Module 1 Flashcards

Question

Clearly identifying the elements of an insurable risk and determining whether they are present is a crucial part of the underwriting process, which is considered from the perspective of the insurance company. That is, the insurer is trying to determine which risks it will or will not insure. The elements of an insurable risk include the following:

Answer 1

There must be a sufficiently large number of homogeneous exposure units to make losses reasonably predictable (i.e., the law of large numbers). The loss resulting from the risk must be definite and measurable. The loss must be fortuitous or accidental. The loss must not be catastrophic to the company.

Answer 2

A fundamental principle in probability and statistics that states: As the size of a sample increases, the average of the results obtained from the sample is more likely to converge to the true average (expected value) of the entire population. In simpler terms, the larger the group or dataset being analyzed, the closer the observed outcomes will align with the expected outcomes over time.

Answer 3

If the potential loss cannot be measured, the insurance company cannot know how much is needed to pay claims. That is the reason for dollar limits on policies. For a risk to be insurable, losses must be fortuitous (i.e., accidental), with the exception of life insurance. A planned loss generally involves a criminal act (e.g., arson).

Answer 4

insurance company.

Answer 5

1. Insurable interest. 2. Actual cash value of the loss. 3. Policy limits or face value. 4. Other insurance. 5. Coinsurance. 6. Deductibles. 7. Subrogation.

Answer 6

Simply stated, insurable interest exists when the interested party will suffer a financial loss if the insured loss occurs. In other words, the policyholder must demonstrate that some sort of reasonable relationship exists with the insured and that they will experience financial or emotional suffering if the insured dies.

Answer 7

Actual cash value (ACV), which is used with property losses, is the replacement cost minus depreciation.

Answer 8

The policy limit or face value of a policy is the maximum amount that will be paid when the insured loss occurs. With most forms of insurance, the policy will pay for losses up to the amount of coverage. With life insurance, it is the amount that is paid when the death occurs.

Answer 9

This provision states that when a loss occurs, and there is more than one insurance policy covering the same loss, the insured will not profit from the loss. Either one policy is considered primary with the other paying for any uncovered loss, or the policies pay prorated shares of the loss.

Answer 10

Coinsurance may be a splitting of costs, or it may refer to a minimum percentage of insurance that is required to avoid being penalized for inadequate property insurance when there are partial losses.

Answer 11

A deductible is a retained risk. It is the portion of insured losses that the insured is expected to pay before the insurance company pays anything.

Answer 12

Subrogation is the right of an insurance company that has paid for a loss to recover its payments if it is determined that a different insurance company or person is responsible for the loss and is required to pay for it. This prevents the insured from collecting twice for the same loss.

Answer 13

Social insurance, public insurance, and private insurance.

Answer 14

Mandatory insurance administered by the government, with benefits mandated by law. The purpose of social insurance is to protect people from large fundamental risks. Examples include Social Security, Medicare, Medicaid, and workers’ compensation.

Answer 15

Designed to enhance public trust in financial institutions. Similar to social insurance, public insurance is usually mandatory and administered by the government or by quasigovernmental institutions. The Federal Deposit Insurance Corporation (FDIC), Pension Benefit Guaranty Corporation (PBGC), and Securities Investor Protection Corporation (SIPC) all administer types of public insurance.

Answer 16

Insurance marketed by private insurance companies. Examples of private insurance include disability, health, long-term care insurance, property insurance, liability insurance, and life insurance. Some of these types of coverage may be mandatory as a result of state laws or lender requirements. For example, states may require automobile liability insurance coverage if you choose to register a motor vehicle.

Answer 17

independent agents, captive agents, career agents, producing general agents, brokers, surplus-line or excess-line brokers or agents, and solicitors.

Answer 18

A licensed individual or business entity authorized to sell, solicit, or negotiate insurance policies on behalf of an insurance company. Insurance producers act as intermediaries between insurance companies and consumers, helping individuals and businesses find coverage that meets their needs.

Answer 19

Generally represent several insurance companies doing business under the American or independent agency insurance system. These independent agents decide where they will place their business, dividing the policies they sell among those various companies they represent while, ideally, basing that on the needs of the client and the suitability of the companies.

Answer 20

An insurance agent who works exclusively for one insurance company. These agents are bound by contract to sell and promote the insurance products of that specific company and generally cannot represent or sell policies from other insurers.

Answer 21

Insurance agents who are employed by a specific insurance company, typically on a long-term or full-time basis, to sell its products. They are similar to captive agents in that they exclusively represent one company, but the term "career agent" often implies a deeper, more structured relationship with the insurer, including benefits like career development opportunities, training programs, and incentives.

