Study 1 Key Terms

Question 1

Define insurance

Answer 1

A contract in which one party, the insurer, for monetary consideration agrees to reimburse another, the insured, for loss or liability for a loss on a defined subject caused by specified hazards or perils.

Question 2

Define risk

Answer 2

The chance of loss. Specifically, the possible loss or destruction of property or the possible incurring of a liability. Sometimes referred to as the subject of an insurance contract.

Question 3

Define speculative risk

Answer 3

An insurance term for a situation where the possibility of either a financial loss or a financial gain exists, such as in purchasing shares, or betting on horses. Speculative risk is usually not insurable, unlike pure risk.

Question 4

Define pure risk

Answer 4

A situation involving a chance of a loss, or no loss but no chance of gain.

Question 5

Define peril

Answer 5

The event that caused a loss covered by the policy; for example, fire, windstorm.

Question 6

Define burglary

Answer 6

Unlawful removal of property from premises involving visible forcible entry.

Question 7

Define robbery

Answer 7

Unlawfully taking another’s property, in the person’s presence, by violence or the threat of violence.

Question 8

Define theft

Answer 8

The wrongful taking of the property of another. It is a broad term and includes larceny, pilfering, holdup, robbery, and pickpocketing.

Question 9

Define boiler nd machinery insurance

Answer 9

Coverage against loss caused by equipment breakdown and malfunction, as well as sudden explosions arising from the ownership, use, and operation of boilers, pressure vessels, and machinery.

Question 10

Define negligence

Answer 10

Failure to use the degree of care expected from a reasonable and prudent person

Question 11

Define hazard

Answer 11

(1) A risk or probability that the event insured against might occur.
(2) A condition that engenders or increases the chances of a loss.

Question 12

Define physical hazard

Answer 12

A hazard arising from the physical condition or characteristics of the object that is insured; for example, using and storing volatile materials and substances on the premises.

Question 13

Define moral hazard

Answer 13

A hazard arising from the character, interest, habits, and lack of integrity of the insured or person concerned; for example, the failure of individuals to pay bills on time or manage their finances.

Question 14

Define proximate cause

Answer 14

A cause that, in a natural and continuous sequence unbroken by any new and independent cause, produces an event and without which the event would not have happened.

Question 15

Define remote cause

Answer 15

A cause that is not the proximate cause of loss and is separate from the proximate cause in a chain of events leading to a loss

Question 16

Define immediate cause

Answer 16

A cause that is not the proximate cause of loss but is the last link in a chain of events leading to a loss.

Question 17

Define surety bond

Answer 17

A contract under which one party (the surety) guarantees the performance of certain obligations of a second party (the principal) to a third party (the obligee).

Question 18

Define avoidance

Answer 18

A risk management technique whereby the risk of loss is prevented by not engaging in activities that present the risk.

Question 19

Define risk transfer

Answer 19

For a non-insurance company, the risk insured. For an insurance company, the risk reinsured.

Question 20

Define risk retention

Answer 20

For a non-insurance company, the risk not insured or self-insured. For an insurance company, the risk not reinsured.

Question 21

Define self-insurance

Answer 21

A means of assuming and managing risk by setting aside a pool of money that will be used for compensation in the event of a loss occurring.

Question 22

Define captive insurance company

Answer 22

An insurance company that provides insurance to, and is controlled by, its owners.

Question 23

Define hold-harmless agreement

Answer 23

An agreement that allows one party to protect another party against any future losses or claims that may result from a particular activity. Also known as an indemnity agreement.

Question 24

Define premium

Answer 24

The price of insurance protection for a specified risk for a specified period of time.