Section I – General Insurance Concepts

Question 1

Insurance

Answer 1

a contract that binds the insurer to indemnify (compensate) the insured against specified types of loss in return for money (premiums).

Question 2

what is insurance designed to protect?

Answer 2

to protect the financial well-being of an individual, company, or other entity against the financial risks associated with unexpected loss.

Question 3

what do premium payments ensure?

Answer 3

In exchange for the premium payments from the insured, the insurer agrees to pay the policyholder upon the occurrence of specific events. In most instances, the insured pays for a portion of each loss in the form of a policy deductible, and the insurer pays for the balance of the loss up to the policy limit of insurance.

Question 4

The Law of Large Numbers

Answer 4

a theory that states that it is more likely to predict a particular outcome as the number of units in a group increases. The bigger the observed sample, the more accurate the predicted results will be.

Question 5

What is the law of large numbers 2 objectives in life insurance?

Answer 5

1) The paying of benefits to survivors of someone who dies while covered
2) The providing of distribution of benefits by lump sum or with guaranteed lifetime payments

Question 6

Indemnity

Answer 6

the underlying principle of insurance, which is restoring an insured to the same financial position that existed before a loss occurred.

Question 7

Loss

Answer 7

the source of a claim for damages under an insurance policy. Losses cause a financial loss to the insured due to loss of property, a liability from something the insured did to someone else, the loss due to the loss of a loved one, or losses due to medical problems. Loss arises from the occurrence of an event that is insured by a policy.

Question 8

direct physical loss

Answer 8

a loss in which damage occurs as the result of an occurrence without an intervening cause, such as hail damage to the roof of a house.

Question 9

intervening cause

Answer 9

an event that interrupts the chain of causation by providing an independent cause of the final result.

Question 10

indirect or consequential loss

Answer 10

a loss in which damage occurs as the result of a direct loss, such as the insured’s increase in expenses when required to stay in a hotel because a hail-damaged home cannot be lived in.

Question 11

Insurable interest

Answer 11

the concept that insurance can only be purchased when the applicant has a potential for financial loss – if the insured person died, or if the insured items were destroyed or not in their possession. In Life insurance, insurable interest is only required at the time of application.

Question 12

what are the 2 meanings of Risk?

Answer 12

(1) The property or party that is insured, and (2) The uncertainty of loss

Question 13

pure risk

Answer 13

a situation that only involves the chance for loss, or no loss, such as property ownership.

Question 14

Speculative risks

Answer 14

are situations that involve the chance for either a loss or a gain, such as gambling.

Question 15

Relationship Between Risk and Premium

Answer 15

The greater the risk, either in value or in potential for a loss or claim, the greater the premium will be.

Question 16

Negligence

Answer 16

is conduct that is culpable because it misses the standard required by law of a reasonable person in protecting others or the interests of others against risky or harmful acts of other people. It is:

The failure to do something that a reasonable person would do OR
Doing something that a reasonable person would not do

Question 17

Self-insurance

Answer 17

making financial preparations to meet risks by setting aside sufficient funds in advance to meet estimated losses, rather than purchasing an insurance policy

Question 18

Applicant

Answer 18

The individual who applies for insurance

Question 19

Insurer

Answer 19

another name for an insurance company

Question 20

Insured

Answer 20

In Life insurance, the insured whose life is covered is named in the policy, along with any covered dependents by name

Question 21

Agent/Producer

Answer 21

An individual who is state-licensed to solicit and sell insurance for one or more insurance companies. He/she must be authorized by an insurer (known as the principal) to act on its behalf.

Question 22

policy owner

Answer 22

Applies for a policy.
Takes responsibility for premium payment.
Has the right to cash values, dividends, and policy proceeds.
Has the ability to change beneficiaries and other policy particulars.

Question 23

Binder

Answer 23

a written or oral contract made by an agent that puts a policy immediately but temporarily into effect for a specified period of time, from the time initially bound until accepted or canceled by the insurance company, that includes all the terms of and endorsements to the policy. The minimum that an agent needs in order to put a binder into effect is the insured’s promise to pay the premium within a certain time frame. All policy terms and conditions are in force until a policy is issued or coverage is declined by the insurer on whom the binder was written.

Question 24

Why agents must be careful not to exceed their binding authority?

