Chapter 1 - General Insurance Flashcards
What are characteristics of an insurable risk?
The loss exposure must be large, the loss must be due to chance, the loss must be measurable.
A producer who fails to segregate premium monies from his own personal funds is guilty of…
Commingling
Events in which a person has both the chance of winning or losing are classified as…
Speculative risk
What must an insurer obtain in order to transact insurance within a given state?
Certificate of authority
What is not true regarding insurable risks?
Insureds cannot be randomly selected.
An individual applies for a life policy. Two years ago he suffered a head injury from an accident, so he cannot remember parts of his past, but is otherwise competent. He has also been hospitalized for drug abuse, but does not remember this when applying for insurance. The insurer issued the policy and learns of his history one year later. What will probably happen?
The policy will not be affected.
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 paid.
The insurer may suspect that a moral hazard exists if the policyholder…
Is not honest about his health on an application for insurance.
What is a foreign insurer?
An insurer with a home office in another state
Hazard is best defined as…
Something that increases the risk of loss
What is considered to be a morale hazard?
Driving recklessly
A situation in which a person can only lose or have no change represents…
Pure risk
Pertaining to insurance, what is the definition of a fiduciary responsibility?
Promptly forwarding premiums to the insurance company
In insurance, an offer is usually made when…
The completed application is submitted
What is a statement that is guaranteed to be true, and if untrue, may breach an insurance contract?
Warranty
An insurer neglects to pay a legitimate claim that is covered under the terms of the policy. Which insurance principles has the insurer violated?
Consideration, which is the binding force in any contract.
The insurer must be able to rely on the statements in the application, and the insured must be able to rely on the insurer to pay valid claims. In the forming of an insurance contract, this is referred to as…
Utmost good faith.
Peril is most easily defined as…
The cause of loss insured against
The causes of loss insured against in an insurance policy are known as…
Perils
An insured intentionally did not disclose a material fact on an application or insurance. This would be considered…
Concealment
If an insurance company is domicile in Montana and transacts insurance in Wyoming, which term best describes the insurer’s classification in Wyoming?
Foreign
What is the major difference between a stock company and a mutual company?
Ownership
In what way can an agent demonstrate a high standard of ethics?
Putting the client’s best interests before their own
What is the basis for a claim against an insurance policy?
Loss
What is a foreign insurer?
An insurer with a home office in another state
The requirement that agents not commingle insurance monies with their own funds is known as…
Fiduciary responsibility
What is material misrepresentation?
A statement by the applicant that, upon discovery, would affect the underwriting decision of the insurance company
A participating insurance policy may…
Pay dividends to the policyowner
What is an example of apparent authority of an agent appointed by an insurer?
The agent accepts a premium payment after the end of the grace period.
A person who does not lock the doors or does not repair leaks shows an indifferent attitude. This person presents what type of hazard?
Morale
The reduction, decrease, or disappearance of value of the person or property insured in a policy by a peril insured against is known as…
Loss
When applying for an individual life insurance policy, an applicant states that he went to the doctor for nausea, but fails to mention that he was also having severe chest pains. This is an example of…
Concealment
When an insured makes truthful statements on the application for insurance and pays the required premium, it is known as…
Consideration
Insurance
Transferring risk of loss from an individual or business entity to an insurance company
Risk
The uncertainty or chance of a loss occurring
Pure Risk
Refers to situations that can only result in a loss or no change; the only type of risk insurance companies are willing to accept
Speculative Risk
Involves the opportunity for loss or gain
Hazard
Conditions or situations that increase the probability of an insured loss occurring
Physical Hazard
Characteristics that increase the chances of the cause of loss; things you can see
Moral Hazard
Tendencies towards increased risk; Applicants who may lie on an application; Things that you do
Morale Hazard
Arise from a state of mind that causes indifference to loss, such as carelessness; things you don’t do
Peril
The causes of loss insured against in an insurance policy
Loss
Defined as the reduction, decrease, or disappearance of value of the person or property
Methods of handling risk
STARR: Sharing, Transfer, Avoidance, Retention, Reduction
Avoidance
Eliminate exposure to loss
Retention
Use of deductibles, copayments, or self-insurance
Sharing
Dealing with risk for a group of individual persons or businesses with the same or similar exposure to loss to share the losses
Reduction
Attempt to lessen the possibility or severity of a loss
Transfer
The loss borne by another party through harmless agreements and other contractual agreements
Insurable risks
Due to chance (outside the insured’s control); Definite and measurable (cause, time, place, amount); Statistically predictable (able to estimate the average frequency and severity of future losses); Not catastrophic (loss will not exceed certain limits); Randomly selected/large loss exposure
Stock companies
Nonparticipating policies; owned by stockholders; don’t pay dividends
Mutual companies
Has no stock; owned and controlled by policyholders; surplus money returned as dividends which are nontaxable
Domestic Insurer
Incorporated in the same state
Foreign Insurer
Incorporated in another state or territorial possession
Alien insurer
Incorporated outside the United States
Express Authority
Authority granted to an agent by means of the contract; written in the contract
Implied authority
Not expressed or written into the contract, but agent is assumed to have this authority to transact business
Apparent Authority
The appearance or the assumption of authority because of circumstances created by principal
Consideration
Something of value each party gives to the other. Insured - premium. Insurer - promise to pay in the event of loss.
Indemnity
Reimbursement; restore but not let an insured or beneficiary profit from loss
Utmost good faith
Implies that there will be no fraud, no misrepresentation or concealment between the parties
Representations
Statements believed to be true to the best of one’s knowledge
Misrepresentations
Untrue statements that could void the contract
Material misrepresentation
Statement that could alter the underwriting decision of the insurance company; if it is intentional, it is considered fraud
Breach of Warranty
Grounds for voiding policy or returning premium
Concealment
Intentional withholding of information
Fraud
Intentional misrepresentation or intentional concealment of a material fact
