GENERAL INSURANCE QUIZ

What constitutes an agreement to enter into a valid contract?

SPECIFIC offer by one party and acceptance by the other

Which of the following describes an insurance company doing business in a state other than the one where it is incorporated?

foreign A company doing business in a state other than where it is incorporated is known as a foreign insurer.

A reduction in the value of an asset is known as a

loss If the value of an asset is reduced due to damage by a peril or by an accident, the insured has suffered a loss.

What is a risk management technique for dealing with the consequences of loss?

loss reduction

Which of the following is a "hazard"?

matches in reach of a child a hazard INCREASES the chance of a loss occurring, or increases the severity.

Purchasing insurance is most closely identified with what risk management technique?

risk transfer risk can be transferred by an injured person suing the negligent party, or through the use of insurance where the risk of loss is transferred to the insurance company

Producers or agents are typically granted the authority by an insurer to:

select applicants The authority to waive exclusions, modify conditions, or reject insurance risks belongs to the insurance company not the agent.

Adverse selection is best characterized by what phrase?

selection against the company

Which of the following is a method for managing risk?

sharing of claim costs Sharing risk is a method of managing it. If the insurance company pays part of the claim and the insured pays part of the claim, they are sharing the risk. The other choices have nothing to do with risk management.

Tom sees an ad on TV for car insurance inviting him to use the web or call a toll free number for information. The insurer is using which of the following marketing distribution systems

direct writer/response Companies that invite the consumer to contact them via a web site or a toll free number are using the direct writer/response system. These TV ads could mention an agent or how to get to one but the question does not mention that specifically, so the best answer choice is direct writer/response.

Adjusting the renewal rate based on claims that have been submitted is an example of:

experience rating experience rating is a method by which an insured's claim experience, either good or bad, can affect renewal rate charged for risk

The amount of risk presented by the insured to the insurer is known as

exposure Risk is the chance that a loss will occur. The amount of risk presented by the insured is the exposure. Underwriting will determine if that is something the insurer is willing to accept and what to charge in premium for it.

Tiffany buys a policy and is not happy with the claim denial based on the wording. She feels the language is vague. The court agrees with her and awards her coverage. This is an example of a

Contract of Adhesion Since the insurer writes the policy and the insured has little or no makeup in the wording. The insured must accept it as is. If the language is vague or unclear, the courts will always side with the party that did not write the contract. This is the Doctrine of Adhesion.

Sarah wants to find out how financially sound her insurance company is. She can check all of the following sources, EXCEPT

Department of Insurance The Department of Insurance does not rate the financial strength of insurance companies. independent rating services provide this information

Theresa has a fire and has no idea where she put her property insurance policy. She hopes this loss is covered under the

Doctrine of Reasonable Expectations. Insureds should reasonably expect certain things to be covered without actually reading the policy.

An individual licensed as an agent in his state represents

a company

An example of transferring risk of loss is

a landlord placing a tenant "hold harmless" clause in the lease agreement Hold Harmless Clause- agreement where one or both parties agree to NOT hold the other party responsible for any loss, damage, or legal liability.

The tendency for people with a greater than average exposure to loss to purchase insurance is called:

adverse selection

What represents valuable consideration on behalf of the insured?

both application, all statements made in application, and intital premium paid to sales represetentnaive

whats NOT an example of risk avoidance?

buying insurance

What best defines risk?

uncertainty of loss

The insured pays a small premium and the insurer promises to pay a large amount if a covered loss occurs. This is an example of a

aleatory contract Since the amount of money at risk between the two parties is so uneven, the contract is considered to be aleatory in nature.

An insurance company organized under the laws of another country best describes a(n)

alien insurer

Los Lobos insurance company is incorporated in Mexico, they write some business in the United States. In each state, Los Lobos would be referred to as a/an:

alien insurer An alien insurer is one whose main home office is outside of the United States.

Kim shows up at the agent's office to pay her premium on her policy that cancelled last night. The agent accepts the premium and Kim believes her policy is paid. This is an example of what kind of agent authority?

apparent authority The agent's actions have given Kim the impression that the company has accepted the premium on the cancelled policy. This is an example of apparent authority based on the agent's actions. To Kim, apparently, the agent can do this by his actions and in her eyes the actions of the agent are the actions of the company and the law would agree with her.

Who makes the offer in an insurance contract?

applicant The applicant submits a request for insurance, thus the offer. The home office underwriter either accepts the application as applied for or issues a counteroffer, which is either accepted or rejected by the applicant.

Which of the following would be considered an insurable risk?

barry things he should buy insurance on his house becuase a neighbors home was once hit by lightning Insurance will only get involved in the possibility of a loss. Insurance premiums must also be commensurate with the risk involved. People in an earthquake fault wanting earthquake insurance is an example of adverse selection.

Rules have to be followed in order for an insurance contract to work. This is an example of a

conditional contract Insurance contracts are "conditional" meaning that rules of conduct need to be adhered to in order to make it work. Think "C" for conditional, "C" for conduct.

Which of the elements of a legal contract does an insurance premium payment represent?

consideration In order for a contract to be valid there must be something of value exchange between the parties. The premium presented for payment is the valuable consideration given by the client.

in the formation of a legal contract, each party must give something of value. Under contract law, this is referred to as

consideration insurer gives coverage as valuable consideration and insured promises to pay a premium. each party gives something of value to agreement.

