General Insurance (Section 1)

Which of the following types of agent authority is also called "perceived authority"? A Implied B Fiduciary C Apparent D Express

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.

An insurance contract must contain all of the following to be considered legally binding EXCEPT A Offer and acceptance. B Consideration. C Competent parties. D Beneficiary's consent.

Beneficiary's consent. The four essential elements of all legal contracts are offer and acceptance, consideration, competent parties, and legal purpose.

Contracts that are prepared by one party and submitted to the other party on a take-it-or-leave-it basis are classified as A Binding contracts. B Contracts of adhesion. C Unilateral contracts. D Aleatory contracts.

Contracts of adhesion. Insurance policies are written by the insurer and submitted to the insured on a take- it-or-leave-it basis. The insured does not have any input into the contract, but simply adheres to the contract.

What method do insurers use to protect themselves against catastrophic losses? A Indemnity B Pro rata liability C Risk management D Reinsurance

Reinsurance Insurers use reinsurance to protect themselves from catastrophic losses. This is a method where the reinsurer indemnifies the ceding insurer for part or all of the losses it sustains related to a policy issued previously.

Courts will interpret any ambiguity in an insurance contract A Through arbitration. B Based on the prudent person rule. C In favor of the insured. D In favor of the insurer.

In favor of the insured. Insurance policies are contracts of adhesion. The insurer writes the contract and the insured accepts the contract as it is written. When ambiguities exist, courts generally rule in favor of the insured.

Which of the following is owned by a corporation to serve that organization's needs at lower rates than would otherwise be available with commercial insurance? A Custom insurer B Reinsurer C Captive insurer D Internal insurer

Captive insurer Corporations organize captive insurers in order to obtain lower insurance rates and avoid the uncertainties and risks associated with commercial insurance.

Events in which a person has both the chance of winning or losing are classified as A Speculative risk. B Insurable. C Pure risk. D Retained risk.

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

What is reinsurance? A An agreement between an insurer and an insured B An agreement between a ceding insurer an assuming insurer C An agreement between an originating insurer and a ceding insurer D An agreement between a domestic insurer and a foreign insurer

An agreement between a ceding insurer an assuming insurer The originating company that procures insurance on itself in another insurer is called the ceding insurer. The other insurer is called assuming insurer.

What do individuals use to transfer their risk of loss to a larger group? A Insurable interest B Exposure C Indemnity D Insurance

Insurance Insurance is the mechanism whereby an insured is protected against loss by a specified future contingency or peril in return for the present payment of premium. Because many other individuals with the same or similar risk of loss are paying premiums, funds are available to indemnify those who actually suffer that loss.

Insurance companies may be classified according to the legal form of their ownership. The type of company organized to return any surplus money to their policyholders is A A stock company. B A mutual insurer. C A reciprocal company. D A fraternal insurer.

A mutual insurer. Mutual companies are owned and controlled by their policyholders. Any surplus money is returned to the policyholders as dividends.

A participating insurance policy may do which of the following? A Pay dividends to the policyowner B Provide group coverage C Pay dividends to the stockholder D 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.

The risk of loss may be classified as A High risk and low risk. B Pure risk and speculative risk. C Certain risk and uncertain risk. D Named risk and un-named risk.

Pure risk and speculative risk. Pure risks involve the probability or possibility of loss with no chance for gain. Pure risks are generally insurable. Speculative risks involve uncertainty as to whether the final outcome will be gain or loss. Speculative risks are generally uninsurable.

Adverse selection is a concept best described as A Risks with higher probability of loss seeking insurance more often than other risks. B Underwriters slanting the odds in favor of the company. C Poor choices of applicants to be covered. D Only offering coverage to good risks.

Risks with higher probability of loss seeking insurance more often than other risks. Adverse selection means that there are more risks with higher probability of loss seeking to purchase and maintain insurance than the risks who present lower probability. Underwriters must guard against this.

When would a misrepresentation on the insurance application be considered fraud? A Never: statements by the applicant are only representations. B When the application is incomplete C Any misrepresentation is considered fraud. D If it is intentional and material

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.

In insurance policies, the insured is not legally bound to any particular action in the insurance contract, but the insurer is legally obligated to pay losses covered by the policy. What contract element does this describe? A Unidirectional B Aleatory C Conditional D Unilateral

Unilateral In a unilateral contract, the insured is not legally bound to do anything. The insurer, however, must pay losses covered by the policy.

