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Insurance CFP > Principles of Insurance > Flashcards

Principles of Insurance Flashcards

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1
Q

Absolute Liability

A

liability without regard to negligence or fault (workers comp)

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2
Q

Adverse Selection

A

parties with greatest possibility of loss have the greatest desire for insurance. Want to AVOID

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3
Q

Aleatory Contract

A

if no loss occurs insurer pays nothing. Alternatively, if loss occurs, they may pay out more than premiums collected

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4
Q

Collateral Source Rule

A

damages assessed against negligent party not be reduced simply bc injured party has other resources of recovery avail. (insurance or employee benefits)

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5
Q

Common law contract

A

negotiable and can be modified (real estate contract)

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6
Q

Contract of adhesion

A

insurance contract is contract of adhesion - insurance co prepares the entire contract. Insured can accept or decline but cannot modify. “take it or leave it”

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7
Q

Can the consumer modify a contract of adhesion?

A

No

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8
Q

First part of insurance contract

A

insurable interest

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9
Q

2nd part of insurance contract

A

-determinable actual cash value
-amount recovered cannot be greater than the loss

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10
Q

3rd part of insurance contract

A

Subrogation- the insurance co must have the right to collect from a negligent 3rd party

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11
Q

Most property, liability and health insurance contracts are what

A

contract of indemnity

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12
Q

Contract of indemnity means what re:payment amount

A

payment only to the extent of financial loss or legal liability

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13
Q

Misrepresentation (contract of good faith)

A

if insured made a false statement, contract may be voided

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14
Q

Warranties (contract of good faith)

A

breach of warranty may cause contract to be voidable. warranty is a statement that is made part of the policy

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15
Q

Concealement (contract of good faith)

A

FAILURE of the insured to DISCLOSE MATERIAL FACTS concerning subject matter of the insurance could cause to be VOIDED

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16
Q

Dynamic risks

A

result from CHANGING ECONOMY (change in biz cycle, consumer taste), insurance doesn’t cover these risks

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17
Q

Estoppel

A

WHEN ONE PARTY IS NOT ALLOWED TO ASSERT A RIGHT due to having MISLED someone, and action is required by the other party

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18
Q

Financial risk

A

exposure to risk that may cause financial loss

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19
Q

Fundamental Risk

A

impersonal and usually a group risk (recession or earthquake) affects large segments of society at same time

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20
Q

Group insurance

A

insurance for more than one person through single contract issued to someone, usually employer, other than persons insured.

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21
Q

What is the contract called in a group insurance situation

A

master contract

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22
Q

What do people receive as proof of coverage in group insurance

A

certificate of insurance

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23
Q

Hazard

A

increases probability that a loss will occur

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24
Q

Physical hazard

A

physical characteristics of the person or property that increase the chance for loss (diabetic, house in flood zone)

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25
Q

Moral Hazard

A

-chance of loss from dishonesty
-OVERSTATES loss or INTENTIONALLY causes loss
-can happen when insured has weakened financial capacity

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26
Q

Morale Hazard

A

indifference to loss WHEN INSURANCE IS IN PLACE - creates carelessness and increases chance for loss (failure to lock doors)

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27
Q

Insurance broker

A

rep of the insured and not of insurance co. Broker has no authority to bind the insurer

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28
Q

Insurable interest

A

-right or relationship to subject matter of the contract such that OWNER would SUFFER FINANCIAL LOSS from damage, loss or destruction

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29
Q

Insurable interest is used to decrease what

A

moral hazard, prevent gambling, help measure actual losses

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30
Q

Property insurable interest needs to exist when

A

at the time of loss

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31
Q

Life insurance insurable interest needs to exist when

A

at the time insurance is purchased

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32
Q

Joint and several liability

A

negligence caused by 1 or 2 or more parties - each party can be held fully liable - party paying more than its own legal share can seek contribution from the others who have not paid their proportional share

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33
Q

Liability Risk

A

getting sued for intentional or unintentional injury to property or others (tort liability or civil suit)

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34
Q

Loss

A

partial or complete disappearance or reduction in value - undesired end result of risk

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35
Q

Negligence

A

failure to act how a reasonably prudent person would act

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36
Q

Negligence per se

A

act itself constitutes negligence - thereby relieving the burden to prove negligence (drunk driving)

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37
Q

particular risk

A

affects only the individual or small group at the same time, like if your home was burglarized

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38
Q

Peril

A

anything that causes a financial loss - unemployment, illness, old age, death, theft, fire, earthquake

39
Q

Personal Risk

A

loss of income/asset from loss of ability to earn income through death, disability or sickness

40
Q

Pure Risk

A

only the chance of loss or no loss at all

41
Q

Res ipsa loquitor

A

“speaks for itself” - ie in a plane crash the negligence does not have to be proven by the injured party - affords reasonable evidence if the specific explanation of negligence isn’t readily available

42
Q

Risk

A

possibility of an adverse deviation from an expected desired outcome

43
Q

Speculative Risk

A

involves chance of loss or gain - gambling

44
Q

Static Risks

A

-Factors other than change in economy (death of family breadwinner)
-tend to occur with regularity and can be insured against

45
Q

Strict Liability

A

-resulting from extraordinarily dangerous activity
-negligence doesn’t have to be proved, however defenses may be allowed to refute or lessen liability
-strict parents wont let you do crazy shit

