2. Insurance Planning. - All Questions and Comprehensive Course Exam Flashcards
Lesson 1. Principles of Insurance
Course 2. Insurance Planning
What is the Financial Definition of Insurance?
Insurance is a financial arrangement that redistributes the costs of unexpected losses.
Insurance involves the transfer of potential losses to a group of individuals exposed to the same risk through what is referred to as an insurance “pool.” Members contribute financial consideration to fund the pool based upon the combined predicted losses divided by the number of members. As covered losses occur, members receive funds from the pool to replace the economic loss sustained.
Certainty of financial payment from a pool with adequate resources and accurate predictability of losses are the hallmarks of the insurance transaction.
The following example of how insurance works is based on a community comprised of 180 homes, each worth $180,000. Without insurance, any individual homeowner may face a substantial loss. However, if they all agree to share equally in any losses, the risk to each is only $1,000 per loss.
What is the Legal Definition of Insurance?
Insurance is a contractual arrangement whereby one party agrees to compensate another party for losses, in exchange for consideration paid (i.e., the premium).
Insurance law is a branch of contract law. The insurance policy, like all contracts, is an arrangement creating rights and corresponding duties for the parties that are involved. In analyzing an insurance contract, you should remember that a right created for one party represents a duty (obligation) for the other party.
In an insurance contract, the party agreeing to pay for the losses is known as the __ ____??____ __.
* insurer
* insured
* premium
* beneficiary
insurer
* In an insurance contract, the party agreeing to pay for the losses is known as the insurer.
* The insured is the party whose loss causes the insurer to make a claims payment.
* The premium is the payment received by the insurer.
* The beneficiary is the recipient of the claim payment.
Define Exposure To Loss
The insured’s possibility of loss is called his exposure to loss. If the insured purchases an insurance policy, he transfers the exposure to loss to the insurer.
When meeting with a client, you can ask questions such as: “What risks do we face and what is our exposure?” Exposure refers to the units that are exposed to risk. In other words, the owner of four houses could be said to be exposed to four chances of loss by fire, theft, or windstorm damage, while a single homeowner has one exposure.
Define Self-Insurance
Self-Insurance means that a firm or other organization may decide to deal with its own risks. They decide to operate much like a commercial insurance company and will engage in the same types of activities as a commercial insurer. When these activities involve the operation of the law of large numbers and predictions regarding future losses, they are commonly referred to as self-insurance.
To self-insure a firm must set up a sound program with the following requirements.
* Law of large numbers: The firm should be big enough to combine sufficiently large numbers of exposure units so as to make a loss predicable.
* Financial Reliability: The firm should be able to accumulate funds to meet losses that may occur. Also, the firm needs to cover losses if they occur more frequently than predicted.
* Geographic distribution: Dispersion of risk in the event of a catastrophe.
Often the context in which the word “self-insurance” is used would be better described as risk retention. There are some important advantages and disadvantages of retaining risk through self-insurance.
Section 1 – Insurance Fundamentals Summary
Insurance is a financial arrangement for redistributing the costs of unexpected losses requiring a legal contract, called a “policy,” whereby an insurer agrees to compensate an insured for unexpected losses.
In this lesson, we have covered the following:
Definitions of Insurance:
* Financial: Insurance is a financial arrangement that redistributes the costs of unexpected losses.
* Legal: Insurance is a contractual arrangement whereby one party agrees to compensate another party for losses.
* Exposure to loss: The insured’s possibility of loss.
* Self-insurance: The firm or individual decides to deal with potential risks and losses using its own funds.
Which of the following is NOT considered an element of the financial definition of insurance?
* Certainty of financial payment from a pool.
* Proper redistribution of losses.
* Accurate predictability of losses.
* Rights and duties of the two parties.
Rights and duties of the two parties.
* Rights and duties of the two parties is not considered an element of the financial definition of insurance.
* Certainty of financial payment from a pool attracts more members to join a particular insurance pool while accurate predictability of losses helps the pool to redistribute losses properly among its members.
* Proper redistribution of losses is also a hallmark of insurance transactions.
An insurance system redistributes the costs of losses from the unfortunate few members experiencing them to all the members of the insurance system who pay premiums.
* False
* True
True
* An insurance system redistributes the costs of losses from the unfortunate few members experiencing them to all the members of the insurance system who pay premiums.
What is exposure to loss?
* Probability of loss.
* Possibility of loss.
* Cause of loss.
* Attitude of indifference to loss.
Possibility of loss.
* We consider the insured’s possibility of loss as his exposure to loss. The insured transfers the exposure to loss to the insurer by purchasing an insurance policy.
Define Loss
The word “loss,” as it is commonly used, means being without something previously possessed such as “loss of memory” and “loss of time.”
When the word is used in insurance, however, it takes on a more limited meaning. It is called insurable loss.
Define Peril
A peril is defined as the cause of the loss. For example, fires, tornadoes, heart attacks, and criminal acts constitute perils.
Insurance policies provide financial protection against losses caused by perils. Insurers call policies that specifically identify a list of covered perils specified-perils contracts.
The alternative format is to cover all losses except those specifically excluded. Insurers call this type of policy an open-perils contract.
Exam Tip: CFP Board often tests the concepts of loss and peril by presenting scenarios in which a specific loss occurrs. Remember that the cause of the loss is the peril.
Define Insurable Loss, Direct, and Indirect Losses
A typical insurable loss is an undesired, unplanned reduction of economic value arising from chance. We call losses not resulting from chance depreciation expenses. Therefore, depreciation cannot be insured against, as such loss is guaranteed to occur, rather than being left to chance.
Insurable losses are categorized as direct or indirect losses.
Direct losses are the immediate, or first, result of an insured peril.
* Example: If a fire destroys a home, the loss of the home is the direct loss.
Indirect losses, also called consequential losses (such as loss of use), are a secondary result of an insured peril.
* Example: If a tornado destroys a restaurant, the property damage is the direct loss. The loss of income during the period when the business is being reestablished is the indirect loss.
There must be a direct loss before an indirect loss. Property insurance policies are specific when providing coverage for direct or indirect losses, or for both.
Define Chance of Loss, A Priori chance of loss and Ex-Post chance of loss
The chance of loss is the probability of loss.
The concept of chance of loss refers to a fraction. The numerator is either the actual or the expected number of losses. The denominator represents the number exposed to loss. The chance of loss in a given case may or may not be known accurately before a loss occurs.
If we are referring to the predicted chance of loss, we divide the expected number of losses by the number of exposed units. This fraction is called a priori chance of loss.
If we are looking back in time, we can divide the actual number of losses by the total number of exposures. This fraction is called the actual or ex-post chance of loss.
If each house in an insurance pool represents one exposure to loss, and we expect three houses out of 1,000 houses in an insurance pool to be destroyed by fire, what would be the expected chance of loss?
* 0.3
* 0.03
* 0.003
* 0.0003
0.003
* If we expect three houses out of 1,000 houses in an insurance pool to be destroyed by fire, the expected chance of loss is 3/1000 or 0.003.
Define Hazards
Hazards are conditions that increase the probability of loss from a peril, by increasing either the frequency or the severity of potential losses.
* For example, every home faces the peril of destruction by fire. Storing oily rags near the home’s furnace would be an example of a hazard.
The hazard increases the chances of the peril occurring. If an insured materially increases a hazard, the insurer may suspend the insurance coverage.
Hazards can be separated into four categories:
1. Physical Hazards: Involve physical characteristics such as type of construction, location, occupancy of building, having frayed wires on plugs, steep stairs with no railing, or smoking in bed.
2. Moral Hazards: Involve dishonest tendency such as exaggerating losses in a theft claim or auto insurance fraud (e.g., two cars intentionally bump each other with many passengers claiming injury).
3. Morale Hazards: Involve an increase in losses due to knowledge of insurance coverage such as having a different attitude toward a loss because the loss will be covered by an insurance company (e.g., leaving a car unlocked, ordering unnecessary medical tests, or a jury’s tendency to grant larger amounts of money in situations where an insurer will have to pay).
4. Legal Hazards: Involve increased frequency and severity of losses such as legislative action (e.g., ADA requirements or mandated insurance coverages).
Exam Tip: It is important to distinguish between a peril and a hazard. As we’ve mentioned, the peril is the occurrance for which we insure. There are circumstances that are often controllable by an insured, that increase the likelihood of loss but are not the specific cause of the loss. These circumstances are called hazards.
If a property owner burns down a building to collect the insurance claim, the fire causes the damage and is considered the peril, while the owner’s behavior is considered a __ ____??____ __.
* morale hazard
* moral hazard
* risk
* claim
moral hazard
* If someone burns down a building to collect the insurance, their actions are considered a moral hazard.
Define Speculative Risks
Speculative risk refers to those exposures to price change that may result in gain or loss.
Most investments, including stock market investments, are classified as speculative risks. Other speculative risks result from the potential gains or losses associated with interest rate changes, price movements of foreign currencies, and price movements of agricultural and other commodities. With speculative risk, the risk is man-made and did not exist naturally. The individual’s goal is not merely to avoid loss, but rather to create risk in the hopes of actually gaining. Since insurance deals with pure risk that exists only when a chance of loss/no loss is possible, man-made speculative risks such as the stock market and gambling are not suitable for coverage.
Pure Risk + Speculative Risk = Risk
Practitioner Advice: Often clients say they don’t believe in buying insurance because they feel it is a “gamble.” This is odd, considering insurers do not take on speculative risk. When people say they won’t buy disability insurance because they have to become disabled in order to “win,” they miss the point of insurance. The risk of disability already exists whether you purchase insurance or not. You either can become disabled or not; there is no gain potential in becoming healthier because you have a policy. On the other hand, when you bet $100 in hopes of winning $1,000 if your favorite football team wins the Super Bowl, your chance of loss or gain did not exist prior to your bet. You created this risk.
Define Adverse Selection
When one party to a transaction has more relevant information or more control of outcomes than another party to the transaction, the party with superior information or control can take advantage of the situation. Insurance scholars call this possession of asymmetric information adverse selection.
Adverse selection is also defined as the actions of individuals acting for themselves or others, who are motivated directly or indirectly to take financial advantage of a risk classification system. For example, adverse selection occurs when people who know their health is deteriorating try to purchase health insurance to cover the cost of a needed operation. Another example would involve a person trying to purchase fire insurance immediately after an arsonist threatened his property.
The reason the term is called adverse selection is because the insurer is trying to select suitable people for coverage from an applicant pool that really doesn’t represent a fair cross-section of the population. This is because those at risk tend to apply in greater proportion to those who are at lower risk. Thus, there is a tendency to select for coverage a higher percentage of adverse candidates.
**Practitioner Advice: Though many new life and health insurance agents get very excited when they receive an unsolicited request to purchase an insurance policy, most seasoned agents remain cautious. Experience shows that such inquiries usually come with a higher risk of adverse selection. It is important to ask these individuals appropriate questions to properly assess their situations. More times than not, an agent will discover that the potential client was compelled into action due to a known change to his or her health.
**
Exam Tip: Adverse selection represents a real risk to an insurance company. Beyond knowing the definition of adverse selection, work towards recognizing a scenario where adverse selection could be present for an insurer.
An insurable loss is:
* An event that has not been predicted.
