Chapter One Practice QuestionsWhich of the following best describes the concept of utmost good faith?

Which of the following is a financial rating service? A.M. Best Company Flint Financial Services State Investment Services Rating Services of America

A.M. Best Company (Independent financial rating services, such as A.M. Best Company, evaluate and rate the stability of insurance companies by assigning rating codes to show financial strength or weakness of each company rated.)

An insurer authorized to transact insurance in a particular state by that state's Department or Division of Insurance is called: The quiz is currently paused. An alien insurer A fraternal insurer An admitted insurer A permitted insurer

Admitted (An admitted insurer has a Certificate of Authority issued by the Department or Division of Insurance to transact insurance.)

A(n) ___________ insurer is authorized to write insurance policies in a particular state. Foreign Non-Admitted Domestic Admitted

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.)

Which of the following defines risk? Financial interest in property Cause of loss Amount of loss Chance of loss

Chance of Loss (The uncertainty or chance of loss is the definition of risk.)

Which of the following is not true about a Reciprocal Insurance Company? Each subscriber assumes a share of the risk of all other subscribers If funds are insufficient to pay claims, the subscribers are assessed for additional premium It is managed by an attorney-in-fact Members are grouped into syndicates

Members are grouped into syndicates (Members of a reciprocal insurance company are not grouped into syndicates, as in the case of Lloyds.)

A policy may not be voided for which of the following reasons? Fraud Misrepresentation Breach of warranty Non-payment of premium

Non Payment of Premium (A voidable contract is a valid contract that for reasons satisfactory to a court may be set aside by one of the parties.)

Insuring a home is an example of which risk management method? Retention Avoidance Enhancement Transfer

Transfer (Transferring the risk from one party, the insured, to another, the insurance company, is managing the risk by transferring the uncertainty of loss via a contract.)

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: An agreement between Mr. R and the reinsurance company An agreement between Mr. R, Insurance Company C, and the reinsurer An agreement between Mr. R's agent and Insurance Company C An agreement between Insurance Company C and the reinsurer

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.)

All of the following are true, except: The quiz is currently paused. A cancellation is the termination of a contract by the insured or the insurer in accordance with provisions in the policy When parties to a contract exchange unequal amounts of money, this is said to be an aleatory contract The insurance contract is interpreted in favor of the insured because it is a contract of adhesion An expense ratio is determined by dividing losses by total of premium received on those accounts

An expense ratio (Expense ratio is dividing an insurer's total operating expenses by total earned premiums.)

When the producer exceeds the authority expressed in the agency contract and the insurer does not take action, which of the following types of authority is created? Express Implied Actual Apparent

Apparent (A producer has apparent authority when he accepts premium on a lapsed policy, and the insurer reinstates the policy.)

A Lloyd's of London underwriter is responsible for doing which of the following? Reviewing every process during the issue of policies by Lloyd's Paying for part of any loss sustained by a defaulting underwriter One of several in an incorporated association Being individually liable for each risk they assume

Being individually liable for each risk they assume (No limitation of liability is permitted, so each underwriter exposes his entire fortune to guarantee payment of losses.)

Which of the following best describes the concept of utmost good faith? Both parties are entitled to rely upon the representations of the other that there is nothing concealed or dishonest The insured must warrant for the insurer that her representations in the application are true The penalty for concealment of known facts on the part of the insured is contract voidance The insurer has drawn up the contract and, therefore, there can be no intent to deceive

Both parties are entitled to rely upon the representations of the other that there is nothing concealed or dishonest

Because the insurance company must pay claims and the insured must comply with the policy terms, the insurance contract is considered which of the following types of contracts? Aleatory contract Contract of adhesion Conditional contract Unilateral contract

Conditional Contract (A conditional contract requires that both parties perform certain duties.)

As long as all parties perform certain duties as obligated, coverage will remain in effect. This defines a: Conditional contract Unilateral contract Contract of adhesion Personal contract

Conditional Contract (A conditional contract states that both parties must perform certain duties and follow rules of conduct to make the contract enforceable.)

The insurance contract is a(n) ___________ because the court will usually interpret in favor of the insured when an insurance policy is not clear. Bilateral contract Contract of Adhesion Aleatory contract Conditional contract

Contract of Adhesion (A Contract of Adhesion is a contract between two parties that does not allow for negotiation, i.e. take it or leave it. An insurance policy, drawn up by the insurer, is such a contract. Any ambiguity in the contract is construed against the party who drew it up.)

The insurance contract is a(n) ___________ because the contract is prepared by one party and submitted to the other party on a take it or leave it basis. Contract of Adhesion Conditional Contract Valued contract Aleatory Contract

Contract of Adhesion (A Contract of Adhesion is one that is prepared by one party and presented to the other party on a take it or leave it basis.)

The Terrorism Risk Insurance Program Reauthorization Act provides for a Terrorism Insurance Program administered by which of the following Federal entities? Executive office Department of Defense Secretary of State Department of the Treasury

Department of the Treasury (The Terrorism Act, which protects consumers by addressing market disruptions and ensuring the continued widespread availability and affordability of property and casualty insurance for a terrorism risk, is administered by the Dept. of Treasury.)

Which statement is false about the National Association of Insurance Commissioners? The NAIC promotes insurance uniformity It provides resources to the insurance commissioner regarding insurance regulation Each commissioner must accept the recommendations that concern his or her state The NAIC is made up of insurance regulators

Each commissioner must accept the recommendations that concern his or her state (The recommendations from the NAIC may be accepted or rejected by the state insurance regulators.)