Answer 24

as the company is liable for the entire risk until reviewed and accepted or canceled by the insurer

Question 25

Certificate of Insurance

Answer 25

A document issued by an insurance company/broker that is used to verify the existence of insurance coverage under specific conditions granted to listed individuals

Question 26

Endorsement

Answer 26

An attachment to a document that amends or adds to it is known as an endorsement. Typically, it is an added provision to an insurance policy. Also referred to as a “rider.”

Question 27

Waiver

Answer 27

The voluntary abandonment of a known or legal right or advantage is a waiver

Question 28

waiver of rights

Answer 28

is the intentional relinquishment of a known right. The insured would need to sign a form if they are relinquishing their rights in a policy or claim settlement.

Question 29

Estoppel

Answer 29

The idea that once a fact has been admitted to be true by a previous action it can no longer be denied to be true

Question 30

Accident

Answer 30

is an unforeseen and unintended event that is identifiable as to time and place.

Question 31

Occurrence

Answer 31

including continuous and repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured

Question 32

Exposure

Answer 32

is the condition of being at risk for financial loss due to hazards or unforeseen events.

Question 33

hazard

Answer 33

is a condition that increases the chance for loss or the severity of loss.

Question 34

4 types of hazards

Answer 34

Physical – Physical hazards are created by the use, condition, or occupancy of property, such as damaged steps or worn auto tires.
Moral – Moral hazards are created by the insured’s habits, such as dishonesty or criminal activity. It is a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost.
Morale – Morale hazards are created by the attitudes of the insured, such as indifference because the insured knows he/she is insured. An example would be not making sure doors and windows are locked before leaving home. If anything is stolen, the insured doesn’t worry because it’s insured. While a Moral hazard describes a conscious change in behavior to try to benefit from an event that occurs, a Morale hazard describes an unconscious change in a person’s behavior when he/she is insured.
Legal – Legal hazards are created when legal authority in a certain situation is unclear or unsettled. These can arise from changes in the law or from court rulings. An example would be a change in the building code requiring new construction to use different materials.

Question 35

Peril

Answer 35

the cause of a loss or the event insured against.

Examples: fire, lightning, theft, etc.

Question 36

Named Peril Policy

Answer 36

is a policy that only provides insurance for perils that are specifically listed or named in the policy

Question 37

Open-Perils Policy

Answer 37

a policy that provides insurance for all perils except those specifically excluded in the policy
Perils Include:

Life insurance: The peril insured against is death.
Health insurance: Perils include sickness, accidental injury, and disability.

Question 38

Maslow’s Hierarchy of Needs

Answer 38

This hierarchy of needs is important for the insurance producer to know because customers need to have one level of need met before worrying about the next. For instance, customers usually need to have the physiological need for food and shelter met before you would approach them about buying Life insurance for charitable causes.

Question 39

National Association of Insurance Commissioners (NAIC)

Answer 39

All state insurance directors or commissioners are members of the National Association of Insurance Commissioners, also known as the NAIC. The group has no official legislative powers.

The NAIC tries to standardize insurance laws throughout the country by recommending model legislation in each commissioner’s home state.

Individually the commissioners or directors do not make any laws, they enforce insurance laws in their own states. They do this by determining the types of policies that can be sold in their state, by determining the amounts of surplus that insurers must maintain, by investigating complaints of agents and insurance companies, and by examining agents and insurers.

Question 40

Tort

Answer 40

In common law jurisdictions, a tort is a civil wrong that unfairly causes someone else to suffer loss or harm resulting in legal liability for the person who commits the tortious act. Although crimes may be torts, the cause of legal action is not necessarily a crime, as the harm may be due to negligence which does not amount to criminal negligence. The victim of the harm can recover their loss as damages in a lawsuit. In order to prevail, the plaintiff in the lawsuit must show that the actions, or lack thereof, were the legally recognizable cause of the harm. A person may be found not guilty in a criminal case, but can still be found guilty or legally liable in a lawsuit.

Question 41

Endowment

Answer 41

Cash from Life insurance payable to the policyholder at policy maturity (usually at the insured’s age of 100)

Question 42

Final Expenses

Answer 42

The financial costs related to dying, funeral and medical expenses, debts, taxes, and administrative expenses

Question 43

Methods of Handling Risk

Answer 43

When managing risk, an insured may choose to avoid, retain, transfer, share, or reduce risk

Question 44

Avoidance

Answer 44

is refraining from engaging in activity that might give rise to risk, such as not owning or driving a car to avoid the risk of car accidents.

