Chapter 1 Quiz

Bob is thinking about obtaining insurance because he just found out he needs extensive surgery that will require several days in the hospital. This situation of waiting until the last minute to obtain insurance is known as: A - Ideally Insurable Risk B - Cost Effective Insurance C - Adverse Selection D - Spread of Risk

C - Adverse Selection (Adverse selection is when people seek insurance at the last minute when they really need it.)

The degree of loss a person/organization faces from suits brought by a third party refers to: A - Loss Exposure B - Property Exposure C - Liability Loss Exposure D - Human Personnel Loss Exposure

C - Liability Loss Exposure (Liability Loss Exposure is the degree of loss a person/organization faces from suits brought by a third party.)

The state of being subject to a loss is considered: A - risk B - insurance C - exposure D - hazard

C - exposure (The state of being, or possibility of loss, is the definition of loss exposure.)

Which of the following is the amount of money the insured pays before the insurer pays for the rest of the claim? A - Premium B - Coinsurance C - Subrogation D - Deductible

D - Deductible (A deductible is the amount of money the insured pays before the insurer (company) pays the rest of the claim.)

Which of the following is an example of an adverse underwriting decision? A - All of these are examples B - Charging a higher rate C - Rejecting the risk D - Issuing with limitations

A - All of these are examples (These decisions allow the underwriter to keep losses within a normal range.)

Performance depends upon an uncertain future event is the feature: A - unilateral B - aleatory C - adhesion D - conditional

B - aleatory (This is the contract feature known as aleatory.)

A beautician stating that this conditioner fixes badly damaged hair is a: A - representation B - expressed warranty C - implied warranty D - stated fact

C - implied warranty (This statement would qualify as an implied warranty.)

Which of the following is not a class of insurance? A - Casualty B - Fire C - Marine D - Auto

A - Casualty (Casualty. Casualty is a label used to describe various liability and crime coverages)

Substitution of a small certain loss for a large uncertain loss is: A - insurance B - law of large numbers C - an insurable event D - a pure risk

A - insurance (This is the layman's definition for insurance.)

Which of the following are the main types of risks? A - Sharing and Transfer B - Pure and Transfer C - Speculative and pure D - Avoidance and Retention

C - Speculative and pure (There are two main types of risk: pure risk and speculative risk.)

What are the two types of torts? A - Intentional & Unintentional B - Legal & Non-Legal C - Broad & Basic D - Pure & Speculative

A - Intentional & Unintentional (Torts are classified as intentional or unintentional (referred to as negligence).)

Which of the following is NOT a known private insurer? A - Stock Insurance Companies B - Bond Insurance Companies C - Mutual Insurance Companies D - Reciprocal Insurance Exchanges

B - Bond Insurance Companies (Bond insurance companies are not considered insurers.)

Examples of tort law include all of the following EXCEPT: A - Bodily injury B - Breach of contract C - Libel and slander D - Personal injury

B - Breach of contract (Tort law includes bodily injury, property damage and personal injury, which includes libel and slander. However, although you can be sued for financial damages due to breach of contract, it is not a tort. The most common tort is negligence, which is defined as the failure to act as reasonable and prudent person)

Type of loss exposure pertaining to land and structures attached to it is: A - personal loss exposure B - liability loss exposure C - property loss exposure D - financial loss exposure

C - property loss exposure (Property loss exposure includes real (buildings & land) and personal property.)

The uncertainty or chance of a loss occurring is known as: A - speculative risk. B - pure risk. C - risk. D - risk management.

C - risk. (Risk is the uncertainty or chance of a loss occurring.)

Restoring the insured back to the condition he or she was in before the loss occurred is known as: A - Indemnification B - Insurable Interest C - Restoration D - Loss Retention

A - Indemnification (Indemnity is the insurer restoring the insured back to the condition they were in before the loss occurred. The insured should not gain or be in a better position than before.)

According to the California insurance law, either party may rescind a contract for any of the following reasons EXCEPT A - Once a contract is signed, it can never be rescinded. B - One party intentionally or unintentionally hides material information. C - One party intentionally omits information from the other party. D - If a representation is false in a material point, whether affirmative or promissory, the injured party is entitled to rescind the contract. :

A - Once a contract is signed, it can never be rescinded. (Never? Always beware of this word.)

Which of the following elements of a contract is/are the binding force? A - Offer & Acceptance B - Consideration C - Legal Purpose D - Competent Parties

B - Consideration (Consideration is the binding force of a contract. What each party considers valuable is the consideration.)

Which of the following is defined as `an agreement between two or more parties enforceable by law?` A - Insurance Policy B - Contract C - Agreement Clause D - Tort

B - Contract (A contract is defined as an agreement between two or more parties enforceable by law.)

When a right or privilege has been given up, a party cannot reassert that right or privilege. The process of preventing the party from reasserting that right or privilege is known as: A - Pro-rata B - Estoppel C - Waiver D - Indemnity

B - Estoppel (This process of preventing a party from reasserting that right or privilege is known as estoppel.)

