Study Questions Flashcards
Which one of the following is NOT an element of an insurable risk?
A)The loss must be unexpected or due to an accident.
B)The loss must be clear and have a measurable dollar value.
C)The loss must not be accidental.
D)The loss must not be catastrophic to the insurer.
A)The loss must be unexpected or due to an accident.
B)The loss must be clear and have a measurable dollar value.
C)The loss must not be accidental.
D)The loss must not be catastrophic to the insurer.
For a risk to be insurable, the loss must be accidental or fortuitous.
LO 1.1.1
Select the method of risk management characterized by purchasing insurance.
- Risk transfer
- Risk avoidance
- Risk reduction
- Risk retention
- Risk transfer
- Risk avoidance
- Risk reduction
- Risk retention
Purchasing insurance is an example of risk transfer; a person who buys insurance transfers the risk of loss to an insurance company.
LO 1.2.1
Bill and Arlene have two very active teenage children. Arlene refuses to allow either child to own or ride a motorcycle because of her fear that they would get hurt. However, Bill and Arlene also realize that other activities in which their children are involved—such as soccer, skiing, and mountain biking—could lead to broken bones and other injuries. To reduce the risk of untimely, large medical expenses, they purchased a supplemental accident indemnity policy to supplement their major medical insurance.
Based on this information alone, which of the following methods of risk management are Bill and Arlene using?
- Risk avoidance
- Risk reduction
- Risk retention
- Risk transfer
A) III and IV
B) II and IV
C) I, III, and IV
D) I and II
A) III and IV
B) II and IV
C) I, III, and IV
D) I and II
Risk avoidance is being used by eliminating potential injuries from motorcycle accidents; the supplemental accident policy and their health insurance is risk transfer. They still retain some of the risk, so that is risk retention. Risk reduction could be used by requiring proper protective equipment when participating in the other activities, but this is not addressed in the fact scenario.
LO 1.2.2
Express authority is authority that is
A) incidental.
B) expected by the public.
C) specifically stated in the agent’s contract.
D) implied.
A) incidental.
B) expected by the public.
C) specifically stated in the agent’s contract.
D) implied.
The answer is specifically stated in the agent’s contract. Express authority is expressly or specifically stated in the agent’s contract. This type of authority is also referred to as stipulated authority, which means the powers are specifically stipulated in the contract. Implied authority is incidental, while apparent authority is expected by the public.
LO 1.3.1
Which one of the following statements about the National Association of Insurance Commissioners’ (NAIC’s) accreditation program is incorrect?
A) The purpose of the NAIC is to increase the reliability of its oversight of insurance companies.
B) If all states become accredited by the NAIC, it will make a good argument for Congress leaving regulation of the insurance industry to the states.
C) States may achieve accreditation by enacting the NAIC’s model laws.
D) It is the goal of the NAIC to transfer regulation of the insurance industry to the federal government.
A) The purpose of the NAIC is to increase the reliability of its oversight of insurance companies.
B) If all states become accredited by the NAIC, it will make a good argument for Congress leaving regulation of the insurance industry to the states.
C) States may achieve accreditation by enacting the NAIC’s model laws.
D) It is the goal of the NAIC to transfer regulation of the insurance industry to the federal government.
The answer is it is the goal of the NAIC to transfer regulation of the insurance industry to the federal government. The NAIC’s goal is the exact opposite. States may achieve accreditation by enacting the NAIC’s model laws. If all states become accredited by the NAIC, it will make a good argument for Congress leaving regulation of the insurance industry to the states. The purpose of the NAIC’s accreditation program is to increase the reliability of its oversight of insurance companies.
LO 1.4.1
Which of the following sets regulations and enforces laws that directly regulate the insurance industry?
- State insurance departments
- State judiciaries
- The National Association of Insurance Commissioners (NAIC)
- The federal government
A) I, II, and IV
B) I only
C) II and III
D) I and II
A) I, II, and IV
B) I only
C) II and III
D) I and II
Explanation
The state insurance department, headed by the state insurance commissioner, enforces laws passed by the state legislature. They also set regulations and make rulings that have the force of law. The judiciary interprets the laws; it does not set regulations or enforce laws. The NAIC had no regulatory powers and does not enforce laws or set regulations. The federal government may pass laws that indirectly affect the insurance industry, but setting regulations and enforcing the laws falls to the state department of insurance and commissioner.
