Terms and Related Concepts

Question 1

Depreciation

Answer 1

Reduction in value, particularly due to wear and tear

Question 2

Exposure

Answer 2

Susceptibility to risk

Question 3

Implied Warranty

Answer 3

A legal term meaning that a product is suitable for its intended purpose and that it fits an ordinary buyer’s expectations

Question 4

Insurance Policy

Answer 4

A contract between a policy owner (and/or insured) and an insurance company that agrees to pay the insured or the beneficiary for loss caused by specific events

Question 5

Insurer (Principal)

Answer 5

The company that issues an insurance policy

Question 6

Obsolescence

Answer 6

Depreciation in the value of a property due to becoming outdated

Question 7

Premium

Answer 7

The money paid to the insurance company for the insurance policy

Question 8

Law of Large Numbers

Answer 8

Forms the basis for statistical predictions of loss upon which insurance rates are calculated by looking are a large group of similar risks and setting premiums accordingly. (The more people in a risk pool, the more predictable future losses become)

Question 9

Insurance

Answer 9

The transfer of risk of loss. (Insured’s loss is transferred over to the insurer and spread among other insureds)

Question 10

Three elements of Insurable Risk

Answer 10

Financial (a monetary interest); Blood (a relative); Business (a business partner)

Question 11

In property and casualty insurance, when must insurable interest exist?

Answer 11

At the time of the loss

Question 12

Risk

Answer 12

The chance of a loss occurring.

Question 13

Pure Risk

Answer 13

Refers to situations that can only result in a loss of no change and there is no opportunity for financial gain. This is the only risk that insurance companies are willing to accept.

Question 14

Speculative Risk

Answer 14

Involves the opportunity for either loss or gain (ex. Gambling). These risks are not insurable.

Question 15

Hazard

Answer 15

Conditions or situations that increase the probability of an insured loss occurring.

Question 16

Physical Hazards

Answer 16

Hazards that arise from the material, structural, or operational features of the risk, apart from the persons owning or managing it

Question 17

Moral Hazards

Answer 17

Hazards that refer to those applicants that may lie on an insurance application, or in the past, have submitted fraudulent claims against an insurer.

Question 18

Morale Hazard

Answer 18

Hazard that 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. (Ex. I’m not going to fix this. If it breaks, my insurance will pay to replace it)

Question 19

Indemnity

Answer 19

Reimbursement. A provision in an insurance policy states that in the event of loss, an insured or a beneficiary cannot recover more than their loss. (Will only receive amount to cover loss and shall not make any money in the process)

Question 20

Accident vs. Occurrence

Answer 20

An accident is a sudden, unplanned, and unexpected event resulting in injury or damage. An occurrence includes losses caused by continuous or repeated exposure to conditions resulting from injury or property damage.

Question 21

Negligence

Answer 21

The failure to use the care that a reasonable, prudent person would have under the same or similar circumstances

Question 22

Special Damages

Answer 22

Out-of-pocket expenses for medical, miscellaneous expenses, or loss of wages

Question 23

General Damages

Answer 23

Compensate an injured person for pain and suffering, mental anguish, or disfigurement

Question 24

Punitive Damage

Answer 24

Punishment for extreme behavior, gross negligence, or willful intent

Question 25

4 Elements of Negligence

Answer 25

Legal duty, Standard of care, Unbroken chain of events, and Actual loss or damage

Question 26

Absolute Liability

Answer 26

Imposed upon a person or company engaged in hazardous or potentially dangerous business who, by negligence or by an omission, causes harm or injury to another person or property. (Owning a swimming pool, selling explosives, wild animals, etc.) The injured party does not need to prove negligence.

Question 27

Strict Liability

Answer 27

Commonly applied to product liability cases. A business that manufactures or sells a product and makes an implied warranty that the product is safe. The business is liable for the defective product regardless of negligence.