Question 45

Retention

Answer 45

is the retaining of responsibility for loss. In this case, the individual will be totally responsible for paying losses. Retention is the most common method of handling risk, typically in the form of deductibles or choosing not to purchase insurance.

Question 46

Sharing

Answer 46

is spreading risk among several entities or a large number of people, such as by insurance companies or physicians.

Question 47

Reduction

Answer 47

decreases the chance for loss by removing or reducing hazards that might cause an accident to happen, such as wearing safety goggles or installing safety railings around a dangerous area.

Question 48

Transfer

Answer 48

shifting the risk for loss from one party (the insured) to another (the insurer), either through the purchase of an insurance policy or issuance of another contractual agreement (e.g., a hold harmless agreement).

Question 49

Adverse selection

Answer 49

is the tendency of persons who present a greater-than-average degree of risk for loss to apply for or continue insurance to a greater extent than persons with average or less-than-average degree of risk for loss. Normal risks may seek insurance elsewhere, possibly at a lower cost. If a person becomes sick, they may be unable to get insurance elsewhere and are, therefore, more likely to maintain the current coverage.

Question 50

Group Risk Selection

Answer 50

Underwriters look more closely at the specific health history of an individual policyholder than at the collective statistics of a large group. Also, exposure to claim payments is lowered per individual because the risk is spread over the group, usually resulting in a cost savings to the group.

Question 51

Reinsurance

Answer 51

is insurance sold and purchased between two (2) insurance companies for the purpose of transferring and sharing risk, usually catastrophic risk or losses in excess of a specific amount (e.g., $500,000 or $10,000,000)

Question 52

reinsurer

Answer 52

is an insurance company that insures the risks of other insurance companies.

Question 53

ceding insurer

Answer 53

issues primary policies of insurance to individuals and/or businesses. It then buys reinsurance from a reinsurer.

Question 54

2 types of Reinsurance Contract or Treaty

Answer 54

Facultative Reinsurance: The ceding insurer offers individual risks to the reinsurer, and the reinsurer may choose to accept or reject each individual risk.
Treaty Reinsurance: The reinsurer writes coverage for one or more lines of insurance issued by the ceding insurer based on terms stated in the reinsurance contract. Treaty reinsurance continues in force unless canceled by one of the parties of the treaty, and the reinsurer cannot reject individual risks.

Question 55

Indemnity

Answer 55

pure and simple protection from a loss by being reimbursed or paid a sum to make you whole after you incurred a cost or experienced a loss.

Question 56

On Behalf Of

Answer 56

refers to someone else beside the person experiencing the loss paying for that lost or cost in your stead. It is paid for you instead of you paying for it directly.

Question 57

Multi-line insurance companies

Answer 57

are insurers that write more than one (1) line of insurance

Question 58

Stock Companies

Answer 58

Insurers organized under the laws of the state in which they are incorporated that are owned by shareholders who elect officers and directors and share in profits through stock growth and dividends

Question 59

Mutual Companies

Answer 59

Companies of this type have no capital stock and are owned by policyholders who share profits through dividends and who can attend and vote at company meetings

Question 60

Assessment Mutual Insurers

Answer 60

share losses among group members. In a pure assessment group, no premium is paid in advance, but losses are assessed to each member as they occur. In an advance premium assessment group, premiums are paid at the beginning of each assessment period and any claims are paid from these premiums. If there are more claims than premiums paid in, additional assessments are levied against each member. If money is left at the end of the period, then the money is returned to the group members.

Question 61

Non-Assessable Mutual Insurers

Answer 61

charge a fixed premium and the policyholders cannot be assessed further. Reserves and surplus are maintained to provide payment of all claims.

Question 62

Reciprocal Companies

Answer 62

Groups that exchange insurance on each other.
Members appoint and empower an attorney-in-fact that legally binds members to insure each other.
Members share in any profits through lower premiums, or in any losses by assessments.
Insured members are called subscribers.

Question 63

Risk Retention Groups

Answer 63

A mutual insurance company that insures people in the same profession or business

Question 64

Fraternal Benefit Societies

Answer 64

Membership is based on religious, ethnic, or national lines, and noted primarily for social and charitable functions. Fraternal Benefit Societies, also called Fraternals, are societies, orders, or supreme lodges, with no capital stock, and that may or may not be incorporated. Fraternal Benefit Societies:

Are conducted solely for the benefit of members and their beneficiaries, and are not for profit.
Operate on a lodge system with a ritualistic form of work.
Have a representative form of government.
Provide benefits in accordance with their charter.
Started offering Life insurance for the benefit of their poorer members on an assessment basis, but have expanded to operate the same as other insurers today, though they still offer insurance only to members or their families.