* An exposure that cannot be easily measured before the event has occurred.
* An unexpected reduction of economic value.
* Being without something one has previously possessed.
An unexpected reduction of economic value.
* The word loss, as it is commonly used, means ‘being without something previously possessed.’ But its meaning, when used in the context of insurance, becomes limited.
* A typical insurable loss is an undesired, unplanned reduction of economic value arising from chance.
* For example, loss or damage to property or life due to fires, tornadoes, heart attacks, and criminal acts.
The definition of peril is:
* An event or condition that increases the chance of loss.
* The uncertainty concerning loss.
* A measure of the accuracy with which a loss can be predicted.
* The actual cause of the loss.
The actual cause of the loss.
* A peril is the actual cause of the loss. For example, fire, tornadoes, heart attack, and criminal acts.
* The event or condition that increases the chance of loss is a hazard.
A moral hazard is:
* A loss of faith in the insurance company because of a denial of claims.
* Illustrated by the theft of a wallet by a thief.
* An attempt to defraud the insurer.
* The potential for the insurance company to increase premiums after a loss.
An attempt to defraud the insurer.
* If an individual causes a loss to collect insurance proceeds, the loss is said to result from the moral hazard.
* If somebody burns down a building to collect insurance, the fire causes the damage, but the moral hazard is responsible for the increased frequency of loss.
Each of the following are types of responses to risk utilized in financial planning EXCEPT:
* Risk Avoidance
* Risk Reduction
* Risk Transfer
* Risk Reassignment
Risk Reassignment
There are five commonly utilized risk management techniques in financial planning:
* Risk Avoidance
* Risk Reduction
* Risk Transfer
* Risk Retention
* Risk Diversification
Define Risk Retention
Risk retention means retaining or bearing the risk personally. Retention is the most common approach to risk because it is the default strategy - not taking any action to transfer a risk means it is retained. Since people are not always aware of the risks they face, much of the retention is done unconsciously and unintentionally.
Risk Retention Example:
A person who retains any income losses caused by a disability is experiencing risk retention.
Exam Tip: Use the matrix below to determine the best risk management approach based on the potential cost of loss and probability of occurrence.
* Low cost, low prob - Risk Retention
* Low cost, high prob - Risk Reduction
* High cost, low prob - Risk transfer
* High cost, high prob - Risk Avoidance
Amelia exercises regularly and eats a well-balanced vegetarian diet. She wants to avoid any loss due to high cholesterol or heart diseases.
Identify the type of risk response Amelia has implemented.
* Risk avoidance.
* Risk reduction.
* Risk transfer.
* Risk retention.
Risk reduction.
* By exercising regularly and having a proper diet, Amelia is reducing the chance that a loss will occur or reducing the magnitude of a loss if it does occur. Thus, her response to risk in this example is risk reduction.
Michael is not taking a medical insurance policy, even after falling sick many times in the past year.
Select the correct category of risk management used by Michael.
* Risk reduction.
* Risk avoidance.
* Risk transfer.
* Risk retention.
Risk retention.
* In the above case, by not taking a medical insurance policy, Michael has decided to bear (retain) all the losses personally.
Arrange the six steps of risk management that are part of the personal financial planning process in the correct order:
* Analyze information.
* Develop the risk management plan.
* Monitor and revise the risk management plan.
* Gather information.
* Implement the risk management plan.
* Establish risk management objectives.
- Establish risk management objectives.
- Gather information.
- Analyze information.
- Develop the risk management plan.
- Implement the risk management plan.
- Monitor and revise the risk management plan.
Exam 1. Principles of Insurance
Exam 1. Principles of Insurance
Course 2. Insurance Planning
Those at risk tend to apply for insurance in greater portion to those who are at lower risk. This is referred to as __ ____??____ __.
* the law of large numbers
* a morale hazard
* adverse selection
* indirect loss
adverse selection
* Adverse selection is also defined as the actions of individuals acting for themselves or others, who are motivated directly or indirectly to take financial advantage of a risk classification system.
Which of the following is NOT a criterion for insurance to be considered efficient?
* The risk must be financially measurable.
* The loss must be predictable.
* The risk is not subject to a catastrophic loss.
* The insurer must be able to charge a high enough premium to cover claims and the expenses of being in the insurance business.
The loss must be predictable.
* The loss must be accidental and not predictable.
Leaving a car unlocked, ordering unnecessary medical tests, or a jury’s tendency to grant larger amounts of money in situations where an insurer will have to pay are examples of which type of hazard?
* Morale hazard
* Physical hazard
* Legal hazard
* Moral hazard
Morale hazard
* A morale hazard involves an increase in losses due to knowledge of insurance coverage because the loss will be covered by insurance.
Which of the following statements accurately describes a direct loss?
I. A tornado causes significant damage to a business, causing the business to be closed for 6 months and results in lost revenue of $250,000.
II. Faulty wiring in a detached garage causes a fire which completely destroys the garage.
III. An out of control automobile crashes through the window of a business and destroys fragile merchandise displayed in the window.
IV. Lightning strikes and destroys a satellite dish on the roof of a house.
* I only
* II, III, and IV
* III and IV
* I and II
II, III, and IV
* Direct losses are the immediate, or first, result of an insured peril. For example, if a fire destroys a home, the loss of the home is the direct loss.
One result of an insurance company’s systems of operations is increased accuracy in the
prediction of losses, thereby __ ____??____ __.
* reducing risk for the insured
* eliminating risk for the insured
* eliminating risk for the insurer
* reducing risk for the insurer
reducing risk for the insurer
* By applying the law of large numbers, the insurance company can more accurately predict the dollar amount of losses it will experience in a given period.
The uncertainty concerning a loss is called a __ ____??____ __.
* risk
* adverse selection
* peril
* hazard
risk
* The uncertainty concerning a loss is called a risk.
* Insurance pools reduce risk by applying a mathematical principle called the law of large numbers.
An insurance policy that covers all losses except those specifically excluded is called __ ____??____ __.
* an open-perils contract
* a specified peril contract
* a unilateral contract
* a proximate cause contract
an open-perils contract
* Insurance companies refer to a contract that covers all losses except those specifically excluded an open-perils contract.
Chet has the habit of leaving his house unlocked when he is away, even for several days at a time. This is an example of __ ____??____ __.
* a hazard
* adverse selection
* a peril
* a loss
a hazard
* Hazards are conditions that increase the probability of loss from a peril, by increasing either the frequency or the severity of potential losses.
Which approach to risk management tends to be the default strategy?
* Risk retention
* Risk avoidance
* Risk transfer
* Risk reduction
Risk retention
* Much of the retention is done unconsciously and unintentionally by not being aware of certain risks.
Choosing not to rent jet skis for inexperienced riders while on summer vacation is a form of __ ____??____ __.
* risk reduction
* retention of risk
* risk avoidance
* risk transfer
risk avoidance
* Risk avoidance means avoiding the risk altogether.
* By electing to not jet ski, the inexperienced rider completely avoids the risk.
Risk may be defined as the variation in possible outcomes of an event based on chance.
Which of the following is an example of a pure risk?
* Playing blackjack in Las Vegas.
* Buying futures contracts on agricultural crops.
* Exposure to loss because of a flood.
* Investing in blue chip stocks in the stock market.
Exposure to loss because of a flood.
* Pure risk refers to possibilities that can result in only loss or no change.
* Insurance deals only with pure risks.
A jury’s tendency to award larger amounts of damages in situations in which an insurer will have to pay is an example of __ ____??____ __.
* a moral hazard
* a morale hazard
* a physical hazard
* a legal hazard
a morale hazard
* Morale hazards involve an increase in losses due to knowledge of insurance coverage such as having a different attitude toward a loss because the loss will be covered by an insurance company.
The possibility of a house fire is an example of __ ____??____ __.
* a degree of risk
* speculative risk
* a direct loss
* pure risk
pure risk
* Pure risk refers to possibilities that can result in only loss or no change. Insurance deals only with pure risks.
What type of hazard is present in a home that has faulty wiring, rotting stairs, and a resident that regularly smokes in bed?
* Moral hazard
* Physical hazard
* Legal hazard
* Morale hazard
Physical hazard
* Physical hazards involve physical characteristics such as type of construction, location, occupancy of building, having frayed wires on plugs, steep stairs with no railing, or smoking in bed.
“I’m insured, why should I care” is an example of a __ ____??____ __.
* moral hazard
* physical hazard
* legal hazard
* morale hazard
morale hazard
* Morale hazards involve an increase in losses due to knowledge of insurance coverage such as having a different attitude toward a loss because the loss will be covered by an insurance company.
Each of the following statements regarding the law of large numbers and insurance is correct EXCEPT:
* The insurance company must have a large enough number of exposures from which to gather their loss experience.
* The greater the number of observations of an event based on chance, the more likely the actual result will approximate the expected result.
* The law of large numbers allows accurate predictions of individual events.
* The insurance company must have enough insured units so that the actual number of losses will be closer to the predicted number.
The law of large numbers allows accurate predictions of individual events.
* The greater the number of exposures in the risk pool, the more likely the projected loss figure will be realized.
Advantages of a company retaining risk through self-insurance include each of the following EXCEPT:
* Losses may be less than average experience.
* Build up reserves if there is a long time between losses.
* Protection from catastrophic loss.
* Avoid having to support higher risk firms that may be in a commercial pool.
Protection from catastrophic loss.
* Retaining risk through self-insurance does not provide protection from catastrophic loss.
When the word “loss” is used in insurance it means __ ____??____ __.
* direct loss
* chance of loss
* insurable loss
* indirect loss
insurable loss
* The word “loss,” as it is commonly used, means being without something previously possessed. When used in insurance it takes on a more limited meaning and is called insurable loss.
There must be __ ____??____ __.
* a known chance of loss before there is an insurable loss.
* a hazard before a peril
* a direct loss before an indirect loss.
* an indirect loss before a direct loss.
a direct loss before an indirect loss.
* There must be a direct loss before an indirect loss.
* Property insurance policies are specific when providing coverage for direct or indirect losses, or for both.
An insured choosing a higher deductible for medical insurance is a form of __ ____??____ __.
* risk avoidance
* risk retention
* ignoring risk
* risk reduction
risk retention
* By choosing a higher deductible, the insured chooses to retain more risk because the deductible will be paid by the insured.
Kevin lives in an area of the country which experiences seismic activity from time to time. Recently, a moderate earthquake caused a gas line to rupture in Kevin’s home while no one was home. The gas accumulated and eventually exploded, causing fire to damage 50% of the home. Firefighters arrived quickly but the water used to extinguish the flames caused an additional $50,000 damage to property inside the house. The earthquake is considered to be __ ____??____ __.
* the sole covered peril
* the proximate cause of the loss
* a moral hazard because of the known seismic activity
* a physical hazard which intensified the loss
the proximate cause of the loss
* The proximate cause of a loss is the first peril in a chain of events resulting in a loss. Without proximate cause, the loss would not have occurred.
When considering a program for a firm to self-insure, each of the following statements are correct EXCEPT:
* The firm needs to have the financial capacity to cover losses if they occur more frequently than predicted.
* The firm should be big enough to combine sufficiently large numbers of exposure units so as to make a loss predicable.
* The firm should be able to accumulate funds to meet losses that may occur.
* There needs to be geographic concentration of risk.
