Final answer:
If after initially answering 'no', an insured person partakes in dangerous activities and a claim arises due to this, their policy may be voided and claims denied (Option C) due to increased risk and material misrepresentation.
Step-by-step explanation:
If an insured truthfully answers "no" to Dangerous Recreational Activities and Aviation questions but later engages in these activities, the correct answer is C. Their policy may be voided, and claims denied. This is because when the insured engages in such activities after the policy is written, they have significantly increased their risk profile. If this new information comes to the insurance company's attention after a claim, especially if the claim is a result of these high-risk activities, the insurer may consider the policyholder to have breached the terms of the agreement based on the principle of material misrepresentation. As a result, the insurer may refuse to pay the claim and may even have grounds to cancel the policy.
Furthermore, the insurance company faces challenges with risk classification. An insured individual often has more detailed knowledge of their own risk factors, such as family health history for life insurance or personal driving habits for car insurance, than the insurer can easily discover. Charging an actuarially fair premium to a mixed-risk group rather than assessing each subgroup separately may lead to adverse selection where only high-risk individuals choose to purchase insurance, causing financial losses for the insurer.