Question 28

Loss Valuation

Answer 28

A factor in determining the premium charged and the amount of insurance required

Question 29

Actual Cash Value (ACV)

Answer 29

A Method of valuation reinforces the principle of indemnity because it recognizes the reduction of value of the property as it ages and becomes subject to wear and tear and obsolescence. Current Replacement Cost - Depreciation = ACV

Question 30

Market Value

Answer 30

Seldom-used method of valuing a loss. This method takes into consideration the value of land and location, rather than just the cost of rebuilding the structure itself.

Question 31

Agreed Value

Answer 31

A property policy that works best for items whose value does not fluctuate much. When a loss occurs, the policy pays the agreed value as specified on the policy schedule regardless of the insured item’s appreciation or depreciation.

Question 32

Stated Amount

Answer 32

An amount of insurance scheduled in a property policy. This scheduled amount is the maximum amount the insure will pay in the event of a loss.

Question 33

Salvage Value

Answer 33

The estimated value an asset will realize upon its sale at the end of its useful life. A property can be sold as a whole or in part. (Ex. car may be beyond repair as a whole, but some parts may be salvageable and sold)

Question 34

Deposit Premium Audit

Answer 34

Insurers may audit the insured’s books and records to determine adequate premiums.

Question 35

Certificate of Insurance

Answer 35

Written evidence showing the insurance policy has been issued and lists amounts and types of insurance provided.

Question 36

Binders

Answer 36

Temporary contract of insurance. Places insurance in effect before it is issued

Question 37

Warranty

Answer 37

Absolutely true statements on which the insurance policy depends

Question 38

Representations vs Concealment

Answer 38

Representations are statements believed to be true to the best of one’s knowledge, but not guaranteed. These are the insured’s statements on the application
A Concealment is intentionally holding information about a material fact

Question 39

Fair Credit Reporting Act

Answer 39

Administered by Federal Trade Commissions to protect consumers from distributing false or obsolete personal financial information

Question 40

Vicarious Liability

Answer 40

Transfers liability from one person to another person who would probably have a greater ability to pay. (Parents liable for children/Employer liable for employee)

Question 41

Peril

Answer 41

Cause of loss

Question 42

Named Peril

Answer 42

Describes the coverage provided under an insurance policy form that lists specific covered perils. (No coverage provided for unlisted perils)

Question 43

Special (Open) Peril

Answer 43

Describes the breadth of coverage provided under an insurance policy form that insured against any risk of loss that is not specifically excluded (Replaced term “all risks”)

Question 44

Direct vs. Indirect Loss

Answer 44

Direct Loss - direct physical damage to buildings and/or personal property
Indirect Loss (Consequential) - losses as a result of direct loss (Ex. paying for extra living expenses while the home is being repaired)

Question 45

Blanket vs Specific Coverage

Answer 45

Blanket Insurance - a single property insurance policy that covers multiple classes of property at one location.
Specific Insurance - a property insurance policy that covers a specific kind of unit of property for a specific amount of insurance.

Question 46

Limits of Liability (5)

Answer 46

Per occurrence (accident) - max on the payment that arises from a single accident
Per person - max amount for payment of bodily injury to a single person regardless of the policy limit
Aggregate - max limit of coverage available under a liability policy during a policy year. Losses paid under coverages subject to aggregate limits reduce the amt available for future losses. (Restored at the anniversary of policy)
Split - separately stated limits of liability for different coverages. (one person/
Combined - single dollar limit of liability applying to the total of damages for bodily injury and property damage combined, resulting from one accident or occurrence.

Question 47

Coinsurance

Answer 47

in consideration of a reduced rate, the insured agrees to maintain a certain minimum amount of insurance on the insured property. (Example: 80% coinsurance - for a $100,000 building, the insured would have to carry at least 80,000 of insurance to meet the requirement.)

Question 48

Insurance to value

Answer 48

replacement cost settlement for policyholders who carry minimum insurance.