LO 1.4.1
The actual cash value (ACV) of a property loss is
A) the property’s replacement cost less depreciation.
B) the fair market value of the property less depreciation.
C) the face value of the policy less the property’s replacement cost.
D) equal to the property’s fair market value.
A) the property’s replacement cost less depreciation.
B) the fair market value of the property less depreciation.
C) the face value of the policy less the property’s replacement cost.
D) equal to the property’s fair market value.
The actual cash value (ACV), used with property losses, is the property’s replacement cost less depreciation.
LO 1.1.1
What is one characteristic of an insurance contract?
A) The insured must meet certain conditions to collect for losses.
B) The insured has the right to change policy provisions unilaterally.
C) The insurer and the insured exchange amounts of equal value.
D) The insurer receives the benefit of the doubt in interpretations of ambiguity in the contract.
A) The insured must meet certain conditions to collect for losses.
B) The insured has the right to change policy provisions unilaterally.
C) The insurer and the insured exchange amounts of equal value.
D) The insurer receives the benefit of the doubt in interpretations of ambiguity in the contract.
The insured must meet certain conditions to collect for losses.
LO 1.5.1
Carl and Jeri signed a contract for Jeri to provide certain consulting services for Carl’s business. Six months later, Jeri realized that Carl had intentionally failed to tell her about some significant conflicts that would arise if she carried out the terms of the contract. What concept, doctrine, or remedy is likely to be used to correct the problem?
A) Doctrine of estoppel
B) Doctrine of specific performance
C) Remedy of reformation
D) Remedy of rescission
A) Doctrine of estoppel
B) Doctrine of specific performance
C) Remedy of reformation
D) Remedy of rescission
The answer is remedy of rescission. There was misrepresentation in the negotiation of the contract. The doctrine of estoppel applies when an insurer voluntarily gives up one or more of its rights upon issuance of a policy, and the applicant relies on statements made by the insurer or agent. The doctrine of specific performance is a remedy where an individual uses the courts to force the other party to a contract to carry out his/her part of the agreement. Remedy of reformation is used where the parties agree that the contract needs to be rewritten to reflect their understanding of the agreed-upon terms.
LO 1.5.1
Fred was backing his car down his driveway. In an effort to avoid his son’s bicycle, he ran into his neighbor’s fence. Under which of the following theories of liability would Fred be financially responsible for the damage?
A) Strict liability
B) Negligence
C) Absolute liability
D) Negligence per se
A) Strict liability
B) Negligence
C) Absolute liability
D) Negligence per se
Fred would be liable for this unintentional tort, also referred to as negligence.
LO 1.6.1
Which one of the following correctly matches a legal term to an example of the term?
A) Strict liability: arson
B) Absolute liability: assault
C) Intentional tort: libel
D) Negligence: battery
A) Strict liability: arson
B) Absolute liability: assault
C) Intentional tort: libel
D) Negligence: battery
The answer is intentional tort: libel. Libel is an example of an intentional tort. Battery is an intentional act and would not constitute negligence. Arson is an example of a criminal act, not strict liability. Assault is an example of an intentional tort, not absolute liability.
LO 1.6.1
Which of the following steps in the insurance adjustment process are correctly described?
- Notice: A phone call to the agent that a loss has occurred is generally adequate notice.
- Investigation: The primary purpose is to determine if an insured is likely to be submitting a false or exaggerated claim.
- Proof of loss: The insured generally must submit a sworn statement stating that a loss occurred, the amount of the claim, and the circumstances surrounding the loss.
- Payment or denial: In this stage, the insurance company usually reunderwrites the policy and reduces protection for any future claims.
A) II, III, and IV
B) I and III
C) I and IV
D) I, II, and III
A) II, III, and IV
B) I and III
C) I and IV
D) I, II, and III
Generally, the purpose of an investigation is to determine whether or not a loss occurred, the extent of the loss, and whether it was covered. The payment or denial stage is limited to either paying the claim or explaining to the insured why the company will not pay it.
LO 1.7.1
The one rating company that rates only insurance companies is
A) A.M. Best Company.
B) Standard & Poor’s Rating Services.
C) Weiss Research.
D) Moody’s Investors Service.
A) A.M. Best Company.