Question 65

Self Insurers

Answer 65

Self-insurance is a risk management technique in which a company or individual sets aside a pool of money to be used to remedy an unexpected loss. One can actually self-insure against any type of loss, but in practice most people choose to purchase insurance against potentially large, infrequent losses.

Question 66

Syndicate insurers

Answer 66

are not true insurance companies.

They provide a place for members to meet and transact the business of insurance individually or as groups through a syndicate manager.
They provide assistance in gathering underwriting information and handling claims and disputes among syndicate members.
Members are individually and wholly liable for all risks they accept, with no limitations on liability.

Question 67

Surplus or excess lines insurers

Answer 67

provide insurance not offered through admitted insurers.

The full amount or type of insurance must not be available through admitted insurers.
Financial consideration cannot be a deciding factor.
While a surplus/excess lines insurer has been selling insurance in a state, if the coverage is now offered by an admitted insurer, the non-admitted insurer must stop selling insurance in the state, or apply to become an admitted insurer.

Question 68

Private vs. Government Insurers

Answer 68

While private insurers offer coverage for more common risks, there are some situations that are unacceptable to them. If there is the potential for special, great, or catastrophic risks, those possibilities are usually indemnified by State and Federal Government insurers.

The State or Federal Government sometimes cover certain types of insurance that private insurers cannot or will not insure. Insurers in each state are required to participate in shared or involuntary markets. These markets provide coverage for high-risk insurance applicants that do not meet normal underwriting standards.
Examples of Federal Government insurance include Social Security, Medicare, Flood insurance, Crop insurance, and Crime insurance.

Question 69

Home Service/Debit Insurers

Answer 69

Home service or Debit insurers specialize in individual and industrial insurance with low face amounts - normally $1,000 or less (but the benefit can be higher). Premiums are usually collected by agents on a weekly basis at the insured’s home or place of employment. Home service agents work within a defined geographical territory and offer monthly debit Life insurance products. Some products have premiums that are billed directly by the insurer. The home service market historically has been comprised of lower and lower middle income individuals and families.

Question 70

Captive Insurance Companies

Answer 70

A captive insurer is a company whose business is primarily supplied and controlled by the one interest or group of related interests that set the company up to insure their assets and operations. In this type of situation, coverage can usually be provided at a lower cost than that which is available in the general insurance market.

A captive insurance company may be a non-admitted, non-resident, or foreign insurer, and there are mainly two (2) types:

Pure captive companies, which are wholly controlled by one parent company, or
Group captive companies, which are insurers owned by a number of otherwise unaffiliated firms that are in the same type of business

Question 71

Admitted/Authorized Insurer

Answer 71

An insurer authorized by a state’s insurance department to transact business in that state

Question 72

Non-Admitted Insurer/Non-Authorized Insurer

Answer 72

Insurance companies not authorized to transact business in a state because they either didn’t seek admission to the state or failed to comply with state requirements

Question 73

Domestic Insurer

Answer 73

insurers that transact business in the state where they are chartered.

Question 74

Foreign Insurer

Answer 74

an insurer transacting business in a state but that is chartered under the laws of a different state or one of the U.S. territories.

Question 75

Alien Insurer

Answer 75

an insurer organized under the laws of a jurisdiction outside of the United States or its territories.

Question 76

Financial Solvency Status (Independent Rating Services)

Answer 76

Independent evaluation services provide information on companies such as financial strength, management caliber, and efficiency of operation.

They publish guides which analyze almost all property and liability business insurers.
They review underwriting results, management, adequacy of reserves for liabilities that are not discharged, adequacy of policyholder reserves to absorb shock losses, and soundness of investments.
If properly used, these rating services help avoid delinquent insurance companies. Ratings should be checked over a period of years to verify trends for the companies. A.M. Best and Weiss Research are two (2) companies that have guides available through most public libraries.

Question 77

Exclusive/Captive Agents or Producers

Answer 77

Agents appointed by an insurer to represent the company by selling and servicing policies on its behalf, representing only one company

Question 78

Independent agents or brokers

Answer 78

are agents that represent several insurers.

Question 79

Nonresident Agent

Answer 79

An agent authorized to write business in a state other than the one in which he or she lives

Question 80

direct writer

Answer 80

is an insurer that deals directly with the insured through a salaried representative or captive/exclusive agent rather than through independent brokers.

