Chapter 23 Packet Notes

Question 1

The possibility of suffering harm or loss.

Answer 1

Risk

Question 2

The possibility of losses associated with the assets and the earnings potential of a firm.

Answer 2

Business Risk

Question 3

The uncertainty (gain or loss) associated with an investment decision.

Answer 3

Market Risk

Question 4

• The uncertainty associated with a situation where only losee or no loss can occur- there is no potential for gain (only downside).
• Only form of risk that is insurable.

Answer 4

Pure Risk

Question 5

• Real property
• Personal property
• Replacement value of property
• Actual cash value (ACV)
• Peril
• Direct loss
• Indirect loss

Answer 5

Property Risks

Question 6

Land and anything physically attached to the land, such as buildings.

Answer 6

Real Property

Question 7

Machinery, equipment, furniture, fixtures, stock, and vehicles.

Answer 7

Personal Property

Question 8

The cost to replace or replicate property at today’s prices.

Answer 8

Replacement Value of Property

Question 9

An insurance term that refers to the depreciated value of the property.

Answer 9

Actual Cash Value (ACV)

Question 10

A cause of loss, either through natural events or through the acts of people.

Answer 10

Peril

Question 11

A loss in which physical damage to property reduces its value to the property owner.

Answer 11

Direct Loss

Question 12

A loss arising from inability to carry on normal operations due to a direct loss to property.

Answer 12

Indirect Loss

Question 13

• Workers compensation legislation
• Contractual liability
• Indemnification clause

Answer 13

Liability Risks: Statutory Liability

Question 14

Laws that obligate the employer to pay the employees for an employment related injury or illness, regardless of fault.

Answer 14

Worker’s Compensation Legislation

Question 15

Performance or financial obligations (risks) that firms assume when entering into contracts with other parties.

Answer 15

Contractual Liability

Question 16

A contractual clause that requires one party to assume the financial consequences of another party’s legal liabilities.

Answer 16

Indemnification Clause

Question 17

• Torts
• Establishing Negligence
• Reasonable (prudent person) standard
• Compensatory damages

Answer 17

Liability Risks: Contractual Liability

Question 18

Wrongful acts or omissions for which an injured can take legal action against the wrongdoer for monetary damages.

Answer 18

Torts

Question 19

• A legal duty between parties to act (or not to act) to cause injury (damage)
• A failure to provide the appropriate standard of care
• The presence of actual injury or damages
• Action that was proximate cause of injury or damage.

Answer 19

Establishing Negligence

Question 20

The typical standard of care, based on what a reasonable or prudent person would have done under similar circumstances.

Answer 20

Reasonable (Prudent Person) Standard

Question 21

Economic or noneconomic damages intended to make the claimant whole, by indemnifying the claimant for any injuries or damage arising from the negligent action.

Answer 21

Compensatory Damages

Question 22

• Economic damages
• Noneconomic damages
• Punitive damages

Answer 22

Torts: Types of Damages

Question 23

Compensatory damages related to an economic loss, such as medical expense, loss of income, or the cost of property replacement/restoration.

• Easier to quantify than noneconomic damages

Answer 23

Economic Damages

Question 24

Compensatory damages for losses such as pain and suffering, mental anguish, and loss of consortium.

Answer 24

Noneconomic Damages

Question 25

Damages intended to punish wrongdoers for gross negligence or a callous disregard for the interests of others and to have a deterrent effect.

Answer 25

Punitive Damages

Question 26

* Manufacturing defect * Design defect * Marketing defect

Answer 26

Product Liability

Question 27

A defect resulting from a problem that occurs during the manufacturing process causing the product to subsequently not be made according to specifications.

Answer 27

Manufacturing Defect

Question 28

A defect resulting from a dangerous design, even though the product was made according to specifications.

Answer 28

Design Defect

Question 29

A defect resulting from failure to convey to the user that hazards are associated with a product or to provide adequate instructions on safe product use.

Answer 29

Marketing Defect

Question 30

Risks that directly affect individual employees, but may have an indirect impact on a business as well.

Answer 30

Personnel Risks

Question 31

* Ways of coping with risk that are designed to preserve assets and the earning power of a firm. * Involves finding the best way possible to reduce the cost fo dealing with risk. * Insurance is only one of several approaches to minimizing the pure risks a firm is sure to encounter.

