Chapter 1, Section 1

Question 1

Define “risk” in pure insurance terms.

Answer 1

The chance of financial loss to which an object of insurance is exposed

Question 2

Three catagories of risk generally faced by people:

Answer 2

Personal Risk
Property Risk
Liability Risk

Question 3

4 options people can choose to deal with risk

Answer 3

• Avoidance of Risk
• Controlling of Risk
• Retention of Risk
• Transfer of Risk

Question 4

Explain Avoidance of Risk

Answer 4

All chance of financial loss has been eliminated. Can also mean “not doing something” - no chance of loss
Ex: people who choose to rent rather than buy
(Rent rather than buy)

Question 5

Explain Controlling of Risk

Answer 5

Taking measures to reduce the frequency and severity of losses.
Ex: Installing intrusion detection alarms in a building
(Loss Control)

Question 6

Explain Retention of Risk

Answer 6

Most people normally retain a portion of their risk by way of insurance policy deductibles. In other cases, people may choose to purchase insurance for certain types of losses while retaining others for themselves.
Ex: A person might choose to purchase insurance covering losses to all property excluding glass breakage
(Self Insurance or Share Risk through deductibles)

Question 7

Explain Transfer of Risk

Answer 7

Persons unable to withstand the financial consequences of a potential loss look to transfer all, or a portion of their risk. In exchange for a premium, insurance companies normally agree to assume the financial responsibility of persons for their losses.
Ex: Insurance companies provide people with the ability to contribute to a fund where the major function is to “spread the losses of the few among the many”
(Purchase insurance)

Question 8

Two examples of loss control measures to reduce frequency/severity of losses:

Answer 8

• Installing intrusion detection alarms in a building

- Installing fire detection alarms in a building

Question 9

Two reasons why Loss Control measures are not a total solution to eliminating financial loss:

Answer 9

• Equipment will not work 100% of the time

- Certain types of losses such as wind, hail and lightning cannot be effectively controlled

Question 10

Which of the 4 options are not an effective means of dealing with risk?

Answer 10

Avoidance of Risk

Question 11

Which of the 4 options is the most popular and practical means of dealing with risk?

Answer 11

Transfer of Risk

Question 12

Explain speculative risk, using an example

Answer 12

Involves the possibility of either financial loss or gain. When people speculate, there’s always a chance that the venture will fail. The interests of society would not be served if people were able to profit from the failure of such ventures
Ex: Placing a bet in Black Jack or investing in a business

Question 13

Explain pure risk using an example

Answer 13

The chance of financial loss which does not, at the same time, offer a chance of financial gain. Only pure risk is insurable.
Ex: A car in a car accident

Question 14

What is a contract?

What are the 5 elements of a contract?

Answer 14

Contract is an agreement between two or more persons which creates an obligation to do or not to do a particular thing.

Agreement
Consideration
Legality of Object
Legal Capacity of the Parties to Contract
Genuine Intention

Question 15

Agreement

Answer 15

A meeting of the minds as to the subject matter and terms of the contract. There must be:

• An offer made
• An unequivocal and unconditional acceptance of the terms of that offer

Question 16

Consideration

Answer 16

An exchange of something of value between the parties

Question 17

Legality of Object

Answer 17

A contract intended for a purpose which is contrary to public policy is not enforceable at law

Question 18

Legal Capacity of the Parties to Contract

Answer 18

The law will enforce only those contracts of persons it recognizes as competent or having the legal capacity to contract. Persons who do not have the legal capacity to contract are called incompetents and are protected in law from exploitation. Such persons include:
Minors, Mental Incompetents, Persons Under the Influence of Alcohol or Drugs, Trade Names

Question 19

Genuine Intention

Answer 19

A contract is enforceable only when it can be shown that the parties actually intended to enter into a contract. To prove genuine intention it’s necessary to show that the agreement between the parties was not affected by:
Fraud, Duress, Concealment, Mistake

Question 20

Two items that are required for a proper agreement, or meeting of the minds, to be valid.
Is it necessary that these items be put in writing?

Answer 20

• An offer made
• An unequivocal and unconditional acceptance of the terms of that offer

No they do not have to be in writing

Question 21

What obligation and/or time restraint is upon the application for insurance when a policy is issued differently than requested?

Answer 21

Orally - there is no obligation to accept a policy which is different from that requested. However, applicants should be advised if they fail to promptly return the policy to the insurer, the courts may rule they have accepted it

Written - policy provided to the applicant must be in accordance with written application, unless the insurer indicates differences in writing. Applicants are entitled to reject such a policy within two weeks of receiving the written notification from the insurer. Accepted if not returned in that period.

