Fundamentals of Insurance Level One Practice Exam

Question 1

Insurance plays an important role in managing financial risk. The main purpose of Insurance is to:

Answer 1

Reduce losses through loss prevention and loss reduction.

Question 2

The definition of insurance in the Insurance Act includes all of the following, except one:

a. Payment is made only when a certain peril has damaged the object of insurance.

b. Payment is limited to the actual amount of the loss - no more and no less.

c. There is no payment for losses that are deliberately caused by an insured.

d. The Indemnity must always be in the form of a sum of money; no other method is permitted by law.

Answer 2

C. There is no payment for losses that are deliberately caused by an insured.

Question 3

The majority of insurance companies use independent brokers to sell their insurance policies to the public. Which of the following statements does NOT apply to this system of distribution?

a. Independent brokers are employees of the insurance companies they represent.

b. Independent brokers receive commissions from their insurers for the business they produce.

c. Independent brokers can represent more than one insurance company.

d. Independent brokers own all of their client files.

Answer 3

a. Independent brokers are employees of the insurance companies they represent.

Question 4

When dealing with financial risk, a person has several options available. In your opinion, which of the following is the best option for most people?

a. Avoidance of risk.
b. Retention of the risk.
c. Controlling of the risk.
d. Transfer of the risk.

Answer 4

d. Transfer of the risk.

Question 5

Risk as the “chance of financial loss” can be classified as either speculative or pure. Which of the following best describes the meaning of pure risk?

a. There is no chance of financial loss.

b. There is a chance of financial gain.

c. Financial loss and financial gain are both present.

d. There is only the chance of financial loss, with no chance of profiting from it.

Answer 5

d. There is only the chance of financial loss, with no chance of profiting from it.

Question 6

A contract is legally enforceable only when the legal elements are present. Only an insurance contract contains the following element:

a. Genuine intention.
b. Legality of the object.
c. Consideration.
d. Indemnity.

Answer 6

d. Indemnity.

Question 7

“Consideration” is required of all parties to a contract. Consideration means:

a. Thinking about purchasing insurance.

b. An agreement by the insurer to treat the insured fairly.

c. An exchange of something of value between parties.

d. A commitment by the broker to represent an insurance company.

Answer 7

c. An exchange of something of value between parties.

Question 8

Legal capacity of the parties is an important element to a contract. Only the following party has the legal capacity to enter into a contract of insurance:

a. Sweet Cravings Bakery.

b. Tools 4 U Enterprises.

c. Mario Montana Sportswear, Ltd.

d. jack Daniels a.k.a. Jacks Liquors

Answer 8

c. Mario Montana Sportswear, Ltd.

Question 9

Insurance brokers are often asked to provide a binder to the insured. A binder is:

a. When a broker has committed an insurer to a contract of insurance.

b. A cover for an insurance manual.

c. Permitted only for risks and limits authorized by the insurer.

d. Never legal when given orally.

Answer 9

c. Permitted only for risks and limits authorized by the insurer.

Question 10

All changes to an existing insurance policy must be in writing. Which document does the insurer issue when both the insurer and insured have agreed to a change in the terms of the policy?

a. A rider.
b. An endorsement.
c. A binder.
d. A floater.

Answer 10

b. An endorsement.

Question 11

In Canada, the General Insurance Industry is strictly regulated by federal and provincial statutes. The Provincial Gov’t performs all of the following functions, EXCEPT one:

a. Supervising the terms and conditions of the insurance contract.

b. Establishing the premium levels for insurance contracts.

c. Licensing insurance companies to transact business in the province.

d. Monitoring the financial stability of insurers that are not federally licensed.

Answer 11

b. Establishing the premium levels for insurance contracts.

Question 12

The financial solvency of insurers is a crucial matter. Solvency refers to:

a. Selling shares to shareholders.

b. The ability of an insurer to pay all insured losses.

c. The payment of commissions to brokers to sell the policies of the insurers.

d. Survival of the fittest.

Answer 12

b. The ability of an insurer to pay all insured losses.

Question 13

Both insurance companies and brokers are considered fiduciaries. Under The Insurance Act, the fiduciary responsibility of a broker requires that:

a. The broker must regularly remit the collected premiums to the insurers.

b. All policies no paid for within 60 days of the effective date must be terminated.

c. Unearned commissions are held in trust to be available should the policy be terminated before expiry.

d. The full amount of the commission must be held in trust until the expiry of the policy.

Answer 13

c. Unearned commissions are held in trust to be available should the policy be terminated before expiry.

Question 14

The Insurance Act determines when a contract of insurance takes effect. Coverage commences at:

a. 12:01 pm standard time at the address of the Named Insured.

b. 12:01 am std time at the address of the location of the risk.

c. 12:01 am Std time at the address of the insurer.

d. 12:01 am std time at the address of the Named Insured.

