Chapter 1 Flashcards
An insurer discovers that an applicant for a policy has submitted a fraudulent insurance claim in the past. What type of hazard does this represent?
Moral
What term describes a loss caused by continuous exposure to condition?
Occurrence
Conditions that increase the chance of a loss are known as what?
Hazards
What is a subrogation?
An insured’s legal right to seek damages from third parties after reimbursing insureds for a loss.
What provision states that if a policy allows for greater benefits than the financial loss incurred, the insured may be compensated only for the amount lost?
Indemnity
An insured’s business is damaged by a fire and temporarily shut down for repairs. As a result, the insured suffers loss of income. What type of loss is the loss of income?
Indirect or consequential loss
(Insurance carried / Insurance required) X loss amount =
Loss payment
What are three types of hazards?
Physical, moral, and morale.
What type of hazard does a person represent if they show an indifferent attitude to loss?
Morale
In property insurance, when must insurable interest exist?
At the time of loss.
Under absolute liability, does an injured party need to prove negligence?
No, absolute liability exists when a condition or conduct is inherently dangerous, so proof of negligence is not required.
What are the two types of compensatory damages?
Special and general
What law protects consumers from the circulation of inaccurate or obsolete information?
The Fair Credit Reporting Act
What is a risk?
Uncertainty of loss
The reduction, decrease, or disappearance of value of the person or property insured in a policy is known as what?
Loss
what type of limits of liability has the limits separately stated for different coverages?
Split limits
What provision found in property policies prevents an insured from collecting twice for the same loss: once from their insurer and again from a third party?
Subrogation
What is burglary?
a forced entry into another’s premises with felonious intent.
What is negligence?
Failure to act as a reasonable, prudent person under given circumstances.
what term defines an exact, direct, and uninterrupted cause of loss?
Proximate Cause
A situation in which a person can experience only a loss, and no gain presents what type of risk?
Pure risk
In property insurance, what is the purpose of a coinsurance clause?
To encourage insureds to insure property close to its value.
What is a deductible in an insurance policy?
A specified dollar amount that the insured must pay before the insurer will pay the policy benefits.
what sublimit in a liability policy puts a ceiling on the payment for all claims that arise from a single accident?
Per occurrence.
what is the term for the causes of loss insured against in an insurance policy?
Peril
If an insured peril was the proximate cause of loss, what type of loss is it?
Direct loss.
How is the actual cash value of a property calculated?
Current replacement cost minus depreciation
Both robbery and burglary can be considered what?
Theft
Wagering on a sporting event is known as what type of risk?
Speculative risk
How are direct and indirect lossses related?
Direct losses can cause indirect losses
What type of policy insures all property at multiple locations for a single amount?
Blanket policy
In property insurance, what is actual cash value?
Replacement cost at the time of loss, minus depreciation.
A tornado that destroys a property would be an example of what?
A peril
Insurance is a contract that protects the insured from what?
Loss
What is the difference between vacancy and unoccupancy?
Vacancy refers to an insured structure in which no people have been living or working and no property has been stored for the physical for the specified period of time. Unoccupancy refers to an insured structure in which no people have been living or working within the required period of time, but some property is stored.
If a manufactured product is unsafe, what type of liability applies to the manufacturer?
Strict liability
A policy that covers all causes of loss except for those specifically excluded known as what type of policy?
Open peril (or special) form
What does indemnify mean in insurance?
To restore an insured to the same financial status as before loss?
What do individuals use to transfer their risk of loss to a larger group?
Insurance
What determines an insurer’s responsibility for payment, as stated in an insurance policy?
Limits of liability
which coverage in dwelling and homeowners policies is for indirect losses?
Loss of use coverage, which applies only after a direct loss caused by a covered peril has occurred.
An insurer neglects to pay a legitimate claim that is covered under the terms and terms of the policy. What insurance principle has the insurer violated?
The binding force in any contract is consideration. Consideration on the part of the insured is the payment of premiums, and the health representations made in the application. Consideration on the part of the insurer is the promise to pay in the event of loss.
What law is the foundation of the statistical prediction of loss upon which rates for insurance are calculated?
Law of large numbers.
What is not an essential element of an insurance contract?
In order for insurance to be legally binding, they must have four essential elements: agreement (offer and acceptance), consideration, competent parties, and legal purpose. Counteroffer is NOT required.
An additional loss that results from a direct loss of property is called a/an:
Indirect loss, also known as consequential losses, come about as a result of a direct loss.
Direct losses come about because of perils named in the policy.
In commercial policies, who has control over the policy?
First Named Insured. The first named insured has control of a commercial policy and is the only insured that may cancel it or request changes to it. The first named insured is also responsible for paying the premiums and reporting losses.
For a contract to be enforceable by law, the purpose of the contract must be:
Legal and not against public policy. The purpose of a contract must be legal and not against public policy for the contract itself to be enforceable by law (or legal).
