Questions - Chapter 1

Question 1

List the three categories of risk generally faced by people.

Answer 1

1) Personal Risk. Financial loss will accompany the loss of one’s own health or life.
2) Property Risk. Owners must deal with the loss to their own property.
3) Liability Risk. When someone’s negligent actions result in bodily injury or property damage to others, the law states they shall be held financially liable.

Question 2

State four possible options people can choose to deal with risk and give a brief explanation and example of each.

Answer 2

1) Avoidance of Risk. Means all chance of financial loss has been eliminated. (eg. people who choose to rent rather than purchase their own business premises)
2) Controlling Risk. Taking measures to reduce the frequency and severity of losses. (eg. installing alarm and fire detection alarms to reduce the potential for a loss)
3) Retention of Risk. large corporations tend to assume financial responsibility for their own losses as its generally less expensive than other options. For most people, they’ll retain a portion of risk from their policy deductibles. (eg. a person may purchase insurance covering losses to all property except glass breakage.)

4) Transfer of Risk. Persons unable to withstand the financial consequences of a potential loss look to transfer all or a portion of their risk. Insurance’s major function is to “spread the losses of the few among the many”.

Question 3

Give two examples of loss control measures that can be taken to reduce the frequency and severity of losses.

Answer 3

Installing alarm systems and fire detection systems.

Question 4

State two reasons why loss control measures are not a total solution in eliminating financial loss.

Answer 4

Equipment isn’t 100% effective all the time and certain types of losses such as wind , hail, and lightning cannot be effectively controlled.

Question 5

Which of the four possible options is generally not an effective means of dealing with risk?

Answer 5

Avoidance of risk isn’t an effective way of dealing with risk. One exposure to financial loss is simply replaced with another.

Question 6

Which of the four possible options is the most popular and practical means of dealing with risk?

Answer 6

The transfer of risk is the most popular and practical way of dealing with risk. The major function for insurance is to “spread the losses of few among the many”.

Question 7

Explain using an example “speculative risk”.

Answer 7

Involves the possibility of either financial gain or loss, there’s always a chance the venture will fail. An example would be when people place a bet on the blackjack table in a casino.

Question 8

Explain using an example “pure risk”.

Answer 8

Involves a chance of financial loss but at the same time does not offer a chance of financial gain. When there’s no opportunity for a person to profit from a loss the risk is pure. Only pure risk is insurable.

Question 9

Which of these types of risk will insurers not provide an insurance policy?

Answer 9

Speculative risks.

Question 10

A contract is an agreement between two or more parties which creates an obligation to do or not to do a particular thing. All contracts contain five elements. Identify and explain these five elements.

Answer 10

1) Agreement. For an agreement to exist there must be a meeting of the minds as to the subject matter and terms of the contract. There must be: an offer made and an unequivocal and unconditional acceptance of the terms of that offer.
2) Consideration. An exchange of something of value between the parties. The consideration given to the other party takes one of the following forms: a return promise, an act performed, and an agreement not to act.
3) Legality of Object. Contracts which have no legal purpose include those involving the deliberate killing of people and the importing of illicit drugs.
4) Legal Capacity of the Parties to Contract. The law will enforce only those contracts of persons it recognizes as competent or having the legal capacity to contract. Incompetents are protected by law and include: Minors (the age of majority is 19), Mental Incompetents (people who are insane, senile, or other mental defects), Persons Under The Influence of Alcohol or Drugs, and Trade Names.
5) Genuine Intention. A contract is only enforceable when both parties intended to enter into a contract. To prove genuine intention its required to show the agreement between the parties was not affected by: Fraud, Duress, Concealment, or Mistake.

Question 11

List the two items that are required for a proper agreement, or meeting of the minds to be valid.

Answer 11

There must be An offer made and an unconditional acceptance of the terms of that offer.

Question 12

Is it necessary that these items be put in writing?

Answer 12

When the parties are still negotiating and an agreement has not been made its not necessary that the offer and acceptance be in writing.

Question 13

What obligation and/or time constraint is upon the applicant for insurance when a policy is issued differently than requested?

Answer 13

The applicant can reject the written notification from the insurer within two weeks of receiving the policy.

Question 14

Identify four persons, or incompetents, who generally do not have the legal capacity to contract.

Answer 14

1) Minors
2) Mental Incompetents
3) Persons Under the Influence of Alcohol or Drugs
4) Trade Names

Question 15

Identify three “necessities” of life for which minors are permitted to contract.

Answer 15

Food, clothing, and lodging.

Question 16

Identify four items that might affect the presence of genuine intention.

Answer 16

1) Fraud
2) Duress (illegal imprisonment)
3) Concealment (misrepresented past or present facts)
4) Mistake

Question 17

While the majority of contract require the presence of the five elements already discussed, an insurance contract is enforceable if it contains three additional elements. Identify and explain each from the insured’s perspective.