Answer 14

d. 12:01 am std time at the address of the Named Insured.

Question 15

The Removal Clause requires the insurer to extend coverage to another location where insured property is kept, even if this location is not stated on the policy. Only one of the following situations would qualify for this coverage:

a. The insured moved to a new residence 5 days ago, and has not yet advised the insurer of the new location.

b. The insured keeps furniture and fixtures in a rented storage locker because there is no more room at the principle residence.

c. The insured moved personal property to a storage facility to protect it from loss because of an encroaching forest fire.

d. The insured keeps some personal property at her seasonal dwelling, but only during summer months.

Answer 15

c. The insured moved personal property to a storage facility to protect it from loss because of an encroaching forest fire.

Question 16

When the insurer has indemnified the insured for a loss caused by a third party, the insurer has a legal right of recovery from that party. This legal process is referred to as:

a. Arbitration.
b. Restitution.
c. Subrogation.
d. Mediation.

Answer 16

c. Subrogation.

Question 17

The Insurance Act provides that a policy insuring the peril of “fire” must also include coverage for:

a. Windstorm and lightning.

b. Lightning, including damage to electrical appliances and devices.

c. Lightning and all types of explosion.

d. Explosion of natural, coal, or manufactured gas and lightning, excluding damage to electrical appliances and devices.

Answer 17

d. Explosion of natural, coal, or manufactured gas and lightning, excluding damage to electrical appliances and devices.

Question 18

Only one of the following statements regarding Statutory Condition No. 1. (Misrepresentation) is correct.

a. Any description of the property that proves to be incorrect constitutes a Misrepresentation.

b. Withholding information about previous cancellations or refusal of insurance is not a Misrepresentation.

c. Statements made by the applicant, which lead the insurer to believe that the risk is better than it actually is, are considered Misrepresentation.

d. A Misrepresentation has no effect whatsoever on the coverage under the policy even the insurer is able to prove misrepresentation.

Answer 18

c. Statements made by the applicant, which lead the insurer to believe that the risk is better than it actually is, are considered Misrepresentation.

Question 19

All of the following statement regarding the Statutory Conditions are true, except one. Pick the exception.

a. The insurer has an obligation only to those parties whose name appears on the Declarations Page, and who can prove insurable interest.

b. A “Material Change” is considered a change that alters the risk in a way that greatly increases the potential for some losses.

c. When a loss is caused directly by an unreported Material Change, the insurer has the right to deny that claim.

d. As long as the insured reports a Material Change promptly, the insurer rarely charges an additional premium.

Answer 19

d. As long as the insured reports a Material Change promptly, the insurer rarely charges an additional premium.

Question 20

Your client has requested the termination of his insurance policy. You advise your client of the provisions of Statutory Condition No. 1 (Termination). Which of the following four provisions stated below is wrong?

a. Written request for termination signed by all persons stated on the policy must be provided to the insurer.

b. Your client does not have to give the insurer any notice prior to the requested cancellation date.

c. As the insurer has the right to charge the insured administrative costs to process the cancellation, the premium refund is calculated on a short-rate basis.

d. When the insured terminated the policy, the insured is not entitled to a premium refund.

Answer 20

d. When the insured terminated the policy, the insured is not entitled to a premium refund.

Question 21

In the event of a claim, there are also a number of Statutory Conditions that affect both the insurer and the insured. One of the following statements regarding these conditions is incorrect. Select the statement that is incorrect.

a. The insured must provide the insurer with a Proof of Loss as soon as practicable.

b. In the claim, the insured included an article she did not even own, therefore, the insurer will only pay for those articles for which the insured can prove ownership.

c. When the insurer opts for a cash settlement, payment must be made to the insured within 60 days after receipt of Proof of Loss or less, if the contract provides for a shorter period.

d. If the insurer denies a claim and the insured wishes to sue the insurer, legal action must be taken within one year after the date of loss.

Answer 21

b. In the claim, the insured included an article she did not even own, therefore, the insurer will only pay for those articles for which the insured can prove ownership.

Question 22

All of the following statements apply to the Statutory Conditions, except one. Pick the Exception.

a. After a loss has been reported, the insurer has the immediate right of access and entry to the property to investigate the loss.

b. When the insurer elects to repair or rebuild the damaged property, it must be given written notice when the insured within 30 days after receipt of Proof of Loss.

c. When the insured is unable to notify the insurer of a loss and provide Proof of Loss, an agent of the insured is permitted to give notice and proof.

d. Even if the insured had a reasonable chance to protect property from loss but failed to do any such thing, this usually does not affect the claim settlement.

Answer 22

d. Even if the insured had a reasonable chance to protect property from loss but failed to do any such thing, this usually does not affect the claim settlement.