Question 81

Direct mail and direct response

Answer 81

policies are marketed directly from the company’s home office rather than through agents. Marketing is done through direct mail, internet, newspapers, magazines, radio, or TV.

Question 82

Agency Agreement

Answer 82

The relationship between the insurer and the producer is defined in the agency agreement

Question 83

Agency Agreement and Contract

Answer 83

In return for commission or salary paid by the company, and the authority to represent the insurer in conducting business on the company’s behalf, the producer:

Is first and foremost the representative of the insurance company and has an ethical obligation to follow the rules of the insurer, to submit applications only for those risks that the insurer deems appropriate, and to service the policies of company customers. He or she is paid commission or salary by the company and is given authority to represent the company in conducting business on the company’s behalf.
Acts as the representative go-between for the company and the insured, with primary responsibility to the company as the principal, while treating the customer in a fair and ethical manner.
Provides correct information to the customer about policy coverages.
Processes any requests for or cancellations of coverage in a timely fashion.
Has no authority beyond that which the insurer gives him or her.

Question 84

Insurance Agent vs. Broker

Answer 84

Superficially, an insurance agent and a broker look identical as both of them are selling insurance policies. The main difference between the two (2) entities lies in the relation these persons have with the insurer and the insured. An insurance agent is designated by the insurance company to sell its products by convincing people to buy the company’s policies, whereas a broker works independently and matches the needs of a client with the products available with any of the insurance companies. Both need a license to carry out their business in a state and both get commission from the company.

Question 85

Professionalism and Ethical Conduct

Answer 85

When acting as representatives of their companies, agents are expected to have and exhibit professional competence that can be shown through:

A broad education and background.
Strong insurance-specific knowledge and continued education in the insurance field.
Membership in professional societies and associations.
Ethical behavior, including honesty, integrity, acting in good faith, and the knowledge of and obedience to insurance industry regulations and codes.
Concern for customers’ welfare over one’s own.

Question 86

Fiduciary

Answer 86

An individual who holds a position of public trust and confidence is a fiduciary. Insurance agents are fiduciaries to both the companies they represent and their clients. As fiduciaries, agents are expected to be professional and to act ethically.

Question 87

Financial Responsibilities

Answer 87

1. Money received in return for an insurance policy or binding of insurance coverage is held in a fiduciary capacity and may not be used by the agent for any other purpose.
2. Many states require producers to maintain a Premium Fund Trust Account (PFTA) if they hold premium money for any length of time before giving it to the insurer. The PFTA must be separate from personal or other business accounts.

Question 88

Law of Agency

Answer 88

According to the Law of Agency, an agent’s actions are regarded the same as if the company itself performed the action. The agent is a representative of the insurer and acts for the insurer. As such, the insurer becomes partially liable for the actions of the agent. It is the insurer’s responsibility to monitor the compliance of its agents in order to verify that they follow all required laws. An agent represents the company through several directives.

Question 89

Express Directive

Answer 89

is when authority is expressly given to the producer, either orally or in writing in his/her contract. An example of this includes the countersigning and delivering of policies. Express directive clauses are such things as scale of commissions, ownership of contracts sold, and contract cancellation procedures.

Question 90

Implied Directive

Answer 90

The doctrine of “ostensible authority,” or implied directive, gives agents unwritten authority to perform incidental acts that the public assumes the agent to have.

Question 91

Apparent Directive

Answer 91

Apparent authority is neither expressly given nor implied, but exists because the agent has used it in the past without the insurer stopping him or her from doing so, or it is authority that a reasonable person would assume an agent to have. If the agent has paid minor claims in the past and been reimbursed by the insurer, it is apparent he or she has the authority to do so.

Question 92

Responsibilities to the Applicant and Insured

Answer 92

For risks covered by the policy, the insurer must pay all sums up to the policy limits that the insured becomes legally liable to pay; in other words, the insurer pays the lower of the claim (loss) or the policy limits. Deductibles will be applied to any property claims, but there is no deductible for medical or liability claims. The producer has responsibilities that are owed to applicants and/or insureds. He or she will:

Act only in the best interests of his or her clients.
Only provide accurate and up-to-date information and advice to customers about policies and coverages.
Aid with the accurate completion of applications and any other accompanying documentation.
Service policies as necessary and according to the desires of the insured.
Process any coverage changes or cancellations.
Act only within the scope of authority that has been given them by the insurer.

