AD Banker P&C Chapter 1 Practice Exams

Which of the following is not true of the Fair Credit Reporting Act?

A - A consumer can obtain the information in the reporting agency file B - Errors in the report can only be changed by court action C - A consumer must be informed whenever insurance was denied due to an adverse report D - A consumer is protected from unwelcome personal information collection practice Answer: B - Errors in the report can only be changed by court action

An insurance contract is considered which type of contract because it restores the insured to the same financial condition as before the loss?

A - A contract of adhesion B - A unilateral contract C - An aleatory contract D - A contract of indemnity Answer: D - A contract of indemnity Indemnity is defined as restoring the insured to the same financial condition as before the loss.

An insurer organized in another state than the state in which it is authorized to do business is known as which type of insurer?

A - Admitted B - Alien C - Domestic D - Foreign Answer: D - Foreign A foreign insurer is not organized under the laws of this state, but in one of the other states or jurisdictions within the United States, whether or not it is admitted to do business in the state or jurisdiction.

An applicant inaccurately representing information on the application is guilty of:

A - Waiver and Estoppel B - Misrepresentation C - Fraud D - Concealment Answer: B - Misrepresentation Misrepresentation is a false statement contained in the application. Fraud is an intentional deception of the truth in order to induce another to part with something of value or to surrender a legal right. Concealment is the willful holding back or secretion of material facts pertinent to the issuance of insurance or a claim. Waiver and Estoppel are terms that apply to the insurer, not the applicant.

What is the correct risk management term for minimizing the chance of a loss?

A -Risk reduction B - Risk sharing C - Risk retention D - Risk avoidance Answer: A - Risk reduction Minimizing the chance of a loss without eliminating the risk altogether is called risk reduction.

A false statement in the application for insurance is called a:

A - Misrepresentation B - Warranty C - Representation D - Concealment Answer: A - Misrepresentation A misrepresentation can render the contract void if the misrepresentation is material to the risk.

An insurer with capital that is divided into shares, and is owned by shareholders, is considered a:

A - Mutual company B - Stock company C - Reciprocal insurer D - Fraternal Benefit Society Answer: B - Stock company A stock company is owned by its stockholders and its capital is divided into shares. Corporate taxable dividends are payable to stockholders.

Because only the insurance company makes a promise to pay a future covered claim, the insurance contract is:

A - Bilateral B - Unilateral C - Conditional D - Aleatory Answer: B - Unilateral A unilateral contract is one in which one party (the insurer) makes a promise of performance

What type of insurance is provided by the Terrorism Insurance Program established by TRIA?

A - Life only B - Life and health C - Personal lines D - Commercial property and casualty Answer: D - Commercial property and casualty TRIA, the Terrorism Risk Insurance Act, provides for a Terrorism Insurance Program. Only commercial property and casualty insurance is covered by the program; personal lines and life/health are not.

An agent is best described as which of the following?

A - A producer who represents persons who have contracted with him/her to obtain insurance for them B - A producer who has a contract with an insurer to represent that insurer in the sale of its products C - A producer who represents members of the public wishing to purchase insurance D - A producer authorized by the Department of Insurance to adjust insurance claims Answer: B - A producer who has a contract with an insurer to represent that insurer in the sale of its products. An insurance producer, or agent, has an agency contract with an insurer (the principal), which authorizes him/her to represent that insurer and grants him/her certain powers and authority to place insurance and bind coverage.

Which of the following is true about a stock insurance company?

A - A stock insurance company is any insurance company whose home office is in this state and is incorporated in this state B - Policyholders own and control a stock insurance company C - A stock insurance company is run by officers and directors and has a stated amount of capital stock owned by stockholders D - A stock insurance company is one whose home office is in some other state, but does business in this state Answer: C A stock insurance company is run by officers and directors and has a stated amount of capital stock owned by stockholders A stock insurance company is owned by its stockholders.

Insurance Company C has decided that it is insuring too many homes in a particular area. Therefore, it decides to reinsure Mr. R's Homeowners Policy because of the high value of his dwelling. The reinsurance contract can best be described as:

A - An agreement between Insurance Company C and the reinsurer B - An agreement between Mr. R, Insurance Company C, and the reinsurer C - An agreement between Mr. R and the reinsurance company D - An agreement between Mr. R's agent and Insurance Company C Answer: A - An agreement between Insurance Company C and the reinsurer A reinsurance contract is between the insuring company and the reinsurer, and does not involve the insured.

An applicant could purchase an insurance policy to cover losses from all the following, except:

A - An operation of drug smuggling B - Sudden and direct damage to property by natural causes C - Loss of property through burglary or theft D - Loss of assets through tort actions brought against the person Answer: A - An operation of drug smuggling

Determining acceptable risks is the primary responsibility of the:

A - Auditor B - Underwriter C - Adjuster D - Producer Answer: B - Underwriter The selection of risk is the primary responsibility of the underwriter, who protects the insurer by selecting risks that fall into the normal range of expected losses.