There needs to be geographic concentration of risk.
* There needs to be a geographic distribution of risk in the event of a catastrophe, not a geographic concentration.
Losses not resulting from chance are called __ ____??____ __.
* indirect losses
* direct losses
* depreciation expenses
* consequential losses
depreciation expenses
* Losses not resulting from chance are referred to as depreciation expenses.
* Therefore, depreciation cannot be insured against, as such loss is guaranteed to occur, rather than being left to chance.
A farmer purchasing crop insurance is an example of __ ____??____ __.
* risk retention
* risk reduction
* risk transfer
* risk avoidance
risk transfer
* Risk transfer means transferring the financial consequences of any loss to some other party.
Each of the following statements regarding risk is correct EXCEPT:
* Insurance deals only in speculative risk.
* Risk is the variation in possible outcomes of an event based on chance.
* Risk can also be defined as the uncertainty concerning a possible loss.
* The degree of risk is a measure of the accuracy with which the outcome of an event based on chance can be predicted.
Insurance deals only in speculative risk.
* Speculative risk refers to those exposures to price change that may result in gain or loss.
* Insurance deals only with pure risks.
An insured’s possibility of loss is __ ____??____ __.
* their insurable interest
* risk of loss
* their exposure to loss
* their self-insurance capacity
their exposure to loss
* The insured’s possibility of loss is called their exposure to loss.
* If the insured purchases an insurance policy, they transfers the exposure to loss to the insurer.
An insured is involved in a minor auto accident along with three other passengers. Before the police arrive, the passengers agree to each complain of severe back pain when questioned about the accident, even though none of them is experiencing back pain. This is an example of a __ ____??____ __.
* moral hazard
* morale hazard
* legal hazard
* physical hazard
moral hazard
* Moral hazards involve dishonest tendency such as exaggerating losses in a theft claim or auto insurance fraud.
Which of the following is an indirect loss?
I. A tornado causes significant damage to a business, causing the business to be closed for 6 months and results in lost revenue of $250,000.
II. Faulty wiring in a detached garage causes a fire which completely destroys the garage.
III. An out of control automobile crashes through the window of a business and destroys fragile merchandise displayed in the window.
IV. Lightning strikes and destroys a satellite dish on the roof of a house.
* I only
* II, III, and IV
* III and IV
* I and II
I only
* Indirect losses, also called consequential losses (such as loss of use), are a secondary result of an insured peril.
Lesson 2. Evaluation and Analysis of Risk Exposures
Course 2. Insurance Planning
With which of the following insurance policies do most people insure their real and personal property?
* Liability
* Life Insurance
* Homeowners
* Personal Auto
Homeowners
* Most people insure their real and personal property with a homeowners insurance policy. This policy provides some extra living expense and liability coverage and can be quite flexible when endorsements for special situations are attached to the basic policy.
Disability insurance usually replaces a portion of your __ ____??____ __ while you are unable to perform your job.
* earned income
* medical costs
* insurance premiums
* daily living costs
earned income
* Many individuals purchase disability insurance to replace a portion of their earned income should they become disabled.
Each of these play an important role in risk management EXCEPT:
* Personal risk.
* Loss prevention.
* Risk avoidance.
* Loss reduction.
Personal risk.
* Personal risk does not play a direct role in the risk management process.
* Loss prevention, risk avoidance, and loss reduction all play important roles in personal risk management as the current legal and economic environment has elevated the chance of liabilities and losses.
Match the insurance type to the correct policy for coverage.
Health Insurance
Personal Property
Personal Liability
* Umbrella policies
* Homeowners insurance policy
* Employee benefit plan
- Health Insurance - Employee benefit plan
- Personal Property - Homeowners insurance policy
- Personal Liability - Umbrella policies
What will insurance companies pay for when rebuilding at the same location?
* Replacement cost with a depreciation deduction
* Actual cash value
* Fair market value
* Replacement cost with no deduction for depreciation
Replacement cost with no deduction for depreciation
* When rebuilding at the same location, insurance companies will pay replacement cost with no deduction for depreciation.
Each of the following are potential problems firms face with international operations EXCEPT:
* Valuation of property
* Lack of local insurance facilities
* Currency fluctuations
* Potential for profitability
Potential for profitability
* Valuation of property due to currency fluctuations and lack of local insurance facilities are potential problems that firms with international operations may experience.
The __ ____??____ __ is the most likely maximum amount of damage a peril might cause under average circumstances.
* maximum probable loss
* policy limit
* maximum possible loss
* hazard threshold
maximum probable loss
* The maximum probable loss is the most likely maximum amount of damage a peril might cause under average circumstances.
* The maximum possible loss refers to the total amount of financial harm a given loss could cause under the worst circumstances.
Each of the following are characteristics of a flow chart EXCEPT:
* A graphical representation of processes.
* Represents the production and distribution process.
* Helps reveal the consequential impact of losses.
* Listing of assets and liabilities.
Listing of assets and liabilities.
* A flow chart graphically represents the production or distribution process and helps analyze the consequential impact of losses that could affect the firm.
What are the property valuation problems faced by firms operating international operations?
I. Valuation of property in foreign countries due to currency fluctuations.
II. Lack of local insurance facilities.
III. Lack of trained staff.
IV. Cultural differences in trained staff.
* I and II
* III and IV
* II and III
* I and IV
I and II
* Firms with international operations have property and employees in several countries. They have to identify all their property, and transportation between locations.
Direct losses typically lead to indirect losses.
* False
* True
True
* Direct losses can lead to indirect losses.
Match the category of loss with the correct description.
Bodily Injuries
Personal Injuries
Property Damages
* Wages lost while the plaintiff was recovering from an injury.
* Destruction and loss of use of tangible personal property.
* Suffered when a person is deprived of his or her rights.
- Bodily Injuries - Wages lost while the plaintiff was recovering from an injury.
- Personal Injuries - Suffered when a person is deprived of his or her rights.
- Property Damages - Destruction and loss of use of tangible personal property.
Contributory Negligence Example:
Assume the plaintiff fails to signal a turn and the plaintiff’s car is hit in the side by an oncoming car that was speeding. Assume the defendant, driver of the speeding car, establishes the plaintiff’s, negligent failure to signal caused, or at least contributed to, the loss. In this circumstance, neither plaintiff nor defendant could recover from each other under the contributory negligence rule.
For recovery under the comparative negligence rule, assume the plaintiff, Moe D’Laun, a landscape architect, sustains $100,000 of damage in an automobile accident. Assume a court decides Moe was 30% responsible for the accident. Under the comparative negligence rule, Moe would recover $70,000.
How much would Moe recover under the contributory negligence rule?
* $50,000
* $0
* $100,000
* $30,000
$0
* Under the contributory negligence rule, Moe would recover nothing.
* If it can be shown the plaintiff’s own negligence contributed to or led to the injury sustained, the court will not allow recovery of damages from the defendant under the contributory negligence rule.
Match the key term with the correct definition.
Breach of Contract
Legal Liability Insurance
Torts
Criminal Acts
* Provides protection against the financial impact of lawsuits.
* General wrongs against society.
* Involves unreasonable conduct toward another person.
* A failure, without a legal excuse, to perform contractual duties.
- Breach of Contract - A failure, without a legal excuse, to perform contractual duties.
- Legal Liability Insurance - Provides protection against the financial impact of lawsuits.
- Torts - Involves unreasonable conduct toward another person.
- Criminal Acts - General wrongs against society.
What is the doctrine of comparative negligence?
* It states that a slight negligence on a plaintiff’s part can relieve a grossly negligent defendant of responsibility for an accident.
* It is a modification of the contributory negligence rule.
* It states that if a plaintiff’s negligence contributes to the loss, nothing may be collected if the court applies the contributory negligence rule.
* It involves establishing that the plaintiff knowingly assumed the risk of injury.
It is a modification of the contributory negligence rule.
* The contributory negligence states that even slight negligence on a plaintiff’s part can relieve a grossly negligent defendant of responsibility for an accident.
* The doctrine of comparative negligence is a modification and allows plaintiffs some recovery despite contributing to their own injuries.
In some states, state laws prevent insurers from covering punitive damages.
* False
* True
True
* In a few states, state laws prevent insurers from covering punitive damages as punishing an insurance company may not satisfy the courts’ purpose of punishing wrongdoers.
George, a prize fighter, stepped into the boxing ring and in the 10th round, broke Mike’s nose. Mike sues George. What the most likely defense that George will provide?
* That Mike assumed a risk when he entered the ring.
* That under the doctrine of comparative negligence, Mike also hurt George so they are both equally at fault.
* That Mike was negligent by not ducking the punch.
That Mike assumed a risk when he entered the ring.
* As a boxer, Mike should assume that there is a risk of having his nose broken.
Exam 2. Evaluation and Analysis of Risk Exposures
Exam 2. Evaluation and Analysis of Risk Exposures
Course 2. Insurance Planning
Defamation includes each of the following EXCEPT:
* Disrupting one’s peace of mind or right to be left alone
* Libel
* Slander
* Communication by gestures
Disrupting one’s peace of mind or right to be left alone
* The law recognizes two forms of defamation: libel (publication of statement by written or printed words) and slander (communication of statement by spoken words or gestures).
What type of court awarded damages are to punish defendants for outrageously offensive acts?
* Punitive damages
* Personal injury
* Compensatory damages
* Collateral source
Punitive damages
* Punitive damages usually imply gross negligence.
What doctrine allows plaintiffs some recovery despite the establishment of contributory negligence as a defense?
* Strict liability
* Assumption of risk
* Risk retention
* Comparative negligence
Comparative negligence
* Most states apply a modification of the contributory negligence rule called the doctrine of comparative negligence.
* The comparative negligence doctrine allows plaintiffs some recovery despite contributing to their own injuries.
Which of the following statements regarding the Occupational Safety and Health Act of 1970 (OSHA) is NOT correct?
* OSHA provides a provision for imprisonment in some cases where employees’ injuries are fatal.
* OSHA requires notification of the Consumer Product Safety Commission (CPSC) by manufacturers and retailers of any product hazard of which they become aware.
* OSHA requires removal of all recognized hazards from the work environment.
* OSHA imposes heavy fines for noncompliance.
OSHA requires notification of the Consumer Product Safety Commission (CPSC) by manufacturers and retailers of any product hazard of which they become aware.
* The Consumer Products Safety Act of 1972 (not OSHA) requires notification of the Consumer Product Safety Commission (CPSC) by manufacturers and retailers of any product hazard of which they become aware.
If it is established that Bill knowingly assumed the risk of injury, he will not be awarded a judgment under the assumption of risk doctrine.
Which of the following acts is considered tortious?
I. Shooting fireworks toward a building
II. Slander
III. Libel
V. Texting while driving resulting in injury to a pedestrian
* All of these
* None of these
* II and III
* I and IV
All of these
* Each of these acts is tortious.
* A person who commits a tort is known as a tortfeasor, and acts or omissions constituting torts are said to be tortious.
What type of insurance provides wider liability insurance coverage than that found in a typical homeowners or automobile insurance policy?
* Liability endorsement
* Liability rider
* Personal protection supplement policy
* Personal liability umbrella policy
Personal liability umbrella policy
* Personal liability umbrella policies provide wider coverage than the base policies they cover.
