Module 4

Question 1

Risk Avoidance

Answer 1

If a business wants to ensure that it will not have windows broken by vandals, it can avoid the risk by not having windows.

Question 2

Risk reduction

Answer 2

business wants windows but is still concerned about vandals, it may choose to have windows made of a material that is very difficult to break.

Question 3

Risk retention

Answer 3

the individual or business retains the risk. If a loss occurs, the individual or business pays the cost.

Question 4

Risk transfer

Answer 4

This is primarily insurance, but can also be accomplished via
waivers or subcontracting.

Question 5

High Frequency, High severity

Answer 5

risk avoidance/reduction

Question 6

high frequency, low severity

Answer 6

risk retention/reduction

Question 7

low frequency, high severity

Answer 7

risk transfer

Question 8

low frequency, low severity

Answer 8

risk retention

Question 9

Risk Retention Groups

Answer 9

insure their own members. The group must be
willing to engage in all of the activities of an insurance company, including (1) investing its own capital, (2) setting up insurance operations (underwriting,
administration, and claims handling), (3) approaching and finding willing reinsurance companies, and (4) pricing the product efficiently.Membership in the risk
retention group is limited to persons engaged in businesses or activities that share a similar position with regard to a given type of liability exposure.

Question 10

Purchasing Groups

Answer 10

not insurers but rather are any group of persons, companies, or associations with similar risk exposures that form an organization with the purpose of purchasing insurance on a group basis. Unlike risk retention groups, these groups do not have to invest capital, submit a feasibility study, or make any
long-term commitments. Many insurance companies issue a master policy to the purchasing group, with
certificates to the insured members.

Question 11

seven factors that insurance companies use to

limit an insurer’s liability covering losses.

Answer 11

Insurable interest. Actual cash value of the loss. Policy limits or face value. Other insurance. Coinsurance. Deductibles. Subrogation.

Question 12

Insurable interest

Answer 12

insurable interest exists when the interested party will suffer a financial loss if the insured loss occurs

Question 13

Actual cash value of the loss

Answer 13

Actual cash value, which is used with property

losses, is the replacement cost minus depreciation.

Question 14

Policy limits or face value

Answer 14

the maximum amount that will be paid when the insured loss occurs.

Question 15

Other insurance

Answer 15

Either one policy is considered primary with the other

paying for any uncovered loss, or the policies pay prorated shares of the loss

Question 16

Coinsurance

Answer 16

It may be a splitting of costs, or it may refer to a minimum percentage of insurance that is required to avoid being penalized for inadequate insurance when there are partial losses

Question 17

Deductibles.

Answer 17

A deductible is a retained risk. It is the portion of insured losses that the insured is expected to pay before the insurance company pays anything.

Question 18

Subrogation

Answer 18

This prevents the insured from collecting twice for the same loss from two different companies.

Question 19

Moral hazard

Answer 19

a result of the client being unethical or misrepresenting himself in order to obtain insurance or to induce the payment of a claim.

Question 20

morale hazard

Answer 20

is indifference

Question 21

Torts

Answer 21

When someone causes physical, emotional, or financial harm to another

Question 22

four elements of negligence:

Answer 22

1. A duty is owed (e.g., individuals have the duty to drive their vehicles in a
   safe manner).
2. The duty was breached (e.g., the individual rear-ended another car).
3. There were actual damages (e.g., the damage to the other car).
4. There was proximate cause (i.e., an uninterrupted sequence of events that
   brought about the damage).

Question 23

collateral source rule

Answer 23

states that a tortfeasor (i.e., one who commits a tort)

will be liable for the full damages caused, regardless of other sources of reimbursement available to the victim.

Question 24

subrogation clause

Answer 24

in an insurance policy prevents the collateral source rule from violating the principle of indemnity (the victim should be reimbursed for loss but not profit from it) by giving the insurer the right to recover an amount
from the tortfeasor that is up to the amount the insurer has paid to the victim

Question 25

Survival of tort actions

Answer 25

means that the right to sue generally survives the death of

either the victim or the tortfeasor.

