General Insurance 7%

A state-issued document empowering an insurance company to become an admitted insurer is called what? - Certificate of title - Certificate of deposit - Certificate of admission - Certificate of authority

Certificate of authority. Before transacting insurance business within a state, each insurer must qualify for and receive a certificate of authority. Only then can it be considered an admitted insurer.

What is a material misrepresentation?

A statement by the applicant that, upon discovery, would affect the underwriting decision of the insurance company A material misrepresentation is a statement that, if discovered, would alter the underwriting decision of the insurance company.

Insurance policies are not drawn up through negotiations, and an insured has little to say about its provisions. What contract characteristic does this describe? - Conditional - Personal - Adhesion - Unilateral

Adhesion A contract of adhesion is prepared by only the insurer; the insured's only option is to accept or reject the policy as it is written.

What documentation grants express authority to an agent? - Agent's insurance license - Fiduciary contract - State provisions - Agent's contract with the principal

Agent's contract with the principal The principal grants authority to an agent through the agent's contract.

What is a foreign insurer? - An insurer with licensed agents who are citizens in more than one country - An insurer with a home office in another state - An insurer with a home office in another country - An insurer with licensed agents doing business in other countries

An insurer with a home office in another state A domestic insurer's home office is in this state, a foreign insurer's is in another state, and an alien insurer's is in another country.

Which of the following types of agent authority is also called "perceived authority"? - Fiduciary - Apparent - Express - Implied

Apparent Apparent authority (also known as perceived authority is the appearance or the assumption of authority based on the actions, words, or deeds of the principal or because of circumstances the principal created.

Because an agent is using stationery with the logo of an insurance company, applicants for insurance assume that the agent is authorized to transact on behalf of that insurer. What type of agent authority does this describe?

Apparent Apparent authority (also knowns as perceived authority) is the appearance or the assumption of authority based on the actions, words, or deeds of the principal or because of circumstances the principals.

An individual was involved in a head-on collision while driving home one day. His injuries were not serious, and he recovered. However, he decided that in order to never be involved in another accident, he would not drive or ride in a car ever again. Which method of risk management does this describe? - Avoidance - Reduction - Sharing - Retention

Avoidance Avoidance is a method of risk management by which a person tries to eliminate risk of loss by avoiding any exposure to an event that could give rise to such loss. Risk avoidance is effective but seldom practical.

The risk management technique that is used to prevent a specific loss by not exposing oneself to that activity is called

Avoidance Risk avoidance is elimination of risk by avoiding any exposure to an event that could give rise to such loss.

A producer who fails to separate premium monies from his own personal funds is guilty of - Larceny - Embezzlement - Theft - Commingling

Commingling It is illegal for insurance producers to commingle premiums collected from the applicants with their own personal funds.

When both parties to a contract must perform certain duties and follow rules of conduct to make the contract enforceable, the contract is - Conditional - Aleatory - Personal - Unilateral

Conditional The contract is formed on the basis that certain conditions are met.

Because an insurance policy is a legal contract, it must conform to the state laws governing contracts which require all of the following elements EXCEPT

Conditions Conditions are part of the policy structure. Consideration is an essential part of a contract.

In insurance transactions, fiduciary responsibility means

Handling insurer funds in a trust capacity An agent's fiduciary responsibility includes handling insurer funds in a trust capacity.

Units with the same or similar exposure to loss are referred to as

Homogeneous The basis of insurance is sharing risk between a large homogeneous group with similar exposure to loss.

When would a misrepresentation on the insurance application be considered fraud?

If it is intentional and material A misrepresentation would be considered fraud if it is intentional and material. Fraud would be grounds for voiding the contract.

Which insurance principle states that if a policy allows for greater compensation than the financial loss incurred, the insured may only receive benefits for the amount lost? - Stop-loss - Consideration - Reasonable expectations - Indemnity

Indemnity The principle of indemnity stipulates that the insured can only collect for the amount of the loss even if the policy is written with greater benefit limits.

A life insurance policy has a legal purpose if both of which of the following elements exist? - Offer and counteroffer - Policyowners and named beneficiaries - Insurable interest and consent - Underwriting and reciprocity

Insurable interest and consent To ensure legal purpose of a life insurance policy, it must have both insurable interest and consent.

Which statement regarding insurable risks is NOT correct?

Insured cannot be randomly selected. Granting insurance must not be mandatory, selecting insured randomly will help the insurer to have a fair proportion of good risks to poor risks. All other statements are true.

All of the following actions by a person could be described as risk avoidance EXCEPT

Investing in the stock market Investing in the stock market is not an example of risk avoidance; it creates a possibility of a loss.

