Chapter 1

Question 1

Key Term : A person licensed and authorized or employed to act on behalf of another.

Answer 1

Agent

Question 2

Key Term: A licensed independent person or firm who acts on behalf of an insured in placing business with insurance companies

Answer 2

Broker

Question 3

Key Term: A person who is an investor in a company and owns a piece of the company through purchasing a share or shares. The shareholder can benefit from ownership if the company makes a profit or can lose financially if it does not.

Answer 3

Shareholder

Question 4

Key Term: A person to whom the administration of something is entrusted for the benefit of another. This term has a greater legal obligation than others to discharge duties honestly and diligently

Answer 4

Fiduciary

Question 5

Key Term: Bond executed on behalf of a person appointed by a court to a position of trust that guarantees the performance of statutory duties and property accounting.

Answer 5

Fiduciary Bond

Question 6

Key Term: The fraudulent acquisition and use of a person’s private identifying information, usually for financial gain.

Answer 6

Identity Theft

Question 7

Key Term: A criminal offence committed through a computer or the internet that causes loss or damage to the victim’s computer system, network or data; Denies access to data or service; or enables further related crimes such as extortion or the resale of stolen data.

Answer 7

Cyber Crime

Question 8

Key Term: A federal statute that governs the collection and use of personal information. It States that the personal information to be collected must be relevant, and that all information that has been collected, is being collected or will be collected must be held in the strictest of confidence.

Answer 8

Personal Information Protection and Electronic Documents Act (PIPEDA)

Question 9

Key Term: An insurance form that protects the insured against liability for committing an error or omission in the performance of professional duties. Generally, such policies are designed to cover financial loss rather than liability for bodily injury or property damage.

Answer 9

Errors & Omissions (E&O) Insurance

Question 10

Key Term: Applies when an agent is authorized to do something on behalf of a principal. The principal is the person or entity for whom the agent or broker acts.

Answer 10

Law of Agency

Question 11

Key Term: A code of conduct prepared by association and other recognized groups of authority that can be referenced to define what the conduct should be for a particular group.

Answer 11

Standard of Care

Question 12

Key Term: A legal principle calling for the highest standards of integrity on the part of the insured and the insurer

Answer 12

Utmost Good Faith

Question 13

Key Term: A broker or agent who sells insurance

Answer 13

Producer

Question 14

Key Term: A system for collecting premiums whereby the agent or broker bills and collects the premium in full from the insured and transmits the payment minus the earned commission to the insurer as required by the terms of the agency or brokerage contract.

Answer 14

Broker Bill

Question 15

Key Term: A system for collecting premiums whereby an insurer bills and collects the premium directly from the insured as opposed to the agent or broker being a middle person. Premiums are usually collected monthly by direct debit from the insureds bank account.

Answer 15

Direct Bill

Question 16

Key Term: Incentive compensation offered to brokers in anticipation of exceptional profits or volumes or business. Also known as profit sharing and bonus commissions agreements.

Answer 16

Contingency Commissions Agreement

Question 17

Key Term: Provisions in insurance policies or bonds stipulating how the policy or bond can be cancelled

Answer 17

Cancellation Clause

Question 18

Key Term: The permission or right coupled with the power to act or to have others act. A broker receives their authority from common law or the Civil Code of Quebec, and the agency contract. This authority can be both expressed and implied.

Answer 18

Legal Authority

Question 19

Key Term: Permission explicitly granted to the agent to carry out any legal action that the agent and the principal agree to orally or in writing, including acts that enable the agent to carry out those instructions.

Answer 19

Express Authority

Question 20

Key Term: Authority that, although no proof exists of its having been given in a specific circumstance, may be inferred from the conduct of the principal or from the general written authority of the principal.

Answer 20

Implied Authority

Question 21

Key Term: One who is appointed by a company in a specific territory. They are usually given an exclusive territory and may appoint sub-agents in that territory.

Answer 21

General Agent

Question 22

Outline the three most common forms of business structure. What are the advantages & disadvantages?

Answer 22

Sole Proprietorship, Partnership or a Corporation. (SPC)

Advantage:
Sole Proprietorship
* Easy to Start
* Personal Tax filing
* Owner controls business
Partnership
* Easy to Start
* Costs and workload shared
* Personal Tax Filing
Corporation
* Limited Liability for corporate debts and obligations
* Ownership can be transferred
* Business continuity
* Tax rates are lower

Disadvantage:
Sole Proprietorship
* Personal Assets at risk
* Higher tax rate
* Business dies with owner
Partnership
* Personal assets at risk
* Liable for own and partners actions
* Disputes with partners
Corporation
* Costly to maintain
* Shareholder conflicts
* Ownership publicly known
* Tax returns are complicated

Question 23

List FIVE (5) fiduciary duties brokers have toward their clients and include a brief description of each.

Answer 23

Loyalty: A broker has a duty to act primarily for the benefit of his or her principal and to deal fairly with the principal in every way.

Obedience: It is the agent’s duty to obey the lawful instructions of the principal.

Reasonable care: An agent has a duty to exercise the degree of care that a reasonable, prudent person would use in the same or similar circumstances.

Accounting: The agent owes a duty to his or her principal to account for all property and money of the principal in the agent’s possession.