* These umbrellas provide coverage if underlying (homeowners and automobile) policies are exhausted.
What type of negligence defense seeks to establish that the injured party’s own negligence contributed to the injury sustained?
* Risk retention
* Collateral source rule
* Assumption of risk
* Contributory negligence
Contributory negligence
* Establishing contributory negligence as a defense means that because both parties are at fault, neither will be allowed recovery from the other.
Joe is at-fault in a serious automobile accident and is sued. His automobile policy has collision coverage with a $500 deductible and liability coverage in the amount of $500,000. Joe has a personal liability umbrella policy with a limit of $1,000,000. If the plaintiff is awarded $400,000, what amount is paid by the automobile policy and what amount is paid by the personal liability umbrella policy?
* $200,000 will be paid by the automobile liability coverage; $200,000 will be paid by the personal liability umbrella policy.
* $0 will be paid by the automobile liability coverage; $400,000 will be paid by the personal liability umbrella policy.
* In this instance, Joe’s collision coverage will pay, and the automobile liability coverage and the personal liability umbrella policy will pay nothing.
* $400,000 will be paid by the automobile liability coverage; $0 will be paid by the personal liability umbrella policy.
$400,000 will be paid by the automobile liability coverage; $0 will be paid by the personal liability umbrella policy.
* $400,000 will be paid by the automobile liability coverage; $0 will be paid by the personal liability umbrella policy.
* A personal liability umbrella policy does not pay until the underlying policy is exhausted.
* The award is $400,000 and Joe has a $500,000 liability limit under his base automobile policy.
Which of the following is not considered a personal risk?
* Death
* Liability to others
* Disability
* Health
Liability to others
* Liability to others is considered a property risk.
Farmer Octavio raises free-range chickens for egg production. Last night, Octavio failed to adequately secure the latch of the chicken pen. Overnight, two mountain lions escaped from the city zoo and ate several of Octavio’s chickens before Octavio shot and killed them.
Which party is likely liable to the other for losses and under what doctrine?
* The city zoo is liable for damages to Joe’s property under the doctrine of infliction of emotional distress.
* The city zoo is liable for the loss of Octavio’s property under the doctrine of strict liability.
* Neither party is liable for the loss’s sustained by the other party under the doctrine of contributory negligence.
* Octavio is liable for the loss of the zoo’s property under the doctrine of assault and battery.
The city zoo is liable for the loss of Octavio’s property under the doctrine of strict liability.
* The city zoo is liable for the loss of Octavio’s property under the doctrine of strict liability even if not found to be negligent because maintaining dangerous wild animals inherently presents a risk to the community.
In risk management, which of the following is a form of risk control?
* Risk transfer
* Risk retention
* Risk avoidance
* Insurance
Risk avoidance
* Risk avoidance is a type of risk control.
* In addition, risk reduction is also considered a form of risk control.
What type of insurance policy extends and increases the liability coverage on other policies?
* Endorsement
* Umbrella
* Open-perils
* Broad form
Umbrella
* An umbrella policy provides additional liability coverage if the underlying policies (auto and homeowners) are exhausted.
Which of the following statements is not correct regarding criminal conduct?
* Criminal prosecution punishes a guilty defendant’s conduct by imposing a fine, prison term, compensatory damages, or punitive damages.
* The same conduct may be both a crime and a tort.
* A crime is an intentional violation of another’s rights.
* Criminal prosecution is maintained by the state or federal government.
Criminal prosecution punishes a guilty defendant’s conduct by imposing a fine, prison term, compensatory damages, or punitive damages.
* Criminal prosecution punishes a guilty defendant’s conduct by imposing a fine, or prison term, but does not award compensatory or punitive damages. A civil legal proceeding may be filed to seek damages.
A hospital being found guilty of negligence for the mistakes made by a physician that resulted in the death of a patient is an example of __ ____??____ __.
* vicarious liability
* errors and omissions
* limited liability
* absolute liability
vicarious liability
* Vicarious liability can arise for people or organizations when parties they hire as employees or contractors injure others.
An intentional tort in which a person confines another within fixed boundaries (for example, by being locked in a room) is called __ ____??____ __.
* defamation
* false imprisonment
* intention infliction of emotional distress
* assault and battery
false imprisonment
* False imprisonment is an intentional tort in which a person confines another within fixed boundaries by physical force, threat of physical force, or other forms of duress.
The use of deductibles, co-payments, and waiting periods are examples of __ ____??____ __.
* Risk transfer
* Risk avoidance
* Risk reduction
* Risk retention
Risk retention
* Deductibles, co-payments, and waiting periods are examples of risk retention and are paid by the insured.
Tom is driving on Main Street and drifts over the center line. Bill is driving from the opposite direction and sees Tom has crossed the center line. Bill does not take evasive action and crashes into Tom.
Under what doctrine may Bill be found liable for damages incurred by Tom?
* Contributory negligence
* Comparative negligence
* Last clear chance
* Assumption of risk
Last clear chance
* Despite Tom’s negligence, Bill had a clear chance to avoid the injury.
Under what doctrine may an injured party seek damages from a negligent party even if the injured party is fully compensated by insurance?
* Collateral source rule
* Compensatory damages
* General damages
* Punitive damages
Collateral source rule
* The collateral source rule allows that damages for bodily injury can be assessed against the negligent party even when the injured person recovers the amount of his or her loss from other sources.
Which of the following can help identify potential direct property losses for a business?
* An analysis of financial statements, as well as the supporting accounts, can highlight assets exposed to loss.
* An analysis of past losses.
* A walking tour of the business can reveal many property loss exposures.
* Each of these approaches can help a risk manager to identify potential loss exposure.
Each of these approaches can help a risk manager to identify potential loss exposure.
* Additionally, regular interviews with knowledgeable employees can be helpful in risk management.
To settle a traffic accident dispute, Tom and Bill agree to a three-round boxing match with all proceeds raised going to a local charity. The charity widely promotes the event and considerable money is raised and provides the boxing ring and gloves for the match. During the boxing match Bill suffers a broken jaw. Bill files a lawsuit against the charity for negligence in not providing proper head gear for the fight.
What doctrine may preclude Bill from collecting damages?
* Assumption of risk
* Comparative negligence
* Last clear chance
* Contributory negligence
Assumption of risk
* A line of defense that involves establishing the plaintiff knowingly assumed the risk of injury.
* If the defendant establishes assumption of the risk, the plaintiff will not be awarded a judgment.
Jill has a homeowners insurance policy that provides $25,000 coverage for personal property. She also has a personal liability umbrella policy with a $1,000,000 limit. Jill’s home is nearly destroyed by a fire and it is determined her personal property loss is $50,000.
How much will the umbrella policy pay for the property loss?
* $0
* $25,000
* $50,000
* Up to $100,000
$0
* Personal liability umbrella policies do not coverage loss of personal property.
* Umbrella policies cover liability claims in excess of the underlying policy limits.
What type of damages award compensate the injured party for intangible losses, such as pain and suffering, disfigurement, mental anguish, and loss of consortium?
* Personal injury damages
* Compensatory damages
* General damages
* Punitive damages
General damages
* General damages awarded compensate the injured party for intangible losses, such as pain and suffering, disfigurement, mental anguish, and loss of consortium.
Each of the following is an indirect cost of legal liability lawsuits EXCEPT:
* Hostile environment where fear of lawsuits inhibits business and personal activity.
* Elimination of products and services.
* Higher costs for goods and services.
* Attorney fees and court costs.
Attorney fees and court costs.
* Attorney fees and court costs are example of direct costs involving legal liability lawsuits.
Which of the following statements regarding key person life insurance is NOT correct?
* Once key employees are identified, life insurance should be considered for them.
* In a key person policy, the business pays the premiums and the key employee names a beneficiary to receive the death benefit tax-free.
* Key person insurance benefits can be used to recruit and train a new person.
* Key person life insurance can help cover lost income to the business due to the key person’s death.
In a key person policy, the business pays the premiums and the key employee names a beneficiary to receive the death benefit tax-free.
* The business owns and pays the premiums for a key person policy and the insurance proceeds are payable to the business.
Which of the following is a form of risk financing?
* Risk avoidance
* Risk management
* Insurance
* Risk reduction
Insurance
* Risk retention and risk transfer (insurance) are levels of risk financing.
Tom is a general contractor in the construction business. He is running behind for the completion date of a major project. He will forfeit a portion of his compensation if he fails to meet the deadline. Tom contracts with a friend to help finish the job. Scaffolding used by the friend accidently collapses into the street, damaging several cars and injuring one pedestrian. Under what type of doctrine may Tom be found responsible for damages?
* Joint and severable liability
* Vicarious liability
* Contributary negligence
* Comparative negligence
Vicarious liability
* Vicarious liability is a form of strict liability which attaches responsibility for damages to another person in a negligence or criminal proceeding.
* An employer can be held liable for damages caused by an employee’s negligence.
Lesson 3. Legal Aspects of Insurance
Course 2. Insurance Planning
Describe Conditional Receipt
and Errors & Omissions Insurance
A conditional receipt can provide temporary coverage, contingent on an applicant’s ability to present evidence of insurability.
Life insurance agents give applicants a conditional receipt when the applicants submit a premium payment with the application. With one common type of conditional receipt, if evidence of insurability exists, coverage begins from the date of the receipt. Evidence of insurability always includes, but is not limited to, good health. Occupation would be another factor.
Practitioner Advice: The conditional receipt affords the life insurance applicant temporary coverage during the underwriting process. Agents should always encourage an applicant to submit an initial premium payment with the application in order to receive such a receipt. If the agent does not educate the applicant of this when a conditional receipt is available, and the applicant dies in an accident after all medical testing had been completed, the agent could be sued by the deceased applicant’s heirs for failure to provide advice that is expected of a licensed professional. Such mistakes of agents are why errors & omissions insurance exists and should be maintained.
Each of the following elements are required in acceptance of an offer EXCEPT:
* Unconditional
* Unequivocal
* Communicated Clearly
* Well-documented
Well-documented
* The acceptance must be unconditional, unequivocal, and communicated clearly.
What are the four elements that all valid contracts must have?
- Offer and acceptance
- Consideration
- Capacity
- Legal purpose
Match the contract-related terms with the correct definition.
Void Contract
Voidable Contract
Binder
Conditional Receipt
* A temporary contract in property insurance. Often used before the issuance of the formal insurance policy.
* Provides temporary life coverage, contingent on an applicant’s ability to present evidence of insurability.
* Not legally enforceable because it lacks one or more features of a valid contract.
* A valid contract that allows one party the option of breaking the agreement because of an act or omission of an act by the other party.
- Void Contract - Not legally enforceable because it lacks one or more features of a valid contract.
- Voidable Contract - A valid contract that allows one party the option of breaking the agreement because of an act or omission of an act by the other party.
- Binder - A temporary contract in property insurance. Often used before the issuance of the formal insurance policy.
- Conditional Receipt - Provides temporary life coverage, contingent on an applicant’s ability to present evidence of insurability.
What would happen if the insured were injured because of having unknowingly dealt with an unauthorized insurer?
* The insured would lose money paid for premiums.
* The insurer would be subject to fines and penalties by court.
* The insurer would obtain a license later and avoid fines.
* None of the above.