The insurer may suspect that a moral hazard exists if the policyholder - Is not honest about his health on an application for insurance - Is prone to depression - Is indifferent to activities that may be dangerous - Always drives over the speed limit

Is not honest about his health on an application for insurance. Moral hazards refer to those applicants that may lie on an application for insurance, or in the past, have submitted fraudulent claims against an insurer.

Which of the following is the basis for a claim against an insurance policy?

Loss Claims result from losses by a peril insured against in an insurance policy.

Untrue statements on the application unintentionally made by insured that, if discovered, would alter the underwriting decision of the insurance company, are called

Material misrepresentations A material misrepresentation is a statement that, if discovered, would alter the underwriting decision of the insurance company.

Which of the following insurance options would be considered a risk-sharing arrangment? - Surplus lines - Reciprocal - Stock - Mutual

Reciprocal When insurance is obtained through a reciprocal insurer, the insureds are sharing the risk of loss with other subscribers of that reciprocal.

Which of the following must an insurer obtain in order to transact insurance within a given state? - Producer's certificate - Business entity license - Insurer's license - Certificate of authority

Certificate of authority All insurers (domestic, foreign, or alien) must obtain a certificate of authority before transacting insurance within a given state.

Which of the following is considered to be a morale hazard? - Driving recklessly - Smoking - Working as a firefighter - Engaging in illegal activities

- Driving recklessly Morale hazards arise from a state of mind that causes indifference to loss, such as carelessness.

An insurer neglects to pay a legitimate claim that is covered under the terms of the policy. Which of the following insurance principles has the insurer violated?

Consideration The binding force in any contract is consideration. Consideration on the part of the insured is the payment of premiums and the health representations made in the application. Consideration on the part of the insurer is the promise to pay in the event of loss.

Which of the following is NOT an essential element of an insurance contract?

Counteroffer In order for insurance contracts to be legally binding, they must have four essential elements: agreement (offer and acceptance), consideration, competent parties, and legal purpose. Counteroffer is not required.

Which of the following best describes an insurance company that has been formed under the laws of the state? - Domestic - Sovereign - Alien - Foreign

Domestic A company is domestic when doing business within the state in which it is incorporated.

Which of the following best describes the aleatory nature of an insurance contract? - Policies are submitted to the insurer on a take-it-or-leave-it basis - Exchange of unequal values - Only one of the parties being legally bound by the contract - Ambiguities are interpreted in favor of the insured

Exchange of unequal values An aleatory contract is a contract in which unequal amounts or values are exchanged. The amount of premium the insured pays is much less than the potential loss assumed by the insurer.

Which of the following are the authorities that an agent can hold? - Authorized and admitted - Primary and secondary - Express and implied - Apparent and allowed

Express and implied The powers and authorities that an agent holds are express and implied. Apparent authority is the appearance of, or the assumption of, authority based on the actions, words, or deeds of the principal or because of circumstances the principal created.

The requirement that agents not commingle insurance monies with their own funds is known as

Fiduciary responsibility Money collected with respect to an insurance transaction must be hold in a position of trust by the agent or broker.

When doing business in this state, an insurance company that is formed under the laws of another state is known as which type of insurer?

Foreign A foreign insurer is one that is formed under the laws of another state. A nonadmitted or unauthorized insurer is an insurance company that has not applied for, or has applied and been denied a certificate of Authority and may not transact insurance.

A person who does not lock the doors or does not repair leaks shows an indifferent attitude. This person presents what type of hazard? - Physical - Morale - Moral - Legal

Morale A morale hazard is someone who has an indifferent attitude towards an insurance company. He is careless or irresponsible because he knows his loss will be covered by insurance.

On a participating insurance policy issued by a mutual insurance company, dividends paid to policyholders are

Not taxable since the IRS treats them as a return of a portion of the premium paid. With participating policies, policyowners are entitled to dividends, which in the case of mutual companies, are nontaxable because they are considered a return of excess premiums.

What is the major difference between a stock company and a mutual company?

Ownership Mutual companies are owned by policyholders, while stock companies are owned by stockholders.

A participating insurance policy may do which of the following? - Pay dividends to the policy owner - Provide group coverage - Pay dividends to the stockholder - Require 80% participation

Pay dividends to the policyowner A participating insurance policy will pay dividends to the owner based upon actual mortality cost, interest earned and costs.

All of the following are examples of risk retention EXCEPT - Premiums - Deductibles - Self-insurance - Copayments

Premiums Retention is a planned assumption of risk, or acceptance of responsibility for the loss by an insured through the use of deductibles, copayments, or self-insurance.