Answer 22

Individuals or entities that act as intermediaries between insurance companies and independent agents or brokers. PGAs typically manage a network of agents and are responsible for overseeing their sales activities while also selling insurance products directly to clients. They often have a more substantial role in terms of business operations and management compared to regular agents.

Answer 23

producing general agents (PGAs)

Answer 24

Brokers. A broker represents a prospective insured and generally cannot bind the prospective insured to an insurance contract. The knowledge, actions, and assertions of the broker are between the broker and the client. The insurer is neither bound by them nor deemed to have any notice of them. Therefore, while the broker can bind herself, the broker cannot bind the insurer. Because of this, the insurer would not have legal liability arising from actions between the broker and the prospective insured.

Answer 25

Handle any type of insurance that cannot be purchased using normal distribution channels within a given state. An individual may not be able to obtain coverage from an admitted (in-state) insurer. A surplus-line agent has the authority to go outside the state and place the business with a surplus-line (nonadmitted) insurer if the necessary coverage cannot be obtained from an insurer admitted in the state. These are found almost exclusively in the property and casualty field.

Answer 26

agents make fraudulent statements unknown to or unauthorized by the insurer.

Answer 27

Express authority Implied authority Apparent authority

Answer 28

Express authority refers to the specific powers and permissions explicitly granted to an individual or entity by a principal, often through a written or oral agreement. In the context of insurance, express authority is the authority given by an insurance company (the principal) to an agent or representative to act on its behalf in specific ways.

Answer 29

Implied authority refers to the power of an agent to perform actions that are not explicitly stated in their contract but are reasonably necessary to fulfill their express authority and carry out their duties effectively. It is a form of authority that is assumed as part of the agent’s role, even though it is not formally documented.

Answer 30

Apparent authority refers to the authority an agent appears to have based on the actions, statements, or representations of the principal (e.g., an insurance company). It is the power an agent seems to possess in the eyes of a third party, even if that authority was not explicitly granted by the principal.

Answer 31

Apparent Authority NOTE: The example encompasses both implied and apparent authority. From the perspective of the client, he presumed the agent had the authority, which is apparent authority. The failure of the insurer to take action against the agent creates implied authority.

Answer 32

Ratification is the act of approving or affirming an action that was taken on behalf of a principal by another party (e.g., an agent), even though the agent did not have proper authority to perform the action at the time it occurred. By ratifying the act, the principal retroactively grants authority and accepts responsibility for the action. For example, an insurer may stipulate that its agents must not write insurance on a certain class of applicant (thus putting such an action outside the scope of the agents’ authority). If an agent then writes coverage on an applicant in the prohibited class and the insurer, with full knowledge of the prohibited action, accepts the premium, then the insurer has ratified the agent’s act, and modified the agent’s powers. From then on, the insurer is bound by that act of the agent. Thus, the agent’s act and the insurer’s ratification of that act have modified the agency agreement.

Answer 33

to maintain competition, to prevent abuse of consumers, and to minimize market failures.

Answer 34

legislative, executive/administrative, and judicial.

Answer 35

organizing an insurance company, standards of solvency, regulation of rates and investments, and licensing of agents.

Answer 36

state insurance department (executive/administrative)

Answer 37

State courts (judiciary)

Answer 38

makes laws; enforces the law; interprets the law when disputes arise

Answer 39

Public Law 15, also known as the McCarran-Ferguson Act of 1945, is a key piece of U.S. legislation that establishes the regulation of insurance as primarily the responsibility of individual states rather than the federal government. This law was enacted to clarify the role of state and federal regulation following a Supreme Court decision in United States v. South-Eastern Underwriters Association (1944), which ruled that insurance transactions could be subject to federal antitrust laws.

Answer 40

The U.S. standard-setting and regulatory support organization created and governed by the chief insurance regulators from the 50 states, the District of Columbia, and five U.S. territories.

Answer 41

An aleatory contract is a legal agreement between two parties where one party's performance is dependent on an uncertain event, such as an accident, natural disaster, or death. The term "aleatory" comes from the Latin word aleatorius, which means "pertaining to a gambler". Aleatory contracts are commonly used in insurance policies, where the insurer is not required to pay the insured until a triggering event occurs. For example, an insurance policy may not pay out if a vehicle is not damaged or stolen.

Answer 42

A "contract of adhesion" in insurance refers to a standard form insurance policy where the terms and conditions are drafted entirely by the insurance company, leaving the insured with little to no ability to negotiate or modify the contract; essentially, the insured must "adhere" to the terms presented on a "take it or leave it" basis, due to the unequal bargaining power between the parties involved.

