Midterm 1 Review Flashcards by Donny Geisler

Q

Uncertainty based on a person’s mental condition or state of mind is known as…

A

Subjective risk

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Q

The long-run relative frequency of an event based on the assumption of an infinite number of observations with no change in the underlying conditions is called…

A

Objective probability

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Q

Dense fog that increases the chance of an automobile accident is an example of a…

A

Physical hazard

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Q

Which of the following statements about finanical risk is (are) true?

I. Enterprise risk does not include financial risk

II. Financial risk is easily addressed through the purchase of insurance.

A

Neither I nor II

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Q

All of the following are burdens to society because of the presence of risk EXCEPT:

A. The size of an emergency fund must be increased

B. Risk provides an incentive for people to engage in loss control

C. Society is deprived of certain goods and services

D. Mental fear and worry are present

A

B

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Q

Identify the type of risk that is present in the following scenario:

The Department of Homeland Security alerts the nation of a possible attack by terrorists

A

Nondiversifiable risk because the entire nation can be affected by a terrorist attack

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Q

Identify the type of risk that is present in the following scenario:

A house may be severely damaged in a fire.

A

Pure risk; The insured rarely profits if his/her house is damaged in a fire.

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Q

Identify the type of risk that is present in the following scenario:

A family head may be totally disabled in a plant explosion.

A

Pure risk because of the loss of earned income

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Q

Identify the type of risk that is present in the following scenario:

An investor purchases 100 shares of Microsoft stock.

A

Speculative risk; Profit or loss is possible

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Q

Identify the type of risk that is present in the following scenario:

A river that periodically overflows may cause substantial property damage to thousands of homes in the floodplain.

A

Nondiversifiable risk because large numbers of people can lose their homes in a major flood.

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Q

Identify the type of risk that is present in the following scenario:

Home buyers may be faced with higher mortgage payments if the Federal Reserve raises interest rates in the next meeting.

A

Nondiversifiable risk because large numbers of home buyers will be adversely affected by higher interest rates and higher monthly mortgage payments. From the viewpoint of home builders and realtors, a rise in interest rates is also a financial risk that can slow down the sale of new and used homes.

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Q

Identify the type of risk that is present in the following scenario:

A worker on vacation plays the slot machines in a casino.

A

Speculative risk because both profit and loss are possible.

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Q

For the following scenario, what method for handling risk is being used?

The decision not to carry earthquake insurance on the firm’s manufacturing plant.

A

Retention. The firm is retaining the earthquake exposure.

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Q

For the following scenario, what method for handling risk is being used?

The installation of an automatic sprinkler system in a hotel.

A

Risk control. If a fire occurs, the sprinkler system will operate automatically to extinguish the fire, thereby reducing the size of the loss.

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Q

For the following scenario, what method for handling risk is being used?

The decision not to produce a product that might result in a products liability suit.

A

Avoidance. The firm is avoiding a lawsuit by not manufacturing products that could injure customers who use the product.

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Q

For the following scenario, what method for handling risk is being used?

Requiring retailers who sell the firm’s product to sign an agreement releasing the firm from liability if the produce injures someone.

A

Noninsurance transfer. The firm manufacturing the product has transferred the risk of a liability suit to the retailers by such an agreement. The agreement is often called a hold-harmless agreement.

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Q

For the following situation, identify a private insurance coverage that would provide the desired protection.

Emily, age 28, is a single parent with 2 dependent children. She wants to make certain that funds are available for her children’s education if she dies before her youngest child finished college.

A

Life insurance

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Q

For the following situation, identify a private insurance coverage that would provide the desired protection.

Danielle, age 16, recently obtained her driver’s license. Her parents want to make sure they are protected if Danielle negligently injures another motorist while driving a family car.

A

Auto liability insurance

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Q

For the following situation, identify a private insurance coverage that would provide the desired protection.

Jacob, age 30, is married with 2 dependents. He wants his income to continue if he becomes totally disabled and unable to work.

