chapter 1 insurance terms and related concepts

Question 1

What is insurable interest and when must it exist?

Answer 1

Insurable interest means the insured would incur a financial loss if the insured property was damaged and it must exist at the time of the loss.

Question 2

What are the two types of property losses?

Answer 2

Direct lost- proximate cause of loss,
Indirect lost- consequential losses.

Question 3

What is direct lost?

Answer 3

Includes damages where the ensure peril was the proximate cause of loss.

Question 4

What’s an example of direct loss?

Answer 4

build catches on fire, fire department uses water to put fire out, in result the walls and floors suffer water damage. Water damage is not an insured peril, but will be covered because the fire was the proximate (original cause) cause.

Question 5

What is an indirect lost

Answer 5

losses considered a result of direct loss

Question 6

What is a proximate cause of loss

Answer 6

Its a direct lost

Question 7

what is a consequential loss

Answer 7

Its an indirect lost

Question 8

What are the various methods of loss valuation?

Answer 8

how deductibles and coinsurance affect the amount of coverage and policy premiums.

Question 9

risk:

Answer 9

is the uncertainty or change of a loss occurring

Question 10

how many types of risks are there and what are they?

Answer 10

Two types of risks,
pure and speculative

Question 11

What is a pure risk?

Answer 11

refers to situations that can only result in a loss or no change, there’s no chance for financial gain, its also the only type of risk that insurance companies are willing to accept. Example: fire, tornado, flood,

Question 12

what is a speculative risk?

Answer 12

involves the opportunity for either loss or gain, prime example: gambling. This would not be insurable.

Question 13

what is a peril?

Answer 13

• the causes of loss insured against In an insurance policy.

Question 14

What’s is an example of peril?

Answer 14

Fire, Wind, Hail, and Explosions

Question 15

Hazard

Answer 15

conditions or situations that increase the probability of an insured loss occurring. Example: slippery floors, congested traffic

Question 16

What are three types of hazards?

Answer 16

1. Physical hazards are those arising from the material, structural, or operational features of the risk, apart from the persons owning or managing it.
2. Moral hazards refer to those applicants that may lie on an application for insurance, or in the past, have submitted fraudulent claims against an insurer.
3. Morale hazard refers to an increase in the hazard presented by a risk, arising from the insured’s indifference to loss because of the existence of insurance.

Question 17

indemnity

Answer 17

CANT RECOVER MORE THAN THEIR LOST —- IF THEIR LOST IS 15K THEY WILL ONLY RECEIVE 15K EVEN IF INSURED UP TO 20K ……also known as reimbursement – is a provision in an insurance policy that states that in the event of loss, an insured or a beneficiary is permitted to collect only to the extent of the financial loss and is not allowed to gain financially because of the existence of an insurance contract

Question 18

example of a life and health indemnity

Answer 18

Brenda has a health insurance policy for $20,000. After she was hospitalized, her medical expenses added up to $15,000. The insurance policy will reimburse Brenda only for $15,000 (the amount of the loss), and not for $20,000 (the total amount of insurance).

Question 19

example of property and casualty indemnity

Answer 19

Brenda has a homeowners insurance policy for $200,000. After her home was destroyed, her expense to rebuild the home added up to $150,000. The insurance policy will reimburse Brenda only for $150,000 (the amount of the loss), and not for $200,000 (the total amount of insurance).

Question 20

Subrogation

Answer 20

is the insurer’s legal right to seek damages from third parties, after it has reimbursed the insured for the loss. Subrogation is based on the principle of indemnity by preventing the insured from collecting on the loss twice: once from the insurer and a second time from the party that caused the damage.

Question 21

example of subrogation

Answer 21

I am in a car accident and the other person is at fault, my insurance company will pay me first and then seek reimbursement from the person at fault.

Question 22

What’s the difference between a named peril and an open peril policy?

Answer 22

Named peril coverage only what is on a lists specific covered perils while open peril insures against any risk of lost that is not specifically excluded.

Question 23

example of difference between named and open peril

Answer 23

Example losing the diamond in an engagement ring, may not be covered by named peril policy, but might be covered by an open peril policy

Question 24

depreciation

Answer 24

reduction in value, particularly due to wear and tear

Question 25

exposure

Answer 25

susceptibility to risk

Question 26

implied warranty

Answer 26

a legal term meaning that a product is suitable for its intended purpose and that it fits an ordinary buyers expectations.

Question 27

insurance policy

Answer 27

a contract between a policy owner and or insured and an insurance company which agrees to pay the insured or the beneficiary for loss caused by specific events

Question 28

insurer (principal)

Answer 28

the company who issues an insurance policy

Question 29

obsolenscence

Answer 29

depreciation in the value of a property due to becoming outdated.

Question 30

premium

Answer 30

the money paid to the insurance company for the insurance policy

Question 31

tort

Answer 31

a wrongful act or the violation of someone's rights that leads to legal liability

Question 32

Property insurance that provides $100k coverage for a building and $50k coverage for personal property at a single location is called

Answer 32

specific coverage