Answer 31

Risk Management

Question 32

* Small businesses pay insufficient attention to analyzing potential risk. * Large firms can assign responsibilities for risk management to a specialized staff manager. * Risk management is not something that requires immediate attention- until something happens.

Answer 32

Risk Management Differences From Large Firms:

Question 33

Loss prevention and loss avoidance =

Answer 33

Risk Control and Loss Reduction

Question 34

Making funds available to cover losses that cannot be managed by risk avoidance. * Risk transfer * Risk retention * Self-insurance

Answer 34

Risk Financing

Question 35

Buying insurance or making other agreements with others to transfer risk.

Answer 35

Risk Transfer

Question 36

Choosing- whether consciously or unconsciously, voluntarily or involuntarily- to manage risk.

Answer 36

Risk Retention

Question 37

Designating part of the firm's earnings as a hedge against possible future risks.

Answer 37

Self-Insurance

Question 38

* Property insurance * Business interruption insurance * Commercial General Liability (CGL) insurance * Automobile insurance * Workers' compensation insurance * Crime insurance * Business owner's policy (BOP) * Package policy

Answer 38

Property and Casualty Insurance

Question 39

* Named-peril approach * All-risk approach * Coinsurance provision

Answer 39

Property Insurance

Question 40

Identifies the specific perils covered.

Answer 40

Named-Peril Approach

Question 41

Defines the perils covered by stating that all direct damages to property are covered except those caused by perils specifically excluded.

Answer 41

All-Risk Approach

Question 42

Property must be insured for at least 80% of its value or ca penalty will be applied to any covered loss.

Answer 42

Coinsurance Provision

Question 43

Reimburses for loss of (anticipated) income plus continuing expenses due to direct loss impacting business revenues.

Answer 43

Business Interruption Insurance

Question 44

Covers bodily injury and property damage for which the business is liable.

Answer 44

Commercial General Liability (CGL) Coverage

Question 45

Protects against liabilty and physical damage to a vehicle resulting from insured perils such as collision, theft, vandalism, hail, and flood.

Answer 45

Automobile Insurance

Question 46

Provides benefits to employees for medical expenses, loss of wages, and rehabilitation expenses, as well as death benefits for employee's families.

Answer 46

Worker's Compensation Insurance

Question 47

Coverage against employee dishonesty.

Answer 47

Crime Insurance

Question 48

A business version of a homeowner's policy, designed to meet the real and personal property and liability insurance needs of small business owners.

Answer 48

Business Owner's Policy (BOP)

Question 49

* A lower premium than would otherwise be required to purchase all coverages separately * Automatic inclusion fo business interruption insurance. * Automatic replacement value protection, as opposed to actual cash value protection.

Answer 49

Advantages of BOP

Question 50

A policy for small businesses that do not qualify for a BOP that combines property insurance and commercial general liability insurance.

Answer 50

Package Policy

Question 51

* Lower premium than would otherwise be required to purchase all coverages seprately. * Ease of adding other coverages more economically. * Inclusion of business interruption insurance * Inclusion of crime insurance

Answer 51

Advantages of Package Policy

Question 52

* Health Insurance * Health Maintenance Organization (HMO) * Preferred Provider Organization (PPO) * Key-Person Insurance * Disability Insurance

Answer 52

Life and Health Insurance

Question 53

Coverage for medical care at hospitals, doctors' offices, and rehabilitation facilities, that usually includes outpatient services and prescription drugs.

Answer 53

Health Insurance

Question 54

A managed-care network that provides health insurance that is generally less expensive than that of a PPO but limits employees' choices of medical care providers more than a PPO does.

Answer 54

Health Maintenance Organization (HMO)

Question 55

A managed-care network that provides health insurance that is generally more expensive than an HMO but offers a broader choice of medical providers.

Answer 55

Preferred Provider Organization (PPO)

Question 56

Provides benefits upon the death of a firm's key personnel.

Answer 56

Key-Person Insurance

Question 57

Provides benefits upon the disability of a firm's partner of other key employee. * Disability buyout insurance * Key-person disability insurance

Answer 57

Disability Insurance