Managing Risk and Insurance Contracts

Question 1

what are the 3 categories of risk and give a brief description of each:

Answer 1

1) personal risk - health or life
2) property risk - financial loss due to property lost or damaged
3) liability risk - your actions result in injury or damage or death to others

Question 2

what are the 4 steps of dealing with risk?

Answer 2

1) avoidance of risk
2) controlling risk
3) retention of risk
4) transfer of risk

Question 3

what is meant by avoidance of risk?

Answer 3

eliminating all chances of financial loss, this is impractical (Ex: have no belongings, dont drive, dont have a house)

Question 4

what is meant by controlling risk?

Answer 4

taking measures to reduce frequency and severity of losses (ex: install alarm, dont run red lights, dont jaywalk across busy streets)

Question 5

what is meant by retention of risk?

Answer 5

self insurance (ex: police cruisers, govt)

Question 6

how does transfer of risk occur?

Answer 6

through insurance

Question 7

what are the 2 types of risk?

Answer 7

speculative and pure

Question 8

what is speculative risk?

Answer 8

possibility of financial loss OR gain, is not insurable

Question 9

what is pure risk?

Answer 9

possibility of financial loss with NO chance of financial gain, INSURABLE

Question 10

what are the 5 elements needed to enforce a contract?

Answer 10

1) Agreement
2) consideration
3) legality of object
4) legal capacity of parties to enter into a contract
5) genuine intention

Question 11

what is meant by ‘consideration’?

Answer 11

paying insurance premiums

Question 12

what are incompetents?

Answer 12

persons who do not have the legal capacity to enter into a contract

Question 13

what is the exception to the rule of those who can enter contract?

Answer 13

minors, when it is regarding a contract for necessities of life (food, clothing, shelter)

Question 14

to prove genuine intention, it must be shown that the agreement was not affected by:

Answer 14

fraud, duress, concealment, or mistake

Question 15

what are the 3 elements unique to insurance contacts?

Answer 15

1) insurable interest
2) “uberrima fides” (utmost good faith)
3) indemnity

Question 16

what is meant by insurable interest?

Answer 16

people have an insurable interest if they can show they would suffer financially by a loss
ex: mortgagees

Question 17

what us “uberrima fides”

Answer 17

utmost good faith, complete honesty

Question 18

what is indemnity?

Answer 18

the law restricts payment under insurance contracts to ensure people receive the actual amount of their loss (back to financial position they were in one second before peril) no more and no less

Question 19

what is meant by ‘void’?

Answer 19

that the contract is considered never to have existed in the first place, completely refund the client all their premiums

Question 20

what is the latin term for void

Answer 20

ab initio

Question 21

what does voidable mean

Answer 21

contract is void to the wrongdoear, but not void as to damage to the affected third parties

Question 22

give an example of voidable

Answer 22

if I arson my own house, and neighbor’s house catches fire, my house is not covered but neighbor’s is. no refund of premium