Insurance Concepts and Principals

Question 1

A social device for spreading the chance of financial loss among a large number of people?

Answer 1

Insurance

Question 2

Combining a large number of Homogenous units, the insurer is able to make predictions of possible loss.

Answer 2

The Law of Large Numbers

Question 3

The process of selecting certain tupes of risks that have historically produced a profit and rejecting those risks that do not fit the criteria of the insurer.

Answer 3

Underwriting

Question 4

Filed with the states based on loss ratios of the various classes of risks. Many components are involved with rate filing.

Answer 4

Insurers Rates

Question 5

Describes insurance that pays the insured for loss of property that is named in an insurance policy.

Answer 5

Property Insurance

Question 6

Insurance that pays a third party for a claim caused by the negligence of the insured.

Answer 6

Liability Insurance

Question 7

Includes the identity and address of the named insured, the policy term or period, the amount of insurance or limits of liability, the policy premium, and any applicable deductibles.

Answer 7

Declarations

Question 8

Describes the covered perils, or risks assumed, or nature of coverage, or makes some reference to the contractual agreement between insurer and insured.

Answer 8

Insuring Agreement

Question 9

Sets provisions, rules of conduct, duties, and obligations for the parties. A number of common insurance conditions describe such things as the policy period and territory, the insured’s obligation to provide proof of loss, how settlements are handled when other insurance is involved.

Answer 9

Conditions

Question 10

Describe property, perils, hazards, or losses arising from specific causes that are not covered by the policy.

Answer 10

Exclusions

Question 11

Defines important terms used in the policy language.

Answer 11

Definitions

Question 12

These may alter the content of the declarations and insuring agreement, and they may contain conditions, exclusions, and definitions.

Answer 12

Endorsements

Question 13

Forms that have been filed by Insurance Services Office, Inc. (ISO) to the individual insurance departments for approval.

Answer 13

Standardized Policies

Question 14

A potential cause of loss.

Answer 14

Peril

Question 15

Anything that increases the seriousness of a loss or increases the likelihood that a loss will occur.

Answer 15

Hazard

Question 16

A loss that is a direct consequence of a particular peril.

Answer 16

Direct Loss

Question 17

A loss that is a result of a covered peril but is not caused directly and immediately by that peril.

Answer 17

Indirect Loss

Question 18

If the insurer pays a loss on behalf of the insured, the insurer is entitled to the salvage to reduce the claim.

Answer 18

Salvage

Question 19

The insured cannot simply abandon the property to the insurance company in exchange for the full-insured value.

Answer 19

Abandonment

Question 20

This is a loss settlement condition that appears in many property insurance contracts including inland marine. It states that if part of a pair or set is lost or damaged, the loss will be valued as fair proportion of the total value of the set, giving consideration to the importance of the damaged article to the set.

Answer 20

Pair or Set Clause

Question 21

This is the self-insured part of an insured loss. Usually applies to first party claims such as property claims or auto physical damage claims. The insured must bear this loss.

Answer 21

Deductible

Question 22

The building is void of contents and people.

Answer 22

Vacancy

Question 23

The premises are void of people. In most cases this will not affect the coverage provided by the policy.

Answer 23

Unoccupancy

Question 24

An insurance policy cannot be assigned to another party without the consent of the insurance company.

Answer 24

Assignment Clause

Question 25

A clause in property/casualty insurance contracts which states that if policy or endorsement forms are broadened and no additional premium is required, then all existing similar policies or endorsements will be construed to include the broadened coverage.

Answer 25

Liberalization

Question 26

Serve as temporary evidence that coverage is in effect until the policy is issued.

Answer 26

Binder

Question 27

In cases where more than one policy is in force, the primary policy pays first.

Answer 27

Primary Insurance

Question 28

An insurance policy that pays benefits only when coverage under other applicable insurance policies has become exhausted.

Answer 28

Excess Insurance

Question 29

A sudden and unforeseen event resulting in a financial loss.

Answer 29

Accident

Question 30

A sudden and unforeseen event resulting in financial loss. May also be a continuous or repeated exposure to an event that results in a financial loss.

Answer 30

Occurrence

Question 31

Policies may contain one or both of these clauses to facilitate an agreement when the insured and the insurer cannot agree on the value of the claim.

Answer 31

Appraisal and Arbitration

Question 32

When the dispute involves a property claim, both parties select an appraiser to determine the value of the loss. If the appraisers cannot agree, then an umpire is selected to make the decision. The insured and insurer each pay for their own appraiser and share the cost of the umpire.

