Chapter 2: Key Terms

Question 1

Actual Cash Value

Answer 1

Represent the depreciated value of the property

Question 2

Adhesion

Answer 2

A take it of leave it contract

Question 3

Adverse Selection

Answer 3

The tendency of those that most need insurance to seek it out

Question 4

Agents

Answer 4

Legal representatives of an insurer and acts on behalf of that insurer

Question 5

Aleatory

Answer 5

A type of insurance contract in which the dollar amounts exchanged are uneven

Question 6

Apparent Authority

Answer 6

When the third party believes implied or express authority exists, but no authority actually exists

Question 7

Appraised/Agreed Upon Value

Answer 7

Used for hard to value items and where the insured may own property that exceeds standard limits of a property insurance policy

Question 8

Brokers

Answer 8

Legal representatives of an insured and can act in the interest of the insured

Question 9

Coinsurance

Answer 9

The percentage of financial responsibility that the insured and the insurer must uphold in order to achieve equity in rating

Question 10

Concealment

Answer 10

When the insured is intentionally silent regarding a material fact during the application process

Question 11

Conditional

Answer 11

The insured must abide by all the terms and conditions of the contract, if the insured intends to collect under the policy

Question 12

Copayment

Answer 12

A loss-sharing arrangement whereby the insured pays a percentage of the loss in excess of the deductible

Question 13

Declarations Section

Answer 13

The section of an insurance policy that describes exactly what property is being covered

Question 14

Deductible

Answer 14

A specified amount of money the insured is required to pay on a loss before the insurer will make any payment under the policy

Question 15

Definition Section

Answer 15

The section of an insurance policy that defines key words, phrases, or terms used through the insurance contract

Question 16

Description Section

Answer 16

The section of an insurance policy that describes exactly what is being insured

Question 17

Endorsement

Answer 17

A modification of change to the existing property insurance policy

Question 18

Estoppel

Answer 18

The legal process of denying a right you might otherwise be entitled to under the law

Question 19

Exclusion Section

Answer 19

The section of an insurance policy that will exclude certain perils, losses, and property

Question 20

Express Authority

Answer 20

Authority given to an agent through a formal written document

Question 21

Financial Risk

Answer 21

A loss of financial value, such as the premature death of a family’s primary wage earner

Question 22

Fundamental Risk

Answer 22

A risk that can impact a large number of individuals at one time (earthquake, flood, hurricane, etc.)

Question 23

Hazards

Answer 23

A specific condition that increases the potential or likelihood of a loss occurring

Question 24

Implied Authority

Answer 24

The authority that a third party relies upon when dealing with an agent based upon the position held by the agent

Question 25

Lacking Sound Mind

Answer 25

The state of not having the capacity to understand the purpose and terms of the contract, therefore the contract lacks a meeting of the minds or mutual consent

Question 26

Law of Large Numbers

Answer 26

A principle that states the more similar events/exposures, the more likely the actual results will equal the probability expected

Question 27

Minors

Answer 27

In most states, a minor is under the age of 18. If a minor enters into a contract, the minor can void the contract at any time

Question 28

Moral Hazard

Answer 28

The potential loss occurring because of the moral character of the insured, and the filing of a claim with their insurance company

Question 29

Mutual Consent

Answer 29

Common understanding and agreement between parties to a contract regarding what the contract covers and the terms of the contract

Question 30

Non-Financial Risk

Answer 30

A risk that would result in a loss, other than a monetary loss

Question 31

Objective Risk

Answer 31

The variation of actual amount of losses that occur over a period of time compared to the expected amount of losses

Question 32

Offer and Acceptance

Answer 32

Consists of one party making an offer to purchase a good/service, and the acceptance is when consideration is received

Question 33

Out-of-Pocket Maximum

Answer 33

The sum of the deductible, the insured's portion of coinsurance, and generally any copayments made by the insured

Question 34

Parol Evidence Rule

Answer 34

States that "what is written prevails." Oral agreements that are not reflected in the written contract are not valid

Question 35

Particular Risk

Answer 35

A risk that can impact a particular individual, such a death or the inability to work because of a sickness or accident

Question 36

Perils

Answer 36

The immediate cause and reason for a loss occurring

Question 37

Physical Hazard

Answer 37

A physical condition that increases the likelihood of a loss occurring

Question 38

Principle of Indemnity

Answer 38

Asserts that an insurer will only compensate the insured to the extent the insured has suffered actual financial loss

Question 39

Principle of Insurable Interest

Answer 39

Asserts that an insured must suffer a financial loss if a covered peril occurs, otherwise no insurance can be offered

Question 40

Pure Risk

Answer 40

The chance of loss or no loss occurring

Question 41

Reinsurance

Answer 41

A means by which an insurance company transfers some or all of its risk to another insurance company

Question 42

Replacement Cost

Answer 42

Represents the amount to repair or replace property, without any deduction for depreciation

Question 43

Representation

Answer 43

A statement made by the applicant during the insurance application process

Question 44

Rider

Answer 44

A modification or change to a life or health insurance policy

Question 45

Risk

Answer 45

The chance of loss, uncertainty associated with loss, or the possibility of a loss

Question 46

Risk Avoidance

Answer 46

A risk management technique used for any risks that are high in frequency and high in severity

Question 47

Risk Reduction

Answer 47

The process of reducing the likelihood of a pure risk that is high in frequency and low in severity

Question 48

Risk Retention

Answer 48

Accepting some or all of the potential loss exposure for risks that are low in frequency and low in severity

Question 49

Risk Transfer

Answer 49

The process of transferring a low frequency and high severity risk to a third party, such as an insurance company

Question 50

Speculative Risk

Answer 50

The chance of loss, no loss, or a profit

Question 51

Subjective Risk

Answer 51

The risk an individual perceives based on their prior experiences and the severity of those experiences

Question 52

Subrogation Clause

Answer 52

A clause in an insurance policy that requires that the insured relinquish a claim against a negligent third party, if the insurer has already indemnified the insured

Question 53

Underwriting

Answer 53

The process of classifying applicants into risk pools, selecting insureds, and assigning a premium

Question 54

Unilateral

Answer 54

There is only one promise made. In the case of an insurance contract, it's made by the insurer to pay in the event of a loss

Question 55

Waiver

Answer 55

The relinquishment of a known legal right

Question 56

Warranty

Answer 56

A promise made by the insured that is part of the insurance contract