Duty to inform: The agent is responsible for providing the principal with all information that materially affects the principal’s interests and is relevant to the affairs entrusted to the agent.

“Loyal Owls Respect All Details.”

Each word corresponds to the first letter:
• Loyalty
• Obedience
• Reasonable care
• Accounting
• Duty to inform

Question 24

What are FIVE (5) major components of an agency contract?

Answer 24

Granting authority

Ownership of expirations

Billing procedures

Commission schedules

Profit sharing and bonus commissions agreements

Agency expenses

Cancellation

Rehabilitation

“Great Owls Bring Care, Protecting Agencies’ Contracts & Renewals.”

Each word corresponds to the key topics:
• Granting authority
• Ownership of expirations
• Billing procedures
• Commission schedules
• Profit sharing and bonus commissions agreements
• Agency expenses
• Cancellation
• Rehabilitation

Question 24

Describe FIVE (5) possible consequences of binding risks when not authorized to do so or of relying on implied authority that turns out to be nonexistent.

Answer 24

Broker loss liability onus until binding: The broker might be held liable for any loss the insured suffers from the date the risk was bound until the insurer confirms it will write the business. Broker partial liability onus: The broker might be held responsible for any uninsured portion of losses if the insurer agrees to write only a portion of the risk. Broker complete loss liability onus: The broker might be held responsible for any losses if the insurer declines the risk. E&O claims might arise out of any of the above three outcomes. Broker authority re-evaluated: The insurer might reconsider the brokerage's binding authority. It could withdraw or revoke the authority from the individual who accepted the risk or from the entire brokerage. This could damage the brokerage's reputation with the insurer or, in the worst case, result in difficulties in operating. Loss of client: The brokerage might lose the client due to dissatisfaction with the service. This reputational harm could spread widely depending on how much attention the situation receives or how active the client is on social media.

Question 25

Application Question Alexandra is thinking about leaving her current position and opening her own brokerage. She has a friend who has expressed some interest in joining her as a partner at her new company, though she is not sure if she will accept their offer. Alexandra is considering the ownership options she has: Should it be a sole proprietorship, a partnership, or a corporation? She is aware of the advantages of each type of company, but she also wants to consider the disadvantages of each type as well. What are some disadvantages of a sole proprietorship?

Answer 25

Unlimited personal liability: The owner bears all responsibility for debts, losses, and judgments arising from the operation. Limited capital: The owner may have to rely heavily on personal capital to finance the business. Limited expertise: The business relies predominantly on the owner's expertise for business decisions. Lack of continuity: The business will not automatically continue after the owner's death, disability, or retirement. Staffing: The business may have difficulty hiring or retaining employees who may be attracted by the prospects of greater stability or more opportunities for promotion in larger organizations. Taxes: Personal income tax rates are usually higher than corporate tax rates.

Question 26

Application Question Alexandra is thinking about leaving her current position and opening her own brokerage. She has a friend who has expressed some interest in joining her as a partner at her new company, though she is not sure if she will accept their offer. Alexandra is considering the ownership options she has: Should it be a sole proprietorship, a partnership, or a corporation? She is aware of the advantages of each type of company, but she also wants to consider the disadvantages of each type as well. What are some disadvantages of a partnership?

Answer 26

Unlimited personal liability: General partners have unlimited personal liability for all debts, losses, and obligations of the business. If the organization has debts, and one partner has no personal wealth, the remaining partner(s) have total personal liability for those debts. Partnership inequality: There may be discord where one partner is (or is perceived to be) not adequately compensated for his or her contribution to the organization. Business discontinuity: The partnership is dissolved on death, disability, or retirement of one of the partners. Talent limit: The corporate intelligence of a partnership is limited to that of the partners and paid external expertise. Increased regulation: A partnership is subject to more government regulation than a sole proprietorship is.

Question 27

Application Question Alexandra is thinking about leaving her current position and opening her own brokerage. She has a friend who has expressed some interest in joining her as a partner at her new company, though she is not sure if she will accept their offer. Alexandra is considering the ownership options she has: Should it be a sole proprietorship, a partnership, or a corporation? She is aware of the advantages of each type of company, but she also wants to consider the disadvantages of each type as well. What are some disadvantages of a corporation?

Answer 27

Directors and officers' financial liability: Many different statutes impose personal liability on directors and officers; for example, when the corporation declares bankruptcy. Directors and officers' shareholder liability: Directors and officers may be found personally liable to the shareholders or to the corporation for losses that result from their actions. Increased legislation: Corporations are subject to many statutorily imposed rules. To make changes to the entity itself requires changes in the charter or by-laws, which may require approval of the incorporating jurisdiction as well as the company's directors and shareholders. To transfer earnings to its shareholders, a corporation must declare and pay formal dividends rather than transferring profits more informally. Higher administration costs: Corporations are subject to the increased costs of incorporation compliance and increased licensing costs. Costs include preparing annual financial returns, complying with increased audit requirements, submitting federal and provincial tax returns, and holding shareholders' meetings. Double taxing: Corporations have the potential for double taxation when the after-tax profits are distributed to the shareholders and taxed again. Limited liquidity: Shareholders must sell their shares to withdraw capital from the business generally. Business losses tied to business: Business losses can only be written off against the business, not against other personal income the owners or shareholders may have.