Chapter 1

Question 1

When dealing with risks, identify and explain four alternatives

Answer 1

1. Avoidance of Risk - All chance of financial loss has been eliminated
2. Controlling of Risk – Taking measures to reduce frequency and severity of losses
3. Retention of Risk – Insured assumes responsibility for their own losses
4. Transfer of Risk – Transferring responsibility for losses to others (insurance)

Question 2

What is the most popular method of dealing with risks?

Answer 2

Insurance is the most popular method to deal with risks

Question 3

What are five elements required to create legally enforceable contracts?

Answer 3

Agreement
Consideration
Legality of object
Legal capacity of the parties
Genuine Intention

Question 4

Who may not have competence to form contracts?

Answer 4

Minors, mental incompetents, persons under the influence of alcohol or drugs and trade names do not have the competence to form contracts.

Question 5

Identify three additional elements required to form legally enforceable insurance contracts.

Answer 5

Insurable interest
Utmost good faith
Indemnity

Question 6

What duties do brokers owe to clients and insurance companies?

Answer 6

Brokers owe clients the duty to provide:
a careful and prompt response to instructions; expert advice;
competitive pricing of products.

Brokers owe insurance companies the duty: to collect premiums;
to pass on any relevant information obtained from clients.

Question 7

When is an indemnity measured?

Answer 7

An indemnity is measured immediately prior to loss

Question 8

How is binding authority provided to brokers?

Answer 8

Brokers receive binding authority through their agency agreements with insurers

Question 9

What should occur after oral binders have been provided by brokers?

Answer 9

Oral binders should be followed up immediately in writing

Question 10

What risk do brokers face when they exceed their binding authorities?

Answer 10

When brokers exceed binding authority and losses occur, they may face an errors and omissions loss

Question 11

How can brokers exceed their binding authorities?

Answer 11

Brokers may exceed their binding authority when they bind risks with values above the limits allowed in their agency agreements

Question 12

What are three elements found in Indemnity Agreements?

Answer 12

Actual cash value of property at the time of loss
Interest of insured in the property
Limit of insurance on policy

Question 13

What considerations are used to determine depreciation?

Answer 13

Condition of the object
Resale value
Normal life expectancy

Question 14

Why do governments play a role in the insurance industry?

Answer 14

Government wants to ensure that insurers are financially competent, that forms of insurance are drafted fairly and that business is conducted to the general benefit of the public

Question 15

What is the PACICC and what limits are available from this organization?

Answer 15

The PACICC is an organization that will pay valid claims when federally licensed insurers become insolvent. Limits available are up to $250,000 per claim and refunds of unearned premiums up to 70% or $700 per policy

Question 16

What are the three coverages that must be present in Fire policies?

Answer 16

Fire
Lightning
Explosion of natural, coal and manufactured gas

Question 17

What are two proximate losses, other than fire damage, arising from fires?

Answer 17

Damage caused by water and other extinguishing agents and physical damage to buildings caused by firefighters are examples of other proximate losses arising from fires

Question 18

Why are there exclusions?

Answer 18

Exclusions exist because there often are more specialized forms of insurance available and some losses are uninsurable

Question 19

Covered or Not covered:
1. Resultant fire damage to home when fire arises from clothes dryer
2. Damage to clothes in clothes dryer
3. Damage to television from lightening strike
4. Fire damage to dwelling from television damaged by lighting strike
5. Damage to blender from power surge
6. Fire damage to kitchen resulting from blender damaged by power surge
7. Fire resulting from nuclear attack

Answer 19

1. C
2. NC
3. NC
4. C
5. NC
6. C
7. NC

Question 20

When do policies come into effect and expire.

Answer 20

Policies come into effect and expire at 12:01 am standard time at the address of the insured

Question 21

Describe “Removal” coverage.

Answer 21

Removal coverage provides protection when property is removed from the named location to protect it from loss or further loss. Coverage at the new, unnamed location is limited to amount of coverage not used at the loss at the named location. Coverage at the new, unnamed location is limited to seven days or the unexpired term of the policy, whichever is least.

Question 22

What rules must be followed when Insurers include clauses that may limit amount payable to clients?

Answer 22

Insurers must provide a warning label on the declaration page in red ink that states, “This policy contains a clause(s) that may limit the amount payable”

Question 23

Explain subrogation.

Answer 23

Subrogation is the right of the insurer to pursue responsible parties for amounts paid to the insured.

Question 24

Explain who may make changes to policies.

Answer 24

Only persons authorized by the insurer may make changes. Brokers do not have this authority

Question 25

Explain significance when clients receive policy documents, even when no premiums have been paid

Answer 25

When policy documents are in the possession of clients, coverage is in effect even when no premiums have been paid. Promise to pay premiums is binding.

Question 26

What are differences between independent brokers and direct writers?

Answer 26

Independent brokers are not employees of insurers. Owners of independent brokerages are responsible for payment of expenses associated with brokerages. Brokerage owners own the business they produce. Independent brokerages are responsible for increased client services.

Direct writers employ their producers. Producers of direct writers are paid a salary or a combination of salary and commission. Direct writers own business produced. Direct writers assume administration function.

Question 27

Considering common law as it relates to minors, explain how minors purchase insurance. Include your thoughts on enforceability of insurance purchased by minors.

Answer 27

Minors may purchase insurance. However, when minors request relief within a reasonable period of time, brokers must provide relief. When minors fail to request this relief within a reasonable period of time, insurance contracts purchased by minors, will be enforceable.

Question 28

Discuss Statutory Condition “Fraud.”

Answer 28

When clients deliberately attempt to deceive in order to secure a profit, the ENTIRE amount of claim may be denied.

Question 29

Discuss Statutory Condition “Material Change.”

Answer 29

When new facts arise during the policy term that increase the chance of loss, these facts must be reported to insurers. When losses arise from unreported material changes and insurers can show this link, policies may be voided with respects to the property involved.

Question 30

Discuss Statutory Condition “Misrepresentation.”

Answer 30

When completing application forms, clients must be truthful with their answers. When losses arise from any misstatement and insurers can show this link between the loss and the misstatement, coverage will not be available and contract may be voided.

Question 31

Discuss Statutory Condition “Replacement.”

Answer 31

When insurers decide to repair or replace damaged property instead of paying an indemnity in the form of money, they must advise the insured of this intention within 30 days of the submission of the proof of loss. Repair or replacement must then begin within 45 days of submission of proof of loss and continue with due diligence.

Question 32

Discuss policy condition “Notice to Authorities.”

Answer 32

When losses involve criminal acts, prompt notice must be provided to police or other authorities.

Question 33

Discuss policy condition “Pair & Set.”

Answer 33

When losses involve items that are a part of a pair or set, the remaining item will still have value. This remaining value will be considered when losses are paid.

Question 34

Discuss policy condition “Parts.”

Answer 34

When losses involve an item that is part of a larger item, payment will only be provided for the lost or damaged part.

Question 35

Policy Limit is $560,000
Actual Cash Value of Property is $890,000 Co-insurance percentage is 80%
Amount of loss is $245,000
Indicate amount of settlement.

Answer 35

$560,000 (did) divide by
$712,000 (should) X $245,000
= $192,697

Question 36

Policy Limit is $635,000
Actual Cash Value of Property is $1,200,000 Co-insurance percentage is 80%
Amount of loss is $1,200,000
Indicate amount of settlement.

Answer 36

$635,000 – Total loss, therefore co-insurance is not applicable