A

An individual or group disability income policy will provide periodic income payments if Jacob becomes totally disabled.

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Q

For the following situation, identify a private insurance coverage that would provide the desired protection.

Tyler, age 35, recently purchased a house for $200,000 that is located in an area where tornadoes frequently occur. He wants to make certain that funds are available if the house is damaged or destroyed by a tornado.

A

A homeowners insurance policy will provide the desired protection. Windstorm and hurricanes are covered perils.

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Q

For the following situation, identify a private insurance coverage that would provide the desired protection.

Nathan, age 40, owns an upscale furniture store. He wants to be protected if a customer is injured while shopping in the store and sues him for bodily injury.

A

A commercial general liability insurance policy

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Q

Which of the following is implied by the pooling of losses?

A. Sharing of losses by an entire group

B. Inability to predict losses with any degree of accuracy

C. Substitution of actual loss for average loss

D. Increase of objective risk

A

A

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Q

From the standpoint of the insurer, which of the following is a characteristic of an ideally insurable risk?

A. The loss must be intentional

B. There must be a small number of exposure units

C. The chance of loss must be calculable

D. The loss must be indeterminable

A

C

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Q

Methods by which insurers may minimize or avoid catastrophic losses include which of the following?

I. The use of reinsurance

II. Concentrating coverage written in one geographic region

A

I only

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Which of the following statements regarding insurance and gambling is (are) true? ## Footnote I. Insurance is used to handle existing pure risks, while gambling creates a new speculative risk. II. Insurance usually involves risk avoidance, while gambling typically involves only risk reduction.

I only

Which of the following is a form of casualty insurance? ## Footnote A. Fire insurance B. General liability insurance C. Inland marine insurance D. Ocean marine insurance

B

Preloss objectives of risk management include which of the following? ## Footnote I. Preparing for potential losses in the most economical way II. Reduction of anxiety

Both I and II

Which of the following is a source of information that a risk manager could use to help identify pure loss exposures? ## Footnote A. Commodity prices B. Physical inspections C. Currency exchange rates D. Interest rate movements

B

In reviewing his company's operations, a risk manager noticed that all of the company's finished goods were stored in a single warehouse. The risk manager recommended that the finished goods be divided among three warehouses to prevent all of the finished goods from being destroyed by the same peril. Dividing the finished goods among three warehouses illustrates...

Separation

Which of the following conditions is (are) appropriate for using retention? ## Footnote I. Losses are difficult to predict II. The worst possible loss is not serious

II only

All of the following are disadvantages of noninsurance transfers EXCEPT ## Footnote A. The party to whom the potential loss is transferred may be unable to pay B. The transfer may fail because the contract language is ambiguous C. The only potential losses that can be transferred are those that are not commercially insurable D. The noninsurance transfer may be costly

C

Mark owns a 2006 sedan. The last time Mark renewed his auto insurance, he decided to drop the physical damage insurance on this vehicle. How is Mark dealing with the auto physical damage exposure in his personal risk management program?

Active retention

Purchasing health insurance illustrates the use of which personal risk management technique?

Risk transfer

State the four elements of negligence.

* Existence of a legal duty to use reasonable care * Failure to perform that duty * Damage or injury to the claimant * A proximate cause relationship between the negligent act and the infliction of damages, which requires an unbroken chain of events

Name the three elements of "res ipsa loquitur."

* The event is one that normally does not occur in the absence of negligence * The defendant has exclusive control over the instrumentality causing the accident * The injured party has not contributed to the accident in any way

A(n) ___ is a person who enters or remains on the owner's property without the owner's consent.

Trespasser

The duty to refrain from injuring a trespasser is sometimes referred to as the \_\_\_.

duty of slight care

A(n) ___ is a person who enters the premises with the occupant's expressed or implied permission.

Licensee

What is the degree of care required from the owner to a licensee?

The property owner must warn the licenseee of unsafe conditions which are apparent

A(n) ___ is a person who is invited onto the premises for the benefit of the occupant.

