Chap. 1 Flashcards
Q: What two elements are necessary for a life insurance contract to have a legal purpose?
A: Insurable interest and consent
Q: An insurance company that is formed under the laws of another state is known as what type of insurer?
A: Foreign
Q: If an applicant does not receive his or her insurance policy, who would be held responsible?
A: The agent
Q: What entities make up the Medical Information Bureau?
A: Insurers
Q: The type of insurance company organized to return any surplus money to its policyholders is known as what?
A: Mutual company
Q: A person who does not lock the doors to his or her house shows an indifferent attitude. This person presents what type of hazard?
A: Morale
Q: What is the term for the causes of loss insured against in an insurance policy?
A: Peril
Q: If an insurer meets the state’s financial requirements and is approved to transact business in the state, it is considered what type of insurer?
A: Authorized or admitted
Q: Whose responsibility is it to determine that all the questions on an insurance application are answered?
A: The agent’s
Q: What is a warranty in an insurance contract?
A: An absolutely true statement upon which the validity of the insurance contract is based
Q: In insurance, when is the offer usually made on a contract?
A: When the insurance application is submitted
Q: The requirement that agents must account for and promptly remit all insurance funds collected is known as what type of agent responsibility?
A: Fiduciary
Pertaining to insurance, what is the definition of a fiduciary responsibility?
Promptly forwarding premiums to the insurance company
Q: What type of report provides information about the applicant’s hobbies, habits and financial status?
A: Inspection report
Q: When agents act within the scope of their contract, their actions will be assumed to be the acts of whom?
A: Insurer
Q: When would a misrepresentation on an insurance application be considered fraud?
A: When it is intentional and material
Q: If an agent fails to obtain the applicant’s signature on the insurance application, what must the insurer do?
A: Send the application back to the applicant for signature
Q: When does an insurance policy go into effect?
A: When the policy is delivered and the premium is paid
Q: What are the four elements of an insurance contract?
A: Agreement (offer and acceptance), consideration, competent parties, and legal purpose
Q: In forming an insurance contract, when does an acceptance usually occur?
A: When the insurer approves a prepaid application
Q: When risks with higher probability of loss are seeking insurance more often than other risks, this is known as what?
A: Adverse selection
Q: Whom does an insurance agent represent?
A: Insurance company
Q: In the agent/insurer relationship, who is considered the principal?
A: Insurer
Q: The reduction, decrease, or disappearance of value of the person or property insured in a policy is known as what?
Loss
Q: What are the three types of agent authority?
A: Express, implied and apparent
Which of the following are the authorities that an agent can hold?
Express and implied
Q: What are the five characteristics of an ideally insurable risk?
A: Loss must be 1) due to chance, 2) definite and measurable, 3) statistically predictable, 4) not catastrophic, and 5) Coverage cannot be mandatory.
Q: Who owns stock companies?
Stockholders
Q: Conditions that increase the chance of a loss are known as what?
A: Hazards
Hazard is best defined as
Something that increases the risk of loss.
Q: What are the strategies used by underwriters to prevent adverse selection?
A: Restriction of coverage, refusal to accept a risk, and accepting a risk at a higher rate
Q: For the purpose of insurance, what is risk?
A: Uncertainty of loss
Q: According to the Law of Agency, a principal is represented by whom?
A: Agent or producer
Q: An applicant conceals relevant health information on the application. The applicant presents what type of hazard?
A: Moral
Q: What type of risk is insurable?
A: Pure
Q: A situation in which a person can only experience a loss and no gain presents what type of risk?
A: Pure risk
Q: When a change needs to be made on the application for insurance, which is the best method for correcting the information?
A: Complete a new application or ask the applicant to initial the correction on the original application
Q: Wagering on a sporting event is known as what type of risk?
A: Speculative
Q: What are the three types of hazards?
A: Physical, moral and morale
Q: Insurance is a contract that protects the insured from what?
A: Loss
Q: What is the best way to handle incomplete insurance applications?
A: Return the application to the applicant for completion
Q: What do individuals use to transfer their risk of loss to a larger group?
A: Insurance
Q: The insurer organized to return a profit to the stockholders is what type of insurer?
A: Stock company
Q: An insurance policy paid a nontaxable dividend to the insured one year, and nothing the next. From what type of insurer did the insured purchase the policy?
A: Mutual
On a participating insurance policy issued by a mutual insurance company, dividends paid to policyholders are
Not taxable
On a participating insurance policy issued by a mutual insurance company, dividends paid to policyholders are
Not taxable since the IRS treats them as a return of a portion of the premium pai
Q: What type of insurer is formed under the laws of another country?
A: Alien
Q: What document is required for an insurance company to transact insurance?