The insurer would be subject to fines and penalties by court.
* The unauthorized insurer would be subject to fines and penalties by court if an insured were injured because of having dealt unknowingly with an unqualified insurer. They must have a license to operate in each state in which they do business.
Which one of the following statements about conditional receipts is true?
* Used only in property insurance.
* Provides permanent coverage when accompanied by first premium payment.
* Used only in life insurance.
* Used mainly when insuring minors.
Used only in life insurance.
* A conditional receipt is used in life insurance. Life insurance agents give applicants a conditional receipt when the applicants submit a premium payment with the application.
How can Contracts be Discharged?
Contracts can be discharged on the grounds of the following conditions:
* Performance
* Condition precedent
* Condition subsequent
* Rescission
* Reformed
Which of the following are exceptions to the rule that insurance contracts are contracts of indemnity?
I. Life Insurance
II. Replacement-Cost Insurance
III. Valued Insurance
IV. Insurable Interest
* I, II, and III
* I only
* II and III
* I and IV
I, II, and III
The three exceptions to the rule that insurance contracts are contracts of indemnity are:
* life insurance,
* replacement-cost insurance, and
* valued insurance.
Indemnity seeks to establish proportionality between the insured object and the proceeds received for its loss so that the insured is not unduly enriched.
* This proportionality does not exist in the above exceptions.
Each of the following are covered under valued insurance policies EXCEPT:
* Marine insurance contracts
* Art objects
* Collector’s items
* Real Estate
Real Estate
* The use of valued policies generally is limited to objects for which market value may fluctuate or be difficult to determine accurately after a loss, such as art objects and other collector’s items.
* Art objects, collector’s items, and some ocean and inland marine insurance contracts are covered under the valued insurance policies.
Exam 3. Legal Aspects of Insurance
Exam 3. Legal Aspects of Insurance
Course 2. Insurance Planning
A contract executed with a minor would be __ ____??____ __.
* invalid
* voidable
* breached
* void
voidable
* A minor does not possess legal capacity to enter a contract.
* In this case, the minor has the option to void the contract but could hold the other party to execute the contract.
* The contract, therefore, is considered voidable.
A contract entered with a person lacking mental capacity to enter a contract is considered __ ____??____ __.
* voidable
* void
* breached
* valid and executable
void
* If a contract is established with a person lacking mental capacity, the contract is considered void and treated as though it never existed.
Which of the statements regarding a property insurance binder is NOT correct?
* A binder is often used before the issuance of the formal insurance policy.
* A binder must be in writing to be enforceable.
* A binder is a temporary contract in property insurance.
* A binder must meet all the requirements for a legal contract. It is distinguished by its temporary nature (often 30 days or less).
A binder must be in writing to be enforceable.
* A binder may be oral or written.
* An oral binder, such as one an agent may give over the telephone, should be followed by a written document.
An insured loses an old, run-down building to a fire and insurance pays for a new building.
This is an example of what type of coverage?
* Valued insurance
* Actual cash value (ACV)
* Replacement-Cost
* Indemnity
Replacement-Cost
* Replacement-Cost Insurance is written when the insurer promises to pay an amount equal to the full cost of repairing or replacing the property without deduction for depreciation.
Which of the following statements regarding replacement cost is correct?
* Replacement cost of a building is equal to the fair market value of the property.
* Location can be an important factor in property value but not in replacement cost.
* Replacement cost means the dollar amount required to rebuild a similar structure meeting the building code requirements in effect at the time of original construction.
* Market value does not include the value of the land and its location.
Replacement cost means the dollar amount required to rebuild a similar structure meeting the building code requirements in effect at the time of original construction.
* Replacement cost means the dollar amount required to rebuild a similar structure meeting the building code requirements in effect at the time of original construction.
* Replacement cost does not reflect the cost of land or impact of location.
A proposal to exchange something of value with another person is called the __ ____??____ __.
* conditional receipt
* acceptance
* offer
* binder
offer
* The proposal to make an exchange is called the offer.
* The offer must be reasonably definite and communicated clearly.
Which of the following statements regarding the owner of a life insurance policy is NOT correct?
* The owner can assign the policy as collateral.
* The owner can execute a loan from the policy, if available.
* The owner and the insured are always the same person.
* The owner of the policy is the party who can name the beneficiary.
The owner and the insured are always the same person.
* The owner and the insured are not always the same person.
* A spouse, child, business partner, or a trust may be the owner of a policy insuring another person’s life.
Insurers enforce the principle of indemnity through each of the following EXCEPT:
* Actual cash value settlements.
* Allowing an insured to profit in an insurance transaction.
* The insurable interest requirement.
* The operation of subrogation clauses.
Allowing an insured to profit in an insurance transaction.
* Insurance contracts provide compensation for an insured’s losses.
* The insured should not profit from an insurance transaction.
Which of the following statements is not correct regarding valid elements of a contract?
* The offer and acceptance must be in writing.
* The contract must have an end or intention permitted by law.
* The parties must have legal capacity to enter into the contract.
* There must be an exchange of consideration to have a valid contract.
The offer and acceptance must be in writing.
* The acceptance must be unconditional, unequivocal, and communicated clearly.
* The offer and acceptance may be oral or in writing.
Each of the following are elements of a valid contract EXCEPT:
* Any purpose agreed upon by the parties
* Offer and acceptance
* Capacity
* Consideration
Any purpose agreed upon by the parties
* The purpose of the contract must be legal.
* A contract for the purpose of committing an illegal act is not valid.
Which of the following statements is NOT correct regarding a life insurance conditional receipt?
* If evidence of insurability exists, coverage begins from the date of the conditional receipt.
* An applicant must submit a premium payment with a life insurance application to receive a conditional receipt.
* A life insurance agent who does not explain a conditional receipt at the time of the application could face legal action by the applicant’s heirs if the applicant dies while the application is being underwritten.
* Evidence of insurability is based solely on the current health of the proposed insured.
Evidence of insurability is based solely on the current health of the proposed insured.
* In addition to the health of the applicant, the occupation of the applicant may be an underwriting factor. A life insurance company may not be willing to insure someone who works in a very dangerous profession.
Each of the following statements regarding insurable interest is correct EXCEPT:
* In property insurance, there must be an insurable interest at the time of the loss.
* In property insurance, a person may purchase insurance on property not yet owned.
* In life insurance and property insurance, the policy owner must have an insurable interest at the time the policy is purchased and at the time of loss.
* In life insurance, the beneficiary must have an insurable in the life of the insured at the time the policy is purchased.
In life insurance and property insurance, the policy owner must have an insurable interest at the time the policy is purchased and at the time of loss.
* In life insurance, the policy owner must have an insurable in the life of the insured at the time the policy is purchased but not at the time of loss.
* In property insurance, there must be an insurable interest at the time of the loss but not at the time the insurance is purchased.
Each of the following statements is correct EXCEPT:
* After a proposal to make an exchange is made, if the second person agrees it is called acceptance.
* The acceptance may be oral.
* The acceptance may include conditions from the accepting party.
* The legally binding arrangement that explains the basic promise of the insurance company is known as the insuring agreement.
The acceptance may include conditions from the accepting party.
* The acceptance must be unconditional, unequivocal, and communicated clearly.
An insurance contract is what type of contract?
* Unilateral contract
* Bilateral contract
* Voidable contract
* Temporary contract
Unilateral contract
* Insurance contracts are unilateral in that only the insurer makes a binding promise.
Which of the following statements regarding a valued insurance policy is NOT correct?
* When a loss occurs, the policy pays the stated amount without regard to the actual amount of loss.
* The value of the insured property is agreed to before the policy is written.
* A valued insurance policy is an exception to the rule of indemnity.
* Coverage under a valued insurance policy pays an amount reflecting appreciation of the property at the time of loss.
Coverage under a valued insurance policy pays an amount reflecting appreciation of the property at the time of loss.
* The loss may be greater than or less than the stated amount of coverage.
* Nonetheless, the policy pays the stated amount.
Several years ago, Sal purchased a piece of machine for his small business at a cost of $50,000. The machine has since depreciated by $25,000. The replacement cost of the today is $65,000. Sam’s property insurance will pay the actual cash value of the machine, with a limit of $100,000. If the machinery is destroyed by fire, how much will the insurance company pay for the loss of the machine?
* $75,000
* $65,000
* $50,000
* $40,000
$40,000
* Actual cash Value (ACV) means replacement cost at the time of the loss, less depreciation.
When replacement cost of a building is greater than the market value, such as is common with historic older structures, an insurer may provide coverage based on replacement cost with modern construction techniques.
This is known as __ ____??____ __.
* purchase price less depreciation
* replacement cost less depreciation
* actual cash value (ACV)
* functional replacement
functional replacement
* The provision described is known as functional replacement.
Joe’s car has been badly damaged by another driver who was speeding and ran through a red light. The police found the speeding driver to be at fault. Joe’s insurance company paid for the repairs.
Under what legal premise may Joe’s insurance company seek to collect from the at-fault driver?
* Functional replacement
* Subrogation
* Performance
* Absolute liability
Subrogation
* Subrogation is supported by the theory that if a person must pay a debt for which another is liable, such payment should give the person a right to collect the debt from the liable party.
* In insurance, subrogation gives the insurer the right to collect from a third party after paying its insured’s claim.
Which of the following statements is not correct regarding a contract executed by a company with a 13-year-old?
* The contract is automatically void because the 13-year-old does not have legal capacity to enter into a contract.
* The contract may be voided by either party at any time.
* The 13-year-old may choose to void the contract, but the company may not.
* At age of majority, the teenager may choose to affirm the contract.
The 13-year-old may choose to void the contract, but the company may not.
* A contract entered into with a 13-year-old is voidable because the teen does not have legal capacity to enter into a contract.
* The teen may choose to enforce the contract.
* At age of majority, the teen may choose to affirm the contract.
Mary’s car was totaled as a complete loss in an accident for which another driver was found at fault. Mary’s insurance company paid the claim. Under which doctrine may Mary’s insurance company pursue damages from the party at fault?
* Subrogation
* Condition precedent
* Principle of indemnity
* Insurable interest
Subrogation
* In insurance, subrogation gives the insurer the right to collect from a third party after paying its insured’s claim.
* A typical case of subrogation arises in automobile insurance collision claims.
Each of the following statements is correct EXCEPT:
* In a binding insurance contract, the insured promises to pay the premiums in exchange for the insurance company’s promise to pay the insurance benefits.
* An insurance contract is a unilateral contract.
* An insurance company is limited to specific situations under which it may cancel a policy.
* Insureds cannot collect for losses if they do not pay premiums.
In a binding insurance contract, the insured promises to pay the premiums in exchange for the insurance company’s promise to pay the insurance benefits.
* The insured does not promise to pay the premiums and cannot be sued for failure to do so.
If one party to a contract fails to perform its duties without a legal excuse, the contract is considered __ ____??____ __.
* illegal
* breached
* void
* voidable
breached
* If a contract is breached or if disputes arise between the parties about the interpretation of the contract, the issues may be settled by a court.
The requirement for a policyholder to pay the required premiums before the insurance company is obligated to pay a claim is called __ ____??____ __.
* subrogation
* a bilateral contract
* a condition subsequent
* a condition precedent
a condition precedent
* A condition precedent is something that must be done by one party to activate the other party’s duty to perform.
