Chapter 1 - General Insurance

Question 1

What are characteristics of an insurable risk?

Answer 1

The loss exposure must be large, the loss must be due to chance, the loss must be measurable.

Question 2

A producer who fails to segregate premium monies from his own personal funds is guilty of…

Answer 2

Commingling

Question 3

Events in which a person has both the chance of winning or losing are classified as…

Answer 3

Speculative risk

Question 4

What must an insurer obtain in order to transact insurance within a given state?

Answer 4

Certificate of authority

Question 5

What is not true regarding insurable risks?

Answer 5

Insureds cannot be randomly selected.

Question 6

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?

Answer 6

The policy will not be affected.

Question 7

On a participating insurance policy issued by a mutual insurance company, dividends paid to policyholders are…

Answer 7

Not taxable since the IRS treats them as a return of a portion of the premium paid.

Question 8

The insurer may suspect that a moral hazard exists if the policyholder…

Answer 8

Is not honest about his health on an application for insurance.

Question 9

What is a foreign insurer?

Answer 9

An insurer with a home office in another state

Question 10

Hazard is best defined as…

Answer 10

Something that increases the risk of loss

Question 11

What is considered to be a morale hazard?

Answer 11

Driving recklessly

Question 12

A situation in which a person can only lose or have no change represents…

Answer 12

Pure risk

Question 13

Pertaining to insurance, what is the definition of a fiduciary responsibility?

Answer 13

Promptly forwarding premiums to the insurance company

Question 14

In insurance, an offer is usually made when…

Answer 14

The completed application is submitted

Question 15

What is a statement that is guaranteed to be true, and if untrue, may breach an insurance contract?

Answer 15

Warranty

Question 16

An insurer neglects to pay a legitimate claim that is covered under the terms of the policy. Which insurance principles has the insurer violated?

Answer 16

Consideration, which is the binding force in any contract.

Question 17

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…

Answer 17

Utmost good faith.

Question 18

Peril is most easily defined as…

Answer 18

The cause of loss insured against

Question 19

The causes of loss insured against in an insurance policy are known as…

Answer 19

Perils

Question 20

An insured intentionally did not disclose a material fact on an application or insurance. This would be considered…

Answer 20

Concealment

Question 21

If an insurance company is domicile in Montana and transacts insurance in Wyoming, which term best describes the insurer’s classification in Wyoming?

Answer 21

Foreign

Question 22

What is the major difference between a stock company and a mutual company?

Answer 22

Ownership

Question 23

In what way can an agent demonstrate a high standard of ethics?

Answer 23

Putting the client’s best interests before their own

Question 24

What is the basis for a claim against an insurance policy?

Answer 24

Loss

Question 25

What is a foreign insurer?

Answer 25

An insurer with a home office in another state

Question 26

The requirement that agents not commingle insurance monies with their own funds is known as...

Answer 26

Fiduciary responsibility

Question 27

What is material misrepresentation?

Answer 27

A statement by the applicant that, upon discovery, would affect the underwriting decision of the insurance company

Question 28

A participating insurance policy may...

Answer 28

Pay dividends to the policyowner

Question 29

What is an example of apparent authority of an agent appointed by an insurer?

Answer 29

The agent accepts a premium payment after the end of the grace period.

Question 30

A person who does not lock the doors or does not repair leaks shows an indifferent attitude. This person presents what type of hazard?

Answer 30

Morale

Question 31

The reduction, decrease, or disappearance of value of the person or property insured in a policy by a peril insured against is known as...

Answer 31

Loss

Question 32

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...

Answer 32

Concealment

Question 33

When an insured makes truthful statements on the application for insurance and pays the required premium, it is known as...

Answer 33

Consideration

Question 34

Insurance

Answer 34

Transferring risk of loss from an individual or business entity to an insurance company

Question 35

Risk

Answer 35

The uncertainty or chance of a loss occurring

Question 36

Pure Risk

Answer 36

Refers to situations that can only result in a loss or no change; the only type of risk insurance companies are willing to accept

Question 37

Speculative Risk

Answer 37

Involves the opportunity for loss or gain

Question 38

Hazard

Answer 38

Conditions or situations that increase the probability of an insured loss occurring

Question 39

Physical Hazard

Answer 39

Characteristics that increase the chances of the cause of loss; things you can see

Question 40

Moral Hazard

Answer 40

Tendencies towards increased risk; Applicants who may lie on an application; Things that you do

Question 41

Morale Hazard

Answer 41

Arise from a state of mind that causes indifference to loss, such as carelessness; things you don't do

Question 42

Peril

Answer 42

The causes of loss insured against in an insurance policy

Question 43

Loss

Answer 43

Defined as the reduction, decrease, or disappearance of value of the person or property

Question 44

Methods of handling risk

Answer 44

STARR: Sharing, Transfer, Avoidance, Retention, Reduction

Question 45

Avoidance

Answer 45

Eliminate exposure to loss

Question 46

Retention

Answer 46

Use of deductibles, copayments, or self-insurance

Question 47

Sharing

Answer 47

Dealing with risk for a group of individual persons or businesses with the same or similar exposure to loss to share the losses

Question 48

Reduction

Answer 48

Attempt to lessen the possibility or severity of a loss

Question 49

Transfer

Answer 49

The loss borne by another party through harmless agreements and other contractual agreements

Question 50

Insurable risks

Answer 50

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

Question 51

Stock companies

Answer 51

Nonparticipating policies; owned by stockholders; don't pay dividends

Question 52

Mutual companies

Answer 52

Has no stock; owned and controlled by policyholders; surplus money returned as dividends which are nontaxable

Question 53

Domestic Insurer

Answer 53

Incorporated in the same state

Question 54

Foreign Insurer

Answer 54

Incorporated in another state or territorial possession

Question 55

Alien insurer

Answer 55

Incorporated outside the United States

Question 56

Express Authority

Answer 56

Authority granted to an agent by means of the contract; written in the contract

Question 57

Implied authority

Answer 57

Not expressed or written into the contract, but agent is assumed to have this authority to transact business

Question 58

Apparent Authority

Answer 58

The appearance or the assumption of authority because of circumstances created by principal

Question 59

Consideration

Answer 59

Something of value each party gives to the other. Insured - premium. Insurer - promise to pay in the event of loss.

Question 60

Indemnity

Answer 60

Reimbursement; restore but not let an insured or beneficiary profit from loss

Question 61

Utmost good faith

Answer 61

Implies that there will be no fraud, no misrepresentation or concealment between the parties

Question 62

Representations

Answer 62

Statements believed to be true to the best of one's knowledge

Question 63

Misrepresentations

Answer 63

Untrue statements that could void the contract

Question 64

Material misrepresentation

Answer 64

Statement that could alter the underwriting decision of the insurance company; if it is intentional, it is considered fraud

Question 65

Breach of Warranty

Answer 65

Grounds for voiding policy or returning premium

Question 66

Concealment

Answer 66

Intentional withholding of information

Question 67

Fraud

Answer 67

Intentional misrepresentation or intentional concealment of a material fact