Invitee

What is the degree of care required from the property owner to an invitee?

The property owner has an obligation to inspect the premises and eliminate any dangerous conditions.

A(n) ___ is a hazardous condition that can attract and injure children.

Attractive nuisance The occupants of land are liable for the injuries of children who may be attracted by some dangrous condition, feature, or article.

The negligent owner and operator of the vehicle can be held liable for bodily injury or property damage caused by the operator under two exceptions:

* The family purpose doctrine * If an agency relationship exists

Under the doctrine of \_\_\_, an employer can be held liable for the negligent acts of employees while they are acting on the employer's behalf.

respondeat superior

State the two conditions required for respondeat superior to be valid.

* The worker must be an employee * The employee must be acting within the scope of employment when the negligent act occurred.

All of the following are categories of torts EXCEPT ## Footnote A. intentional torts B. breach of contract C. strict liability D. negligence

B

A common situation involving strict liability includes which of the following? ## Footnote A. Operating a motor vehicle B. Blasting operations C. Manufacturing a product D. Mining operations

B

Trisha was injured when the delivery truck for a local furniture store struck her. The delivery driver claimed the brakes of the delivery truck failed, causing the accident. Trisha filed suit, and in her lawsuit named the delivery driver, the furniture store, the service station responsible for vehicle maintenance, and the manufacturer of the vehicle. Even though the manufacturer of the vehicle may be only 1% responsible for the accident, it may be required to pay a large percentage of the damages under the... ## Footnote A. Collateral source rule B. Assumption of risk rule C. Joint and several liability rule D. Last clear chance rule

C

James was injured in an auto accident caused by another motorist's negligence. He received severe facial lacerations and injured his back in the accident. In payment for his pain, suffering, and disfigurement, losses which cannot be specifically itemized, James will receive... ## Footnote A. Punitive damages B. Special damages C. Imputed damages D. General damages

D

Steve was involved in an auto accident. Both drivers were partially at fault for the accident. Steve's actual damages were $50,000. He was judged to be 60% at fault. If Steve's state has a pure comparative negligence law, how much will Steve collect?

$20,000

Heather sued Robert for injuries suffered in an automobile accident. Based upon the facts presented, the jury concluded that Heather was 40% at fault in the accident and Robert was 60% at fault. Under the common law doctrine of contributory negligence, the jury should award Heather...

Nothing

Under one doctrine, a person who understands the danger inherent in an activity cannot recover damages in the event of injury from the activity. This doctrine is called the...

Contributory negligence doctrine

Which of the following statements about the legal obligations of a property owner is (are) true? ## Footnote I. A property owner must inspect the premises for the benefit of an invitee and correct any unsafe conditions. II. A property owner has the right to set a trap designed to injure a trespasser.

I only

Under the common law, which of the following persons is most likely to be classified as an invitee? ## Footnote A. A mail carrier B. A social guest C. A door-to-door salesperson D. A solicitor for a charitable organization

A

Which of the following is an intentional tort? ## Footnote A. Slander B. Negligence C. Strict liability D. Murder

A

Proof of financial responsibility is typically required under which 3 circumstances?

* After an accident involving bodily injury or property damage over a certain amount * Upon failure to pay a final judgment resulting from an auto accident * Following a conviction for certain offenses, such as drunk driving or reckless driving

Motorists can meet the financial responsibility law requirements by doing one of which three things?

* By carrying auto liability insurance limits equal to a certain minimum amount * By posting a bond, money, or securities * By showing that the person is a qualified self-insurer

\_\_\_ laws require the owners and operators of automobiles to carry at least a minimum amount of liability insurance before the vehicle can be registered or licensed.

Compulsory insurance

\_\_\_ insurance means that after an accident has occurred, each party collects from his or her own insurer for bodily injury claims, regardless of who is at fault.

No-fault auto

A(n) ___ is a dollar amount in a no-fault law; if a bodily injury claim is below this amount, an injured motorist would not be permitted to sue but would instead collect from his or her insurer.