* The insured must satisfy a condition precedent before the insurer is obligated to pay the claim.
Lesson 5. General Business Liability
Course 2. Insurance Planning
Business liability insurance can protect firms from which of the following losses?
I. Independent losses
II. Contractual liability losses
III. Direct liability losses
IV. Vicarious liability losses
* II only
* I and III
* II and IV
* II, III, and IV
II, III, and IV
* Risk managers may purchase liability insurance to protect their firms from direct, vicarious, and contractual liability losses.
Each of the following may be covered under a general liability and property package policy EXCEPT:
* Bodily Injury
* Property Damage
* Libel
* Errors & Omissions
Errors & Omissions
* A general liability and package policy can cover accidents, bodily injury, property damage, libel, slander, and false advertising.
* An errors & omissions (E&O) policy is a type of professional liability insurance that covers negligence while providing services or advice.
* E&O insurance primarily serves to protect against instances of financial harm imposed by a business professional.
Coffee distributor, The General Bean Factory, is found responsible for injuring W. Marlowe Rose, a visiting salesperson. The jury returns a $10 million verdict in favor of Mr. Rose. The General Bean Factory’s CGL policy has a coverage limit of $1 million for injuries of this type.
If The General Bean Factory had a $10 million liability umbrella policy, how much of an award would it pay in this situation?
* $9 million
* $10 million
* $1 million
* $11 million
$9 million
* In this situation, the $1 million of CGL coverage would apply first and the liability umbrella policy would pay the remaining $9 million of the award.
The claims-made form places the insured in a more vulnerable position than occurrence-type policies.
* False
* True
True
* Because claims-made policies expose the insured to claims made after the policy expires, they place the insured in a more vulnerable position than occurrence-type policies.
Match the term with the correct definition.
Direct Liability
Vicarious liability
Contractual liability
* A firm that accepts a liability by contract.
* Also called indirect liability.
* Arises out of the firm’s own actions.
- Direct Liability - Arises out of the firm’s own actions.
- Vicarious liability - Also called indirect liability.
- Contractual liability - A firm that accepts a liability by contract.
Which of the following categories would the following example fall into, if an employee of an organization causes harm to a third party by actions such as assault and battery?
* Vicarious Liability
* Contractual Liability
* Premises and Operations Exposure
* Completed Operations Exposure
Vicarious Liability
* Vicarious liability is an indirect liability that arises when a firm hires an independent subcontractor, who in turn injures a third party.
* This liability can be extend to intentional wrongs acts done by employees or agents of an organization that cause harm to a third party.
* These include actions such as assault and battery.
Tail coverage would be useful, if a contractor ceased operations but wanted liability insurance for a few years in case some lawsuits were filed over previously completed work.
* False
* True
True
* The tail period, also called the extended reporting period by insurers, extends the time during which a claim may be filed for a loss occurring during the policy period.
* Tail coverage would be useful, if a contractor ceased operations but wanted liability insurance for a few years in case some lawsuits were filed over previously completed work.
What are the three triggers of Triple-Trigger Theory?
If several insurance policies were in force when a developing injury is in progress, all the insurers would be responsible for providing coverage. This is called the triple-trigger theory. The three triggers are exposure, manifestation, and exposure-in-residence period.
The three triggers defined:
* Exposure: The insurer whose policy was in force when the first exposure to hazardous substance occurred.
* Manifestation: The insurer whose policy was in force when the disease was first recognized.
* Exposure-in-residence period: The insurer whose policy was in force when the disease developed.
Cristina was an New York City firefighter with Ladder No. 10. She and her team served as first responders at the World Trade Center on September 11, 2001. In 2013, Cristina suddenly developed chronic asthma that has persisted ever since. Lab results have concluded that toxins at the World Trade Center site led to the chronic condition. At the time Cristina’s asthma was first recognized, she was covered by an Ascendant Health Insurance plan.
According to the Triple-Trigger Theory, which of the three trigger types would apply to the Ascendant Health Insurance?
* Exposure
* Manifestation
* Exposure-in-residence period
Manifestation
* The Ascendant Health Insurance plan would be categorized as a manifestation trigger since it was the in-force policy when Cristina’s asthma was first recognized.
Jerry is a risk manager in a shipping company, S & S Shipping Corporation. Two weeks ago one of its ships was responsible for oil spill in the North Sea. As a risk manager he needs to familiarize himself with federal and state environmental legislation.
* False
* True
True
* Risk managers in organizations must be familiar with all relevant federal and state environmental legislation for two reasons.
* Many corporations accept the responsibility of protecting the environment.
* Second, many of these laws provide for significant fines and penalties.
The manufacturer supplies a firearm to the retailer and encloses detailed printed instructions and warnings. An employee of the owner sells the gun without finding the original box and instructions. The buyer is injured because he does something that warnings could have prevented. The retailer could be found negligent and sued on for product liability insurance.
* False
* True
True
* A manufacturer of a product has a legal liability to design and produce a product that will not injure people in normal use.
* Products must be packaged carefully and accompanied by adequate instructions and warnings so consumers may use them properly and avoid injury.
* Products liability arises when a manufactured item injures a consumer.
* Products liability insurance traditionally has been provided to manufacturers as part of the comprehensive general liability policy.
* The manufacturer as well as the vendor of a product can be named defendants in the lawsuit.
Which of the following types of employment liability is NOT commonly accepted:
* Wrongful termination
* Negligent supervision
* Invasion of privacy
* Unfair reprimand
Unfair reprimand
* Employers are not typically held liable for action that has not violated the legal rights of employees or has not resulted in actual harm to the employee.
Jake bought an iron and every time he plugged it in he found that there was a leakage of electric current from the iron. After a couple of weeks of this happening repeatedly he finally sued the manufacturer of this iron. Jake can claim liability under which of the following categories?
* Premises and Operations
* Products Liability
* Completed Operations
* Vicarious Liability
Products Liability
* Direct liability arises out of the firm’s own actions.
* Most of these exposures fall into three subcategories. Premises and operations, products liability, completed operations.
* In the question scenario, Jake can sue the manufacturer of the iron under product liability, which is direct liability.
Exam 5. General Business Liability
Exam 5. General Business Liability
Course 2. Insurance Planning
Ken, a financial planner, is away on vacation. His paraplanner, Shyrah, gives advice to one of Ken’s clients. Sue’s information causes the client to lose money. Can Ken be held responsible?
* No, he did not give the advice.
* Yes, Ken can be held responsible under strict liability.
* Yes, Ken can be held responsible under the doctrine of vicarious liability.
* No, he was on vacation.
Yes, Ken can be held responsible under the doctrine of vicarious liability.
* An employer or superior may be subject to vicarious liability for damages created by an employee or subordinate.
Choose the type of insurance that will cover claims from injuries arising after a service is rendered and the property’s control is returned to the owner.
* Directors and Officers Liability Insurance
* Completed Operations Insurance
* Employment Practices Liability Insurance
* Errors & Omissions Insurance
Completed Operations Insurance
* Completed Operations Insurance covers claims from injuries arising after a service is rendered and the property’s control is returned to the owner.
Identify the correct type(s) of Commercial General Liability (CGL) format(s).
I. Occurrence-based
II. Claims-made
* Neither I nor II
* I only
* II only
* Both I and II
Both I and II
CGL policies have two formats:
* Occurrence-based
* Claims-made
What type of insurance pays a worker who is injured on the job?
* Unemployment insurance
* Commercial umbrella coverage
* Directors and officers liability insurance
* Worker’s compensation insurance
Worker’s compensation insurance
* Worker’s Compensation Insurance provides benefits to workers and their dependents when a worker suffers an occupational injury or disease.
Zev owns and operates a custom furniture company. On a recent job, Zev hires Greg to install a specialized hinge system into his handcrafted cabinets. While hanging a cabinet, Greg dropped the door onto the homeowner which resulted in a broken collarbone.
The homeowner filed a lawsuit against Zev’s company even though Greg was responsible for dropping the cabinet door.
Select the type of liability exposure to which Zev’s company has been subjected.
* Contractor Liability
* Direct Liability
* Contractual Liability
* Vicarious Liability
Vicarious Liability
* Vicarious liability most often arises when a firm hires an independent subcontractor.
* The plaintiff would claim the firm was negligent in hiring, informing, or supervising the contractor.
A commercial umbrella policy is considered __ ____??____ __ because it pays only for losses above the underlying limits.
* long-tail liability insurance
* excess liability insurance
* general liability insurance
* professional indemnity insurance
excess liability insurance
* A commercial umbrella policy can be purchased to provide coverage after underlying liability policies have been exhausted.
* In this case, the umbrella policy is called excess liability insurance because the umbrella policy pays only for losses in excess of the underlying limits.
Mr. Harris serves as a director of his condo association. He is not paid for his services. During the year, the management company of the condo lost $1 million due to negligent acts. Can Mr. Harris be sued?
* No, Mr. Harris is only responsible in case of mismanagement.
* No, Mr. Harris is not an officer of the condo association.
* No, the management company is solely responsible.
* Yes, Mr. Harris can be sued.
Yes, Mr. Harris can be sued.
* This is why Mr. Harris should require the condo association to purchase Directors and Officers coverage.
* He can be sued by an association member.
Choose the laws that have been enacted to establish a sound foundation of environmental rules and regulations.
I. Clean Air Act
II. The Clean Water Act
III. The Toxic Substances Control Act
IV. Comprehensive Environmental Response and Compensation Liability Act (CERCLA)
* III and IV
* I and II
* I, II, and III
* I, II, III, and IV
The following laws have been enacted to establish a sound foundation of environmental rules and regulations:
Clean Air Act
The Clean Water Act
The Toxic Substances Control Act
Comprehensive Environmental Response and Compensation Liability Act (CERCLA) [commonly referred to as Superfund] and its amendments, including SARA of 1986.
I, II, III, and IV
The following laws have been enacted to establish a sound foundation of environmental rules and regulations:
* Clean Air Act
* The Clean Water Act
* The Toxic Substances Control Act
* Comprehensive Environmental Response and Compensation Liability Act (CERCLA) [commonly referred to as Superfund] and its amendments, including SARA of 1986.
A __ ____??____ __ is a highly trained person with specialized skills, education, or knowledge that is compensated to provide a service to the public.
* technician
* pundit
* professional
* consultant
professional
* The term professional refers to a highly trained person with specialized skills, education, or knowledge that is compensated to provide a service to the public.
Which of the following statements is not correct regarding commercial umbrella policies?
* There is no standard form of commercial umbrella liability insurance and many policies have substantial differences.
* Many contracts contain exclusions, such as for liabilities arising from workers compensation, unemployment compensation, and disability benefits law.
* Coverage is provided on an “all-risk” basis.
* Most policies provide coverage for personal injury liability, property damage liability and advertising liability.
Coverage is provided on an “all-risk” basis.
* Coverage is generally comprehensive but is not “all-risk” since many contracts contain common exclusions for liabilities arising from workers compensation, unemployment compensation, disability benefits law and others.
Which type of liability insurance covers a financial advisor for damages awarded a client due to advisor negligence in business dealings with the client?