Question 26

Attractive nuisance

Answer 26

to something about a property (e.g., a swimming pool)

that is likely to attract and possibly injure children.

Question 27

Negligence per se

Answer 27

where the duty or standard of care owed by the defendant is determined by reference to a statute. This can happen where there is a statute that was enacted to protect the class of people to which the plaintiff belongs against the type of harm that occurred in the case. The other elements of a tort still must be proved.

Question 28

Absolute liability

Answer 28

the standard imposed when a person or organization is held responsible for any damages, even where there has been no negligence in the usual sense of the word. Generally, there is no defense to absolute liability claims.

Question 29

Vicarious liability

Answer 29

is when someone is held liable for the acts of another (e.g., the
person’s child, employee, or agent).

Question 30

Legal Defenses to Liability

Assumption of the risk

Answer 30

If the party recognizes and understands the danger in an activity and voluntarily chooses to encounter it, then another cannot be held responsible for the injury.

Question 31

Legal Defenses to Liability

Contributory negligence

Answer 31

If any negligence on the part of the injured party

contributes to the injury, it absolves the other party of liability.

Question 32

Legal Defenses to Liability

Comparative negligence

Answer 32

If the jury determines that the injured party was 20% to blame for the injury, the plaintiff’s award might be reduced by 20%.

Question 33

Legal Defenses to Liability

Last clear chance

Answer 33

immediately prior to the accident, had a last clear

chance to prevent the accident but failed to seize the chance

Question 34

Requirements of an enforceable contract are:

Answer 34

Offer and acceptance
 Consideration
 Legal object
 Competent parties
 Legal form

Question 35

bilateral

Answer 35

Contracts under which both parties have made

enforceable promises

Question 36

unilateral

Answer 36

only one party to the contract makes a promise

Question 37

aleatory contract

Answer 37

one where the outcome is controlled by chance, and the

dollars that change hands are generally of substantially unequal amounts

Question 38

Adhesion

Answer 38

means that if you wrote the contract, you are stuck with any ambiguities that you created. prepared by one party and either accepted or rejected by the other.

Question 39

indemnity

Answer 39

based on the idea that when persons suffer a loss,

they should be made whole.

Question 40

personal contracts

Answer 40

Insurance contracts. because the nature of the risk is

related to the individual who owns the contract

Question 41

utmost good faith

Answer 41

The insurance company can make three claims if it believes that good faith was not maintained:
 misrepresentation,
 warranties, or
 concealment.

Question 42

Misrepresentation

Answer 42

occurs when a false statement is made that at least partially induces the company to issue the contract. For a misrepresentation to void a contract, it must be material

Question 43

warranty

Answer 43

a statement by the applicant that all of the information on the application is absolutely true. Under strict application of the warranty doctrine, any mistake, however insignificant, would permit the company to void or rescind the contract

Question 44

Concealment

Answer 44

the intentional failure to provide material information, violates the requirement of utmost good faith even if no specific question arises about that information

Question 45

Offer and acceptance

Answer 45

An offer must be made by one party and accepted by

the other party

Question 46

Consideration

Answer 46

Each party must give the other something of value. The

insured pays an initial premium, and the insurer binds coverage

Question 47

Legal object

Answer 47

The contract must not be contrary to public policy (e.g., a contract will not be enforced if the object of the contract is illegal).

Question 48

Competent parties.

Answer 48

Parties to the agreement must be capable of contracting in the eyes of the law. Minors are capable of entering into a legal contract. However, such contracts may be voidable by the minor

Question 49

Legal form

Answer 49

The contract must satisfy any legal requirements specifying its form (e.g., contracts for the sale of land must be in writing, insurance application, etc.).

Question 50

void contract

Answer 50

is not enforceable. It lacks one or more of the preceding requirements of an enforceable contract.

Question 51

voidable contract

Answer 51

is a contract where one party has the option of voiding the contract, but the other party is bound

Question 52

The four basic sections of insurance policies are:

Answer 52

 declarations,
 insuring agreement,
 exclusions, and
 conditions.