The insurer must be able to rely on the statements in the application, and the insured must be able to rely on the insurer to pay valid claims. In the forming of an insurance contract, this is referred to as A Utmost good faith. B Reasonable expectations. C A warranty. D Implied warranty.

Utmost good faith. The insurer must be able to rely on the statements given by the insured in the application. The insured must be able to rely on the insurer's promise to pay covered losses.

An insurer has made all of the decisions regarding the provisions included in the insured's policy. The insured finds an objectionable provision and wants to negotiate it with the insurer but is not allowed to do so. Her only options are to reject the policy or accept it as is. Which contract feature does this describe? A Conditional B Personal C Adhesion D 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.

The risk management technique that is used to prevent a specific loss by not exposing oneself to that activity is called A Avoidance. B Transfer. C Reduction. D Sharing.

Avoidance

Something of value exchanged between the insurer and the insured is considered an A Legal capacity. B Consideration. C Offer. D Acceptance.

Consideration. Consideration is something of value that each party to an insurance contract gives to the other.

Which of the following best describes an insurance company that has been formed under the laws of this state? A Alien B Foreign C Domestic D Sovereign

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

The authority granted to an agent through the agent's contract is referred to as A Express authority. B Apparent authority. C Implied authority. D Absolute authority.

Express powers Written into the contract between the insurer and the agent.

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

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

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.

Not all losses are insurable, and there are certain requirements that must be met before a risk is a proper subject for insurance. These requirements include all of the following EXCEPT A The loss produced by the risk must be definite. B The loss may be intentional. C The loss must not be catastrophic. D There must be a sufficient number of homogeneous exposure units to make losses reasonably predictable.

The loss may be intentional. To insure intentional losses would be against public policy.

Pertaining to insurance, what is the definition of a fiduciary responsibility? A Promptly forwarding premiums to the insurance company B Helping insureds to file claims C Performing reviews of insured's coverage D 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 true regarding a risk retention group? A It provides support for underwriters and is not an insurance company. B It is a benefit society formed to provide insurance for members of an affiliated lodge. C It is a company owned by the stockholders that provides nonparticipating policies. D It is a liability insurance company owned by its members.

It is a liability insurance company owned by its members. A risk retention group (RRG) is a liability insurance company owned by its members. The members are exposed to similar liability risks by virtue of being in the same business or industry.

Events or conditions that increase the chances of an insured loss occurring are referred to as A Exposures. B Risks. C Perils. D Hazards.

Hazards. Conditions such as lifestyle and existing health, or activities such as scuba diving are hazards and may increase the chance of a loss occurring.

Which authority is NOT stated in an agent's contract but is required for the agent to conduct business? A Apparent B Assumed C Express D Implied

Implied

Which of the following statements is an accurate comparison between private and government insurers? A Private insurers may be authorized to transact insurance by state insurance departments. B Insurance provided by the government is called federal insurance. C Private insurers offer fewer lines of insurance than government insurers. D Private insurers provide insurance in areas where the government will not.

Private insurers may be authorized to transact insurance by state insurance departments. Private insurers offer many lines of insurance. Government insurance programs, also known as social insurance, cover areas that private companies cannot or will not, providing programs like Medicare, Social Security, and National Flood Insurance. Government programs are funded with tax dollars and serve national causes, in contrast with private insurers.

Which of the following best describes the concept that the insured pays a small amount of premium for a large amount of risk on the part of the insurance company? A Subrogation B Warranty C Aleatory D Adhesion

Aleatory An insurance contract is an aleatory contract in that it requires a relatively small amount of premium for a large risk.

In which of the following examples would a contract between an insurer and prospective insured be legal? A The applicant is a 12-year-old student. B The applicant is under the influence of medication at the time of application. C The applicant has a prior felony conviction. D The applicant is intoxicated at the time of application.

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, and a 12-year-old student is considered to be underage in most states.

A tornado that destroys property would be an example of which of the following? A A pure risk B A loss C A physical hazard D A peril

A peril A peril is the cause of loss insured against in an insurance policy.

An insurance producer who by contract is bound to write insurance for only one company or group of companies is classified as a/an A Captive agent. B Solicitor. C Broker. D Independent producer.

Captive Agent A captive/exclusive agent has agreed, by contract, to produce insurance business only for the insurer they are contracted with.

A state-issued document empowering an insurance company to become an admitted insurer is called A Certificate of title. B Certificate of deposit. C Certificate of admission. D 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.