Answer 43

conditional

Answer 44

The "collateral source rule" is a legal principle in tort law that prevents a defendant from reducing a plaintiff's damages award by the amount of compensation they received from sources other than the defendant, such as health insurance, meaning the plaintiff can still seek full recovery even if they have already been partially compensated by a third party; essentially, it ensures the wrongdoer bears full responsibility for the harm caused, regardless of other sources of payment for the plaintiff's injuries.

Answer 45

personal contracts

Answer 46

unilateral or bilateral.

Answer 47

unilateral

Answer 48

"Utmost good faith," also known as "uberrimae fides" in Latin, is a legal principle that requires all parties involved in a contract to act honestly and disclose all material information relevant to the agreement, particularly applied in insurance contracts where a higher standard of transparency is expected between the insurer and policyholder; essentially, it means both parties must fully disclose all important facts without any misleading or withheld information.

Answer 49

Misrepresentation Warranties Concealment

Answer 50

Occurs when a false statement is made that at least partially induces the company to issue the contract. For a misrepresentation to void a contract, it must be material, or significant.

Answer 51

A statement by the applicant that all of the information on the application is absolutely true. Under strict application of the warranty doctrine, any mistake, however insignificant, would permit the company to void or rescind the contract. With very limited exceptions, however, the courts will not permit such an extreme application of the doctrine to insurance contracts.

Answer 52

The intentional withholding of material information, violates the requirement of utmost good faith even if no specific question arises about that information.

Answer 53

unilateral

Answer 54

Offer and acceptance. Consideration. Legal object. Competent parties. Legal form.

Answer 55

legal object

Answer 56

void contract

Answer 57

voidable contract. For example, where a contract is made with a minor, the contract is voidable by the minor; until the minor reaches the age of majority, he can void the contract, but if not voided it remains a legal contract. If one of the two people making the contract is legally incompetent, the incompetent person cannot be forced to hold up his end of the contract. The incompetent person may, however, force the other person to live up to his part of the contract. When one of the parties to a contract is legally incompetent because of age, illness, inebriation, or some other reason, the contract most likely is valid but may be voided by the incompetent person (i.e., such a contract is not void, but it is voidable by the incompetent individual).

Answer 58

declarations, insuring agreement, exclusions, and conditions.

Answer 59

contract disputes

Answer 60

The parol evidence rule is a legal principle in contract law that prevents parties from introducing evidence of prior or contemporaneous oral agreements that contradict the terms of a final written contract, essentially stating that the written contract represents the complete understanding between the parties and any prior discussions are inadmissible in court to alter its terms.

Answer 61

doctrine of waiver

Answer 62

doctrine of waiver

Answer 63

The doctrine of estoppel is a legal principle that prevents a person from asserting a claim or right that contradicts their previous statements, actions, or behaviors if such inconsistency would unfairly harm another party who relied on the original conduct or representation.

Answer 64

Waiver & estoppel.

Answer 65

equitable remedies

Answer 66

Rescission

Answer 67

Reformation

Answer 68

Reformation

Answer 69

have never existed; simply not accurately stated in the original writing

Answer 70

A waiver provision is a clause in a contract that allows one party to voluntarily relinquish or forgo a right, claim, or privilege under the agreement. This provision defines the conditions and implications of such a waiver and ensures that the party waiving its rights cannot later attempt to enforce them, provided the waiver is made knowingly and intentionally.

Answer 71

It is important to note that, although the names are similar, the waiver provision mentioned in the preceding paragraph and the doctrine of waiver discussed previously are two different concepts. A waiver provision has effect because it is placed in the contract. It is intended to prevent a company’s agents from intentionally or unintentionally waiving a privilege or benefit the company would otherwise have. The doctrine of waiver, on the other hand, is based on equity, applies without being explicitly mentioned in the contract, allows waiver of a known right, and has far broader application than a waiver provision.

Answer 72

A tort is a civil wrong or wrongful act (other than a breach of contract) that causes harm or loss to another person. The person who suffers the harm may seek compensation or remedy through the legal system.

Answer 73

A tortfeasor is an individual, company, or entity that commits a tort—an act that causes harm or injury to another person or their property. The tortfeasor is legally responsible (liable) for the harm caused and may be required to compensate the injured party through damages or other legal remedies.

Answer 74

An unintentional tort is a type of civil wrong that occurs when one party's actions, often due to negligence or carelessness, unintentionally cause harm or injury to another person. Unlike intentional torts, there is no deliberate intent to cause harm, but the party responsible can still be held legally liable for their actions (or inactions).

