Terms & Related Concepts

Question 1

ISO

Answer 1

Insurance Services Office is an important factor in Property and Casualty or Personal Lines insurance licensing exams. One of ISO’s many functions is to create standardized property and casualty insurance policies that are then approved by individual states and used as a standard policy form for insurers. The basic ISO policy forms are modified to comply with each state’s regulations, and may be modified to a degree by each insurance company to create its own policy form.

Question 2

Risk

Answer 2

Risk is the uncertainty or chance of a loss occurring.

Question 3

What are the two types of risks?

Answer 3

Pure and Speculative

Question 4

What is Pure risk?

Answer 4

Pure risk refers to situations that can only result in a loss or no change. There is no opportunity for financial gain. Pure risk is the only type insurance companies are willing to accept.

Question 5

What is Speculative risk?

Answer 5

Speculative risk involves the opportunity for either loss or gain. An example of speculative risk is gambling. These types of risks are not insurable.

Question 6

What are Hazards?

Answer 6

Hazards are conditions or situations that increase the probability of an insured loss occurring.

Question 7

What are examples of Hazards?

Answer 7

Conditions such as slippery floors, or congested traffic are Hazards and may increase the chance of a loss occurring.

Question 8

How are Hazards classified?

Answer 8

Hazards are classified as physical hazards, moral hazards, or morale hazards.

Question 9

What are Physical Hazards?

Answer 9

Physical Hazards are those arising from the material, structural, or operational features of the risk, apart from the persons owning or managing it.

Question 10

What are Moral Hazards?

Answer 10

Moral Hazards refer to those applicants that may lie on an application for insurance, or in the past, have submitted fraudulent claims against the insurer.

Question 11

What is a Morale Hazard?

Answer 11

Morale Hazard refers to an increase in the Hazard presented by a risk, arising from insured’ indifference to loss because of the existence of insurance. (e.g. I’m not going to bother fixing this. If it breaks my insurance will pay to replace it.)

Question 12

What is Indemnity sometimes referred to as?

Answer 12

Indemnity is sometimes referred to as reimbursement.

Question 13

What is Indemnity?

Answer 13

Indemnity is a provision in an insurance policy that states that in the event of a loss, an insured is permitted to collect only to the extent of his/her financial loss and is not allowed to gain financially because of the existence of an insurance contract. The purpose of insurance is to restore, but not profit from loss.

Question 14

What is Insurable Interest?

Answer 14

The financial interest in property to be insured is called insurable interest.

Question 15

In property and causality insurance, when must insurable interest exist?

Answer 15

Insurable Interest must exist at the time of loss.

Question 16

What are the three requirements to prove Insurable Interest?

Answer 16

1. Legitimate financial interest in preserving the property to be insured.
2. There must be no potential for gain.
3. There must be no potential for loss.

Question 17

What is Actual Cash Value?

Answer 17

The actual cash value (ACV) method of valuation reinforces the principle of indemnity because it recognizes the reduction of value of property as it ages and becomes subject to wear and tear and obsolescence.

Question 18

How is Actual Cash Value calculated?

Answer 18

Current replacement cost-depreciation= Actual Cash Value

Question 19

What is Negligence?

Answer 19

Negligence is the failure to use the care that a reasonable, prudent person would have taken under the same or similar circumstances.

Question 20

What are the three types of liability?

Answer 20

1. Absolute Liability
2. Strict liability
3. Vicarious Liability

Question 21

When is absolute liability imposed?

Answer 21

Absolute liability is imposed on defendants engaged in hazardous activities, such as harboring wild animals, using explosives, etc. The insured party does not need to prove negligence.