Massachusetts Health & Accident Insurance Practice Exam

What is the consequence of obtaining benefits that result in overinsurance?

1. Increased premiums

2. Refusal of policy renewal

3. Delayed claim processing

4. No effect on policyholder's status

The correct answer is: Refusal of policy renewal

The correct answer highlights that obtaining benefits leading to overinsurance can indeed result in the refusal of policy renewal. Overinsurance occurs when an individual has multiple insurance policies that cover the same risks to an extent that their total coverage exceeds their actual need. Insurance providers aim to mitigate the risks of overinsurance, as it can lead to moral hazard, where policyholders may take greater risks because they feel overly protected. In situations of overinsurance, insurers may choose not to renew a policy due to concerns that the policyholder is profiting from the coverage rather than merely covering potential losses. Essentially, insurers need to ensure that their services are used to protect against genuine risks, not to facilitate profits through redundancy of coverage. The other options present situations that are less direct consequences of overinsurance. Increased premiums may occur due to higher perceived risk, and delayed claim processing could happen for various reasons, but these do not specifically address the fundamental concern of overinsurance as clearly as the option discussing policy renewal. Similarly, saying there would be no effect on the policyholder's status overlooks the regulatory and contractual obligations that insurers maintain regarding coverage adequacy and responsible underwriting practices.