General Insurance Concepts

A producer is a representative of: A. The insured B. The insurance company C. The general agency system D. The policyholder

B. The insurance company Producers represent the insurer. Under the Doctrine of the Agency, insurers are responsible for what their producers do.

An insurance company owned by its policyholders, who receive a return of unused premiums in the form of policy dividends, is a(n): A. Stock company B. Assessment insurer C. Mutual company D. Fraternal insurer

A mutual company has no stock although it is a corporation. Ownership of the company rests with the policyholders, who might receive a dividend from accumulated surplus, if declared. Dividends are not guaranteed. Dividends paid by mutuals are not taxable. A stock company is owned by shareholders, who have "equity" in the company. The stockholders may also receive dividends, which are taxable. Stock companies issue "non-participaating" policies. A fraternal insurer is non-profit with a lodge system that sells L&H insurance only to their own members.

An independent producer: A. Represents more than one insurance company B. Is a "captive" producer C. Works for a solicitor D. Represents only direct writers

A. Represents more than one insurance company Captive or exclusive producers work for only one insurer and are often company employees. Independent producers are self-employed and usually represent more than one insurer on a straight commission basis.

The uncertainty about loss that exists whenever more than one outcome is possible is called: A. Risk B. Hazard C. Insurable interest D. Indemnity

A. Risk Risk is the chance or uncertainty of loss. A hazard is something that increases the risk. The word indemnity means to pay or to reimburse the insured for covered losses. The principle of indemnity states that an insurance policy cannot pay you more than you actually lost.

All of the following are true about "speculative risk," EXCEPT: A. Speculative risk is a feature of insurance B. Speculative risk is a feature of gambling C. Speculative risk involves an uncertainty of loss D. Speculative risk involves a possibility of gain

A. Speculative risk is a feature of insurance Only pure risk is insurable, which is defined as the chance of loss without any possibility of gain. Speculative risk, like investing in the stock market that has the chance of gain or loss, is not insurable.

Which of the following terms means that an insurance contract may be of unequal benefit to one party or the other: A. Unilateral B. Aleatory C. Valued D. Adhesion

B. Aleatory Aleatory means that the consideration is not necessarily equal. A valued contract is like life insurance, where the insurer agrees to pay a specified amount upon the death of the insured, regardless of their human life value. All insurance contracts are unilateral, meaning one-sided. The doctrine of adhesion states that any vague language in an insurance contract will be construed against the insurance company, since they wrote it.

When the outcome of a contract depends upon chance, the contract is said to be: A. Unenforceable B. Aleatory C. Bilateral D. Invalid

B. Aleatory Insurance policies are "aleatory", in that the insured may have a claim and they may not.

An insurer with a Certificate of Authority in this State is known as a(n): A. Licensed insurer B. Authorized insurer C. Non-admitted insurer D. Certified insurer

B. Authorized insurer Virtually all insurers doing business in this state must obtain a Certificate of Authority from the Commissioner authorizing them to do business in this State. An "authorized" insurer is also known as an "admitted" insurer.

The applicant's initial premium and the answers they provide on the application make up which of the following: A. Incontestability clause B. Consideration clause C. Legal purpose D. Insuring agreement

B. Consideration clause In order for an insurance policy to be legally enforceable an exchange of values must occur, which is referred to as consideration. The applicant's consideration is the premium they pay, and the answers they provide on the application. The insurer's consideration is their promise to provide coverage. Consideration is not required to be equal, but must be present.

Because an insurer writes the policy language and the insured has little or no control over the content, any ambiguity in the wording is usually resolved in favor of the insured. Because the design and wording of a policy are in the hands of the insurer, insurance policies are said to be: A. Unilateral contracts B. Contracts of adhesion C. Aleatory contracts D. Contracts of indemnity

B. Contracts of adhesion The Doctrine of Adhesion states that any ambiguity in an insurance contract is always construed against the party who wrote it, the insurer. This is why the insured often wins in court, since they have to buy the policy on a "take it or leave it" basis, without any negotiation.

A condition that could result in a loss is known as a(n): A. Hazard B. Exposure C. Risk D. Peril

B. Exposure A condition that could result in a loss is known as an "exposure". For example, being exposed to asbestos over a period of time could cause lung cancer.