Question 93

Common Situations for Errors and Omissions

Answer 93

Failure to adequately explain policy coverages or claim procedures
Unfairly/inadequately comparing policy coverages when replacing an existing policy
Failure to get the policyholder’s signature upon delivery
Failure to explain changes made to the policy during underwriting

Question 94

Insurance Contract

Answer 94

a binding agreement between two (2) or more parties, legally enforceable to do certain things. In an insurance contract, the insured agrees to pay a monetary premium and abide by certain agreements in exchange for the insurer agreeing to indemnify the insured in case of loss.

Question 95

four (4) principle elements that must be in every legal contract

Answer 95

1. Offer and Acceptance
2. Consideration
3. Competent Parties
4. Legal Purpose

Question 96

legal contract- Offer and Acceptance

Answer 96

An insurance policy is the written statement of the terms of the contract. There must be both an offer and an acceptance.

During the offer period the applicant submits an application along with the correct premium. During the acceptance period the insurer issues the policy.

If the applicant does not submit money with the application, it is not an offer, but it is an invitation to the insurer to make an offer, and the agent cannot bind coverage.

Question 97

legal contract- Consideration

Answer 97

The applicant’s consideration is the premium, and the insurer’s consideration is the promise to indemnify the insured in the event of a loss.

Question 98

legal contract- Competent Parties

Answer 98

A party to a contract is one who holds the obligations and receives the benefits of a legally binding agreement. When two (2) parties enter into an agreement, there are two (2) distinct roles each play: the promisor and the promisee.

When a contract benefits others who are not party to the agreement, these third-party beneficiaries receive benefits of a contract, while not owing any obligation.

All parties concerned must have legal capacity to enter into a contract. This is best shown by defining those who do not have legal capacity to enter into a contract. This includes:

Minors
Those legally declared incompetent
People under the influence of drugs or alcohol
In the case of minors, the insurer may be required to uphold the terms of the contract while minors may not be.

Question 99

legal contract- Legal Purpose

Answer 99

The insurance policy owner must have an insurable interest in the property or person being insured. Insurable interest is defined as having a financial interest wherein the insured could lose financial position if the property were damaged or destroyed, or if the person was injured or died.

Question 100

Mutual Agreement

Answer 100

Any changes the insurer makes must be agreed to in writing by the insured, or the policy will not be issued.

Question 101

Two Party Contracts

Answer 101

Insurance contracts are generally between two (2) parties: (1) The insured, and (2) The insurer. The insured suffers a loss of property, health, or life, or is liable for someone else’s losses. The insurer agrees to indemnify the insured for such financial loss. Insurers may pay money to a third party to whom the insured is liable (the insured has liability because they caused financial damage to another, or owe compensation for services rendered for repair of property or health).

Question 102

Third Party Contracts

Answer 102

Sometimes a third party contract is created to indicate that the performance of the contract will result in a benefit to a person that did not sign the contact. Benefits to third parties are usually expected and left out of contracts, unless one of the signers wants to designate a specific benefit to a specific third party. To be able to enforce the contract, a third party must be able to prove that the contract was drawn for its benefit, otherwise the benefit is considered incidental and the contract is only enforceable by the original signers.

Banks and other mortgage companies are common third parties because many contracts involve payment on property for which the mortgage company has a financial interest because of a loan.

Question 103

Contract of Adhesion

Answer 103

Only one (1) party to the contract (the insurer) prepares the contract and submits it to the other party (the insured) for acceptance in a contract of adhesion. The insured cannot make any changes to the contract.

Question 104

Aleatory Contract

Answer 104

In an aleatory contract, unequal amounts of money are exchanged. The premium that the insured pays is less than the potential benefit he or she will receive in the event of a loss.

Question 105

Personal Contract

Answer 105

Insurance policies are personal contracts. They cover the insurable interest of the individual insured and cannot be transferred or assigned to another individual. The exception is Life insurance.

Question 106

Unilateral Contract

Answer 106

In a unilateral contract, only one party is legally bound to perform any duties once premium is paid. In an insurance contract, only the insurer makes any legally enforceable promise. The insured does not make a promise but pays a premium, which constitutes his or her part of the consideration.

Question 107

Conditional Contract

Answer 107

In a conditional contract, both parties must perform certain duties to make the agreement enforceable. The insured pays premiums and follows certain policy conditions. The insurer pays claims according to policy terms.