Question 53

parol evidence rule

Answer 53

not a remedy but a rule of substantive law. Under this rule, when the parties put their agreement into a final,
complete, written form, evidence of prior understandings—whether oral or written—will not be
admitted to contradict the writing.

Question 54

Doctrine of waiver

Answer 54

cant deny a claim if it previously accepted claim without requiring certain action. waived its right

Question 55

Doctrine of estoppel

Answer 55

prevents a company for claiming they can deny a claim, when they had waived their right through the doctrine of waiver

Question 56

Equitable remedies

Answer 56

Rescission and reformation are the remedies used when a contract must be changed

Question 57

Rescission

Answer 57

is an equitable remedy by which the original contract is

deemed null from its beginning

Question 58

Reformation.

Answer 58

is the equitable remedy by which the written instrument

between the parties is changed to express the original intentions of the parties

Question 59

Waiver provision

Answer 59

inserted in insurance contracts to protect the insurer.insurance companies have not always benefited from this clause

Question 60

Independent Agents

Answer 60

represent several insurance companies. may affiliate with a producer group. Producer
groups generally are made up of high-end independent agents.

Question 61

Captive Agents

Answer 61

sell property and liability insurance for companies that are known as direct writers. represents only one company or one group of companies under common ownership.

Question 62

Career Agents

Answer 62

generally life insurance agents in a general agency or a company-owned office under the agency management or the branch office systems. In some cases, career agents are also captive agents, but in many situations career agents maintain selling contracts with other companies to better serve their clients. have access to benefits and must earn a minimum level of commissions to maintain.

Question 63

Producing General Agents

Answer 63

 generally produce the majority of their income by selling insurance
personally,
 do not have specified territories, and
 frequently do not hire agents to work for them, although they have authority
to do so if they wish

Question 64

PGA contract

Answer 64

A PGA contract allows an insurer to pay a producer an expense allowance, in addition to the normal commissions, in order to “encourage” the PGA to place more business with the insurer. Even with expense allowances, the PGA companies may be spending less in distribution costs than other companies spend using traditional agencies

Question 65

Brokers

Answer 65

individuals who are licensed with and can work with many insurers. A broker is the agent of an insurance buyer. cannot bind the insurer

Question 66

Surplus-Line, Excess-Line Brokers, or Agents

Answer 66

handle any type of insurance that cannot be purchased using normal distribution channels within a given state. These are found almost exclusively in the
property and casualty field

Question 67

Solicitors

Answer 67

Solicitors generally cannot bind the insurer or issue policies. They find insurance prospects and then handle the business through an independent agent, a
broker, a company branch, or a service office. Not every state allows solicitors to operate.

Question 68

all agents

Answer 68

Acts of an insurance agent within the scope of express, implied, or apparent authority are considered
acts of the insurer

Question 69

Express authority

Answer 69

specifically conferred on the agent. This authority is stated in the agent’s contract with the insurer. The insurer may specify the types of policies, the types of coverage, and the amount of insurance that the agent may
write.

Question 70

Implied authority

Answer 70

authority not expressly granted, but which the agent is

assumed to have in order to transact the insurer’s business

Question 71

Apparent authority

Answer 71

a doctrine of ostensible authority (another name
sometimes used interchangeably), is the appearance of, or assumption of, authority based on the actions, words, or deeds of the agent/insurer

Question 72

state legislature

Answer 72

passes laws that govern conduct of the insurance business in the state. These laws cover the requirements involved in organizing an insurance
company, standards of solvency, regulation of rates and investments, and licensing of agents.

Question 73

state insurance department

Answer 73

headed by the state insurance commissioner, sets regulations implementing legislation and
administers compliance. It also exercises judicial power in interpreting and enforcing the state insurance code—making rulings that have the force of law

Question 74

insurance commissioner

Answer 74

Areas of insurer operations regulated:
 examination of companies
 rates
 guarantee funds
 involuntary markets
 competence of agents
 unfair practices
 company insolvencies
 policy forms
 access to insurance
 social pricing
 investments
 licensing of companies
 reserves