An applicant inaccurately representing information on the application is guilty of:

A - Concealment B - Fraud C - Waiver and Estoppel D - Misrepresentation Answer: D - Misrepresentation Misrepresentation is a false statement contained in the application. Fraud is an intentional deception of the truth in order to induce another to part with something of value or to surrender a legal right. Concealment is the willful holding back or secretion of material facts pertinent to the issuance of insurance or a claim. Waiver and Estoppel are terms that apply to the insurer, not the applicant.

When both parties to a contract must perform certain duties in order to make the contract enforceable, this is known as a(n):

A - Conditional contract B - Unilateral contract C - Contract of adhesion D - Aleatory contract Answer: A - Conditional contract A conditional contract requires that both parties perform certain duties.

A contract that binds only one party to future performance, is a(n):

A - Contract of adhesion B - Unilateral contract C - Aleatory contract D - Conditional contract Answer: B - Unilateral contract

The Terrorism Insurance Program created by TRIA is administered by which of the following federal entities?

A - Department of Defense B - Department of the Treasury C - White House D - Department of State Answer: B - Department of the Treasury TRIA's Terrorism Insurance Program protects consumers by addressing market disruptions and ensuring the availability and affordability of property and casualty insurance for a terrorism risks. It is administered by the Department of the Treasury.

Which of the following is a characteristic of a Mutual Insurance Company?

A - Dividends are returned profits B - Stockholders have ownership C - A policyholder is a voting member on the Board of Directors D - Members are provided insurance by the company Answer: D - Members are provided insurance by the company A mutual insurer is owned by its members (not stockholders) and dividends are a return of unused premium (not a return of profit). Although policyholders are the owners of a mutual insurer, they are not voting members of the Board of Directors. Members are provided insurance by the company.

An insurer that is authorized to do business in a particular state is said to be:

A - Domestic B - Foreign C - Non-Admitted D - Admitted Answer: D - Admitted An admitted insurer is an insurer that is authorized to transact insurance in a state by that state's insurance department, as evidenced by a Certificate of Authority to transact business.

All of the following are risk management techniques, except:

A - Enhancement B - Retention C - Avoidance D - Transfer Answer: A - Enhancement Enhancement is not a risk management technique.

The Gramm-Leach-Bliley Act was responsible for which of the following?

A - Establishment of privacy protection for consumers B - Regulation of investment companies C - Deregulation of the trucking industry D - Enforcement of fraudulent insurance acts Answer: A - Establishment of privacy protection for consumers The Gramm-Leach-Bliley Act also allowed the merger of banks, securities companies, and insurance companies.

What is the term for the idea that some risks are less desirable than average risks, and that these risks tend to seek coverage to a greater extent than more favorable risks?

A - Estoppel B - Adverse selection C - Law of Large Numbers D - Sharing Answer: Adverse Selection Adverse selection is tendency of higher risks to seek or maintain coverage.

Which kind of agent enters into agreements with more than one insurer?

A - Exclusive B - Captive C - Independent D - Direct Answer: C - Independent An independent agent may represent many insurers at the same time.

Which of the following powers describes the authority stated in an agent's agency contract?

A - Express B - Implied C - Apparent D - Assumed Answer: A -Express The agency contract, which exists between an insurer and a producer, sets forth the powers that are granted to the producer. These powers are referred to as express because they are directly stated in the contract.

An insurer that is not approved by the state Department of Insurance to transact insurance is called which type of insurer?

A - Fraternal B - Authorized C - Non-admitted D - Domestic Answer: C - Non-admitted An admitted insurer has a Certificate of Authority issued by the Department or Division of Insurance to transact insurance.

An underwriter will consider each of the following factors when evaluating a risk, except:

A - Hazards B - Nature of the risk C - Rates D - Claim history Answer: C - Rates The underwriter protects the insurer against adverse selection by evaluating the factors likely to contribute to a loss. Rates do not have such an impact.

The following statements regarding hazards are all correct, except:

A - Ice on a sidewalk is a physical hazard B - A moral hazard arises from a disposition for dishonesty C - A moral hazard arises from an attitude of indifference to loss D - A gambling addiction could be a moral hazard Answer: C - A moral hazard arises from an attitude of indifference to loss. A physical hazard is a physical condition that increases the likelihood of loss. A moral hazard is tendency toward dishonesty, and a morale hazard is an attitude of indifference to loss.

When an individual faces the risk of economic loss in the event of property damage, this indicates which of the following?

A - Insurable interest B - Merit rating C - Limit of recovery D - Subrogation Answer: A - Insurable Interest Typically, if there is a risk of financial loss, there is an insurable interest.

Which of the following risks may be protected against by insurance?

A - Intentional Risk B - Involuntary risk C - Pure Risk D - Catastrophic risk Answer: C - Pure Risk A pure risk is one that may only result in a loss or no loss. Because there is no chance of gain, the risk is insurable. A catastrophic risk (e.g. nuclear explosion) is not generally insurable because the losses would be too great for a private insurer to underwrite.

The insurer's promise to pay a covered loss and the insured's payment of the first premium are examples of:

A - Legal Purpose B - Consideration C - Offer D - Acceptance Answer: B - Consideration Consideration is the term used to describe the rights, money, promises or property exchanged between the parties as part of a contract transaction.