All of the following choices are true about "insurance," EXCEPT: A. A large, uncertain loss is traded for a small, certain loss B. Insurance is a mechanism for handling speculative risk C. It is a social device for spreading loss over a large number of people D. Insurance transfers risk from one party to a group

B. Insurance is a mechanism for handling speculative risk Speculative risk, like the chance of winning the lottery, is not insurable

If agent Mike fills out an application for customer Fred and the insurer issues the policy, who has made the offer: A. The insured B. The insurer C. Fred D. Mike

B. The insurer This is probably a COD (collect on delivery) application, since the question does not say that Fred paid any premium. On a COD application, it is the insurer who makes the offer and it is the applicant who accepts the offer by paying the premium upon policy delivery.

All of the following are required elements of legal contract, EXCEPT: A. Legal Purpose B. Waiver and Estoppel C. Offer and acceptance D. Competent Parties

B. Waiver and Estoppel Waiver and Estoppel are legal doctrines, but are not parts of the contract.

The authority that a producer has that is based upon their actions and deeds is known as _____ authority: A. Express B. Implied C. Apparent D. Delegated

C. Apparent Producers (agents) have 3 types of authority: express, which is written in their contract; implied, which is based on common industry practices; and apparent, which is based upon their prior actions or deeds.

In the formation of a legal contract, each party must give something of value. Under contract law, this is referred to as: A. Agreement B. Adhesion C. Consideration D. Indemnity

C. Consideration Consideration is defined as the exchange of values. A client exchanges a small certain amount (the possibility of a claim). The Principle of Indemnity states that you cannot recover more than you lost.

A prospect's statements made in the application for insurance, constitute a part of: A. Coinsurance Clause B. Incontestability Clause C. Consideration Clause D. Subrogation Clause

C. Consideration Clause The Consideration Clause states, "In consideration of the premium paid and the statements and answers contained herein, I hereby apply for life insurance with....." The Incontestability Clause states that the insurance company may not contest a claim for any reason after the policy has been in force for two consecutive years. The Subrogation Clause has to do with Liability Insurance and the Co-Insurance Clause has to do with Major Medical (Health) Insurance.

The exchange of value is a prerequisite to a valid insurance contract, as stated in which of the following required elements of a legal contract: A. Legal purpose B. acceptance C. Consideration D. Offer

C. Consideration. Consideration, which is an exchange of values between the parties entering the contract, is an element that is required in order for a contract to be considered legally enforceable. although it may be, it is not required to be equal.

The authority of an insurance producer that is spelled out in the written words of the agency contract between the producer and the insurer is: A. Implied Authority B. Apparent authority C. Express Authority D. Presumed authority

C. Express Authority Express authority is written down or "expressed" in your producer's contract. Implied authority is the authority a producer has based on the reasonable expectations of their customers. apparent authority is the authority created when the action or inaction of an insurer gives the impression that such authority exists.

Some producers supervise all of an insurance company's business within a specified territory. These producers appoint other producers, supervise their business, and receive an overriding commission on that business. What is the formal name for this type of producer? A. Independent producer B. Captive producer C. Managing General Agent D. Exclusive producer

C. Managing General Agent A Managing General Agent (MGA) is like a sales manager who is responsible for recruiting and training producers on behalf of an insurer in a specific territory. They need a special MGA license and are compensated on a commission over-ride basis.

Which of the following would cause a contract not to be enforceable: A. It is not in writing B. Consideration is not monetary C. One of the parties is not competent D. It is aleatory

C. One of the parties is not competent All parties entering into the contract must have legal capacity, or the contract will not be enforceable in court of law.

If someone frequently has physical exams completed they are using the following risk management technique: A. Retention B. Avoidance C. Reduction D. Sharing

C. Reduction Taking an annual physical exam is a form of risk reduction.

When an insurance applicant makes a statement, to the best of their knowledge, on an application that becomes part of the contract, the statement is considered to be a: A. warranty B. Condition precedent C. Representation D. Waiver.

C. Representation Representations are defined as the truth to the best of your knowledge and are required on insurance applications. Warranties are defined as something you guarantee to be true, and are usually not required, although some P&C policies ask that the customer "warrant" that a loss prevention device (such as a burglar alarm) has been installed in order to get a rate reduction.

Insurance is a means of: A. Retaining risk B. Avoiding risk C. Transferring risk D. Eliminating risk

C. Transferring risk Insurance is defined as the transfer of risk in consideration of a premium paid. If you drive without auto insurance, you are retaining the risk by self-insuring. If you take the bus, you are avoiding the risk. If you sell your car, you are eliminating risk.

Under contract law, the actions by a party may intentionally and voluntarily give up a known right. When this occurs, it is known as: A. Representation B. Binding Contract C. Waiver D. Warranty

C. Waiver Waiver is defined as the voluntary giving up of a legal right. The doctrine of estoppel states that once you voluntarily waive a legal right, you can't get it back.

