Final answer:
The correct term for a statement made by an insured in an insurance application is representation. It is based on the best of one's knowledge and becomes part of the contract. Representations must be truthful to ensure the validity of the contract.
Step-by-step explanation:
The statement made by an insured in an insurance application that must be true to the best of one's knowledge, and which becomes a part of the contract, is known as a representation. A representation is an assertion or declaration made by the insured at the time of the contract, which they believe to be true. In terms of contract law, it's crucial that representations are truthful since the validity of the insurance contract can depend on them
If the representation turns out to be false, it can lead to a misrepresentation, which could ultimately result in the voiding of the insurance contract. Therefore, a representation must be made with the intent to be truthful and is typically based on evidence or information known at the time of the contract's inception. Unlike a warranty, which is a guarantee that certain facts or conditions will be met, a representation is a statement believed to be true when it's made, but it's not a guarantee.