All of the following conditions are commonly found in the insurance policy EXCEPT:
-Insuring agreement
-Subrogation
-Cancellation and non-renewal
-Appraisal
Insuring agreement. The insuring agreement provides information on the policy’s coverages. Conditions state the legal obligations and duties of the parties to the contract.
The section of an insurance policy that details what perils are not insured against and what persons are not insured is known as the
Exclusions. The exclusions section of an insurance policy details what perils are not insured against and what persons are not insured.
The part of the policy that sets forth the rules of conduct, duties, and obligations of the parties is called the:
Conditions. The conditions are the part of an insurance policy that sets forth the obligations and duties of the insurer and the insured.
A beauty parlor burns to the ground. What type of loss is this to the owner?
Direct. Damage caused by a peril that is insured against is classified as direct loss.
Which of the following is most likely to occur if it is determined by the audit that the deposit premium was too high?
-The insurer will have to pay a fine.
-The insured will receive a return premium
-Nothing; the premium cannot be adjusted.
-Additional benefits will be added
The insured will receive a return premium.
A building is insured, but no one has lived or worked in it for 10 years. The building is completely empty of any furniture or personal belongings. From an insurance standpoint, the building is considered:
Vacant. An insured structure in which no people have been living or working, and no contents have been stored for the period of time required as stated in the policy (usually 60 days) constitutes vacancy.
What is reinsurance?
An agreement between a ceding insurer and an assuming insurer. The originating company that procures the insurance on itself in another insurer is called the ceding insurer. The other insurer is called the assuming insurer.
An insured is applying for a casualty insurance policy. One of the conditions of the policy allows the insurance company to inspect the insured’s books at the end of the policy term to make sure sufficient premium has been collected for the exposure she plans to insure. What condition is part of the insured’s policy?
Deposit premium audit– this allows an insurer to inspect the insured’s books at the end of the policy term to make sure sufficient payment has been collected for the exposure.
during the application process, a producer tells an applicant that their homeowner’s policy will go into effect within 5 business days of completing the application. which of the following ensures that the applicant’s home will be covered temporarily until the policy goes into effect?
-Notice of claim
-Binder
-Mortgagee clause
-Loss settlement provision
Binder– a binder is a temporary agreement issued by a producer or insurer that provides temporary coverage until a policy can be issued.
What term best describes the act of withholding material information that would be crucial to an underwriting decision?
-Withholding
-Breach of warranty
-Concealment
-Leading
Concealment– concealment occurs when a person withholds a material fact that is crucial to making a decision. In insurance, this involves withholding information that would be important for making underwriting decisions.
A man is working on the roof of his house, and his neighbor is watching from the ground. When roof shingles are thrown off of the roof, they hit the neighbor in the face, injuring his eye. Which best classifies the homeowner’s legal liability?
-Bodily injury
-Personal injury
-Property damage
-Contributory negligence
Bodily injury– is the legal liability arising from physical trauma to a person or death arising from the negligent or purposeful act and omissions by an insured.
In insurance, an offer is usually made when:
-An applicant submits an application to the insurer
-The insurer approves the application and receives the initial premium
-The agent hands the policy to the policy holder
-An agent explains a policy to a potential applicant.
When an applicant submits an application to the insurer–in insurance, the offer is usually made by the applicant in the form of the application. Acceptance takes place when an insurer’s underwriter approves the application and issues a policy.
Which of the following is defined as the cost to replace damaged property with less expensive and more modern construction equipment?
-Market value
-Actual cash value
-Replacement cost
-Functional replacement cost
Functional replacement cost
Property insurance that provides $100,000 coverage for a building and $50,000 coverage for personal property at a single location is called:
-Described coverage
-Specific coverage
-Schedule coverage
-Blanket coverage
Specific coverage– one location is insured for a specific amount of insurance on the structure and contents.
A certificate of insurance is a written document that:
-Obligates the insurer to the person to whom the insurance was issued
-Shows the types and amounts of insurance issued to the insured
-Allows the insurer to inspect the insured’s books
-Names the insured’s beneficiary
Shows the types and amounts of insurance issued to the insured; it does not obligate the insurer to the person to which the certificate was issued.
Contracts that are prepared by one party and submitted to the other party on a “take it or leave it” basis are classified as:
-Unilateral contracts
-Contracts of adhesion
-Binding Contracts
-Aleatory Contracts
Contracts of adhesion–Insurance policies are written by the insurer and submitted to the insured on a “take it or leave it” basis. The insured does not have any input into the contract, but simply adheres to the contract.
What method of loss valuation is contrary to the basic concept of indemnity?
-Replacement cost
-Market value
-Agreed value
-Functional replacement cost
Replacement cost– the replacement cost method of loss valuation is contrary to the basic concept of indemnity because following a loss it may provide the insured with a settlement in excess of the property’s actual cash value.
Which of the following is a mandatory part of an insurance policy that varies with each individual policy?
-Insuring agreement
-Exclusions
-Declarations
-Conditions
Declarations– The declarations tell who, what, when, and where, this information is different in each contract.