Monetary threshold

A(n) ___ means that a suit for damages is allowed only in serious cases, such as those involving death, dismemberment, disfigurement, or permanent loss of a bodily member or function.

Verbal threshold

Name the four types of no-fault plans.

* Pure no-fault * Modified no-fault * Add-on plan * Choice no-fault

\_\_\_ is a no-fault plan in which lawsuits are not permitted, regardless of the size of the loss.

Pure no-fault

\_\_\_ is a no-fault plan in which a lawsuit is allowed only if the claim exceeds a certain dollar threshold or meets a verbal threshold.

Modified no-fault

\_\_\_ is a no-fault plan in which additional benefits are paid, but there is no restriction on the right to sue.

Add-on plan

\_\_\_ is a no-fault plan in which motorists can elect to be covered under no-fault or the tort liability system.

Choice no-fault

Under financial responsibility laws, proof of financial responsibility is generally required under which of the following circumstances? ## Footnote A. The use of an auto by any driver with fewer than 3 years of driving experience B. When an individual renews his or her driver's license C. Failure to pay a final judgment resulting from an auto accident D. The accumulation of unpaid parking tickets exceeding a specified value

C

Defects of financial responsibility laws include which of the following? ## Footnote I. Accident victims may not be fully compensated for their injuries II. They apply only to property damage losses, not to bodily injury claims

I only

Which of the following statements is true with respect to a pure no-fault auto insurance plan? ## Footnote A. Under such a plan, you would collect from your own insurer and retain the right to sue the other party if your injuries surpass a dollar or verbal threshold B. Most no-fault plans that have been adopted by states are pure no-fault plans C. Under such a plan, you would collect from your own insurer and retain the right to sue the other party without having to satisfy a threshold D. Under such a plan, an accident victim cannot sue the other party, and no payments are made for pain and suffering.

D

A(n) ___ is an organization of all insurers operating in the state to make insurance available to high-risk drivers

Joint Underwriting Association

Which of the following statements about joint underwriting associations for insuring high-risk driver is (are) true? ## Footnote I. Underwriting losses are proportionately shared by all auto insurers based on premiums written in the state II. Each company participating in a joint underwriting association sets its own rates

I only

Amber believes that her auto insurance premium is too high. Which of the following would most likely lower Amber's premium? ## Footnote A. Amber could increase her physical damage deductible B. Amber could move from the rural area where she lives to an urban or suburban area C. Amber could increase the amount of liability insurance that she carries D. Amber could add "other-than-collision loss" coverage to her policy

A

Which of the following statements is (are) true with respects to the use of credit-based insurance scores as an auto insurance rating factor? ## Footnote I. Insurers claim that drivers who have poor insurance scores are expected to have relatively more accidents II. The use of insurance scores has been banned as a rating factor in all states as it unfairly discriminates against certain groups of individuals

I only

\_\_\_ is the most important part of the PAP; it protects a covered person against a suit of claim arising out of the ownership or operation of a covered vehicle.

Part A: Liability coverage

\_\_\_ covers all reasonable medical and funeral expenses incurred by an insured in an accident. (PAP)

Part B: Medical Payments

\_\_\_ pays for the bodily injury caused by an uninsured motorist, by a hit-and-run driver, or by a negligent driver whose insurance company is insolvent. (PAP)

Part C: Uninsured Motorists coverage

Under the \_\_\_, the insurer agrees to pay for any direct and accidental loss to a covered auto or any nonowned auto. (PAP)

Part D: Coverage for Damage to Your Auto

A(n) ___ is defined as the upset of your covered auto or nonowned auto or its impact with another vehicle or object.

Collision

The PAP is typically written with split limits. Split limits of 250/500/100 means that you have:

* A max amount of $250,000 for bodily injury to each person for any one accident * A max amount of $500,000 for the bodily injury to all persons resulting from any one accident * A max amount of $100,000 paid for property damage resulting from any one accident