, which is built on the premise that all parties act honestly. By terminating a policy involved in fraudulent behavior, the insurer not only protects its own interests but also sends a strong message to deter similar behaviors from other policyholders. The decision to terminate helps safeguard the insurer's financial health and ensures that resources are allocated to legitimate claims. Furthermore, it can also help protect the insurer's reputation and maintain fair pricing for all customers. This action is a critical component of risk management within the insurance industry, ensuring that the costs associated with fraudulent claims do not adversely affect the overall customer base or lead to increased premiums for honest policyholders.