Answer 75

A duty is owed. – Example: Individuals have the duty to drive their vehicles in a safe manner. The duty was breached. – Example: The individual rear-ended another car. There were actual damages. – Example: The other car had broken taillights and a crushed bumper. There was proximate cause, which is an uninterrupted sequence of events that brought about the damage. – Example: The individual was texting, didn’t see the other driver, and rear-ended him.

Answer 76

Refers to something about a property (e.g., a swimming pool) that is likely to attract and possibly injure children. Property owners must use a high degree of care to discover others on their properties. They must also take steps to prevent harm, such as installing fences and locks.

Answer 77

A legal doctrine in tort law that establishes negligence when a defendant violates a statute, regulation, or ordinance that is specifically designed to protect a certain class of people from a certain type of harm. Under this doctrine, the violation itself is considered sufficient to prove that the defendant breached their duty of care.

Answer 78

The standard imposed when a person or organization is held responsible for any damages, even when there has been no negligence. This generally is a case in which people cause extra-hazardous situations through their activities (e.g., keeping wild animals, blasting). This is also known as strict liability.

Answer 79

synonymous

Answer 80

When someone is held liable for the acts of another (e.g., the person’s child, employee, or agent). While this aspect is usually seen with parents and children, it essentially extends to anyone acting as your agent.

Answer 81

vicarious liability

Answer 82

Under the doctrine of contributory negligence, if any negligence on the part of the injured party contributes to the injury, it absolves the other party of liability. This is the strictest approach and has been replaced by comparative negligence.

Answer 83

contributory negligence

Answer 84

An alternative to the contributory negligence defense; comparative negligence reduces the defendant’s liability in some proportion based on the injured party’s contribution to the total negligence causing the injury. For example, if a jury determines that the injured party was 20% to blame for the injury, the plaintiff’s award might be reduced by 20%.

Answer 85

A modification of contributory negligence. Here, contributory negligence on the part of the injured party will not bar recovery if the other party, immediately prior to the accident, had a last clear chance to prevent the accident but failed to seize the chance.

Answer 86

Field underwriting is the process of gathering information about a potential policyholder before submitting a formal application to an insurance underwriter.

Answer 87

A result of a client being unethical or misrepresenting himself in order to obtain insurance or to induce the payment of a claim.

Answer 88

moral hazards

Answer 89

Simply put, is indifference. An insured might leave her car unlocked in a bad part of town, or leave the car running while she runs into the convenience store with the attitude that, “it’s okay, it’s insured.”

Answer 90

Occurs when individuals with a higher risk of needing to make a claim are more likely to purchase an insurance policy, while individuals with lower risk are less likely to do so, leading to a situation where the insurance company is disproportionately exposed to higher risk customers, potentially causing higher premiums for everyone involved.

Answer 91

adverse selection

Answer 92

mortality and morbidity

Answer 93

Mortality; Morbidity

Answer 94

mortality rates

Answer 95

mortality rates, investment income, and expenses.

Answer 96

mortality; morbidity

Answer 97

A series of steps that are taken when an insured property loss occurs.

Answer 98

When individuals suffer a financial loss, they generally expect their insurance company to make them whole. This process is known as indemnification, and it involves the loss adjustment process.

Answer 99

An essential part of the claim process is the adjuster, who is responsible for investigating insurance claims and determining the amount of payment to be made.

Answer 100

Notice of loss. The insured is required to give notice of a loss to allow the insurer to investigate it. Protection of property. A provision (i.e., a policy condition) that requires the insured to protect the damaged property after a loss. Inventory. An itemized report that must contain the quantity, a description, either the actual cash value (ACV) or replacement cost, and the amount of loss of the damaged property. ACV is the replacement cost of property less depreciation. Evidence. The insured may be required to show the damaged property to the insurer as often as is reasonably required. Proof of loss. To document a loss, most insurers supply the insured with proof of loss forms for completion. Assistance and cooperation. The insured is required to cooperate with and provide assistance to the insurer when a loss occurs. Cooperation and assistance include attending hearings and trials, presenting evidence, and supplying medical reports. Appraisal. An appraisal is necessary to avoid litigation when the insured and insurer cannot agree on the ACV or amount of the loss.

Answer 101

Investigation. During the investigation, all relevant information is evaluated. Proof of loss. This may require helping the insured complete the necessary forms. Payment or denial of the claim. Based on the adjuster’s findings, the claim may be paid (in whole or in part) or denied.

Answer 102

Involves surrendering ownership of damaged property to the insurance company so that a total loss can be claimed.

Answer 103

Takes place when the insurer takes ownership of the property and sells it to reduce its loss.