Answer 32

Appraisal Clause

Question 33

This clause usually appears in automobile policies to resolve disputes for uninsured/underinsured motorist claims for bodily injury. It may also be used to settle disputes between insurance companies involving third party liability claims.

Answer 33

Arbitration Clause

Question 34

This clause is used when the insurer has paid a covered claim on behalf of the insured that is caused by another party. The insurance company is entitled to the insured’s right of recovery from the negligent party. This clause is sometimes called “transfer of right of recovery against others to us”.

Answer 34

Subrogation Clause

Question 35

If the insured has other sources of recovery for a covered claim, this clause is activated.

Answer 35

Other Insurance Clause

Question 36

Evidence that coverage is in effect. Many states require evidence of automobile insurance be carried at all times.

Answer 36

Certificate of Insurance

Question 37

The definition of this term may vary in individual states. In most states it means that any person who has contact with an insured involving insurance matter should be licensed. Personnel that quote, sell, service, offer advice, explain coverage or adjusts claims would normally be required to be licensed. Attorneys, appraisers and clerical personnel usually are not required to be licensed.

Answer 37

Transacting Insurance

Question 38

Assumes that a claimant should only be restored to the approximate financial condition that existed prior to the loss, no better or no worse.

Answer 38

Indemnity

Question 39

An unbroken chain of events that causes a loss. An event that, in a natural and continuous sequence, produces a loss.

Answer 39

Proximate Cause of Loss

Question 40

This is a form completed by the claimant listing the property that has been either lost or damaged due to a covered loss.

Answer 40

Proof of Loss

Question 41

Language that is vague and creates doubt

Answer 41

Ambiguity

Question 42

Type of “Other Insurance” condition found in liability policies. It calls for all insurers to contribute equally up to the limit of the policy having the smallest limit, whereupon the company stops paying. The other companies share in the remainder of the loss until the loss is paid in full or all policy limits are exhausted.

Answer 42

Contribution By Equal Shares

Question 43

Situation that exists when the same property is covered by more than one policy, but the policies are not identical as to the extent of coverage provided.

Answer 43

Nonconcurrency

Question 44

Refers frame, masonry, metal, brick veneer, fire resistive, etc. The better the construction the lower the fire rate.

Answer 44

Basic Types of Construction

Question 45

A named peril form lists the specific perils to be covered in the policy. The open peril form does not list the perils but provides broader coverage. This means that all perils are covered except the perils listed in the Exclusions section of the policy.

Answer 45

Named Peril vs. Open Peril

Question 46

Refers frame, masonry, metal, brick veneer, fire resistive, etc. The better the construction the lower the fire rate.

Answer 46

Basic Types of Construction

Question 47

The cost of replacement minus depreciation.

Answer 47

Actual Cash Value

Question 48

The current cost to purchase new, the item that was lost, without depreciations.

Answer 48

Replacement Cost

Question 49

As reasonably close to the replacement of the lost or damaged item if possible.

Answer 49

Functional Replacement Cost

Question 50

Usually antiques claims are adjusted on the basis of market value – the price that the market will support.

Answer 50

Market value

Question 51

The value to be insured is agreed to by the insured and the insurer. This method is used when the true value cannot accurately be determined.

Answer 51

Agreed Value

Question 52

An agreed amount of insurance which is shown on the policy and that will be paid in the event of a total loss regardless of the actual value of the property.

Answer 52

Stated Amount

Question 53

A policy that states that in the event of a total loss, a specific amount will be paid, and that is set as the limit of the policy. It is generally used to insure fine arts, jewelry and furs.

Answer 53

Valued policy

Question 54

Those that have an insurable interest in the property who would suffer a financial loss if the property were damaged by an insured peril. In personal insurance this can include family members without listing their names on the declarations page of the policy. And additional insured’s such as a lien holder.

Answer 54

An Insured

Question 55

A separate limit per insured item applies. Example: A separate limit on the building and/or one for the contents.

Answer 55

Specific Basis

Question 56

One limit that applies to both building and contents. With blanket insurance, usually more than one location is insured under a single limit. Blanket insurance is more often written on contents coverage with one blanket limit applying to more than one building or location. This assists the insured in avoiding underinsurance at a particular location in case of loss.

Answer 56

Blanket Basis

Question 57

This allows the insured to report values to the company (usually on a monthly basis) of the insured contents. This allows the insured to pay for coverage on what is actually reported to the company. This form requires a 100% coinsurance clause.

Answer 57

Reporting Form

Question 58

With commercial insurance the coinsurance clause is a method of requiring the insured to insure at least 80% of the value of the property in exchange for a premium discount. If the insured’s policy contains this clause and the insured carries less than this amount, a penalty will occur in the case of partial losses. The insured can always insure for more than 80% of the value of the property.