Which type of licensee may legally represent an "unauthorized" insurer, such as Lloyds of London: A. Any insurance producer B. An independent insurance producer C. A service representative D. A Surplus Lines broker

D. A Surplus Lines broker Surplus Lines brokers represent "unauthorized" insurers, such as Lloyds of London. Producers represent the insurer. A service representative works for an insurance company in a marketing capacity. An independent producer may represent as many insurers as they want and is paid on a straight commission basis.

Which of the following insurance doctrines states that ambiguities in a policy will always be construed against the insurer: A. Utmost good faith B. Unilateral C. Alienation D. Adhesion

D. Adhesion Under the doctrine of "adhesion", ambiguities in an insurance policy are always construed against the insurer who wrote the policy.

Which of the following meets the definition of an alien insurer: A. An insurer organized in California who provides insurance on important shipments B. An insurer organized in Tennessee selling to those who travel out of the country C. An insurer organized in the US which primarily sells insurance to immigrants D. An insurer organized under the laws of Canada

D. An insurer organized under the laws of Canada An insurer organized in another country is considered an alien insurer.

Which of the following is not one of the available methods for dealing with an exposure to risk: A. Transfer the risk B. Retain the risk C. Avoid the risk D. Ascertain the risk

D. Ascertain the risk Once a risk is identified, it can be dealt with the several ways. Self insurance is risk retention. Insurance is defined as the transfer of risk. Avoiding risk is difficult.

When someone considers buying a business, but elects not to do so, it is known as risk: A. Retention B. Transfer C. Reduction D. Avoidance

D. Avoidance Risk is defined as the chance, probability, or uncertainty of loss. Once identified, risk may be avoided, reduced, retained or transferred. Most people transfer their risk by purchasing insurance.

An insurer incorporated under the laws of the state in which it is operating is considered to be a(n): A. Foreign insurer B. Reciprocal insurer C. Alien insurer D. Domestic insurer

D. Domestic insurer A domestic company has their home office in his state. A foreign company is in another state and and alien company is in another country.

The authority which is given by the insurer is that not specified is which of the following: A. Apparent B. Express C. Advised D. Implied

D. Implied The authority an insurer grants a producer that is specified is express authority. The authority which is given by the insurer that is not specified, but needed to conduct customary business practices, is implied authority.

In property and casualty and in medical-expense insurance, the principle of making someone "whole" again after a loss by paying only for actual losses is: A. Subrogation B. Estoppel C. Warranty D. Indemnity

D. Indemnity The Principle of Indemnity states that you cannot make a profit from insurance. Subrogation is a provistion that allows your insurance company to stand in your place to recover moneys they have already paid you.

A moral hazard: A. Arises from the condition, occupancy or use of the property itself B. Arises through an individual's carelessness or irresponsible action C. Is not a consideration in insurable risk D. Is the tendency to create a loss on purpose, to collect from the insurance company

D. Is the tendency to create a loss on purpose, to collect from the insurance company. A moral hazard is created by a dishonest person, such as someone who may use arson to collect on their fire insurance. Moral hazards are best spotted by the producer, who is considered to be the "front line" underwriter.

Which of the following contractual elements consists of the "offer" and the "acceptance": A. Consideration B. Competent parties C. Legal object D. Mutual Agreement

D. Mutual agreement Mutual agreement of the parties is also known as offer and acceptance. The client makes the offer when they sign the application and write the initial premium check. The underwriter accepts the risk by issuing the policy.

If the policy language is unclear, an insurer may elect to pay the claim under the doctrine of: A. Enforceable contracts B. utmost good faith C. Public interest D. Reasonable expectations

D. Reasonable expectations The doctrine of "reasonable expectations" states that an insurance policy should cover what a prudent person would expect that it would.

Who within the insurer determines if a risk is acceptable: A. Adjuster B. Producer C. Actuary D. Underwriter

D. Underwriter It is the underwriter that is responsible for determining if an applicant is acceptable, and if so, at what rate.

In which company may stockholders share in the profits and losses of the insurer: A. Assessment B. Service C. Stock D. Mutual

Stockholders may receive dividends from the shares of stock they own in a stock company. These dividends are not guaranteed, but if paid, are taxable as ordinary income.

In an insurance contract, the insuring agreement contains which of the following: A. Definitions B. Conditions C. Insurer's promise to pay D. Exclusions

The insuring agreement in an insurance contract contains the insurer's promise to pay covered claims.