Question 22

Identify 4 persons/incompetents who generally do not have the legal capacity to contract:

Answer 22

• Minors
• Mental Incompetents
• Persons Under the Influence of Alcohol or Drugs
• Trade Names

Question 23

Identify three “necessities” of life for which Minors are permitted to contract

Answer 23

• Food
• Clothing
• Lodging

Question 24

Identify four items that might affect the presence of genuine intention

Answer 24

• Fraud
• Duress
• Concealment
• Mistake

Question 25

The majority of contracts contain the 5 elements, an insurance contract is enforceable if it contains 3 additional elements, they are:

Answer 25

• Insurable Interest
• Utmost Good Faith
• Indemnity

Question 26

Insurable Interest

Answer 26

People have insurable interest in the subject matter of an insurance contract when they are able to show they would suffer financially by a loss.

Question 27

Utmost Good Faith

Answer 27

The law requires insurance contracts to maintain a higher standard of honesty than is needed of other contracts. The complete honesty of the parties is viewed as critical to the contract.
When utmost good faith is breached by one party, the other party can challenge the enforceability of the contract.

Question 28

Indemnity

Answer 28

Ensures that people receive the actual amount of their loss, no more and no less.

Question 29

Identiy 4 persons who might have insurable interest in a contract of insurance:

Answer 29

• Owners of property, including their business partners
• Mortgagee
• Bailees to whom property is entrusted for repair, service or safekeeping
• Any person who may be held legally responsible to a third party for bodily injury or property damage

Question 30

At what point in time is the true measure of indemnity determined?

Answer 30

By the value of the insured property as it existed immediately prior to the loss.

Question 31

Explain the difference between a void contract and a voidable contract.

Answer 31

A void contract is one which is unable in law to support the purpose for which it was intended, “never have existed”
A voidable contract is one which is void as to the wrongdoer but not void as to the wronged party, unless he elects to so treat it

Question 32

What does it mean when an insurance broker issues a binder?

Answer 32

Issuing a temporary agreement where the insurer agrees to provide certain coverages pending the issuance of the policy

Question 33

Binders may be oral or written, as a general rule what should brokers do when they give an oral binder and why?

Answer 33

They should write it down immediately to avoid the potential for disagreement as to coverages and amounts insured in the event of a loss occurring before the policy has been issued

Question 34

List two places where a broker might find the limits of their binding authority

Answer 34

• Agency Agreement

- Insurer’s Rate Manual

Question 35

The purpose of insurance is to respond to losses which are both accidental and future. Explain what is meant by this statement.

Answer 35

Insurance will cover accidental and future losses, but will not cover anything that has already occurred prior to the policy or that was deliberate.
Intended to indemnify insured’s for losses to which the object of insurance may be exposed

Question 36

Define peril

Answer 36

The cause of the loss

Question 37

List three examples of a direct loss

Answer 37

• Fire, Smoke
• Lightning
• Falling Objects
  Other identified perils

Question 38

List three examples of indirect loss

Answer 38

• Loss of food in freezer when electrical motor malfunctions
• Loss of rental income from an apartment building after fire totally destroys the building
• Loss to profits to the business after a winstorm levels the building

Question 39

Property policies contain a description of method(s) used to determine the amount of indemnity to be paid in the event of an insured loss. Identify the three factors to be considered when determining the amount to be paid to the insured.

Answer 39

• The actual cash value (ACV) of the property at the time of the loss, destruction or damage
• The interest of the insured in the property
• The limit of insurance provided by this policy in respect of the property lost, destroyed or damaged

Question 40

Which one of the three methods (to determine the amount of indemnity) will be paid to the insured?

Answer 40

The least of:
Actual Cash Value
Insurable Interest
The Limit of Insurance

Question 41

Define “Actual Cash Value”

Answer 41

The new or replacement cost of the property at the time of the loss, less depreciation

Question 42

Identify three factors to be considered when calculating deprecation

Answer 42

Condition of Object(s)
Resale Value
Normal Life Expectancy

Question 43

What is meant by Replacement Cost

Answer 43

The cost to repair or replace the lost or damaged property with new property of like kind and quality without deduction for depreciation

Question 44

In your own words and by use of an example, explain to a potential client the difference between Actual Cash Value and Replacement Cost

Answer 44

Actual Cash Value is the new or replacement cost at the time of loss, less depreciation.
Ex: House worth $235,000, cost to rebuild is $285,000. Insurance won’t pay the $50,000 difference
Replacement Cost provides for repair or replacement with new property of like and kind quality without deduction for depreciation.
Ex: $235,000 home, fire destroys is, home is re-built to same size and quality even if the cost to rebuild was $285,000. Insurance will pay the $50,000 difference.

Question 45

Explain what is meant by valued basis and give two examples of property that may be insured on a valued basis.

Answer 45

Both the insured and the insurer will agree at the time the policy is issued as to the cash value of the property. In the event of a loss the agreed amount would be paid.
Ex: Old jewelry and Antiques