46
Q

Tort

A

infringement on the rights of another. Wrongdoer is the tortfeasor - creates right for damaged party to bring civil action

47
Q

Tort results in 2 forms of injury

A

bodily injury and property damage

48
Q

What type of tort liability can be waived in banruptcy

A

general tort liability other than an intentional tort

49
Q

4 elements to prove in tort

A

-duty owed by defendant
- must be breach of that duty
- damage or loss suffered by plaintiff
- breach of duty must be proximate cause of damage

50
Q

Unilateral contract

A

insurance contract - only the insurer promises to do anything as there is no promise of the insured to pay the premium

51
Q

Vicarious Liability

A

one person may become legally liable for the torts (negligence) of another - parent/child, employer/employee

52
Q

Waiver

A

one party voluntarily relinquishes a right “I waive mt right to” and no action is required by the other party

53
Q

Law of Large Numbers

A

-larger sample will improve the insurers estimate of the underlying probability
-In a perfect world premiums would equal losses
-As actual events differ from predictions, risk exists for the insurer

54
Q

What type of liability is workers comp?

A

Absolute liability

55
Q

Adverse Selection example

A

people in california purchase earthquake insurance more than people in new york

56
Q

4 Elements of insurable risk

A
  1. reasonably predictable
  2. definite and measurable
  3. fortuitous or accidental
  4. must not be catastrophic
57
Q

Biz Self insurance

A

-biz sets aside own funds to cover certain non-catastrophic risks
-Biz predicts exposure and sets aside cash to cover
-needs to purchase catastrophic risk insurance as well

58
Q

Risk Management Process

A
  1. Identify risk
  2. Measure frequency, severity and variability
  3. Choose method to treat - avoid, retained and/or transferred to ins. co
  4. Evaluate and review effectiveness of choices
59
Q

Essential coverage

A

ins. required by law for possibly disastrous results required for biz or household

60
Q

Desirable coverage

A

losses that would seriously impair but not totally wipe out the financial position of the household or biz.

61
Q

Available coverage and cash flow available for premiums

A

evaluate all available insurance coverage and establish budget to pay premiums

62
Q

Risk control

A

actions taken to minimize exposure to risk. - loss prevention and control efforts

63
Q

Risk avoidance/Strict liability

A

risk has catastrophic potential and can’t be reduced or transferred - athlete piloting a plane, bungee jumping etc.

64
Q

Risk diversification

A

duplication of assets or activities at different locations - separate buildings, inventory at various warehouses, duplicate record of will

65
Q

Risk Reduction

A

all techniques designed to reduce loss - security systems, fire detectors, physical exams, seatbelts

66
Q

Risk financing

A

guarantees that funds are available to meet losses when they occur - 2 ways to do this - risk retention and risk transfer

67
Q

Risk retention

A

you retain the risk of loss arising out of the exposure, either intentional or unintentional

68
Q

Risk transfer

A

shift as much of the $ burden of the risk to another person or entity. when insurance in used a premium payment is required

69
Q

What type of contract is insurance contract?

A

Contract of adhesion

70
Q

Can a common law contract be modified?

A

Yes

71
Q

What would someone with moral hazard do?

A

Overstate loss or intentionally cause loss

72
Q

Does a broker have the power to bind the insurer?

A

No - they are an agent of the insured

73
Q

Loss is the end result of what

A

risk

74
Q

Subrogation

A

Insurance companies right to collect $

75
Q

In a tort, the wrongdoer is the what

A

tortfeasor

76
Q

What does a tort create for the damaged party

A

creates right for damaged party to bring civil action

77
Q

Insurance is regulated at what level?

A

The state level

78
Q

Enforceable Contracts Must have What

A

Competent parties, legal purpose, consideration, offer and acceptance

79
Q

Is a tort civil or criminal in nature?

A

Civil

80
Q

An agent is responsible to ____ not to the _______

A

Their Principal, not to the client

81
Q

A condition that increases the probability loss will occur

A

Hazard

82
Q

An event that causes loss such as fire, lightning, smoke or theft

A

Peril

83
Q

The possibility of an adverse deviation from an expected outcome

A

Risk

84
Q

Adverse selection says people who are what are the most likely to purchase insurance

A

Most in need of insurance

85
Q

Required elements to make a risk insurable

A

-must be reasonably predictable
-definite and measurable
-must be fortuitous or accidental

86
Q

Low Severity of loss and high probability of loss - what should you do with the risk

A

Reduce the risk

87
Q

High severity of loss and high probability of loss what should you do with the risk

A

Avoid the risk

88
Q

Low severity of loss and and low probability of loss what should you do with the risk?

A

Retain the risk

89
Q

High severity of loss and low probability of loss what should you do with the risk

A

Transfer the risk

90
Q

When must insurable interest exist for property and casualty insurance?

A

when the policy is written and when the loss happens

91
Q

Can you reinstate your life insurance policy if the premiums lapsed?

A

Yes as long as the insurable interest still exists and the insured is still insurable

92
Q

What rule states the damages assessed against the negligent party won’t be reduced because they have insurance in place?

A

Collateral source rule

93
Q

speculative risk can be described how

A

risk that results in an uncertain degree of gain or loss

94
Q

Hazard that deals with negligence or carelessness

A

Morale hazard

Insurance CFP (14 decks)

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