What NEEDS to be present in order for a contract to be legally binding to both parties?

consideration offer and acceptance legal purpose

An insurance policy drafted by the company and offered to the insured for acceptance or rejection without negotiation is called a:

contract of adhesion Because the insured has no input in the wording of the policy, the insured is stuck with it the way the insurer wrote it. This is known as a contract of adhesion.

The insurer relies on the application information to be truthful and the insured relies on the insurer to be truthful and fair in the claim settlement. This is an example of a

contract of utmost good faith

All of the following are taken into consideration when an insurer sets rates for insurance

cost of losses that will be paid profit cost of doing business Insurers must set rates to cover costs and losses and hope to make a profit.

Types of agent authority

expressed implied apparent An agent's overall authority stems from three separate sources: express-authority granted by the company in an oral or written agreement (e.g., contract with insurer); implied-authority the public may believe an agent to have (e.g., if an agent issues policies, it is reasonable to expect the agent also issues endorsements); and apparent-authority created when action or inaction by the insurer gives the impression that the authority exists (e.g., binding authority).

An agent has a fiduciary duty to the insured. This means a relationship resulting in

faith and trust in the agent's advice

Which is NOT considered a hazard?

fire burning burning out of control Hazard- anything that increases the seriousness of a loss or increases the likelihood of a loss occurring due to a peril. for ex. improperly stored combustible materials, worn tires, intentional abuse to insured property, or unsafe structural changes

Mike belongs to the Loyal Order of Moose lodge #3441. He enrolls in the insurance program through the lodge. The insurer offering coverage is a

fraternal benefit society insurer Since Mike belongs to the club, (Fraternity=Fraternal) he is eligible for the insurance program written by a Fraternal Benefit Society.

Which of the following best describes a Lloyd's Association and Risk Retention Groups?

group of individuals who band together to accept risks and are responsible for the risks they accept While either of those could be alien insurers based on where their main home office is located, they are groups of individuals coming together to insure certain types of risks and each individual is responsible for the risk they accept.

All of the following are taken into consideration when an insurer sets rates for insurance, EXCEPT

how much insureds are willing to pay

The authority the agent believes he has in order to do his job correctly for the company is known as

implied authority authority an agent believes he has in order to complete his duties

A homeowner whose house suffered a $50,000 total loss was insured for $60,000. What principle would be violated if her insurance company paid $60,000?

indemnity indemnity implies not making a profit from a claims situation. collecting $60,000 when loss is only $50,000 violates this principle

An example of loss reduction is

installing a smoke dectetor Reduction of risk reduces the probability or severity of a possible loss. A smoke detector, by giving warning, can reduce the severity of a fire loss.

An example of loss reduction is

installing a smoke detector.

What does NOT make a property policy an indemnity contract?

liberalization liberalization clause permits an insurer to" increase coverage immediately at no charge insurable interest, ACV, and subrogation are meant to place a person in the same position as before loss happened

All of the following are elements of an insurable risk,

nnon catastrophic lossess losses causing economic hardship ascertainable losses (losses must be measurable) In order for a risk to be insurable, it must fit into a large number of homogenous units, losses must be measurable and uncertain and they must cause an economic hardship

Something that will cause a loss is a

peril

Rick sells his car to Joe. He calls his insurer to transfer his auto policy to Joe. The insurer declines to do this. This is an example of a

personal contract Rick's policy is his and is personal in nature meaning that it doesn't automatically transfer with the sale of his car.

A unincorporated group of individuals sharing risk and managed by an attorney-in-fact is a

reciprocal

When insurers agree in advance to offer certain types of risks to reduce the risk of a catastrophic loss and a re-insurer agrees to accept them, what has occurred?

reinsurance

when insurers agree in advance to offer certain types of risks to reduce the risk of a catastrophic loss and a re-insurer agrees to accept them, what has occurred?

reinsurance Reinsurance is a form of insurance that occurs between insurers when the reinsurer agrees to accept all or a portion of a risk covered by another company.

All statements made by the applicant are

representations truth to the best of the client's knowledge. Statements on insurance applications are, in the absence of fraud, not warranties, but representations (statements true to the best of the applicant's knowledge)

A nonexclusive (independent) agent:

represents more than one insurance company.

A deductible in an insurance policy is an example of

risk retention Risk Retention- person assumes financial responsibility for certain events. deductible can be seen as a way the insured retains some portion of risk.

An insurer whose activity consists of assuming and spreading risks among its members is known as:

risk retention group (captive insurers) A risk retention group spreads the risk of loss among its members. In many states these are known as captive insurers

An unauthorized company writing business in the state that is not subject to state approved policy forms, rates, or rules is known as a

surplus lines insurer Surplus lines companies can charge whatever they want and their policies can say whatever they want. They are NOT authorized to do business in the state and therefore not subject to state approved policy forms, rules and rates.

Only one of the parties, the insurer, can be legally bound to honor their promise. This is an example of a

unilateral contract Since only one party can be held bound to their promise, the contract is unilateral in nature

Insurance company has the authority to

waive exclusions, modify conditions, or reject insurance risks

What does NOT need to be present in order for a contract to be legally binding to both parties?

written agreement Oral contracts are acceptable in many states; having the contract in writing is not necessarily required. Common sense, however, points out the difficulties of enforcing the terms of the contract unless they are written.