Vocabulary

Question 1

Risk

Answer 1

The uncertainty or chance of loss

Question 2

The law of large numbers

Answer 2

With a large enough sample size, predictions can be made about a population

Question 3

Insurer

Answer 3

The insurance company providing coverage

Question 4

Insured

Answer 4

the individual/s whose property the policy is based on

Question 5

5 criteria of risk

Answer 5

Rate of loss must be predictable; catastrophic loss must be unlikely; loss must be definite (monetarily defined); loss must be uncertain (unknown to client before loss); loss must be economically feasible

Question 6

4 requirements of contracts to be legally binding

Answer 6

CALC- Consideration (insured’s is down payment, insurer is terms of contract); Agreement (applicant offers property to be covered, insurer offers terms); Legal purpose (contract cannot be illegal); Competent parties (each party must be sober, over 15, legally and mentally competent)

Question 7

Adhesion

Answer 7

Insurers require that potential clients take contracts as written. No negotiation on policy language. Client “adheres” to insurers policy.

Question 8

Aleatory

Answer 8

Principle of inequality of an insurance policy due to inherent element of chance in the contract. Insured exchanges small premiums for potentially large payment..

Question 9

Conditional

Answer 9

Performance of an insurance contract is conditional upon certain events taking place. Ex. Insurer will only pay if premiums are current and there is proof of a loss.

Question 10

Unilateral

Answer 10

Only one party is obliged to perform in an insurance contract, the insurer. (Insured can void policy anytime, insurer is bound to honor contract)

Question 11

Utmost good faith

Answer 11

Insurer relies upon the statements made by insured as truthful. Insured relies on promise of payment in event of loss.

Question 12

Express Authority

Answer 12

Abilities of agent which are explicitly stated as actions he/she can take on behalf of insurer

Question 13

Implied Authority

Answer 13

Actions which are not explicitly stated, but are necessary and allowable on behalf of the insurer

Question 14

Apparent Authority

Answer 14

authority a prudent person (insured) may believe the agent has the ability to execute, but in reality the agent does not.

Question 15

Presumption of Agency

Answer 15

The presumption a prudent person (insured) believes an agent is acting within his/her authority, but in reality the agent has overstepped their boundaries.

Question 16

Domestic domicile of insurer

Answer 16

Insurer conducting business in its state of incorporation

Question 17

Foreign domicile of insurer

Answer 17

Insurer incorporated in a state other than the one its doing business in.

Question 18

Alien domicile of insurer

Answer 18

Insurer incorporated in a country other than the US

Question 19

Commercial insurers

Answer 19

Consist of mutual or stock insurers; mutual are owned by the policyholders.

Question 20

Reinsurers

Answer 20

Companies that provide insurance to insurance companies to spread risk.

Question 21

Lloyd’s of London

Answer 21

Specialize in nonstandard risks that other insurers will not.

Question 22

Brokers vs. Captive agents

Answer 22

Brokers represent multiple insurers, captive agents only one insurer.

Question 23

Loss

Answer 23

Reduction in the value of an asset

Question 24

Hazard

Answer 24

increases the likelihood of a loss

Question 25

peril

Answer 25

cause of a loss; fire, accident, flood

Question 26

Accident

Answer 26

unplanned, unpredicted event

Question 27

Pure risk

Answer 27

The possibility of a loss with no possibility of a gain

Question 28

5 risk management techniques

Answer 28

STARR; Sharing, sharing risk with another; Transferring, insurance is an example of risk transfer; Avoiding, simply not engaging in a possible risk; Retaining, ex. deductible, retaining some risk while transferring the rest; Reducing, minimizing exposure to a hazard.

Question 29

Physical hazard

Answer 29

any tangible hazard

Question 30

Moral hazard

Answer 30

Potential loss when applicants and claimants are untruthful

Question 31

Morale hazard

Answer 31

When insured doesn’t take measures to reduce the severity of a loss.

Question 32

Legal hazard

Answer 32

Potential losses due to punitive and compensatory damages

Question 33

Economic loss

Answer 33

Includes the total monetary costs of a loss, including the continuing and future expenses.

Question 34

Indemnity

Answer 34

To make whole, to place the insured in the same financial position as he/she was prior to the loss

Question 35

Insurable interest

Answer 35

Exists when an individual or entity (ex. bank) will suffer a financial loss if the insured’s property is damaged or destroyed. An insurable interest must exist at the time of application and at the time of loss (ex. Bank with mortgage must be listed on application, and still hold a financial interested when loss occurs).

Question 36

Deducible

Answer 36

Amount of loss insured would retain in the event of a loss.

Question 37

Direct vs. Indirect loss

Answer 37

Direct loss occurs due to peril such as fire, etc. Indirect loss occurs secondarily due to loss of use of property (Ex. hotel room costs due to house fire)

Question 38

Named peril vs, open peril policy

Answer 38

named peril only covers explicitly named risks, open peril policy covers everything except explicitly named risks.

Question 39

Actual cash value

Answer 39

ACV= replacement cost - depreciation

Question 40

Replacement cost

Answer 40

represents the amounts needed to rebuild or replace the dwelling or personal property in today’s dollars.

Question 41

Functional replacement cost

Answer 41

when materials or craftsmanship outweighs market value, in which case insurer will replace items with functional equivalents.

Question 42

Salvage value

Answer 42

Refers to a property that has been damaged, insurer provides option of replacement cost or salvage property with replacement cost- salvage property value.

Question 43

Material misrepresentation

Answer 43

A misrepresentation that would have resulted in a different underwriting decision.

Question 44

Warranty

Answer 44

Statement that an individual guarantees to be true

Question 45

Breach of warranty

Answer 45

a lie that is grounds for void of contract of insurance

Question 46

Concealment

Answer 46

Not revealing the whole truth

Question 47

Negligence

Answer 47

Failure to do what a reasonable person would do in a given set of circumstances

Question 48

Subrogation

Answer 48

The insurer’s right to recover from a third party that caused loss suffered by the insured.

Question 49

Binder

Answer 49

written statement showing temporary insurance coverage . Valid for up to 60 days.

Question 50

Endorsement

Answer 50

attachment to the policy that can add or take away coverage.