Answer 58

Coinsurance Clause

Question 59

Protects the interest of the financial institution against loss to real property caused by perils insured against. It also grants coverage even if the insured intentionally caused the loss. The institution can also provide a proof of loss or pay premiums in case the insured cannot or refuses to do so. They must also be advised if the contracts have been cancelled or non-renewed by the insurer.

Answer 59

Standard Mortgage Clauses

Question 60

Similar to the mortgagee clause but applies to chattel property.

Answer 60

Loss Payable Clause

Question 61

An insured’s property insurance policy protects the insured and not a bailee of the insured’s property.

Answer 61

No Benefit to the Bailee

Question 62

Occurs when a person or entity is determined to have been responsible, or legally liable, for injury or loss to another person or liable for damage to another’s property and the law requires them to make financial restitution. These are called third party losses.

Answer 62

Liability Losses

Question 63

Occurs when the damage to repair exceeds the value of the vehicle after repairs have been made. The vehicle is considered to be a “constructive total loss”

Answer 63

Constructive Total Loss

Question 64

For a liability policy to respond the insured must be guilty of “negligence” and coverage must be granted by the policy. Intentional acts are never covered by liability policies.

Answer 64

Negligence

Question 65

A civil wrong that violates the rights of others.

Answer 65

Tort

Question 66

Casualty policies cover bodily injury and property damage caused by the insured as a result of his/her negligence.

Answer 66

Punitive Damages

Question 67

Common law defense against negligence that states that if an individual contributes to his or her own loss in any way, then another cannot be held liable for the loss.

Answer 67

Contributory Negligence

Question 68

Law that allows an injured party to collect from another party for a loss, even when the injured party contributed to his or her own loss. Damages are reduced to the extent of the injured party’s negligence.

Answer 68

Comparative Negligence

Question 69

Applies when a person assumes the risk, he or she may be prevented from recovering from a negligent party. This doctrine is frequently associated with injuries incurred by spectators at sporting events.

Answer 69

Assumption of Risk

Question 70

An independent action that breaks the chain of causation and sets in motion a new chain of events.

Answer 70

Intervening Cause

Question 71

States have enacted laws as to when certain types of lawsuits must be filled.

Answer 71

Statute of Limitations

Question 72

Imposed by law on those participating in certain activities that are considered especially hazardous. Individuals involved in such operations may be held liable for the damages of another, even though the individual was not negligent.

Answer 72

Absolute Liability

Question 73

There are times when a person may be held responsible for the negligent acts of another person.

Answer 73

Vicarious Liability

Question 74

Pays a single amount as the maximum liability of the insurer with respect to any one accident occurrence.

Answer 74

Single Limit

Question 75

Expressed by two figures. There may be a limit representing the maximum payable for each person injured per occurrence for bodily injury and another limit applicable to the claims of all persons injured in the accident or occurrence.

Answer 75

Split Limits

Question 76

The limit stated in the policy represents the total amount for all claims paid during the policy period.

Answer 76

The Aggregate Limit

Question 77

This clause outlines the promises made by the insurance company to the insured. These will vary by type of liability policy.

Answer 77

Insuring Agreement

Question 78

There are exposures for which the insurer is unwilling to provide coverage.

Answer 78

Exclusions

Question 79

Outline the duties of each party in case of a loss as well as other items that require clarification.

Answer 79

Conditions

Question 80

Usually coverage is limited to the United States, its possessions, Canada and Puerto Rico. There are some policies and personal property covered in a Homeowners policy.

Answer 80

Policy Territory

Question 81

Occurs before a policy has expired, in other words “mid-term”

Answer 81

Cancellation

Question 82

Notice is sent prior to the expiration date of the policy advising the insured that the policy will not be renewed.

Answer 82

Nonrenewal

Question 83

Any hazard arising from the material, structural, or operational features of the risk itself apart from the persons owning or managing it.

Answer 83

Physical Hazard

Question 84

A condition of morals or the habits that increases the probability of a loss from peril.

Answer 84

Moral Hazard

Question 85

A condition of morals or the habits that increases the probability of a loss from peril.

Answer 85

Morale Hazard

Question 86

A situation where there is only the possibility of loss. (Ex. Catastrophic medical expenses, liability loss suit, damage by fire, lightening, etc.) This is an insurable risk.

Answer 86

Pure Risk

Question 87

A situation where either profit or loss is possible. (Ex. Betting on a horse race, investing in real estate) Usually not insurable.

Answer 87

Speculative Risk

Question 88

These are connected with losses caused by the irregular action of nature, by the mistakes and misdeeds of human beings. Similar to pure risk. This is insurable.

