2 - Terms and Concepts

Question 1

Risk

Answer 1

-uncertainty of a financial loss

Question 2

speculative risks

Answer 2

• uninsurable

- financial gain or loss

Question 3

pure risk

Answer 3

• chance of loss

- insurable

Question 4

Risk Management Methods

Answer 4

• Risk Avoidance
• Risk Assumption
• Risk Transference
• Risk Sharing
• Risk Reduction

Question 5

Hazard

Answer 5

-any circumstance that increases a possible loss (peril)

Question 6

3 main Hazards

Answer 6

• Physical
• Moral
• Morale

Question 7

Exception Hazard for Property

Answer 7

• “ordinance or law”

- would limit any compensation for temporary inability to occupy your home (sinkhole)

Question 8

Peril

Answer 8

-cause of loss

Question 9

Economic Loss

Answer 9

-total estimated cost to a person or business resulting from the damage or destruction of property or from a liability risk

Question 10

Indemnity

Answer 10

• compensation for a loss
• “put-back”
• not designed to place insured in a better financial position than before the loss occurred

Question 11

Insurable Interest

Answer 11

-expectation of a financial loss that can be covered by insurance

Question 12

Deductible

Answer 12

-amount paid after a loss by the insured

Question 13

Direct Loss

Answer 13

-a property loss by an unbroken chain of events from a covered peril

Question 14

Indirect Loss (Loss of Use)

Answer 14

• a loss that is not a direct result of a covered peril

- ex. loss of business earnings due to property damage

Question 15

Proximate Cause

Answer 15

-may be used in conjunction with direct or indirect losses

Question 16

Named Perils

Answer 16

-contracts under which perils covered are specifically listed

Question 17

Open Perils

Answer 17

• contracts that cover all perils unless specifically excluded
• “All Risk of Perils”

Question 18

Specific Coverage

Answer 18

• single insurance for only one kind of property at only one location of an insured
• ex. rare antique in a home

Question 19

Blanket Coverage

Answer 19

-single policy on the insured’s property for more than one type of property

Question 20

4 methods of property loss valuations

Answer 20

• Actual Cash Value (ACV)
• Replacement Cost
• Functional Replacement Cost
• Salvage Value

Question 21

Actual Cash Value (ACV)

Answer 21

• cost of replacing damaged/destroyed property with comparable new property minus depreciation
• insurer not required to pay more than ACV on total building losses

Question 22

If an insured was carrying more coverage than the actual loss on building…

Answer 22

-the insurer is required to refund the overpaid premium with an addition of 6% interest/year

Question 23

Functional Replacement Cost

Answer 23

-amount needed to put a building back the the functional manner before the loss occurred

Question 24

Salvage Value

Answer 24

-amount for which an insurance company can sell recovery property after paying damages to the insured

Question 25

Supplementary Payments

Answer 25

-payments from the insurance companies for costs such as court cost and attorney’s fees

Question 26

Binder

Answer 26

• temporary insurance contract providing coverage until a Permian policy is issued
• good for a maximum of 60 days from the date of issue

Question 27

Endorsement

Answer 27

-written agreement attached to a policy to add or subtract insurance coverage

Question 28

Subrogation

Answer 28

-right granted in an insurance contract allowing an insurance company to take action against a third party that owes monetary damages to the company’s insured

Question 29

Adhesion

Answer 29

• “take it or leave it basis”

- accepted “as is”

Question 30

Law of Large Numbers

Answer 30

-statistical concept that is used that states the larger the # of similar risks insured by the company, the greater chance of predicting the possible losses

Question 31

Spread of Risk

Answer 31

-companies select risks that are fairly uniform in size and sufficiently large in number

Question 32

adverse selection

Answer 32

-tendency of those in dangerous jobs or high risk lifestyles to purchase life insurance

Question 33

when the insured yields the right of recovery of damages to his or her insurer because the insurer has made him or her whole

Answer 33

-subrogation

Question 34

the key element that must be present for a person or entity to be held liable for some action is…

Answer 34

-negligence

Question 35

A Binder is good for a maximum of how many days in NC?

Answer 35

-60

Question 36

Which section of an insurance policy would the insured find the amount of coverage for losses?

Answer 36

-declarations