Question 23

The role of agents and brokers is to serve as an intermediary between the client and the insurer. Which of the following best reflects the duties of the broker?

a. A broker acts exclusively in the best interest of the client.

b. A broker must always place insurance with the insurer that charges the lowest premium.

c. A broker must always present the client’s risk truthfully and disclose all material facts to the insurer.

d. A broker does not owe any duty to the insurer he or she represents.

Answer 23

c. A broker must always present the client’s risk truthfully and disclose all material facts to the insurer.

Question 24

The law requires that insurance brokers exercise “reasonable skill, care and diligence” in carrying out their duties. Failure to do so can result in an Errors and Omissions claim against the broker. The main reason for Errors and Omissions claims is due to:

a. Providing the client with coverage he doesn’t need.

b. The failure to properly identify the client’s loss exposures and offering the required coverages.

c. The failure to cancel the policy when requested by the insured.

d. A violation of the Agency Agreement.

Answer 24

b. The failure to properly identify the client’s loss exposures and offering the required coverages

Question 25

An Underwriter is required to perform numerous tasks, however, the primary function of an Underwriter is to:

a. Select those risks that are most likely to be profitable to the insurer.

b. Bind coverage on all risks the insurer accepts.

c. Set the premium rates for commercial risks.

d. Process the cancellation certificates and issue premium refund cheques.

Question 26

An Underwriter is required to perform numerous tasks, however, the primary function of an Underwriter is to:

a. Select those risks that are most likely to be profitable to the insurer.

b. Bind coverage on all risks the insurer accepts.

c. Set the premium rates for commercial risks.

d. Process the cancellation certificates and issue premium refund cheques.

Answer 26

a. Select those risks that are most likely to be profitable to the insurer.

Question 27

Determining whether a risk meets the criteria for insurance, the Underwriter must assess the hazards that could cause a peril to occur. When checking into an applicant’s prior claims history or financial condition, the Underwriter is concerned about the existence of:

a. Other parties with insurable interest.

b. Abnormal physical hazards.

c. A moral hazard.

d. Smoking material on the premises.

Answer 27

c. A moral hazard.

Question 28

Property policies are designed to insure “Direct Damage” only. Two months ago, a fire caused substantial damage to an apartment building your client owns, and he was shocked when the adjuster explained that a portion of the loss would not be paid out under this policy. Which parts of the loss is not covered by the property policy?

a. Damage to the building’s roof caused by fire fighters’ axes to dampen the fire.

b. Water damage to the entire structure to halt the spread of an extinguish the fire.

c. Heat damage to the siding of the undamaged part of the building.

d. Loss of rental income from the tenants who left because the building was unsafe after the fire.

Answer 28

d. Loss of rental income from the tenants who left because the building was unsafe after the fire.

Question 29

All property policies contain conditions; insurers may also include warranties. The following provisions, except one, apply to conditions and warranties. Select the exception.

a. A conditions is a clause in a policy that requires the insured to do or not do something.

b. A warranty is a promise made by the insured that certain facts are truly as they are represented, and will remain so for the duration of the policy.

c. A breach of a condition does not result in the denial of a claim, so long as the loss was not caused by such a breach.

d. A breach of warrant by the insured has the effect that the insurer will not pay a claim when this breach directly caused the loss.

Answer 29

d. A breach of warrant by the insured has the effect that the insurer will not pay a claim when this breach directly caused the loss.

Question 30

Property policies include certain types of property. All of the following properties are generally excluded, except one. Select the Exception:

a. Money and securities.

b. A building that, to the insured’s knowledge, has been vacant for more than 15 days.

c. Automobilies and other motorized vehicles.

d. Books of account.

Answer 30

b. A building that, to the insured’s knowledge, has been vacant for more than 15 days.

Question 31

The following perils, except one, are also excluded under property policies. Select the Exception:

a. Lightning, including lightning damage to electrical devices.

b. War and nuclear Incidents.

c. Earthquake and flood.

d. Sewer backup.

Answer 31

a. Lightning, including lightning damage to electrical devices.

Question 32

Your client lost jewellery during a recent burglary and reported the loss of a matching gold necklace with pendant and earrings. However, the insured found one of the earrings under her bed, but she claimed the full set value. How will the insurer settle this loss?

a. Your client will receiive a payment based on the full value of the set.

b. Your client will be paid for the necklace and one earring, plus 10% to compensate for loss of value because the set is incomplete.

c. Your client will receive a settlement for the value, less the value of one earring.

d. Your client will receive nothing, because her claim is fraudulent.

Answer 32

c. Your client will receive a settlement for the value, less the value of one earring.