Answer 104

Gives the insurer the right to repair or replace any part, to restore a pair (e.g., of earrings) or set (e.g., of silverware) to its value before the loss, or to pay the difference between the ACV of the property before and after the loss. For example, this clause stipulates that a loss of one earring is not a total loss of the set. The insurer, in this case, does not have to replace both earrings, but it will try to reach an equitable settlement with the insured.

Answer 105

competence, inclination to service, experience, training, education, specialization, and reputation.

Answer 106

mutual companies and stock companies

Answer 107

mutual; stock

Answer 108

B. You park your car on a steep incline without setting the parking brake. Explanation: Parking your car on a steep incline without setting the parking brake increases the potential for loss; therefore, it is a hazard. Skidding on ice and hitting a light pole and damage from wind are perils (i.e., the cause of the loss that is insured against), not hazards. One could argue that owning a luxury car is a hazard, particularly if the luxury automobile is one highly desired by prospective thieves, but the mere fact that you own a particular automobile does not increase the risk of loss. Rather, the best answer is not setting the parking brake, which clearly increases the probability of the car colliding with another object.

Answer 109

D. Insurance is a device used to manage risk by having a large pool of people share in the financial losses suffered by members of the pool. Explanation: Insurance is a device used to manage risk by having a large pool of people share in the financial losses suffered by members of the pool. Pure risk involves the chance of loss or no loss. A peril is the cause of financial loss. A morale hazard is the indifference to the loss that creates carelessness and increases the chance of loss due to the existence of insurance.

Answer 110

C. Retention Explanation: With respect to collision coverage for the car, Ricky should opt to retain the risk. The car is only worth $1,500.

Answer 111

A. Implied authority Explanation: Implied authority is the authority that insurance companies do not expressly give to agents. However, agents typically possess it because it is reasonably necessary for them to carry out their duties. Express authority is typically in writing. Apparent authority involves an agent waiving a provision in a contract and the insurance company knowing about it but doing nothing to prevent the agent from doing so.

Answer 112

C. I and II Explanation: The NAIC makes recommendations for legislation and policy, but the organization does not have the legal authority to require that states adopt its regulations.

Answer 113

A. The right of subrogation Explanation: The right of subrogation permits Gary’s insurance company to sue Jacob. Reformation is a right of the insurance company to amend the contract when the contract fails to express the actual intent of the parties. This should be compared with rescission, in which the insurance contract is considered null and void from its beginning because of fraud or misrepresentation on the part of the insured.

Answer 114

D. Contracts of indemnity will reimburse the insured only up to the actual amount of the loss. Explanation: Contracts of indemnity will reimburse the insured only up to the actual amount of the loss. The notable exception to this rule is a life insurance contract which pays a stated death benefit or face value.

Answer 115

B. I and II Explanation: Statements I and II are correct. Statement III is incorrect. Insurance contracts are aleatory contracts meaning that the outcome is affected by chance and that the dollars collected by the parties are usually unequal.

Answer 116

A. Vicarious liability Explanation: XYZ Food Company is vicariously liable for any damages caused by XYZ’s employees. Even though the employee caused the damage, the company is responsible for his actions when he drives a company vehicle.

Answer 117

A. Moral hazard: unethical practices designed to induce the payment of a claim. Explanation: Moral hazards are unethical practices designed to induce the payment of a claim. A morale hazard has more to do with indifference rather than unethical behavior. Adverse selection is something insurance companies attempt to avoid so that it is not only the people likely to have a claim who purchase insurance. The underwriting process is the process of evaluating risks to determine if they are reasonable to accept and to what degree.

Answer 118

A. The NAIC Explanation: The NAIC compiles a watch list, but does not rate insurance companies. Moody’s, Standard & Poor’s, and A.M. Best are all rating agencies.

Answer 119

D. An oily rag is left in your garage which catches fire and destroys your home.

Answer 120

C. Gather pertinent data to determine risk exposures.

Answer 121

C. Transfer

Answer 122

B. AIC is required to pay because Daryl had an ostensible authority (i.e. apparent) to do what the public reasonably believed he could do.

Answer 123

D. State Departments of Justice

Answer 124

C. The applicant must be considered a competent party to make a valid contract.

Answer 125

C. Punitive Damages

Answer 126

B. I and IV

Answer 127

B. I and III

Answer 128

B. Financial Strength

Answer 129

B) A broker Brokers represent the insured, and for exam purposes, brokers cannot bind coverage since they do not represent a specific company.

Answer 130

D) The deductible A deductible is the amount of money an insured is required to pay on a loss before the insurer will make any payments under the policy. Deductibles help eliminate small claims, reduce premiums, and decrease morale hazards. Deductibles are used mainly in property, health, and automobile insurance contracts. Disability policies use an elimination period, which is a waiting period—measured in days—that must be satisfied before benefits become payable. This elimination period essentially acts as a time deductible.