Question 108

Contract of Indemnity

Answer 108

The insurer must restore the insured to the same financial position they were in before the loss occurred in a contract of indemnity.

Question 109

Valued Contract

Answer 109

requires the insurer to pay the insured the full face value of the policy in the event of total loss, regardless of the actual value of the lost property.

Question 110

Health Reimbursement Arrangement

Answer 110

is an IRS approved, employer-funded, tax advantaged employer health benefit plan that reimburses employees for out-of-pocket medical expenses and individual health insurance premiums. A health reimbursement arrangement is not health insurance.

Question 111

two (2) types of service contracts

Answer 111

Plans where the service provider (doctor or hospital) is directly compensated by the insurer (e.g., Blue Cross and Blue Shield)
Contracts which provide protection for specific products and situations (e.g., extended service)

Note: A service contract is not an insurance policy – some states require that the contractual obligations of all service contracts sold must be guaranteed by a reimbursement insurance policy.

Question 112

Ambiguities in a Contract of Adhesion

Answer 112

Any doubt or ambiguity found in an insurance policy will be found in favor of the party that did not draw up the contract (the insured).

Question 113

Reasonable Expectations

Answer 113

The reasonable expectations of policy owners or beneficiaries will be honored even though the strict terms of the policy do not support these expectations.

Question 114

Utmost Good Faith

Answer 114

It is understood that both parties bargain in good faith in forming the contract. Applicants and insureds are expected to make a full, fair, and honest disclosure of facts. Insurers are expected to promptly indemnify the insured in the event of loss according to the contract.

Question 115

Representations/Misrepresentations

Answer 115

Representations are statements made by one party that are believed to be true. The insured’s misrepresentation will not affect the insurance contract or policy unless it affects the conditions under which the policy would be issued or not. Therefore, it is material to the risk. An agent’s misrepresentation, whether intended or not, is more likely to void a policy. For example, an agent may falsely represent that certain coverage is contained in the policy when, in fact, it is not.

Question 116

Warranties

Answer 116

These are statements made by the applicant that are guaranteed to be true. Warranties become part of the contract and, if found to be untrue, can be grounds for revoking the contract. They are considered to be material because they affect the insurer’s decision to accept or reject an applicant.

Question 117

Concealment

Answer 117

Concealment is the willful failure to disclose facts that are material to the risk. An applicant’s concealment of information from the insurance company could affect the insurer’s decision whether or not to insure the property and could void the policy.

Question 118

Fraud

Answer 118

Deceit, intentional misrepresentation, or the concealment of material facts with the intention of causing injury to another party is known as fraud. It is a deception deliberately practiced in order to secure unfair or unlawful gain (e.g., making false or misleading statements or concealing circumstances in relation to a claim or on an application).

Question 119

Misrepresentation

Answer 119

Insurers or producers may not misrepresent:

A policy’s terms, benefits, or dividends.
Policy comparisons (e.g., through incomplete explanations).
The type of policy being sold.
The company’s financial status.
The assets or funds owned or controlled by an insurance company.
The company or its funds being guaranteed by a federal or state governmental agency.
Disparaging remarks about another agent, company, or policy can also be examples of misrepresentation and defamation.

Question 120

Unfair Policy Replacement

Answer 120

Insurance laws of many states:

Regulate the replacement of insurance policies.
Protect policyholders and prospective buyers from unfair or deceptive practices.
Require full disclosure to the prospective buyer, as well as notice to the existing insuring company, that a policy is to be replaced. This gives the existing company a chance to contact the insured and make sure they have correct information and understand what might be lost by making the change.

Question 121

Discrimination

Answer 121

Charging different rates for the same exposure based on non-actuarial data, or not founded in actual statistics, is a form of discrimination. It is also illegal to discriminate against handicapped or disabled individuals, or against anyone regarding the following:

Race
Religion
National origin
Marital status
Sex
Where he or she lives
Individuals of the same class and equal expectation in life
Individuals of essentially the same hazard

Question 122

Rebating

Answer 122

The reduction in premium charged or the return of part of the required premium.
A form of discrimination. Rebating allows one individual to purchase insurance at a lower cost than another with no actuarial purpose.
Included in the area of paying commissions to an individual who does not have a license.
A misdemeanor in many states. (If so, both the agent and the insured may be subject to fines, and the agent’s license could be suspended.)