What is the term for the entity that an agent represents regarding contractual agreements with third parties? - Client - Designee - Insured - Principal

Principal An agent represents the principal, acting on the entity's behalf in contractual agreements with third parties.

Pertaining to insurance, what is the definition of a fiduciary responsibility? - Promptly forwarding premiums to the insurance company - Helping insureds to file claims - Performing reviews of insured's coverage - Offering additional coverage to clients

Promptly forwarding premiums to the insurance company Fiduciary refers to a position of trust. When an agent is handling the premiums that belong to an insurance company, they are acting in a fiduciary capacity.

Which of the following is the most common way to transfer risk? - Purchase insurance - Increase control of claims - Lessen the possibility of loss - Name a beneficiary

Purchase insurance The most effective way to handle risk is to transfer it so that the loss is borne by another party. Insurance is the most common method of transferring risk from an individual or group to an insurance company.

In what way can an agent demonstrate a high standard of ethics? - Making enough commissions to cover personal expenses - Setting and meeting monthly production goals - Recommending qualified retirement plans to each client - Putting the client's best interests before their own

Putting the client's best interests before their own The needs of the client(s) are the priority to a highly ethical agent.

Which of the following factors is NOT considered by an underwriter when determining the premium rates for an individual seeking insurance? - Race - Age - Medical history - Sex

Race Age, medical history, and sex provide sound statistical data for determining the probability of loss. Race, religion, sexual orientation, etc., are some of the factors that cannot be used because there is not sound statistical data to show that they effect the probability of loss; therefore, they are considered to be discriminatory.

Ina court ordered payment for a loss that was not covered in the policy even if it was clearly worded, it would be an example of which legal concept? - Reasonable expectations - Cease and desist - Nonforfeiture - Indemnity

Reasonable expectations If, because of advertising or sales literature or statements by an agent, an insured could reasonably expect the coverage, the courts have held that the insurer must provide that coverage.

In case of a loss, the indemnity provision in insurance policies

Restores an insured person to the same financial state as before the loss Indemnity (sometimes referred to as reimbursement) is a provision in an insurance policy that states that in the event of loss, an insured or beneficiary is permitted to collect only to the extent of the financial loss, and is not allowed to gain financially because of the existence of an insurance contract.

Hazard is best defined as

Something that increases the risk of loss Hazards are conditions or situation that increase the probability of an insured loss occurring.

Events in which a person has both the chance of winning or losing are classified as

Speculative risk Speculative risk involves the chance of gain or loss and is not insurable.

Which of the following insurers are owned by stockholders?

Stock Only stock insurance companies are owned and controlled by stockholders.

Which of the following would qualify as a competent party in an insurance contract?

The applicant has a prior felony conviction When an insurer and insured enter into a contract, both parties must be of legal age and mentally competent. It is legal for a person convicted of a felony to buy an insurance contract. An intoxicated person, however may not be mentally competent, a 12 year old student is considered to be underage in most states and a person under mind-impairing medication most likely would not be mentally competent.

Which of the following is NOT the consideration in a policy? - The premium amount paid at the time of application - The promise to pay covered losses - The application given to a prospective insured - Something of value exchanged between parties

The application given to a prospective insured Consideration is something of value that is transferred between the two parties to form a legal contract.

Which of the following is NOT a characteristic of an insurable risk?

The loss must be catastrophic In order to characterized as pure risk, the loss must be due to change, definite, measurable, and predictable, but NOT catastrophic.

Which of the following is an example of a producer's fiduciary duty? - A duty to base all transactions upon the principle of Utmost Good Faith - The obligation to tell the truth to the best of one's knowledge - The trust that a client places in the producer in regard to handling premiums - An obligation to state every known fact about the policy the producer is selling

The trust that a client places in the producer in regard to handling premiums An agent acts in a fiduciary capacity, based upon trust and confidence, when handling the financial affairs of their customers, including the handling of premiums.

For the purpose of insurance, risk is defined as

The uncertainty or chance of loss Risk, or the chance of loss occurring, is the basic reason for buying insurance.

When an individual purchases insurance, what risk management technique is he or she practicing?

Transfer Insurance is a transfer of the risk of financial loss from a covered peril from the insured to the insurance company.

If only one party to an insurance contract has made a legally enforceable promise, what kind of contract is it?

Unilateral In a unilateral contract, only one of the parties to the contract is legally bound to do anything.

Which of the following is a statement that is guaranteed to be true, and if untrue, may breach an insurance contract?

Warranty A warranty in insurance is a statement guaranteed to be true. When an applicant is applying for an insurance contract, the statements he or she makes are generally not warranties but representations. Representations are statements that are true to the best of the applicant's knowledge.