Answer 131

B) Accepting any settlement offered by the insurer The insured is not obligated to accept any settlement offered by the insurer. The duties of the insured include providing notice of loss, protecting property, and providing proof of loss.

Answer 132

C) An aleatory contract is one in which one party might receive benefits substantially greater in value than the benefits received by the other party. The answer is an aleatory contract is one in which one party might receive benefits substantially greater in value than the benefits received by the other party. Insurance is an aleatory contract. As such, one party (the insured) may receive benefits substantially greater in value than those of the other party (the insurance company).

Answer 133

B) An interested party will suffer a financial loss if the insured loss occurs. Insurable interest exists when an interested party will suffer a financial loss if the insured loss occurs.

Answer 134

C) I and II The NAIC makes recommendations for legislation and policy, but it does not have the authority to require states to adopt its regulations.

Answer 135

B) Morbidity rate The answer is the morbidity rate. Morbidity rate is the probability of a person becoming disabled.

Answer 136

D) Pay the claim. The answer is pay the claim. The company must pay the claim. A voidable contract is a contract where one party has the option of voiding the contract, but the other party is bound. In this case, where a contract is made with a minor, the contract is voidable by the minor, but if it isn't voided, it remains a legal contract. The insurance company cannot void the contract and must pay the claim.

Answer 137

A) identifying the insurance required to cover every risk. The answer is identifying the insurance required to cover every risk. While insurance is certainly an option for handling risk, it is not and should not be the only option utilized to cover every risk.

Answer 138

D) Elimination Elimination is not a method of managing risk. The four methods of managing risk are avoidance, retention, reduction, and transfer.

Answer 139

D) I, II, III, and IV

Answer 140

D) I and III The answer is I and III. The probability of experiencing long-term care costs below age 60 is low.

Answer 141

A) I, II, III, and IV The answer is I, II, III, and IV. All of these organizations rate insurance companies.

Answer 142

D) To interpret and apply the laws in place relative to the insurance industry The answer is to interpret and apply the laws in place relative to the insurance industry. The legislative branch votes on and passes laws relative to the insurance industry. These laws are enforced by the executive branch, and disputes concerning the interpretation or application of the laws is handled by the judicial branch. The NAIC provides model legislation that may or may not be enacted by several states.

Answer 143

B) Legal responsibility extended to someone other than the person who caused the injury The answer is legal responsibilities extended to someone other than the person who caused the injury. Vicarious liability is legal responsibility extended to someone other than the person who caused the injury. For example, parents may be liable for torts committed by their children, and employers can be liable for torts committed by their employees.

Answer 144

D) Negotiation of settlement with a third party The answer is negotiation of settlement with a third party. Negotiation of a settlement with a third party is not a duty of the insured that relates to loss settlement. Evidence, notice of loss, protection of damaged property, and proof of loss are all duties of the insured relating to loss settlement.

Answer 145

A) I, II, and III The answer is I, II, and III. Options I, II, and III, along with experience, inclination to service, education, and a good reputation, are important when selecting an insurance producer. The length of time with a single insurance company may indicate nothing more than the ability to keep one's job. Experience, which should be sought in an insurance producer, is intentionally developed expertise.

Answer 146

A) I and II The answer is I and II. Options I and II are both methods of retention, as coinsurance and increased deductibles leave the insured with the potential for greater out-of-pocket expenses. Increasing a benefit period and adding a waiver of premium rider are forms of risk transfer.

Answer 147

C) Low probability, high severity The answer is low probability, high severity. Insurance (or the transference of risk) is most suited to those losses that have a low probability or frequency of occurring and potentially high severity.

Answer 148

A) Insurance underwriting The answer is insurance underwriting. A loss must occur for a loss assessment or loss adjustment. Actuarial pricing is a determination of how a insurance should be priced.

Answer 149

Risk avoidance.

Answer 150

Risk reduction.

Answer 151

Risk retention.

Answer 152

Risk transfer.

Answer 153

D) I and IV Explanation: Risk is the condition in which there is a possibility of an adverse result from the expected desired outcome. A peril is the cause of a financial loss, and a hazard is a condition that increases the chance of financial loss. Pure risk is the risk that only involves the chance of loss or no loss.

Answer 154

C) A condition of carelessness or indifference on the part of an individual as to whether a loss occurs and/or the size of a loss if one does occur Explanation: A morale hazard is a condition of carelessness or indifference as to whether a loss occurs and/or the size of a loss if one does occur. Moral hazard is a result of an individual being unethical or misrepresenting himself in order to obtain insurance or to induce the payment of a claim.

