General Insurance Flashcards
Joan, an underwriter with Happy Valley Mutual, makes great efforts to avoid adverse selection in deciding which risks to insure. Which of the following is an example of adverse selection?
Refusing to insure a commercial applicant that had five burglary losses in the past year.
Adverse selection is the tendency of persons or businesses more likely to have a claim to buy and keep insurance. These people are selecting against the insurance company. For example, a person with a high-performance car and a bad driving record is especially likely to recognize the need for auto insurance, but an insurer might be reluctant to provide it.
Harold’s property insurance policy is a contract of indemnity because
The benefit payable is related to the amount of loss.
Mr. Davidson has chosen to assume personally the risks associated with automobile ownership. If his car sustains a loss, Mr. Davidson will pay for the damages and injuries himself. What method of handling risk has he chosen?
Retention Risk retention is the ‘do nothing’ option. Rather than avoiding, controlling, sharing, or transferring risk, a person becomes personally responsible for the consequences of risk.
What term is used to describe a peril such as a fire or explosion?
Cause of loss A cause of loss is another term for peril. Examples of perils include fire, explosion, windstorm, flood, and collision.
Underwriters know that as the number of units of exposure increases, prediction becomes more accurate. This basic insurance principle is known as
Law of large numbers. The law of large numbers, as applied to insurance, means that the larger the number of exposure units independently exposed to loss, the greater the probability that actual loss experience will equal expected loss experience.
Ed, a prospect for property insurance, completes the insurance application with the help of Michael, an agent. Ed gives Michael a check for the six month premium. The application and premium payment are sent to the insurance company, which deposits the premium. Has a legal contract formed?
Yes, Ed made an offer that the insurer accepted.
By completing the application and submitting a premium payment, Ed offered to enter into an insurance contract. When the insurer accepted the application, the insurer accepted the offer. Then a binding agreement existed.
Kent stated on his application for property insurance that the roof of the building being insured had been recently replaced. In fact, the replacement occurred 12 years ago. Kent made a false statement of a material fact, which is also known as a(n)
Misrepresentation A misrepresentation is a false statement of a material fact that was made knowingly. A material fact is information that would affect an insurer’s decision to underwrite or settle a claim.
Randy goes to Main Street Insurance Company to buy a homeowner’s policy. He observes that he cannot negotiate the terms with the insurer, which presented the policy to him on a take-it-or-leave-it basis. This type of contract is considered a(n)
Contract of adhesion. A contract of adhesion is drafted by one party and offered on a take-it-or-leave-it basis. The other party has no opportunity to negotiate its terms, price, or other elements. The party must adhere to its provisions as presented.
When an insurance contract is formed, only the insurer makes a legally enforceable promise to pay covered claims. After the premium is paid and the policy is in force, the policyholder has no further promises to keep. What characteristic of insurance contracts is described?
They are unilateral.
An insurance contract is a unilateral contract in that only the insurer makes a legally enforceable promise which is to pay covered claims, that is, after the premium is paid and the policy is in force. The insured must continue to pay premiums to keep the policy in force, but is not obligated to continue to do so.
Edwin has decided not to retain the risk of home ownership himself. What method of risk does he choose when he purchases homeowners insurance?
When insurance is purchased, the risk of loss is transferred from the insured to the insurance company in exchange for a premium payment.
Which of the following statements BEST describes the transfer of risk via an insurance contract?
Not all risks are transferrable via insurance contracts
Not all risks are insurable. Before an insurer agrees to accept risk transfer, it must determine if the risk is eligible.
Ajax Manufacturing Company bought a $1 million building property policy for a premium of $2,500. Two months after the policy went into effect, the building was destroyed by a tornado. For the consideration of a $2,500 premium, the insured will receive $1 million. Clearly, the insured is receiving a benefit that is out of proportion to the consideration it gave in its premium payment. This type of contract is considered a(n)
Aleatory Contract.
An insurance policy is aleatory in that one party may receive a benefit that is out of proportion to the consideration he or she paid for it. Receiving the disproportionately large benefit, however, depends on whether a chance event occurs. That element of uncertainty is essential to an aleatory contract.
Mr. Underwood gave his agent a down payment for the purchase of a business insurance policy. The insurance company issued a policy that promises to pay Mr. Underwood under terms and conditions stated in the policy. What specific term is used to refer to Mr. Underwood’s payment and the insurance company’s promise to pay?
Consideration Insurance contracts involve considerations by both parties to the contract. The insured’s consideration is the premiums paid and the insurer’s consideration is the promise to pay claims.
What term is used when a loss victim is financially restored up to the amount of his or her loss?
Indemnity financially restores the victim of a loss up to the amount of the loss. The fundamental goal of insurance is to indemnify policyholders against covered losses or, in other words, to restore them to the same financial position they were in before the loss occurred.
Which of the following would be considered an indirect loss?
An indirect loss is a more remote loss than a direct loss. It is a loss that results from direct damage to property, such as additional living expenses or a business interruption due to a fire.
