Module 4 - Quiz

Question 1

The process of deciding how much and what kind of insurance to buy is called?

1) life insurance planning
2) financial planning
3) risk management
4) insurance management

Answer 1

3) risk management

Deciding how to deal with insurable and uninsurable risk is called risk management. Risk management is more comprehensive than insurance management.

Question 2

Liability risk is

1) one form of pure risk
2) one form of speculative risk
3) avoidable with good behavior
4) only a concern for wealthy individuals

Answer 2

1) one form of pure risk

Question 3

Which one of the following is not a requirement for an insurable risk from the insurance company’s perspective?

1) the law of large numbers must apply
2) the loss must be catastrophic
3) the loss must be accidental
4) the loss must be measurable

Answer 3

2) the loss must be catastrophic

The loss cannot be catastrophic (for the insurance company) in order for it to be an insurable risk.

Question 4

T / F - The owner of a life insurance policy must have an insurable interest in the insured at the time of death.

Answer 4

False - The owner of a life insurance policy must have an insurable interest in the insured at the time of purchase of the contract. An insurable interest indicates the policy owner will suffer a loss as a result of the insured casualty or death.

Question 5

T/ F - Insurable interest is not a factor after purchase of personal property.

Answer 5

False - There must be an insurable interest in personal property at the time of a claim. An insurable interest indicates the policy owner will suffer a loss as a result of the insured casualty or death.

Question 6

T / F - Without the requirement of insurable interest, policy owners could unfairly profit from insured casualties.

Answer 6

True - Without the requirement of insurable interest, policy owners could profit unfairly from casualty losses or the death of others where they have no insurable interest whatsoever. An insurable interest indicates the policy owner will suffer a loss as a result of the insured casualty or death.

Question 7

T / F - A beneficiary must show proof of insurable interest to collect the death proceeds on a life insurance policy.

Answer 7

False - A beneficiary does not need to show proof of insurable interest to collect the death proceeds on a life insurance contract. An insurable interest indicates the policy owner will suffer a loss as a result of the insured casualty or death.

Question 8

Which one of the following is not one of the basic/standard sections of an insurance policy?

1) declarations
2) riders and endorsements
3) exclusions
4) conditions

Answer 8

2) riders and endorsements

Riders and endorsements increase coverage or provide additional coverage to an existing policy; however, they are not considered to be one of the basic or standard sections of a policy.

Question 9

Which one of the following is not one of the primary factors in determining the cost of automobile insurance in any given state?

1) age and sex of driver
2) gas mileage of vehicle
3) type of vehicle
4) use of vehicle

Answer 9

2) gas mileage of vehicle

Question 10

T / F - Standard Form 734 is used for all umbrella insurance contracts.

Answer 10

False

Question 11

T / F - Umbrella insurance generally comes in $1 million increments.

Answer 11

True - Umbrella insurance generally comes in $1 million increments. Underlying insurance is used first, and then umbrella coverage kicks in, with little specification of liabilities covered. Comprehensive personal liability insurance is covered in Section II of the homeowners policy.

Question 12

T / F - Umbrella insurance pays out a claim first and the underlying insurance pays out any remainder amounts.

Answer 12

False

Question 13

T / F - Umbrella insurance covers only specific liability exposures and has many exclusions.

Answer 13

False

Question 14

“Other than collision” coverage under a personal auto policy (PAP) would cover which one of the following events?

1) running an auto into a tree.
2) a tree falling on a parked car in a storm.
3) a fender bender with a parked car.

Answer 14

2) a tree falling on a parked car in a storm.

This would have to be covered under “other than collision,” not “collision.” Falling objects such as trees and hail would be examples of situations that would need other than collision coverage.

Question 15

T / F - Contributory negligence means that if an injured individual has contributed to an accident, the amount of damages will be reduced by the degree to which the injured party was at fault.

Answer 15

False - This is a definition of comparative negligence, not contributory negligence.

Question 16

T / F - Comparative negligence precludes an injured individual from collecting any damages if he or she contributed in any way to the accident.

Answer 16

False - This is a definition of contributory negligence, not comparative negligence.

Question 17

T / F - Assumption of risk means that the injured party is entitled to damages because the other party involved has assumed any risk.

Answer 17

False - This is incorrect, under assumption of risk, the individual understands the danger of a particular activity and is barred from collecting damages in the event of an injury.

Question 18

T / F - An individual can still be sued for negligence even if he or she behaves responsibly and hasn’t done anything wrong.