* Directors and officer’s liability insurance
* Completed operations insurance
* Errors and omissions insurance
* Commercial umbrella liability insurance
Errors and omissions insurance
* Financial professionals should include Errors and Omissions insurance as a necessary coverage in the advisor’s personal risk management plan.
Each of the following may be categorized as a type of business general liability exposure EXCEPT:
* Direct Liability
* Contingent Liability
* Vicarious Liability
* Contractual Liability
Contingent Liability
We can categorize business general liability exposures as follows:
* Direct Liability
* Vicarious Liability
* Contractual Liability
A contingent liability is an accounting item and is a type of potential loss that is payable following the occurrence of an event.
According to the triple-trigger theory, identify the category of insurer whose policy was in force when the disease developed.
* Exposure
* Covered perils
* Exposure-in-residence period
* Manifestation
Exposure-in-residence period
* The type of exposure described is an exposure-in-residence period.
* This refers to the insurer whose policy was in force when the disease developed.
What type of liability insurance covers claims filed many years after the alleged injury?
* Commercial umbrella liability insurance
* Completed operations insurance
* Errors and omissions insurance
* Tail coverage
Tail coverage
* Tail coverage is useful if a contractor ceased operations but wanted liability insurance for a few years in case a lawsuit is filed over previously completed work.
* The tail period, which insurers also call the extended reporting period, extends the time during which a claim may be filed for a loss occurring during the policy period.
A business insurance package policy generally insures lost or damaged property at what value?
* Actual cash value
* Replacement value
* Actual cash value less depreciation
* Replacement value less depreciation
Replacement value
* A business insurance package policy generally insures lost or damaged property for replacement value without deducting for depreciation.
Insurers call claims filed many years after the alleged injury __ ____??____ __ claims.
* prolonged
* subsequent
* postponed
* long-tail
long-tail
* Insurers call claims filed many years after the alleged injury long-tail claims.
Tile-blazers, a manufacturer of performance mall-walking sneakers, had a factory fire that caused bodily injury to several employees. A jury ruled that the injured employees were owed $15 million from Tile-blazers. The company has a general liability and property package policy with a coverage limit of $2.5 million & a commercial umbrella policy worth $20 million.
How much did Tile-blazers commercial umbrella policy pay?
* $20 million
* $12.5 million
* $2.5 million
* $15 million
$12.5 million
* In this situation, the $2.5 million of general liability coverage would apply first, reducing the $15 million to $12.5 million ($15 million - $2.5 million).
* Then, the liability umbrella policy would pay the remaining $12.5 million balance.
Joe, a CFP® practitioner, has various personal, business, and professional insurance policies. He is sued by a client for unsuitable investments recommendations. Which policy or policies will afford Joe coverage?
I. Malpractice
II. Errors and Omissions
III. Personal Umbrella
IV. Commercial Umbrella
V. Business Owners Policy
* II, IV, V
* III, IV, V
* II
* I, III, IV
* II, IV
II
* Professional liability is covered only by errors and omissions.
* The personal umbrellas, the commercial umbrella, and the BOP all have exclusions for professional liability.
Business liability insurance can protect firms from which of the following losses?
I. Independent losses
II. Contractual liability losses
III. Direct liability losses
IV. Vicarious liability losses
* II, III, and IV
* II and IV
* II only
* I and III
II, III, and IV
* Risk managers may purchase liability insurance to protect their firms from direct, vicarious, and contractual liability losses.
Which of the following may have liability exposure(s) if a faulty product injures a consumer?
I. Manufacturer
II. Vendor
* Neither I nor II
* Both I and II
* I only
* II only
Both I and II
* Products must be packaged carefully and accompanied by adequate instructions and warnings to ensure proper use and avoidance of injury.
* If any of these duties are not fulfilled and the result is an injured user, potential for a product liability lawsuit exists with the manufacturer and/or the vendor of a product.
Under ____________, if several insurance policies were in force when a developing injury is in progress, all the insurers would be responsible for providing coverage.
* vicarious liability
* comprehensive coverage
* triple-trigger theory
* multi-line insurance coverage
triple-trigger theory
* If several insurance policies were in force when a developing injury is in progress, all the insurers would be responsible for providing coverage.
* This is called the triple-trigger theory.
Lesson 4. Property and Casualty Insurance
Course 2. Insurance Planning
List the ISO Forms and their Coverages
- HO-2 Broad Dwelling and structures: Named peril; Contents coverage up to 50% of dwelling coverage.
- HO-3 Special Losses are covered unless specifically excluded. Dwelling and structures: Open peril; Contents coverage up to 50% of dwelling coverage.
- HO-4 Contents Broad Covers contents and personal liability of renters. No coverage on dwelling and other structures.
- HO-5 Comprehensive Losses are covered unless specifically excluded. Open perils coverage on dwelling, structures, and contents.
- HO-6 Unit Owners Property interest, contents, and personal liability of people owning a unit in a condominium or co-op.
- HO-8 Modified Homes having a replacement cost greater than FMV. Typically, historic homes.
Exam Tip: Work toward memorizing the type of residence that is covered by each homeowners form and the extent of the included coverage. For example, single-family, residential homes are covered by HO-2, HO-3, and HO-5 forms. The higher the number of these forms, the greater the extent of the coverage.
Audio:
6 types of homeowner’s or residential types of insurance
* HO-2, HO-3, and HO-5 forms - covers traditional single-family, residential homes
* HO-3 - open perils coverage for the dwelling, but** broad form coverage for contents**
* HO-5 - open perils coverage for the dwelling and the contents
* HO-4 - for renter’s personal belongings; the contents and some liability coverage
* HO-6 - for condominium owners, wall studs in, contents and liability
* HO-8 - historic homes (150yo home), replacement value would be so high that no insurer would be comfortable insuring it on a replacement basis
Describe Sections One and Two of HO insurance
Section One (Property) of the HO consists of the following parts:
* Coverage A: Dwelling
* Coverage B: Other Structures (typically limited to 10% of Coverage A)
* Coverage C: Personal Property (typically limited to 50% of Coverage A)
* Coverage D: Loss of Use (typically limited to 20% of Coverage A)
Section Two (Liability) of the HO consists of the following parts:
* Coverage E: Personal Liability
* Coverage F: Medical Payments to others
* Homeowner Insurance
Exam Tip: Homeowners insurance policies are split into two major sections, Section 1, which provides insurance protection on the homeowners property, and Section 2, which provides liability coverage. Listen in for important exam-related information on the separate coverages within each Section.
Audio:
* Important to know which section coverages what
* A - for “address” - dwelling itself
* B - for the barn out back, “backyard”, shed, fence (10% of A)
* C - “contents - clothing, couch, curtains” personal property (50% of A)
* D - “displacement”, fire in the home and uninhabitable while being (20% of A) replaced/repairs
* Notice for B, C and D - all have maximum limits that pertain to Coverage A Dwelling.
* Section 2
* E - personal liability “exposure to legal damages”
* F - “funding for medical fees for others that might have been hurt on property”
Which of the following are covered by homeowners property insurance?
I. The insured’s home
II. A garage that is not attached to the insured’s home
III. The insured’s summer cottage
IV. Furniture in the insured’s home
* I, II, and IV
* I only
* I and III
* I and II
I, II, and IV
* Coverage A insures the home of the insured person. Coverage B applies to a garage that is not attached to the insured’s home, while furniture in the insured’s home comes under coverage C.
* The insured’s summer cottage is not covered since it does not specify that it was included in the policy declarations. Had the cottage been included, it would have also been covered.
Match the peril with the correct description.
War
Ordinance
Earth Movement
Intentional Loss
* Any act committed at the direction of the insured
* Destruction, seizure or use for a military purpose
* Tremors before, during or after a volcanic eruption
* Enforcement of any law regulating the construction of a building
- War - Destruction, seizure or use for a military purpose
- Ordinance - Enforcement of any law regulating the construction of a building
- Earth Movement - Tremors before, during or after a volcanic eruption
- Intentional Loss - Any act committed at the direction of the insured
Household appliances, outdoor antennas and outdoor equipment are settled at actual cash value at the time of loss.
* False
* True
True
* Household appliances, outdoor antennas, and outdoor equipment are settled at actual cash value at the time of loss.
* However, this amount is restricted to that required to repair or replace this type of property at depreciated value.
Which type of policy may provide more compensation to a single victim of the insured?
* Single limit policy
* Split limit policy
Single limit policy
* The single limit policy may provide more compensation to a single victim than a split limit policy.
Which of the following can be referred to as an ‘uninsured motorist’?
I. Drivers with coverage provided by insolvent insurers.
II. Hit-and-run drivers.
III. Drivers with less insurance than the minimum required by state law.
IV. Drivers without insurance.
* I and II
* I, III, and IV
* I, II, III, and IV
* IV only
I, II, III, and IV
* Each of these driver categories can be considered uninsured motorists.
Suppose Robert borrows Eddie’s car for a day. He wants to be at his best for his date tonight. Afraid that he’ll be late, he presses his foot on the accelerator. The car slides out of control as it hits a patch of grease and Robert lands in the hospital.
Who will pay for his hospital bills?
* Eddie’s PAP
* Robert’s PAP
Eddie’s PAP
* The PAP provides coverage for four categories of insured that have potential liability arising from the use of an auto.
* Coverage 2 covers any person using the named insured’s covered auto.
* That is, the car owner’s insurance, not the driver’s insurance, would pay a claim if the owner let somebody borrow his or her auto.
Assume Lecter has taken a split limit ($250,000/$500,000/$5,000) coverage PAP. Suppose he causes a collision injuring four people (A, B, C, and D) and damages the property of F. Suppose they file suit in the following order: A’s injuries total $300,000, B’s equal $400,000, C’s equal $200,000, D’s equals $100,000, and F’s property damage amounts to $5,000.
With split limits, how much does each get from Lecter’s insurer?
* A gets $300,000, B gets $400,000, C gets $200,000, D gets $100,000 and F gets $5,000.
* A gets $250,000, B gets $400,000, C gets $100,000, D gets none and F gets $5,000.
* A gets $250,000, B gets $250,000, C gets none, D gets none and F gets $5,000.
* A gets $300,000, B gets $400,000, C gets $25,000, D gets $25,000 and F gets $5,000.
* A gets $250,000, B gets $300,000, C gets $200,000, D gets none and F gets $5,000.
A gets $250,000, B gets $250,000, C gets none, D gets none and F gets $5,000.
* Assuming the claims are submitted and paid in alpha order, A=$250,000 (max per person), B=$250,000 (max per person), C & D get $0 (the maximum per accident of $500,000 was used for A & B), F=$5000 for property damage (meets the limit available).
If fire destroys a clothing store, the loss of the building and inventory is a(n) __ ____??____ __. The income lost while the building is rebuilt and the business reestablished is the __ ____??____ __.
* indirect loss, direct loss
* extra expenses, physical damage
* direct loss, indirect loss
* physical damage, extra expense
direct loss, indirect loss
* If fire destroys a clothing store, the loss of the building and inventory is a direct loss.
* The income lost while the building is rebuilt and the business reestablished is the indirect loss.
Consider the three scenarios given below and identify which bulleted statement is correct:
1. A car is stolen and the thief has a collision.
2. A car in Florida is under a coconut tree during a storm and a coconut falls and breaks the windshield.
3. A car hits a pheasant causing the bird to disintegrate on the windshield, in turn causing the driver to leave the road and hit a tree.