Answer 17

1) Insurable Interest. When people can show that they would suffer financially should a loss occur. Owners of property, including business partners and, mortgagees. Bailees to whom property is entrusted for repair, service, or safekeeping. Any person who may be held legally responsible to a third party for bodily injury or property damage.
2) Utmost Good Faith. The law requires that insurance contracts maintain a higher standard of honesty than is needed of other contracts. The complete honesty of the parties is critical to the contract. The onus is on the insureds to exercise utmost good faith in their dealings with the insurers.
3) Indemnity. Ensures that people receive the actual amount of their loss, no more and no less. Indemnity is measured by the value of the insured property as it existed immediately prior to the loss.

Question 18

Identify four persons who might have an insurable interest in a contract of insurance.

Answer 18

1) Owners of Property including their business partners
2) Mortgagees
3) Bailees to whom property is entrusted for repair, service, or safekeeping
4) Any person who may be held responsible to a third party for bodily injury or property damage.

Question 19

At what point in time is the true measure of indemnity determined?

Answer 19

Indemnity is measured by the value of the insured property as it existed immediately prior to the loss.

Question 20

In an insurance contract (policy), from your clients perspective, explain what they must do, or be present, to meet the following elements.

Answer 20

I) Consideration. The consideration given by the insured is payment of the premium or the promise to pay the premium at a later date.
II) Legal Capacity. Some minors own or rent their own property and cars and the law recognizes that persons to void a contract due to them being minors is forfeited after a reasonable time. If a policy is issued to a mentally incompetent person the legality of that contract will be determined by the insurer and the insured or their representative. The law makes it extremely difficult for people under the influence to void contracts they negotiate. The extent of a corporation’s right to contract will be stated in its charter.
III) Insurable Interest. When there’s no insurable interest the contract is not enforceable. The intent of the law is to prevent people from benefiting from a loss in which they have no financial stake in.
IV) Utmost Good Faith. The decision to issue the contract will be based on the information given in the application. The insurer relies on the truthfulness of the insured’s statements. The onus is on the insureds to exercise utmost good faith in their dealings with the insurer.

Question 21

Explain the difference between a void contract and a voidable contract.

Answer 21

A void contract is one which is unable in law to support the purpose for which it was intended. A voidable contract is one which is void as to the wrongdoer but not void as to the wronged party unless he elects to so treat it.

Question 22

What does it mean when a broker issues a binder?

Answer 22

The broker has committed the insurer to provide a contract of insurance on the subject matter under discussion.

Question 23

Binders may be oral or written, as a general rule what should brokers do when they give an oral binder and why?

Answer 23

As a general rule, oral insurance binders should be confirmed immediately in writing. This avoids the potential for disagreements to coverages and amounts insured in the event of a loss.

Question 24

List two places where a broker might find the limits of their binding authority.

Answer 24

I) An Insurer’s Agency Agreement

II) Insurer’s Rate Manual

Question 25

The purpose of insurance is to respond to losses which are both accidental and future. Explain what is meant by this statement.

Answer 25

Insurance is not meant to respond to losses which are deliberate or have already happened.

Question 26

Define ‘Peril”.

Answer 26

The cause of the loss.

Question 27

List three examples of direct loss.

Answer 27

I) Fire
II) Lightning
III) Smoke

Question 28

List three examples of indirect loss.

Answer 28

I) Loss of food in a freezer when electrical motor malfunctions.
II) Loss of rental income after fire damage destroys the building.
III) Loss of profits to a business after a windstorm destroys the building.

Question 29

Property policies contain a description of the method used to determine the amount of indemnity to be paid in the event of an insured loss. Identify the three factors to be considered when determining the amount to be paid to the insured.

Answer 29

I) Determine the actual cash value of the property at the time of loss, destruction, or damage.
II) Determine the interest of the insured in the property.
III) Verify the limit of insurance provided by the policy.

Question 30

Which one of these three will be paid to the insured?

Answer 30

In the event of a loss the agreed amount would be paid to the insured under a valued policy.

Question 31

Define “Actual Cash Value”.

Answer 31

ACV is deemed to be the new or replacement cost of the property at the time of the loss, less depreciation.

Question 32

Identify three factors to be considered when calculating depreciation.

Answer 32

I) Condition of the object.
II) Resale value.
III) Normal Life Expectancy.

Question 33

Most insurers will amend the Indemnity Agreement to delete the acv basis and indemnify on either a replacement cost settlement basis or a valued settlement basis.

a) Explain what’s meant by Replacement Cost.
b) In your own words and example, explain to a client the difference between acv and replacement cost.
c) Explain what is meant by valued basis and give two examples of property that may be insured on a valued basis.

Answer 33

a) Replacement cost policies provide for the repair or replacement of lost or damaged property with new property of like kind and quality without deduction for depreciation.
b) ACV takes into account the depreciation of the property right immediately before the time of loss. Replacement cost takes into account what it would take to replace or repair the property without depreciation deducted.
c) Valued Basis policies are there for property such as old jewelry, and antiques that are unable to be replaced in the event of a loss. Both the insured and the insurer agree upon an amount a the time the policy is made to the cash value of such property.