Answer 18

True - This is a correct statement. Unfortunately, one can still be held liable for negligence even if he or she has not done anything wrong. Behaving responsibly does not guarantee or protect someone from getting sued for negligence.

Question 19

T / F - A homeowners policy would include covering any liability incurred from running a business out of the home.

Answer 19

False - A homeowners policy is a personal, not business, policy. Additional or separate insurance would be needed in order to protect against any liability resulting from running a business out of the home.

Question 20

T / F - A personal auto policy covers liabilities resulting from any use of an auto listed on the policy.

Answer 20

False - A personal auto policy provides coverage for personal use of the auto, not business use. Thus it does not provide coverage for any use of the auto.

Question 21

T / F - A homeowners and personal auto policy are meant to cover personal property and liability, not business property and liability.

Answer 21

True - Homeowners and auto insurance are meant to cover individuals and property that is being used personally, not for business. There is other insurance available to cover business insurance needs.

Question 22

Katie and Dan are buying their first home. Which one of the following risks will be facilitated when they obtain homeowners insurance?

1) risk avoidance
2) risk reduction
3) risk retention
4) risk transfer

Answer 22

4) risk transfer

Risk transfer is largely facilitated through obtaining insurance.

Question 23

The cause of a loss is called a(n)

1) risk
2) peril
3) hazard
4) accident

Answer 23

2) peril

Question 24

Someone who has a position of selecting or rejecting risks for insurance coverage is known as a(n)

1) insurer
2) agent
3) underwriter
4) broker

Answer 24

3) underwriter

Question 25

T / F - Insurance contracts are bilateral contracts.

Answer 25

False - Insurance contracts are considered to be unilateral since the insured cannot be forced to pay the premiums. Of course if the insured doesn’t pay the premiums, then the policy will lapse and no longer be in force.

Question 26

T / F - The concept of indemnity is based on the idea that when one suffers a loss they should profit from it above being made whole again.

Answer 26

False - The concept of indemnity is based on the idea that when one suffers a loss they should be made whole again, but not profit from it.

Question 27

T / F - In order to avoid a coinsurance penalty the insured must have coverage for at least 80% of their home’s replacement cost.

Answer 27

True - This is the correct amount of coverage in order to avoid the coinsurance penalty.

Question 28

T / F - Coverage for personal property on a homeowners policy is typically the same amount as coverage for the dwelling.

Answer 28

False - Personal property coverage on a homeowners policy is typically expressed as a percentage of the amount on the dwelling itself, such as 50%.

Question 29

Which one of the following is an example of a type of speculative risk?

1) swimming pool
2) stock market investment
3) home located in a flood plain

Answer 29

2) stock market investment

Question 30

A risk management plan can

1) prevent catastrophic losses of property from occurring.
2) prevent a negligence lawsuit.
3) prevent judgments awarded against the insured.
4) protect against possible large losses.

Answer 30

4) protect against possible large losses.

Risk management cannot prevent losses from occurring, but a risk management plan can protect against possible large losses.

Question 31

Choosing to live in a well-lit, gated community is an example of

1) risk avoidance
2) risk reduction
3) risk retention
4) risk transfer

Answer 31

2) risk reduction

Question 32

T / F - The insurance field has one area that deals with life and health related coverage and another that deals with property and casualty coverage, and insurance agents tend to work primarily in one area or the other.

Answer 32

True - There are two different and distinct areas of insurance, and typically insurance agents will specialize and work primarily in one area.

Question 33

T / F - Insurance agents oftentimes sell multiple types of insurance as part of their practice, including life, health, property, and casualty.

Answer 33

False - There are two different and distinct areas of insurance: life and health or property and casualty. Typically agents focus on one or the other.

Question 34

T / F - Individuals who sell insurance may be called agents or brokers, both of which mean essentially the same thing as far as the client is concerned.

Answer 34

False - An insurance agent primarily works for the insurance company and can bind coverage, whereas a broker works for the client.

Question 35

The difference between an insurance agent and an insurance broker can be best described by which one of the following statements?

1) A broker is a legal representative of one insurance company.
2) Brokers can bind an insurance company.
3) An agent makes the insurance company accountable to information given by the client to the agent.
4) An agent cannot instantly insure a client, they must wait to contact an insurer.

Answer 35

3) An agent makes the insurance company accountable to information given by the client to the agent.

A broker can shop around different insurance agencies. An insurance agent is bound to one particular company, can bind insurance with that company, and is accountable to information given by the client to the agent.