B) Standard & Poor’s Rating Services.
C) Weiss Research.
D) Moody’s Investors Service.
The answer is A.M. Best Company. The A.M. Best Company is the only rating company that rates only insurance companies.
LO 1.8.1
Which of the following is NOT one of the eight general exclusions that apply to all standard homeowners policies?
A) Neglect
B) War
C) Vandalism
D) Earth movement
A) Neglect
B) War
C) Vandalism
D) Earth movement
Vandalism is one of the 12 basic coverages provided by standard policies. It is not an exclusion.
LO 2.1.1
Karla purchased a building to house her quilting supply business. The purchase price eight years ago was $75,000. After she upgraded the building with improvements and changes were made in traffic patterns around the building, she was told she could sell the property for $250,000. Due to the value of the land, the replacement cost would be $160,000. Over the years, she has increased the property insurance to its current level of $130,000. Last week, a gas leak caused an explosion, which blew out an entire wall of the building. The cost to repair the building will be $57,000. Her policy has an 80% coinsurance clause and a $1,000 deductible.
How much will her insurance company pay toward repair of the damage?
A) $45,313
B) $56,891
C) $28,640
D) $56,000
A) $45,313
B) $56,891
C) $28,640
D) $56,000
The answer is $56,000. The building is insured for 81.25% of its replacement cost ($130,000 insurance coverage divided by $160,000 replacement cost). Since the amount of insurance exceeds 80% of the replacement cost (.8 x $160,000 = $128,000), the company will pay the amount of the loss, less the deductible. When adequate insurance is maintained, there is no coinsurance penalty. It is also good to remember that carrying more insurance than the minimum required (i.e., 80% in this case) will not result in more money than the actual claim being paid (e.g., based on having 81.25% coverage, which translates to 102% of the required 80% coverage, Karla would not receive $56,891).
LO 2.1.2
Arnold and Melinda own several homes and a yacht. They rotate their artwork between homes and loan it to art galleries. They travel frequently and take jewelry and collectibles with them along with their chef and personal assistant, who arranges for their belongings to be transferred routinely. What combination of coverage will best protect their personal property?
A) Homeowners, automobile, umbrella policy
B) Homeowners and inland marine
C) Homeowners, automobile, yacht, and inland marine
D) Homeowners, automobile, yacht, inland marine, and umbrella
A) Homeowners, automobile, umbrella policy
B) Homeowners and inland marine
C) Homeowners, automobile, yacht, and inland marine
D) Homeowners, automobile, yacht, inland marine, and umbrella
The best combination of coverage is homeowners, automobile, yacht, and inland marine. Inland marine or floater policy will cover the personal property wherever it is. The homeowners, yacht, and automobile coverage also have some coverage for personal property. The umbrella policy covers liability, not property, so it would be of no use.
LO 2.1.2
Hiram is 41 years old and has been the owner of a $250,000 whole life insurance policy for 15 years. His only child just left for college on a full scholarship provided by her deceased mother’s employer. Hiram feels he may no longer need all the insurance coverage and doesn’t want to continue paying the premiums. He would like to maintain some permanent death benefit and still owes $140,000 on his home mortgage (15 years remaining), so he wants to keep some insurance.
Using the following nonforfeiture values, make a recommendation for Hiram that best meets all his criteria
A) Take the cash value and invest it.
B) Use the extended insurance option, because it provides coverage during the mortgage repayment term.
C) Use the reduced paid-up insurance option.
D) Use the cash option to pay down the mortgage, then use the reduced paid-up insurance option for a small permanent death benefit.
A) Take the cash value and invest it.
B) Use the extended insurance option, because it provides coverage during the mortgage repayment term.
C) Use the reduced paid-up insurance option.
D) Use the cash option to pay down the mortgage, then use the reduced paid-up insurance option for a small permanent death benefit.
Explanation
The best recommendation would be to use the paid-up insurance nonforfeiture provision because this will provide $151,000 of ongoing insurance coverage [$604 x 250 (from face amount)]. This amount will cover the mortgage and provide a permanent death benefit, while allowing Mr. Beam to stop paying insurance premiums. Taking the cash value and investing it terminates insurance. The extended insurance option does not provide a permanent death benefit. Selecting the cash option terminates the policy.
LO 3.3.1