Answer 155

B) I, II, III, and IV Explanation: The answer is I, II, III, and IV. All of these are examples of risk management techniques. The professional athlete is using "avoidance" to mitigate the risk of injury. An emergency savings fund is an example of an individual retaining some of the risk and associated costs before utilizing insurance. Wearing a seatbelt and driving in good weather conditions is an example of reducing risk. The use of disability insurance by the surgeon is an example of transferring risk.

Answer 156

A) The self-insurer must be able to competently manage the investment of the self-insurance fund. Explanation: The self-insurer must be able to competently manage the investment of the self-insurance fund. Relatively few firms are good candidates for self-insurance, which is a method of risk retention. For example, small-to-medium sized firms tend to rely on insurance to cover losses, with only large companies utilizing self insurance methods. If funds are set aside, they should be held in emergency accounts rather than the general business checking account. The organization that self-insures should have enough homogeneous exposure units to make losses somewhat predictable.

Answer 157

A) Creating accreditation programs to maintain state regulation of the insurance industry Explanation: The answer is creating accreditation programs for state adoption in order to maintain state regulation of the insurance industry, rather than Congress. The legislative branch votes on and passes laws relative to the insurance industry. These laws are enforced by the executive branch, and disputes concerning the interpretation or application of the law is handled by the judicial branch. The National Association of Insurance Commissioners provides model legislation that may or may not be enacted by the several states.

Answer 158

C) Consideration Explanation: The answer is consideration. Consideration occurs when there is an exchange of value. The insurance contract requires an exchange of value to be legally binding. For most insurance, the promise to pay the premium is usually sufficient consideration to make the contract binding; however, for life insurance, the premium must be paid before the insurance contract is binding for the insurer. The submission of a completed insurance application (offer) plus the payment of the first premium (consideration) to the insurance company will generally create a binding contract if the application would pass standard underwriting requirements.

Answer 159

A) Negligence and assumption of risk Explanation: The answer is negligence and assumption of risk. The doctrine of attractive nuisance is exemplified by a homeowner not fencing in a below-ground swimming pool and then children drowning in the pool. Barbara, by failing to apply her emergency brake at the top of a hill, was negligent. However, the children are also assuming risk by playing in the street.

Answer 160

D) Adverse selection Explanation: This describes adverse selection. Physical hazard is a physical condition that increases the chance of loss. Under the doctrine of contributory negligence, if any negligence on the part of the injured party contributes to the injury, it absolves the other party of liability. A moral hazard is a result of individuals being unethical or misrepresenting themselves to obtain insurance or to induce the payment of claims.

Answer 161

C) Risk retention and transfer Explanation: The answer is risk retention and transfer. The client is transferring the risk to the health insurance company through the use of a policy; however, they are also retaining some of the risk by utilizing a high-deductible-based plan. A high-deductible-based plan requires the insured to pay more out-of-pocket expenses before insurance coverage takes effect.

Answer 162

C) subrogation. Explanation: Subrogation is the right of an insurance company that has paid for a loss to recover its payments if it is determined that a different insurance company or person is responsible for the loss and is required to pay for it. This prevents the insured from collecting twice for the same loss. Coinsurance may be a splitting of costs, or it may refer to a minimum percentage of insurance that is required to avoid being penalized for inadequate insurance when there are partial losses. Insurable interest exists when the interested party will suffer a financial loss if the insured loss occurs. Indemnity involves placing a person back in the position they would have been had the loss not occurred.

Answer 163

B) I only Explanation: Although not blood related, a foster child still shares a relationship with Client A through legal means. Client B likely does not have insurable interest unless a relationship can be proved on the basis of blood, marriage, or business.

Answer 164

A) A broker Explanation: The answer is a broker. Brokers represent potential insureds. Agents represent insurance companies.

Answer 165

D) To enforce the laws in place relative to the insurance industry Explanation: The answer is to enforce the laws in place relative to the insurance industry. The legislative branch votes on and passes laws relative to the insurance industry. These laws are enforced by the executive branch, and disputes concerning the interpretation or application of the law is handled by the judicial branch. The National Association of Insurance Commissioners provides model legislation that may or may not be enacted by the several states.

Answer 166

C) Coinsurance Explanation: The answer is coinsurance. The question defines coinsurance, which is a splitting of costs. A deductible is what the insured must pay before the insurance company pays anything. It is possible to have a loss that is valued at an amount below the deductible, and nothing would be owed by the insurance company. It is not possible for the insurance company and the insured to not split costs when coinsurance applies.