Question 33

The Indemnity Agreement describes how the amount of a loss settlement is determined. One of the following values is not a factor in arriving at the amount of the settlement. Select this value:

a. Replacement cost of the lost or damaged property, less depreciation.

b. The financial interest of the insured in the property that was lost or damaged.

c. The future investment value of the property that was lost or damaged.

d. The amount of insurance purchased on the property that was lost or damaged.

Answer 33

c. The future investment value of the property that was lost or damaged.

Question 34

A fire totally destroyed the building owned by your client, I.I. Broke. The Actual Cash Value of the building was $400,000. I.M. Broke still carries a mortgage of $200,000 on his property. The building was insured for $350,000. Based on the Indemnity Agreement, what is the amount that I.M. Broke is entitled to?

a. $400,000
b. $200,000
c. $350,000
d. $150,000

Answer 34

d. $150,000

Question 35

Actual Cash Value means:

a. The value of the property at the time it was purchased.

b. The resale value of the property.

c. Replacement cost, less the amount for the depreciation.

d. Replacement cost, less the sentimental value the insured has in the property.

Answer 35

c. Replacement cost, less the amount for the depreciation.

Question 36

The Standard Mortgage Claus contained in the property policies provides:

a. A Guarantee to the insured that the mortgage will be paid off if the insured became sick or unemployed.

b. A guarantee to the mortgagee that even if the insured breached a condition of warranty, the mortgagee’s interests will still be protected.

c. A guarantee that, if the policy is cancelled by the insured, the insurer will issue a separate policy to the mortgagee.

d. A guarantee that a payment will be made to the insured, if the mortgagee has breached a certain policy condition.

Answer 36

b. A guarantee to the mortgagee that even if the insured breached a condition of warranty, the mortgagee’s interests will still be protected.

Question 37

All Homeowners policies define the persons who are deemed to be an Insured. All of the following persons are insured, except one. Pick the Exception.

a. The insured’s common law spouse who has lived with the insured for five years.

b. The parents who are permanently living with the insured.

c. The insured’s daughter who lives in the dorm while attending university in a neighbouring province.

d. The tenant who occupies the basement suite in the insured’s dwelling.

Answer 37

d. The tenant who occupies the basement suite in the insured’s dwelling.

Question 38

In all Homeowners, the Basis of Claim Payment on dwelling building, detached private structures, and personal property is based on Replacement Cost. However, in certain circumstances, the insurer will provide settlement only on an Actual Cash Value basis. Which of the following losses will be settled on an Actual Cash Value?

a. Reconstruction at the insured location after a fire destroyed the home.

b. Replacement of the hardwood floor due to the damage from a ruptured water pipe.

c. Replacement of the insured’s antique doll house which was smashed by burglars.

d. Reconstruction of the fence which was blown over by a windstorm.

Answer 38

c. Replacement of the insured’s antique doll house which was smashed by burglars.

Question 39

The Homeowners Basic Form (IBC1151) insures loss or damage caused by Windstorm or Hail. Only one of the following losses would be covered under this peril; select the loss for which coverage is provided.

a. Damage to the exterior and interior during a severe windstorm, which had ripped off a section of the roof on the insured’s house.

b. The radio and TV antennae permanently installed on the insured’s property, collapsed during a storm.

c. Collapse of the insured’s storage shed caused by the accumulation of snow during a snowstorm with winds reaching 50 km/hr.

d. Damage to the interior of the house caused by heavy rain that entered through a window, which as left open by the insured.

Answer 39

a. Damage to the exterior and interior during a severe windstorm, which had ripped off a section of the roof on the insured’s house.

Question 40

The Homeowners Basic Form (IBC1151) provides coverage for Glass Breakage. Under this peril, all of the following losses, except one, are insured. Select the loss for which coverage is EXCLUDED under this form.

a. While practicing his golf swing in the backyard, a flying golf ball shattered a large pane of glass of the enclosed sunroom.

b. Accidental breakage occcured during a party when one of the guests stepped into the closed patio door.

c. Breakage of the glass table top which slipped out of the helper’s hands during the move to the insured’s new residence.

d. Breakage from the large picture window at the front of the insured’s house caused by a rock thrown up by the wheels of a passing vehicle.

Answer 40

c. Breakage of the glass table top which slipped out of the helper’s hands during the move to the insured’s new residence.

Question 41

Although the Homeowners Comprehension Form (IBC 1155) insures on the basis of “all risks of direct physical loss or damage”, coverage is subject to conditions and exclusions. All of the following losses, except one, are excluded. Select the loss which is covered by this form.

a. Damage to the roof caused by raccoons, which tried to get into the attic.

b. Crack in the foundation wall due to settling of the ground over time.

c. Wear and tear of the furniture upholstery due to continuous use.

d. Smoke damage to family room from fireplace.

Answer 41

d. Smoke damage to family room from fireplace.