West Virginia State Life Insurance Practice Exam

What is a bank guilty of if it requires a borrower to purchase credit insurance from a specific company as a condition for a loan?

1. Discrimination

2. Coercion

3. Fraud

4. Misrepresentation

The correct answer is: Coercion

When a bank requires a borrower to purchase credit insurance from a specific company as a condition for a loan, it can be considered coercion. Coercion implies that the bank is using its power over the borrower to compel them to act against their will or to make a decision they would not have made under normal circumstances. In this case, the borrower may feel pressured to buy insurance from a particular provider instead of choosing one that may be more favorable or cost-effective for them. This practice can be problematic because it limits the borrower's options and could lead to unfair financial terms. In many jurisdictions, such practices might be seen as an attempt to manipulate the borrower into choosing a product that benefits the lender, rather than providing a truly competitive marketplace for insurance. Coercive practices can be subject to legal scrutiny, as they can undermine the principles of voluntary agreement and informed consent in financial transactions.