* 1 is a collision
* 2 is a collision
* 3 is a collision
* None of the three scenarios involve collisions
* All three scenarios can be considered collisions
None of the three scenarios involve collisions
* Breakage of glass and loss caused by missile, falling objects, fire, theft or larceny, explosion, earthquake, windstorm, hail, water, flood, malicious mischief or vandalism, riot or civil commotion, or colliding with a bird or animal shall not be deemed to be loss caused by collision, according to automobile insurance policy under collision coverage.
Which statement is true?
* Ocean marine insurance is a relatively new form of coverage appearing slightly more than 100 years ago.
* Ocean and inland marine insurance cover about the same losses and are used for about the same purposes.
* Inland marine insurance is found mostly in Europe.
* Inland marine insurance is a term used mostly in the United States.
Inland marine insurance is a term used mostly in the United States.
* Inland marine insurance is essentially an American distinction.
* Other countries have not separated the underwriting powers of insurers to the extent Americans have. In the United States, the distinction between inland marine insurance and ocean marine insurance still remains because of separation of underwriting powers.
* The statement “Ocean marine insurance is a relatively new form of coverage appearing slightly more than 100 years ago” is false because ocean marine insurance is one of the earliest forms of insurance (established some time in 2000 BC) and was practiced by Roman, Babylonian and Greek sea-traders.
Identify the section of the Commercial Package Policy (CPP) where policy cancellation, assignment of the policy, and other legal rights and duties are stated.
* Declarations
* Conditions
* Property Covered
* Perils Covered
Conditions
* Within the CPP, the common conditions cover policy cancellation, assignment of the policy, and other legal rights and duties.
* In addition to the common declarations and conditions, each component part has its own specific declarations page and conditions.
Exam 4. Property and Casualty Insurance
Exam 4. Property and Casualty Insurance
Course 2. Insurance Planning
Which of the following accurately describes open-peril coverage?
* Provides a minimum level of protection restricted to nine basic perils.
* Coverage for nine basic perils for the property section and seven additional perils.
* Provides coverage for damages by any peril, except for those excluded in the policy.
* Provides coverage for damages by any peril.
Provides coverage for damages by any peril, except for those excluded in the policy.
* In open-peril coverage the insurer pays for damages by any peril, except for those excluded in the policy.
Tom and Sarah have a HO-3 homeowners insurance policy. Currently, the property is valued at $800,000 and the replacement cost is estimated to be $500,000. The homeowners policy has $300,000 coverage for the dwelling, a $1,000 deductible, an 80% coinsurance clause, and $500,000 liability coverage.
Given this information, which of the following correctly lists the typical coverage amount for Coverages A, B, C, D for this policy?
* A - $300,000 B - $150,000; C - $30,000; D - $60,000
* A - $300,000; B - $30,000; C - $150,000; D - $60,000
* A - $150,000; B - $300,000; C - $500,000; D - $30,000
* A - $500,000; B - $60,000; C - $150,000; D - $30,000
A - $300,000; B - $30,000; C - $150,000; D - $60,000
* Coverage A is coverage for the dwelling, $300,000.
* Coverage B is for other structures on the property and is typically 10% of the Coverage A amount.
* Coverage C is for personal property (contents) and is typically 50% of the Coverage A amount.
* Coverage D is for loss of use and is typically 20% of the Coverage A amount.
On the 4th of July, Kent was entertaining neighbors with a fireworks show. One of the rockets malfunctioned, injuring his daughter and three of her neighborhood friends. Each child needed urgent care treatment at a cost of $3000 per person. Kent’s homeowners policy has a $500,000 limit for liability and a per person limit of $2,000 for medical payments to others.
What amount will Kent’s homeowners insurance pay for this accident under Coverage F?
* $9,000
* $8,000
* $12,000
* $6,000
$6,000
* Coverage F is Medical Payments to Others. Kent’s policy has a $2,000 per person limit, so this is the maximum payable to each eligible party under Coverage F.
* However, the coverage does not extend to Kent’s family.
* The total payable under Coverage F: 3 x $2,000 = $6,000.
* It is likely Kent’s liability insurance under Coverage E will pay the balance for the three neighbors.
Which coverage in a homeowners insurance policy provides coverage for the dwelling?
* Coverage D
* Coverage A
* Coverage C
* Coverage B
Coverage A
* In Section 1, Coverage A provides coverage for the dwelling.
* Coverage B covers other structures.
* Coverage C covers personal property (contents).
* Coverage D covers loss of use of the dwelling.
How should high value personal property such as jewelry, guns, and antiques be insured?
* A separate scheduled personal property endorsement.
* A separate policy for each type of high value property.
* Coverage up to 20% of the Coverage A limit is provided under Coverage D.
* Coverage for the full value is provided under Coverage C up to 50% of the Coverage A limit.
A separate scheduled personal property endorsement.
* High value property can be covered on a Scheduled Personal Property Endorsement.
* Its purpose is to provide open-perils coverage for specific items at higher amounts of coverage.
* This typically requires having the items professionally appraised.
Which type of homeowners insurance is referred to as “special coverage”?
* Open-perils coverage
* Standard coverage
* Basic coverage
* Broad form coverage
Open-perils coverage
* Special coverage provides coverage on an open-peril basis which also includes coverage for theft.
Tom and Sarah had storm damage to their home. The loss was $100,000. At the time of the claim, the property was valued at $800,000 and the replacement cost was estimated to be $500,000. The homeowners policy has $300,000 Part A coverage, a $1,000 deductible and an 80% coinsurance clause. The actual cash value of the damaged portion of the home is $80,000.
How much will the insurance company pay for this claim?
* $100,000
* $80,000
* $99,000
* $74,000
$74,000
* Under a coinsurance clause of 80%, Tom and Sarah must maintain dwelling coverage of at least $400,000 (80% x $500,000).
* Their current coverage is $300,000 and does not meet the 80% coinsurance requirement.
* As a result, there will be partial reimbursement for the loss, calculated as follows:
([Current Coverage ÷ Required Coverage] x Loss Amount) – Deductible = Partial Reimbursement Amount
([$300,000 ÷ $400,000] x $100,000) - $1,000
(0.75 x $100,000) - $1,000
$75,000 - $1,000 = $74,000
Which provision in a homeowners insurance policy sets forth the coverage provided by the insurance contract and states the insurer’s obligation to provide coverage as stated in the policy?.
* Endorsements
* Declarations
* Insuring agreement
* Conditions
Insuring agreement
* The insuring agreement states the insurer’s obligation to provide coverage as stated in the policy in return for the insured’s compliance with all policy provisions and payment of premiums.
In a HO-3 policy coverage for personal property is typically at what percentage of the Coverage A amount?
* 20%
* 50%
* 10%
* 100%
50%
* Coverage C for personal property is typically 50% of the Coverage A (dwelling) amount but the insurer may allow this to be increased at the option of the insured.
Which homeowners policy form may be offered to insure an 150 year old dwelling for which the replacement cost far exceeds the FMV?
* HO-6
* HO-3
* HO-8
* HO-4
HO-8
* An insurer may offer a HO-8 policy for an 150 year old dwelling for which the replacement cost far exceeds the FMV.
Scott left the front door of his apartment open and his German Shepherd dog ran out. Three blocks from home the dog attacked a postal worker which caused the postal worker to go to the hospital for stitches. Scott carries a HO-4 policy. The postal worker’s emergency room treatment costs are $3,000. Which of the following statements is correct regarding coverage for the injuries caused to the postal worker?
* The policy will pay only the limit of the medical payments to others coverage.
* A HO-4 policy provides coverage only for personal property and will not pay anything for the emergency costs.
* The HO-4 policy will not cover any portion of the emergency costs because the attack did not occur in Scott’s apartment.
* The policy may cover 100% of the emergency medical costs either through the medical payments to others coverage and/or the liability coverage.
The policy may cover 100% of the emergency medical costs either through the medical payments to others coverage and/or the liability coverage.
* First, the policy will pay up to the limit for medical payments to others coverage.
* Any remaining costs can be paid through the liability coverage provided in the policy.
Tom and Sarah had storm damage to their home. The loss was $100,000. At the time of the claim, the property was valued at $800,000 and the replacement cost was estimated to be $500,000. The homeowners policy has $500,000 Part A coverage, a $1,000 deductible and an 80% coinsurance clause. The actual cash value of the damaged portion of the home is $80,000.
How much will the insurance company pay for this claim?
* $100,000
* $99,000
* $80,000
* $124,000
$99,000
* Under a coinsurance clause of 80%, Tom and Sarah must maintain dwelling coverage of at least $400,000 (80% x $500,000).
* Their coverage meets the coinsurance requirement, therefore, the insurance company will pay the amount of the claim less the deductible, $99,000.
While driving home through a rural area at night recently, a deer ran in front of Jill’s car. Jill swerved but could not avoid hitting the deer, causing significant damage to the front of the car and windshield.
If this type of claim is covered under a personal automobile policy (PAP), which coverage applies?
* Coverage D.1. Collision Loss
* Coverage A: Liability for Property Damage
* Coverage D.2. Other than Collision Loss
* This type of claim is not covered under a PAP.
Coverage D.2. Other than Collision Loss
* Loss resulting from contact with an animal is covered under D.2., Other than Collision Loss.
* This coverage is sometimes referred to as “Comprehensive.”
* Typically, a deductible applies.
Jose’s personal automobile policy (PAP) is written with split limits of $50,000/$100,000/$5,000.
What is the maximum coverage amount payable for bodily injury to one person?
* $50,000
* $100,000
* $150,000
* $5,000
$50,000
* Under split limits of $50,000/$100,000/$5,000, the insurer pays a maximum of $50,000 to any one injured person, and a maximum of $100,000 for any one accident regardless of the number of injured people.
Which of the following homeowners insurance policy forms covers the dwelling on an open-perils basis?
* HO-8
* HO-4
* HO-3
* HO-2
HO-3
* A HO-3 policy provides dwelling coverage on an open-perils basis.
* A HO-2 policy has broad form, named perils coverage.
* HO-4 covers contents for a renter, there is no dwelling coverage.
* HO-8 is for historic homes where the replacement cost value is higher than FMV. Dwelling coverage on an HO-8 policy is named-perils.
Under a personal automobile policy (PAP), breakage of glass and loss caused by missile, falling objects, fire, theft or larceny, explosion, earthquake, windstorm, hail, water, flood, malicious mischief or vandalism, or by riot or civil commotion are covered under which element the policy?
* Uninsured motorist
* Other than Collision Loss
* Collision Loss
* Liability for damage to personal property
Other than Collision Loss
* The loss described is covered under “Other than Collision Loss (Comprehensive).”
While driving home through a rural area at night recently, a deer ran in front of Jill’s car. Jill swerved to avoid hitting the deer but lost control of the car and hit a tree on the side of the road. Significant damage was sustained to the front of the car and windshield.
If this type of claim is covered under a personal automobile policy (PAP), which coverage applies?
* This type of claim is not covered under a PAP.
* Coverage D.2. Other than Collision Loss
* Coverage D.1. Collision Loss
* Coverage A: Liability for Property Damage
Coverage D.1. Collision Loss
* This type of loss is covered under D.1., Collision Typically, a deductible applies.
