Chapter 2: Insurance Contracts

Question 1

3 major categories of risk

Answer 1

1. personal risk
2. property risk
3. liability risk

Question 2

4 options dealing with risk

Answer 2

1. Avoidance: totally eliminate all chance of loss (not practical)
2. Controlling: reducing frequency and severity of loss (can’t control everything)
3. Retention: paying for losses yourself (not practical for most people)
4. Transfer: shift the financial burden to someone else (most practical)

Question 3

2 types of financial risk

Answer 3

1. speculative risk: chance of gain or loss (ie. stock investing)
2. pure risk: can only lose (the only risk that is insurable)

Question 4

Define contract

Answer 4

agreement between 2 or more parties to do or not do something

Question 5

5 elements in ALL contracts

Answer 5

1. agreement: offer + acceptance
2. consideration: all parties contribute something of value
3. legality of object: purpose of the contract is legal
4. legal capacity of the parties: all parties have equal understanding of the obligations undertaken
5. genuine intentions: all parties exercise free will and are aware of all terms

Question 6

3 special elements to insurance contracts

Answer 6

1. insurable interest: basis of entitlement (only those who actually suffer loss are entitled to benefit)
2. utmost good faith: requires exact compliance with condition and both parties must be honest
3. indemnity: actual amount of loss ONLY

Question 7

Meaning of “Binder”

Answer 7

interim contract of insurance (when a broker commits the insurer to an insurance contract)

Question 8

3 types insurers use to make changes to an existing policy

Answer 8

1. endorsement: issued by insurer to show a change has been made
2. rider: adds coverage
3. floater: insures mobile property