Indiana State Life and Health Insurance Practice Exam

As a condition for a loan, a bank requires the borrower to purchase credit insurance from a specific company. What is the bank guilty of?

1. Coercion

2. Defamation

3. Rebating

4. Misrepresentation

The correct answer is: Coercion

When a bank requires a borrower to purchase credit insurance specifically from a designated company as a condition for a loan, it is engaging in a practice known as coercion. Coercion occurs when one party forces another party to act in a certain way, typically through pressure or the threat of negative consequences, which in this case, is the denial of a loan. In the context of insurance and financial agreements, this practice raises ethical and legal concerns. It restricts the borrower’s freedom to choose their insurance provider, which can lead to limited competition and potentially higher costs for the borrower. Borrowers should have the right to explore different insurance options and select the provider that best meets their needs. The other choices do not accurately reflect the situation. Defamation involves making false statements that harm someone's reputation, rebating refers to offering a portion of the premium back to the insured as an incentive, and misrepresentation would involve presenting false information about the insurance product itself. None of these accurately capture the scenario where a bank mandates a specific insurer for credit insurance as a precondition for the loan.