Question 123

examples of rebating

Answer 123

Reducing premiums
Accepting something of material value (barter)
Offering an incentive if the person buys a policy

Question 124

Redlining

Answer 124

Redlining is the refusal of an insurer to underwrite insurance coverage in certain geographic areas, such as inner-city neighborhoods, or the increasing of premium rates to an unreasonable amount to discourage certain customers in order to avoid perceived risks.

Question 125

Twisting

Answer 125

Twisting is the act of inducing a policyholder to drop an existing policy in order to buy a similar policy, or one with fewer benefits, from the agent doing the twisting. It usually involves fraud and misrepresentation. It is usually also not in the policyholder’s best interest. To begin with, there will usually be a higher premium for fewer benefits because the insured is generally older than when he or she bought the first policy. The NAIC encourages policyholders to request a written and signed proposal setting forth all the facts comparing the two policies. The comparisons should be submitted to both the company whose policy is proposed, as well as to the company whose policy is to be replaced.

Question 126

Churning

Answer 126

Churning is a form of twisting and also involves taking 25 percent, or more, of the cash value from the existing policy to pay the premium on a new policy.

Question 127

Boycotting

Answer 127

To boycott is to stop buying or using the goods or services of a certain company or country as a protest. Boycotting in insurance is to stop buying from a particular business to force them to buy insurance from a particular source. Insurers may not boycott or deny legitimate claims of insureds because of the provider used for services covered by the insurer. Neither insurers nor producers may use boycotts to manipulate individuals or companies to purchase insurance coverage from them.

Question 128

Intimidation

Answer 128

To force into or deter from buying insurance by inducing fear is known as intimidation.

Question 129

Monopoly in the Insurance Business

Answer 129

A monopoly is a situation in which a single company owns all, or nearly all, of the market for a given product or service. Neither insurers nor producers may set up artificial barriers to entry that do not allow competition to enter the marketplace.

Question 130

Misappropriation of Funds

Answer 130

This is the intentional, illegal use of the property or funds of another person for one’s own use or other unauthorized purpose, particularly by a public official, a trustee of a trust, an executor, administrator of a deceased person’s estate, or by any person with the responsibility to care for and protect another person’s assets (a fiduciary duty, such as an insurance producer). Misappropriation of funds is a felony, a crime punishable by a prison sentence.

Question 131

False Financial Statements

Answer 131

It is prohibited to knowingly:

Make any false material statement of fact as to the financial condition of a person or company.
Make any false entry of a material fact in a book, report, or statement of a person or company.
Omit to make a true entry of a material fact pertaining to a person’s or company’s business in any book, report, or statement.

Question 132

General Industry Regulations

Answer 132

The insurance industry is regulated mainly by State Government rather than the Federal Government. The Federal Government can apply antitrust laws to the industry, but all states have included such laws in their own legislation in order to help keep all aspects under their own control.

Laws and penalties related to insurance companies and agents vary between states.
Certain principles remain the same in relation to the handling of public monies (insurance premiums and investment funds) and the selling of insurance.
Some Life insurance products are a cross between insurance and securities markets. As a producer begins selling these products, the producer is subject to the compliance standards that accompany these sales. In particular, the producer needs to be aware of the National Association of Securities Dealers and the Financial Industry Regulatory Authority.

Question 133

National Association of Securities Dealers

Answer 133

The National Association of Securities Dealers (NASD) was the self-regulatory organization for the NASDAQ stock market and the over-the-counter market. It was the association of broker/dealers that supervised and regulated the trading and the conduct of its member organizations and the licensed brokers who worked for those member organizations. The NASD was created under the Securities and Exchange Act of 1934. Even though it is not a government organization, it worked closely with state and federal securities regulators.

Question 134

The Financial Industry Regulatory Authority

Answer 134

The Financial Industry Regulatory Authority (FINRA) is the largest non-governmental regulator for all securities firms doing business in the United States.

Registering and educating industry participants
Examining securities firms
Writing and enforcing rules and the federal securities laws
Informing and educating the investing public
Providing trade reporting and other industry utilities
Administering the largest dispute resolution forum for investors and registered firms.

Question 135

The purpose of FINRA?

Answer 135

The purpose of FINRA is to modernize investor protection and market integrity by streamlining processes and integrating regulation in the complexity and competitiveness of today’s global capital markets.

One of FINRA’s goals is to increase investor education and knowledge of markets and basic principles of saving and investing.

FINRA is a trusted advocate for investors, dedicated to keeping the markets fair, ensuring investor choice, and proactively addressing emerging regulatory issues before they harm investors or the markets.