Insurance Terms & Related Concepts

Question 1

Jerrod is awarded $4000 in a court case after Ollie accidentally starts a fire and burns down his detached garage. This award is an example of:

A.
statutory damages.
B.
general damages.
C.
punitive damages.
D.
special damages.

Answer 1

D.
special damages.

Question 2

Which of the following best describes the insurance concept of “exposure”?

A.
The reduction in value of an insured item
B.
A condition that increases the possibility of a loss
C.
The cause of damage or loss
D.
The possibility of damage or loss

Answer 2

D.
The possibility of damage or loss

Exposure refers to how likely it is that a loss will occur.

Question 3

The conditions page in an insurance contract may allow a lender all of the following provisions EXCEPT:
A.
promising to give the lender notice if the policy is canceled, reduced, or has expired without payment.
B.
allowing a lender to be listed as a payee on the policy.
C.
allowing the lender to cancel the insurance policy at any time.
D.
permitting the lender to pay the policy premium if the insured fails to do so to maintain coverage.

Answer 3

C.
allowing the lender to cancel the insurance policy at any time.

Question 4

Which of the following statements about risk retention groups is FALSE?
A.
Risk retention groups are subject to state laws regarding Unfair Claims Settlement practices.
B.
Risk retention groups are a form of self-insurance.
C.
Risk retention groups can provide commercial liability insurance.
D.
Risk retention groups must be licensed in every state in which they operate.

Answer 4

D.
Risk retention groups must be licensed in every state in which they operate.

Question 5

When an insurer buys insurance to reduce its exposure to loss, this is called:
A.
re-insurance.
B.
loss reduction.
C.
coinsurance.
D.
mitigation.

Answer 5

A.
re-insurance.

When an insurer buys insurance to reduce its exposure to loss, this is called re-insurance.

Question 6

A passenger on a commercial airline flight was injured when the plane crashed due to a mechanical problem. In court, the injured passenger’s lawyer could invoke the doctrine of:

A.
Contributory negligence.
B.
Res Ipsa Loquitur.
C.
Comparative negligence.
D.
Assumption of Risk.

Answer 6

B.
Res Ipsa Loquitur.

In this case, the lawyer could invoke the doctrine of Res Ipsa Loquitur, because the circumstances of the injury make it obvious that the defendant is negligent; no proof is needed.

Question 7

John has purchased a homeowners insurance policy with a percentage deductible based on the total limit of insurance for his home. John insures his home for $600,000, and the policy includes a 3% deductible. A huge thunderstorm passes through one night and blows the roof off his house. The insurance company estimates that covered damage totals $80,000. How much indemnification should John expect for the losses to his roof?
A.
$80,000
B.
$77,600
C.
$62,000
D.
$18,000

Answer 7

C.
$62,000

Question 8

A captive insurance company:
A.
operates through an attorney-in-fact to provide insurance benefits for its members.
B.
provides insurance for insurers.
C.
provides insurance that is designed to meet the needs of the general public.
D.
exists solely to provide insurance for its parent company.

Answer 8

D.
exists solely to provide insurance for its parent company.

Question 9

Josephine’s gas station suffered severe damage when one of the fuel tanks caught fire and exploded. After completing his inspection, the adjuster determines that Josephine’s claim is not covered because she did not have automatic shut-offs for the fuel tanks. If this safety measure was in fact required in order for coverage to apply, where might Josephine find it in the policy?
A.
Declarations
B.
Exclusions
C.
Conditions
D.
Endorsements

Answer 9

C.
Conditions

Endorsements are used to make changes to a policy, such as adding an insured or increasing or reducing coverage, whereas the conditions section is where the policy establishes a set of conditions that the insured must meet in order for the policy to be valid.

Question 10

Sovereign immunity restricts an individual’s ability to file a lawsuit against:
A.
a defendant.
B.
an individual or organization that deals with dangerous instrumentalities.
C.
the government.
D.
an insurance company.

Answer 10

C.
the government.

Question 11

Charlotte’s son just turned 16 and got his driver’s license. She wants him to be covered, so she adds him to her auto insurance policy. Where would this addition be found in Charlotte’s policy?
A.
Insuring agreement
B.
Endorsements
C.
Exclusions
D.
Conditions

Answer 11

B.
Endorsements

Question 12

Which of the following describes a contract in which only one party makes a promise to perform?

A.
Utmost Good Faith Contract
B.
Personal Contract
C.
Aleatory Contract
D.
Unilateral Contract

Answer 12

D.
Unilateral Contract

Question 13

Which of the following best describes a Fraternal Benefit Society?
A.
A fraternal benefit society uses investors’ money to pay claims.
B.
A fraternal benefit society pays dividends to its stockholders.
C.
A fraternal benefit society is a social organization based around common interests and beliefs.
D.
A fraternal benefit society is a for-profit provider of insurance.

Answer 13

C.
A fraternal benefit society is a social organization based around common interests and beliefs.

Fraternal Benefit Societies, or Fraternal Associations, are non-profit, mutual aid organizations that engage primarily in charitable or benevolent activities. They offer their members insurance against death, disease, and disability.

Question 14

Strict liability:
A.
does not hold up in a court of law.
B.
releases an individual from liability in dealing with dangerous objects.
C.
holds an individual to a lower level of responsibility.
D.
holds a person liable for his actions regardless of how much care he demonstrates.

Answer 14

D.
holds a person liable for his actions regardless of how much care he demonstrates.

Question 15

When would a default judgment occur?
A.
When a defendant does not answer a complaint
B.
In cases that involve an intentional tort
C.
When an insurer sends a reservation of rights
D.
When a defendant submits an answer

Answer 15

A.
When a defendant does not answer a complaint

Question 16

Last month, an elderly man slipped and fell on a cracked, uneven icy sidewalk on Mulberry Street. He sued the homeowner and was awarded $60,000. The insurers of other properties on Mulberry Street would consider this award to be:

A.
a moral hazard.
B.
a morale hazard.
C.
a physical hazard.
D.
a legal hazard.

Answer 16

D.
a legal hazard.

The cracked, uneven sidewalk would be a physical hazard, but the results of the lawsuit are a legal hazard. A legal hazard is an increased chance of loss due to legal action.

Question 17

The purpose of the principle of indemnity is:
A.
to prevent an insurer from making a profit on a loss.
B.
to transfer the right to collect a debt from one party to another.
C.
to transfer the risk of financial loss from one party to another.
D.
to prevent an insured from making a profit on a loss.

Answer 17

D.
to prevent an insured from making a profit on a loss.

Question 18

Six Stars Development Company has just purchased several large properties in Las Vegas. As a result of this large purchase, they are a little short on money and decide to save money by not purchasing insurance on their new properties. Six Stars is practicing:
A.
risk retention.
B.
risk avoidance.
C.
risk reduction.
D.
risk transference.

Answer 18

A.
risk retention.

In this situation, Six Stars is practicing risk retention.

Question 19

ABC Masonry, Inc. has an aggregate liability policy with limits of 100,000/300,000. One day, an accident at a construction site leads to $150,000 in damage to public property. Assuming the cause of loss is covered under ABC Masonry’s liability policy, how will this claim be paid?
A.
The insurer pays $150,000 and the aggregate limit is still $300,000.
B.
The insurer pays $150,000 and the aggregate limit is now $200,000.
C.
The insurer pays $100,000; the aggregate limit is now $200,000; and ABC Masonry must pay $50,000.
D.
The insurer pays $100,000; the aggregate limit is still $300,000; and ABC Masonry must pay $50,000.