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? A Domestic B Alien C Nonadmitted D Foreign

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.

Which of the following is issued by the state Department of Insurance to show that the insurer has power to write insurance contracts in that state? A Binder B License C Certificate of Authority D Certificate of Insurance

Certificate of Authority A Certificate of Authority is issued by the state Department of Insurance and shows that the insurer has power to write insurance contracts in that state.

Who might receive dividends from a mutual insurer? A Policyholders B Subscribers C Stockholders D Agents

Policyholders A mutual insurer has no stock, and is owned by the policyholders. Since they may receive a dividend (not guaranteed), such policies are known as participating policies. Dividends received by policyholders of a mutual insurer are not taxable.

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

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

The document that indicates that an insurer has been approved and is authorized to transact insurance in a particular state is known as A Discretionary Authority. B Certificate of Insurance. C Binder. D Certificate of Authority.

Certificate of Authority. When the Commissioner of a particular state has determined that an insurer has met all of the requirements for transacting insurance in that state, a Certificate of Authority shall be issued to that insurer.

An insurance company sells an insurance policy over the phone in response to a TV ad. Which of the following best describes this act? A Direct response marketing B Independent agency marketing C Illegal D Insurance telemarketing

Direct response marketing A direct response marketing system effectively bypasses the insurance agent. Business is conducted over the phone, through the mail, or online. This is a perfectly legal approach to selling insurance. It is not mandatory in all situations for the insured to physically sign any documents in order for coverage to go into effect.

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

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 insurance providers must be nonprofit and sell insurance only to its members? A Fraternal B Service C Mutual D Reciprocal

Fraternal To be characterized as a fraternal benefit society, the organization must be nonprofit, have a lodge system that includes ritualistic work and maintain a representative form of government with elected officers. Insurance may only be sold to members of the society.

On a participating insurance policy issued by a mutual insurance company, dividends paid to policyholders are A Guaranteed. B Not taxable since the IRS treats them as a return of a portion of the premium paid. C Paid at a fixed rate every year. D Taxable as ordinary income.

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 term for the entity that an agent represents regarding contractual agreements with third parties? A Client B Designee C Insured D Principal

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

In insurance, an offer is usually made when A The insurer approves the application and receives the initial premium. B The agent hands the policy to the policyholder. C An agent explains a policy to a potential applicant. D The completed application is submitted.

The completed application is submitted. In insurance, the offer is usually made by the applicant in the form of the application. Acceptance takes place when an insurer's underwriter approves the application and issues a policy.

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 A Consideration. B Legal purpose. C Offer and acceptance. D Conditions.

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

Insurance is the transfer of A Hazard. B Peril. C Risk. D Loss.

Risk

All of the following are examples of risk retention EXCEPT A Self-insurance. B Premiums. C Deductibles. D 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.

Following a career change, an insured is no longer required to perform many physical activities, so he has implemented a program where he walks and jogs for 45 minutes each morning. The insured has also eliminated most fatty foods from his diet. Which method of dealing with risk does this scenario describe? A Reduction B Transfer C Avoidance D Retention

Reduction The insured's change in lifestyle and habits would likely reduce the chances of health problems.

All of the following are marketing arrangements used by insurers EXCEPT A Direct Response Marketing System. B Independent Agency System. C Reinsurance System. D General Agency System.

Reinsurance System. Reinsurance is a method used by insurers to protect against catastrophic losses. The rest are marketing arrangements.

An insurance company is domiciled in Montana and transacts insurance in Wyoming. Which term best describes the insurer's classification in Wyoming? A Domestic B Unauthorized C Foreign D Alien

Foreign A foreign insurer is domiciled in one state and transacts insurance in another. A domestic insurer transacts insurance in the domicile state (in this case, Montana). An alien insurer is domiciled in one country and transacts insurance in another.

Which of the following entities is not an insurer but an organization formed to provide insurance benefits for members of an affiliated lodge or religious organization? A Reciprocal association B Fraternal benefit society C Mutual company D Stock company

Fraternal benefit society Fraternal insurers operate on the basis of a lodge or charitable organization, but they may also sell formal insurance plans for the benefit of their members. Reciprocal insurers are also associations that provide insurance for their members, but they are formed only for the purpose of providing insurance.

Which of the following insurers are owned by stockholders who have the usual rights of ownership, including the right of voting? A Stock B Mutual C Reciprocal D Fraternal

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