A: Certificate of Authority
Which of the following is issued by the state Department of Insurance to show that the insurer has power to write insurance contracts in that state?
Certificate of Authority
Q: An insurance company is domiciled in California and transacts insurance in Nevada. What is this insurer’s classification in Nevada?
A: Foreign
Q: Insurers are classified according to their domicile. What are the three types of insurers?
A: Domestic, foreign, and alien
Which of the following best describes an insurance company that has been formed under the laws of this state?
Domestic
An insurance company receives an application with some information missing and issues the policy anyway. What is this called?
Waiver
Which authority is NOT stated in an agent’s contract but is required for the agent to conduct business?
Implied
The requirement that agents not commingle insurance monies with their own funds is known as
Fiduciary responsibility.
Which of the following statements is an accurate comparison between private and government insurers?
Private insurers may be authorized to transact insurance by state insurance departments
In insurance transactions, fiduciary responsibility means
Handling insurer funds in a trust capacity.
A tornado that destroys property would be an example of which of the following?
A peril
An insurance contract must contain all of the following to be considered legally binding EXCEPT
Beneficiary’s consent.
An individual was involved in a head-on collision while driving home one day. His injuries were not serious, and he recovered. However, he decided that in order to never be involved in another accident, he would not drive or ride in a car ever again. Which method of risk management does this describe?
Q:The risk management technique that is used to prevent a specific loss by not exposing oneself to that activity is called
Avoidance
Units with the same or similar exposure to loss are referred to as
homogeneous
Insurance policies are not drawn up through negotiations, and an insured has little to say about its provisions. What contract characteristic does this describe?
Adhesion
Which type of insurance is based on mutual agreements among subscribers?
Q:Which of the following insurance options would be considered a risk-sharing arrangement?
Reciprocal insurance
Which of the following is an example of a producer’s fiduciary duty?
The trust that a client places in the producer in regard to handling premiums.
An insured wants to transfer his personal insurance policy to a friend. Under what conditions would this be possible?
The insured will need a written consent of the insurer.
The document that indicates that an insurer has been approved and is authorized to transact insurance in a particular state is known as
Certificate of Authority.
When an individual purchases insurance, what risk management technique is he or she practicing?
Transfer
An insurer neglects to pay a legitimate claim that is covered under the terms of the policy. Which of the following insurance principles has the insurer violated?
Consideration
An insurance company sells an insurance policy over the phone in response to a TV ad. Which of the following best describes this act?
Direct response marketing
Following a career change, an insured is no longer required to perform many physical activities, so he has implemented a program where he walks and jogs for 45 minutes each morning. The insured has also eliminated most fatty foods from his diet. Which method of dealing with risk does this scenario describe?
Reduction
Which of the following is the basis for a claim against an insurance policy?
Loss
A participating insurance policy may do which of the following?
Pay dividends to the policy owner
An insured pays a $100 premium every month for his insurance coverage, yet the insurer promises to pay $10,000 for a covered loss. What characteristic of an insurance contract does this describe?
Aleatory
For the reported losses of an insured group to become more likely to equal the statistical probability of loss for that particular class, the insured group must become
Larger
What is the major difference between a stock company and a mutual company?
Ownership
An insured purchased an insurance policy 5 years ago. Last year, she received a dividend check from the insurance company that was not taxable. This year, she did not receive a check from the insurer. From what type of insurer did the insured purchase the policy?
Mutual
A situation in which a person can only lose or have no change represents
Pure risk.
A producer who fails to segregate premium monies from his own personal funds is guilty of
Commingling.
An individual’s tendency to be dishonest would be indicative of a
Moral hazard.
In forming an insurance contract, when does acceptance usually occur?
When an insurer’s underwriter approves coverage
When both parties to a contract must perform certain duties and follow rules of conduct to make the contract enforceable, the contract is
Conditional.
An insurance producer who by contract is bound to write insurance for only one company is classified as a/an
Captive agent.
What term best describes the act of withholding material information that would be crucial to an underwriting decision?
Concealment
Installing deadbolt locks on the doors of a home is an example of which method of handling risk?
Reduction
Which of the following would qualify as a competent party in an insurance contract?
The applicant has a prior felony conviction.
Which of the following is NOT a characteristic of an insurable risk?
The loss must be catastrophic.
What documentation grants express authority to an agent?
Agent’s contract with the principal
What is the term for the entity that an agent represents regarding contractual agreements with third parties?
Principal
Which statement regarding insurable risks is NOT correct?
Insureds cannot be randomly selected.
Because an insurance policy is a legal contract, it must conform to the state laws governing contracts which require all of the following elements EXCEPT
Conditions.
Which of the following is owned by a corporation to serve that organization’s needs at lower rates than would otherwise be available with commercial insurance?
Captive insurer