Question 36

Which one of the following perils is not covered under a typical homeowners insurance policy?

1) fire
2) flood
3) vandalism
4) volcanic eruption

Answer 36

2) flood

Question 37

Which one of the following is not one of the rules of risk management?

1) don’t risk more than you can afford to lose
2) the law of large numbers
3) consider the odds
4) don’t risk a lot for a little

Answer 37

2) the law of large numbers

The law of large numbers is a requirement for an insurable risk, and is not a rule of risk management.

Question 38

Which one of the following would be an example of a peril?

1) running a red light
2) theft of jewelry
3) a swimming pool
4) a vicious dog

Answer 38

2) theft of jewelry - cause of loss, not contributing factor

Question 39

Under a personal auto policy, which one of the following is not one of the insured’s duties after an accident?

1) providing the insurer with authorization to examine medical records and any other pertinent records
2) cooperating with any investigation
3) contacting the police after any accident
4) submitting any required proof of loss

Answer 39

3) contacting the police after any accident

Contacting the police is not a requirement, unless it is a hit-and-run accident or theft.

Question 40

T / F - The state-mandated liability limits for auto insurance are appropriate for most drivers.

Answer 40

False - The state-mandated limits are often quite low, such as $25,000 or $50,000. Coverage levels should be higher in order to be sufficient.

Question 41

T / F - Most states require liability insurance, but they do not require collision insurance.

Answer 41

True - States require liability insurance only, they do not require coverage for collisions.

Question 42

T / F - It is a good idea to consider uninsured motorist coverage in case your insurance lapses and you are involved in an accident.

Answer 42

False - Uninsured motorist coverage provides coverage in the event one is in an accident with someone who does not have auto insurance. Without this coverage the driver with insurance would have to sue the uninsured driver, which can be a costly and drawn-out process that will not necessarily be successful, especially if the uninsured driver has little or no assets.

Question 43

T / F - stock companies only use agents and mutual companies only use brokers

Answer 43

False

Question 44

T / F - a broker is a legal representative of the insurance company

Answer 44

False

Question 45

T / F - an agent represents the buyer

Answer 45

False

Question 46

T / F - most brokers cannot bind coverage with an insurance company

Answer 46

True - Most stock and mutual companies use agents or brokers or both. An agent is a legal representative of the insurance company and can bind insurance with that company, while a broker represents the buyer and cannot usually bind coverage with an insurance company.

Question 47

Which one of the following represents the best protection against financial loss suffered due to premature death?

1) life insurance
2) medical insurance
3) disability insurance
4) long-term care insurance

Answer 47

1) life insurance

Question 48

T / F - Mutual companies are publicly traded on a stock exchange.

Answer 48

False - Mutual companies are private and dividends go to the policyholders (participating policies).

Question 49

T / F - Mutual companies offer participating and nonparticipating policies.

Answer 49

False - By law mutual companies can only offer participating policies.

Question 50

T / F - Stock companies are owned by the policyholders.

Answer 50

False - Stock companies are owned by shareholders.

Question 51

T / F - Nonparticipating policies are only sold by stock companies.

Answer 51

True - Nonparticipating policies can only be sold by stock companies, mutual companies cannot sell nonparticipating policies.

Question 52

Which one of the following would not be considered an insured as described in a personal automobile policy?

1) your teenage son who is a senior in high school
2) your neighbor borrowing your vehicle, with your permission, to take her driving test
3) the teenager down the street uses your car with permission while babysitting your children
4) your estranged son who lives in another state

Answer 52

4) your estranged son who lives in another state

Two reasons: He does not live in your household (this is the most significant reason) and, if estranged, we can make the assumption that he does not have your permission to drive your automobile.

Question 53

The major problem with standard homeowners and automobile liability insurance is

1) the lack of availability.
2) narrow geographic coverage.
3) inadequate liability coverage limits.
4) cost-prohibitive deductibles.

Answer 53

3) inadequate liability coverage limits.

The main problem with both homeowners and automobile liability insurance is the relatively low upper limits of liability coverage.

Question 54

Comprehensive personal liability insurance (umbrella policies) was designed to

1) replace automobile liability insurance.
2) provide protection for otherwise uninsurable risks.
3) provide workers’ compensation in event of injury.
4) provide personal catastrophic liability protection.

Answer 54

4) provide personal catastrophic liability protection.

The umbrella liability policy was designed to provide personal catastrophe liability protection.