Which statement defines estoppel? Estoppel is the intentional misrepresentation of a material fact Estoppel prevents one from denying a fact, if the fact was admitted to be true by a previous action Estoppel is the intentional abandonment of a known right Estoppel is the failure to disclose known facts

Estoppel prevents one from denying a fact, if the fact was admitted to be true by a previous action (This is the legal definition of estoppel. The intentional misrepresentation of a material fact defines Fraud. The intentional abandonment of a known right defines Waiver. The failure to disclose known facts defines Concealment.)

An agreement that pays on behalf of another party is which of the following types of insurance contracts? Aleatory Adhesion Valued Indemnity

Indemnity (The insurance company pays for a claim covered by the indemnity contract on behalf of the insured.)

An agent that enters into agreements with more than one insurer is which of the following? Exclusive Captive Independent Direct

Independent (The independent agent may represent many insurers at the same time.)

Insurable interest in property insurance: Must be present at the time the policy is written, but is not necessary at the time of loss Is not necessary at the time the policy is written or when the loss occurs Is only necessary at the time of loss Must be present at the time the policy is taken out and at the time of loss

Is only necessary at the time of the loss (In order for a party to receive payment for a loss, they must have an insurable interest at the time of loss.)

All of the following are true of a Reciprocal Insurance Company, except: Each subscriber assumes part of the risk of all other subscribers If funds are insufficient to pay claims, the subscribers can be assessed for additional premium It is managed by an attorney-in-fact It is an incorporated entity, with a Board of Directors elected by policyholders

It is an incorporated entity, with a Board of Directors elected by policyholders (A reciprocal insurance company is not incorporated, which is why it must be managed by an 'attorney-in-fact'.)

The Commissioner, Director, or Superintendent of insurance is responsible for all of the following, except: Examines insurance companies Approves premium rates Make insurance laws when appropriate Admits insurance companies to do business in the state

Make Insurance laws when appropriate (State legislature is responsible for passing insurance laws.)

All of the following are types of insurers, except: Stock insurers Mutual insurers Reciprocal insurers Proprietary insurers

Proprietary insurer is not a type of insurer.

Assuming the responsibility for loss is considered which of the following ways of managing risk? Retention Avoidance Transfer Reduction

Retention (Risk retention involves assuming the responsibility for loss. Self-insure the entire loss or a portion of the loss. Choosing deductibles is a method of risk retention.)

All of the following are restricted persons concerning the formulation of an insurance contract, except: Mentally incompetent persons People under the influence of drugs or alcohol Minors Retired persons

Retired persons

Which term describes the probability of loss? Peril Liability Risk Negligence

Risk (Risk is the probability of loss.)

Through whom do direct writing companies normally market? General agents General brokers Salaried employees Independent agents

Salaried Employess (An agent for a direct writing company is a salaried representative of the company.)

Which of the following best describes a hazard? Something that increases the chance of a loss A reduction in, decrease in, or disappearance of, value The possibility of a loss The loss itself

Something that increases the chance of a loss (Hazards increase the chance of loss.)

All of the following are characteristics of a Mutual Insurance Company, except: A policyholder votes on the Board of Directors Profits are returned as dividends Stockholders have ownership They provide insurance to members

Stockholders have ownership (A Mutual Insurance Company is owned by its policyholders, and does not have stockholders.)

All of the following are characteristics of a Mutual Insurance Company, except: A policyholder votes on the Board of Directors Profits are returned as dividends Stockholders have ownership They provide insurance to members

Stockholders have ownership (A Mutual Insurance Company is owned by its policyholders, and does not have stockholders.)

Which of the following is not true about insurance financial ratios? The combined ratio sums the operating and expense ratios Loss reserves are considered when determining the loss ratio The combined ratio sums the loss and expense ratios Expense ratio is dividing an insurer's total operating expenses by total written premiums

The combined ratio sums the operating and expense ratios (After determining the loss ratio and the expense ratio, the combined ratio is determined by adding those two ratios together.)

A contract in which both parties bargain in good faith is an example of the: Concept of adhesion Concept of utmost good faith Parol evidence rule Doctrine of estoppel

The concept of utmost good faith (The concept of utmost good faith says that both parties will bargain in good faith to form the contract.)

Which of the following determines a loss ratio? Multiplying actual cash value of loss by the coinsurance factor Dividing operating expenses by total premium Dividing losses plus loss reserves by total earned premiums Multiplying replacement cost by insurance premium

The loss ratio is determined by dividing paid losses plus loss reserves by total earned premiums.

The Law of Large Numbers states: Small certain losses are substituted for large uncertain losses The number of insured units increases, then the losses decrease The number of insured units increases, predictability improves Funds are insufficient to pay claims, and the insured is assessed additional premium

The number of insured units increases, predictability improves (The larger the sample is, the more accurate the prediction is.)

The concept that the insured should not profit from an insurance transaction is called: The principle of subrogation The principle of utmost good faith The principle of personal aspect The principle of indemnity

The principle of indemnity (Indemnity is restoring the insured to the same financial condition as before the loss, i.e., no profit.)

Fraud is an intentional act of all of the following, except: Misrepresentation used to induce another to part with something of value Concealment Warranty Deceit

Warranty (A warranty is a statement in the application guaranteed true in all respects.)