Answer 88

Static Risk

Question 89

Associated with a changing economy. Examples are the change in taste of consumers, technological changes, etc. Not uninsurable.

Answer 89

Dynamic Risk

Question 90

Defined as a risk that affects the entire economy or large number of persons or groups within the economy. Example: double digit inflation, foreign competition. Not insurable.

Answer 90

Fundamental Risk

Question 91

A risk that affects only the individual and not the entire community or country. Example: Theft of a stereo set. Insurable.

Answer 91

Particular Risk

Question 92

Simply means avoiding the hazard. For example, if you don’t want the risk of owning a car or a home, you avoid owning a car or a home.

Answer 92

Avoidance

Question 93

This is a common method of risk management by members of insurance pools.

Answer 93

Sharing a Risk

Question 94

This is the most common method of handling risk. It involves transferring the risk to an insurance company in return for a premium charge.

Answer 94

Transfer of Risk

Question 95

(Also known as risk retention) an individual decides to do what creates a risk (buys a car or home) and retain the uncertainty of loss. If the care is wrecked or the house burns, the individual will replace the car, rebuild the home or do whatever he deems appropriate at his own expense.

Answer 95

Assumption of Risk

Question 96

Risk may be reduced via loss prevention methods. Examples are installing a sprinkler system in a building, a person stopping smoking or a planned weight loss program.

Answer 96

Risk Reduction or Risk Control

Question 97

The Insured

Answer 97

First Party

Question 98

The Insurance Company

Answer 98

Second Party

Question 99

In liability insurance, this is the party that has been damaged by the first party. An at-fault auto accident is an example.

Answer 99

Third Party

Question 100

In order for the contract to be binding, all parties must have the necessary ________ __ ________

Answer 100

Capacity to Contract

Question 101

An insurance contract must not be written to cover an illegal activity or immoral purposes.

Answer 101

Legal Purposes/Object

Question 102

An applicant completes an application for coverage and the insurance company accepts it and returns a policy or a binder. If the insurance company issues an altered policy, the altered policy becomes a counter-offer.

Answer 102

Offer and Acceptance

Question 103

Something that has value in the eyes of the law in which a promisee receives something in return for a promise. The injured (the promisee) gives the application and premium to the agent and/or company in return for their promise to pay in the future.

Answer 103

Consideration

Question 104

This is contingent on an uncertain event (a loss). Insureds who pay premium but have no losses will not receive claim payments under the policy.

Answer 104

Aleatory

Question 105

The insurance company is the author of the contract and the insured must accept it “as is”. There is unequal bargaining strength between the parties; therefore, any ambiguous language will bring a court decision in favor of the insured.

Answer 105

Contract of Adhesion

Question 106

Both sides must perform certain acts to make the contract legally enforceable.

Answer 106

Executory

Question 107

Promises action in the event of a future occurrence.

Answer 107

Conditional

Question 108

Both parties bargain in good faith.

Answer 108

Utmost Good Faith

Question 109

Contract is bound to the insurable interest of the insured person. For instance, with the sale of a house, the policy does not automatically pass to the new purchaser.

Answer 109

Assignability

Question 110

Pays only the amount of the loss.

Answer 110

Reimbursement Contract

Question 111

Pays stated amount in the event of a claim.

Answer 111

Valued Contract

Question 112

The contract must restore the insured to the financial position previously held before the loss. This is also known as indemnification.

Answer 112

Principle of Indemnity

Question 113

The insured has agreed to pay a premium in exchange for the insurers promise to act in the future.

Answer 113

Unilateral

Question 114

A policy condition, based either on information given by the insured in an application or inserted by the insurer in the policy.

Answer 114

Breach of Warranty

Question 115

An untrue statement or statements made by the insured, usually at the time the application is made.

Answer 115

Misrepresentation

Question 116

The failure of the insured to reveal relevant facts known to the insured when applying for insurance.

Answer 116

Concealment

Question 117

An intentional act designed to deceive and induce another party to part with something of value.

Answer 117

Fraud

Question 118

Something that becomes part of the contract and is a statement that is considered to be a guarantee.

Answer 118

Warranty

Question 119

States that a policy includes coverages that an average person would reasonably expect it to include, regardless of what the policy actually provides.

Answer 119

Reasonable Expectations

Question 120

Generally defined as the voluntary or intentional relinquishment of a known right.

Answer 120

Waiver

Question 121

If someone intentionally or unintentionally creates the impression that a certain fact exists, an innocent party relies on the impression and is damaged as a result, the guilty party may be legally prohibited from asserting that the fact does not exist.

Answer 121

Estoppel