Answer 167

A) Adhesion: if you wrote the contract, you are bound by any ambiguities you created. Explanation: A contract of adhesion maintains that, if you wrote the contract, you are bound by any ambiguities you created.

Answer 168

B) No, because Augusto’s actions were not the proximate cause of Regena’s loss. Explanation: To be liable for an unintentional tort, four elements of negligence must exist. First, a duty is owed, and second, that duty is breached. Then, there must be actual damages and, finally, the breach must be the proximate cause for the damage. In this case, Augusto had a duty to drive his car in a safe manner, and he and breached that duty when he ran the stop sign. While Regena's car did, in fact, have actual damages, the proximate cause of the damage was her trying to use her cell phone while driving. Proximate cause is an uninterrupted sequence of events that brings about damage, and Regena using her cell phone interrupted that sequence. Had she swerved to avoid Augusto and hit a telephone pole, then the proximate cause would have been Augusto's actions and he could be found negligent.

Answer 169

A) Neither I nor II Explanation: Neither statement I nor II is correct. Statement I is incorrect because it describes a morale hazard. Statement II is incorrect because it describes a misrepresentation.

Answer 170

B) I, II, and III Explanation: The answer is I, II, and III. All except NASDAQ are insurance company rating services.

Answer 171

B) II, III, and IV Explanation: 401(k) and other retirement statements are a part of the employee benefit and retirement planning process, but not the risk management process. All other statements are examples of the risk management process.

Answer 172

C) Develop a risk management plan Explanation: The steps in the risk management process are to: 1) identify and establish risk management goals, 2) gather pertinent data to determine risk exposures, 3) analyze and evaluate the information to identify risk exposures, 4) develop a risk management plan, 5) communicate the recommendations, 6) implement the recommendations, and 7) monitor the recommendations for needed changes.

Answer 173

B) Principle of indemnity Explanation: The answer is principle of indemnity. The principle of indemnity has two purposes: to prevent the insured from profiting from insurance claims and to reduce moral hazards.

Answer 174

C) Agent A represents several companies under common ownership, but with different operating business names. They are a captive agent. Explanation: The answer is captive agents. Captive agents sell for direct writers, including their subsidiaries if under common ownership. Examples include State Farm, Allstate, and Farmers Insurance. Brokers can represent multiple companies. Independent agents have no cap on the number of carriers they can work with. Surplus-line broker/agents can operate in and out of state.

Answer 175

C) Producing general agents Explanation: This describes a producing general agent (PGA).

Answer 176

B) The National Association of Insurance Commissioners (NAIC) Explanation: The answer is the National Association of Insurance Commissioners (NAIC). The NAIC does not regulate the insurance industry, but rather, provides model legislation that may or may not be enacted by several states. It is not a federal law or agency.

Answer 177

C) Adhesion: one party writes the contract, and the other party has no say in the matter—she only accepts or rejects the contract. Explanation: The answer is adhesion: one party writes a contract, and the other party has no say in the matter—she only accepts or rejects the contract. This is an accurate description of adhesion.

Answer 178

D) Offer and acceptance, consideration, legal object, legal capacity, and legal form Explanation: The five elements of an insurable contract are offer and acceptance, consideration, legal object, legal capacity, and legal form.

Answer 179

B) Margarita failed to protect the property when she had adequate time to do so. Explanation: The insurance company will pay for the broken window and any other damage from the hail storm, but could deny the claim for the damaged floor and ceiling since Margarita failed to protect the property when she had ample time to do so.

Answer 180

B) Require Debbie to surrender the remaining earring before receiving a check Explanation: The answer is require Debbie to surrender the remaining earring before receiving a check. Options available to the insurer to settle a claim like this include replacing both earrings, replacing just the lost earring, or simpy issuing a check for an amount equal to the value of the lost earring. The insurance company can ask but cannot require Debbie to surrender the other earring. It can reduce the settlement amount by the salvage value of the single earring if she does not surrender it.

Answer 181

D) The tendency of persons with the highest risk of loss to also be the most likely to purchase insurance, thereby causing the insurer the greatest cost in terms of claims Explanation: The answer is the tendency of persons with the highest risk of loss to also be the most likely to purchase insurance, thereby causing the insurer the greatest cost in terms of claims. Adverse selection is the tendency for those most likely to incur losses to seek insurance.

Answer 182

D) I, II, and III Explanation: The answer is I, II, and III. Options I, II, and III, along with competence, inclination to service, specialization, and a good reputation, are important when selecting an insurance producer. The production awards earned are an indication of sales ability, but not necessarily what should be sought in an insurance producer.

Module 1 Flashcards

Principles of Insurance