Paul is an agent for ABC Insurance Company, which has just issued a life insurance policy to Maria. Who is the "principal" in this transaction?

A - Paul, the agent B - ABC Insurance Company C - Maria's beneficiary D - Maria, the insured Answer: B - ABC Insurance Company

A potential cause of loss, such as fire, explosion, flood, or theft is considered to be a(n):

A - Peril B - Hazard C - Occurrence D - Accident Answer: A - Peril A peril is a cause of potential loss to property such as fire, windstorm, hail, or flood.

The owner of an antique store leaves valuable breakable items on display while heavy construction is taking place, believing that any pieces that fall and break will be covered by insurance. This demonstrates which hazard?

A - Physical hazard B - Morale hazard C - Moral hazard D - Speculative hazard Answer: B - Morale hazard This is considered an attitude of indifference or carelessness, which increases the probability of a loss.

Which of the following is not true about a Reciprocal Insurance Company?

A - Reciprocal companies may only transact liability insurance B - It allows individuals and corporations to exchange insurance on one another's risks C - If funds are insufficient to pay claims, the subscribers are assessed for additional premium D - Each subscriber assumes a share of the risk of all other subscribers Answer: A - Reciprocal companies may only transact liability insurance Reciprocals, unlike risk retention groups, are not restricted on the type of insurance they transact.

All of the following are options for managing risk, except:

A - Retaining the risk B - Subrogating the risk C - Transferring the risk D - Avoiding the risk Answer: B - Subrogating the risk Subrogation is not a risk management technique, but rather a means of collecting a loss payment from a liable party.

A fire sprinkler system installed in a factory is considered which of the following methods of managing risk?

A - Retention B - Avoidance C - Reduction D - Transfer Answer: C - Reduction The fire sprinkler system will minimize the chance and severity of loss, but not entirely prevent it.

All of the following are restricted from entering into an insurance contract, except:

A - Retired persons B - Mentally incompetent persons C - People under the influence of drugs or alcohol D - Minors Answer: A - Retired Persons Persons without legal capacity to enter an agreement are minors, the mentally incompetent, and those under the influence of an intoxicant.

What is the term for a cause of loss, such as the theft of a car?

A - Risk B - A peril C - Accident D - Hazard Answer: A peril Property insurance insures against perils. A peril is a cause of potential loss to property such as fire, windstorm, hail, flood, etc.

Where can an insured find insurance coverage after being rejected by Insurer A due to claims history?

A - Risk retention insurer B - Residual market C - Lloyd's of London D - Reinsurance market Answer: B - Residual Market

The most common method of managing risk is:

A - Self-insuring B - Obtaining a Certificate of Security C - Avoiding all risks D - Purchasing insurance Answer: D - Purchasing insurance Purchasing insurance is the most common method of managing risk. Avoiding all risks is impossible, and self-insuring is very costly.

Taxable corporate dividends are received by which type of insurer's shareholders?

A - Stock B - Mutual C - Risk Retention Group D - Reciprocal Answer: A - Stock A stock company is owned by its stockholders who elect the directors and officers.

All of the following are elements of an insurable risk, except:

A - The loss may be catastrophic B - The loss must be measurable C - The loss must be accidental D - There must be a large number of homogenous units with the same exposure Answer: A - The loss may be catastrophic Insurers want to avoid insuring against catastrophic perils

Which of the following is least likely to be a factor when determining the eligibility of a person for property insurance?

A - The nature of the risk, such as the type of building and the number of families living in the building B - Existence of any hazards such as a nearby gas station exposure C - Whether the premium will be paid in full or billed to the insured D - The claims history showing when prior claims occurred and how much was paid to settle the claim Answer: C - Whether the premium will be paid in full or billed to the insured

When an insurance policy is not clear, the court will usually interpret in favor of the insured because of which characteristic?

A - The policy is a bilateral contract B - The policy is a conditional contract C - The policy is a contract of adhesion D - The policy is an aleatory contract Answer: C - The policy is a contract of adhesion. A contract of adhesion is a contract between two parties that is written on a 'take it or leave it' basis. Because the other party has no control over the terms of the contract, any ambiguity is usually construed against the party who drew it up.

An insured should not profit from an insurance transaction. This describes which of the following principles?

A - The principle of personal aspect B - The principle of subrogation C - The principle of utmost good faith D - The principle of indemnity Answer: D - The principle of indemnity Indemnity is restoring the insured to the same financial condition as before the loss, i.e., no profit.

Rates that cannot be used until the Department or Division of Insurance approves them are referred to as:

A - Use and file rates B - Prior approval rates C - File and use rates D - Open competition rates Answer: B - Prior approval rates

When writing the application for homeowners insurance, B's agent asked him if he had any theft losses in the past 3 years. B answered 'no,' despite the fact that he was a theft victim 3 times in the past 3 years. B is guilty of which of the following?

A - Waiver B - Unilateral statement C - Misrepresentation D - Representation Answer: C - Misrepresentation