Which of the following is NOT required for a risk to be ideally insurable? A - The loss must be definite and measurable. B - The loss must occur on the insured`s property. C - The loss must be an accident. D - The loss must create economic hardship.

B - The loss must occur on the insured`s property. (A loss may not occur on the insured`s property, such as a liability claim.)

The process of reviewing applications for insurance and the information on the application is: A - Application Evaluation B - Underwriting C - the job of the agent before accepting or rejecting an application D - Field Underwriting

B - Underwriting (Underwriting is the process of reviewing applications for insurance and the information on the application.)

A hazard is best defined as A - a possibility of a loss. B - anything that increases the chance of loss or severity of loss due to a peril. C - risk shifted from one to another. D - any action from a court that increases the likelihood or size of a loss

B - anything that increases the chance of loss or severity of loss due to a peril. (A Hazard is anything that increases the chance of loss or severity of loss due to a peril.)

Punishment for twisting or misrepresentation would be: A - up to $25,000 B - both are correct C - up to 1 year in jail D - neither are correct

B - both are correct (Fraud occurs when one party intentionally gives the other party false information in order to benefit from the unlawful gain.)

Loss control refers to: A - a combination of risk control techniques with risk financing techniques. B - taking measures to prevent further damage during a loss. C - taking the necessary precautions that will reduce the risk of a loss. D - preventing a loss from becoming catastrophic.

C - taking the necessary precautions that will reduce the risk of a loss. (Loss control refers to taking necessary precautions to reduce the risk of a loss.)

Insurance is a contract whereby one undertakes to indemnify another against: A - Exposure B - Physical hazard C - Damage D - Uncertainty

C - Damage (According to the California Code of Insurance, insurance is a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event.)

Which of the following describes when one party intentionally gives the other party false information in order to benefit from the unlawful gain. A - Theft B - Misrepresentation C - Fraud D - Concealment

C - Fraud (Materiality is not judged by the event but by the influence of the facts.)

Which of the following statements is true about reinsurance A - When an insurer obtains reinsurance, it has sold the contract to another insurer, and no longer has direct responsibility for the policy. B - Reinsurance is when the insured allows a policy to lapse for nonpayment. Later, if the insured makes the payment, the policy is reinsured. C - Reinsurance is the process whereby the insurer transfers all or part of the risk to another company. D - Property and casualty insurers use reinsurance, life insurers do not.

C - Reinsurance is the process whereby the insurer transfers all or part of the risk to another company. (Reinsurance is the process of the insurer transferring all or part of Reinsurance is the process whereby the insurer transfers all or part of the risk to another insurer so they share the risk together.)

A peril is: A - pure and speculative. B - anything that increases the chance of loss or severity of loss. C - the actual cause of the loss. D - a possibility of a loss.

C - the actual cause of the loss. (A Peril is the actual cause of the loss. Some examples of common perils are fire, wind, hail, collision with another car, theft, etc.)

Any contingent or unknown event, whether past or future, which may damnify a person having an insurable interest or create a liability against him/her, may be insured against. The more unpredictable a loss becomes: A - the less it becomes insurable interest. B - the more it becomes insurable interest. C - the more insurable it becomes. D - the less insurable it becomes.

C - the more insurable it becomes (The more predictable a loss becomes, the less insurable it becomes. The more unpredictable a loss becomes, the more insurable it becomes.)

The term loss exposure refers to: A - the actual cause of the loss. B - the uncertainty of a loss occurring. C - the possibility of a loss. D - the increase in the possibility of a loss.

C - the possibility of a loss. (Exposure means there is a possibility of a loss. Loss Exposure is the degree to which a person or their property is at risk for loss.)

A hazard that deals with a persons mental attitude, behavior and habits is an example of: A - Legal hazard B - Physical hazard C - Morale hazard D - Moral hazard

D - Moral hazard (Moral hazards deal with a persons mental attitudes, behaviors and habits. Some examples of moral hazards are drug abuse, dishonest claims, alcoholism, smoking, driving over the speed limit.)

When an insured rejects uninsured motorist in writing this is considered: A - a rescission B - a modification C - an example of estoppel D - a waiver

D - a waiver (A waiver. The insured gave up the right to pursue any uninsured motorist claim.)

Materiality is determined by the disadvantage placed on the other party and: A - neither are correct B - not by the event C - the influence of the facts D - both are correct

D - both are correct (Materiality is not judged by the event but by the influence of the facts.)

The law of large numbers is a principal that basically says: A - the larger the number of people in an insurance company, the more stable it is. B - the larger the possibility of a loss, the greater the exposure. C - the more insurance you have, the more protected you are. D - the larger the amount of information gathered, the more reliable that information will be.

D - the larger the amount of information gathered, the more reliable that information will be. (The law of large numbers is a principle that basically says, the larger the amount of information gathered, the more reliable that information will be.)