AD BANKER AL P&C CH 1 GENERAL INSURANCE

In which of the following would you have an insurable interest? A. Neither answer B. The house you own but have rented to a tenant C. Both answers D. The car on which you are still paying

C. To have an insurable interest, a party must have a chance of financial loss or a financial interest in the property

A peril is: A. Also called a hazard B. An intentional loss C. The cause of a loss D. The chance of a loss

C. A peril is a cause of a loss. Example: Fire, Lightning, Wind, Hail, etc. Risk is the chance of a loss. Intentional loss is not a peril and a hazard increases the chance of a loss occurring.

A morale hazard: A. Arises through an individual's carelessness or irresponsible actions B. Is the extent to which one may be affected by a peril C. Is a physical condition that increases the probability of loss D. Is being dishonest on an application or claim form

A. A morale hazard refers to a persons behavior, or a persons morale. It refers to an increase in the possibility of loss through an individual's carelessness or irresponsible actions.

The tendency for people with a greater than average exposure to loss to purchase insurance is called: A. Adverse selection B. Reinsurance C. Substandard selection D. A morale hazard

A. Adverse selection is the tendency for people with a greater than average exposure to loss to ,purchase insurance. Insurance companies greatest concern is how much adverse selection or adverse risk is currently covered. The more bad risks they have on the books, the more financial losses they will incur.

What constitutes an agreement to enter into a valid contract? A. A specific offer by one party and acceptance by the other B. The values exchanges by both parties C. The parties to the contract must have the legal capacity to enter into a contract D. Both parties in the contract must have an insurable interest

A. An Agreement consists of the 'Offer and Acceptance'. Offer is the application submitted and Acceptance is the issued policy. This is one of the four elements of a legal contract. (The values exchanges by both parties) describes considerations, (Both parties in the contract must have an insurable interest) describes the principle of insurable interest, and (The parties to the contract must have the legal capacity to enter into a contract) describes competent parties.

Which is NOT considered an insurable loss? A. Stock Market losses B. Fire losses following a lightning strike C. Income losses due to a business' inability to remain open following a covered loss D. Medical costs following a women's fall on a wet Drugstore floor

A. Insurance covers Pure Risk NOT Speculative Risks such as: Gambling, Stock Market, etc.

The purpose of insurance is to: A. Transfer risk from a person, business, or organization to an insurance company that agrees to pay for losses in exchange for a premium B. Protect the insured against the certainty of a future loss C. Provide protection against speculative risks D. Eliminating the risk entirely by engaging in reinsurance

A. Insurance is Risk Transfer. It protects against uncertainty, shares the loss, and reduces anxiety. The principle of insurance is the substitution of a small certain expense (premium) for a large uncertain loss (claim payment).

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

A. Insurance is Risk Transfer. It protects against uncertainty, shares the loss, and reduces anxiety. The principle of insurance is the substitution of a small certain expense (premium) for a large uncertain loss (claim payment). It does not eliminate risk. It is not used to retain risk, which is the same as being self insured.

Which rating method listed below is established by the underwriter? A. Judgment rating B. Manual rating C. Retrospective rating D. Individual rating

A. Judgment rating is the only rating method that is determined by the underwriter. All other rating methods are determined by the actuarial department of the insurance company.

The insurance contract is considered a contract of indemnity because: A. Only one party prepares the contract and submits it to the other party on a 'take-it-or-leave-it' basis (without negotiation) B. An insured may collect no more than the amount required to restore him or her to the same financial condition that existed prior to the loss C. Parties to the contract exchange unequal amounts of money D. Only one party is legally bound to contractual obligations after the premium is paid to the insurer

B. A contract of indemnity restores an individual to approximately the same financial condition he or she was in before a loss, not to profit-not to gain. The other answers are describing: An aleatory contract, a contract of adhesion and a unilateral contract.

The type of insurance company in which the policyholder is considered an owner, with the right to vote and share in the profits, is a: A. Stock company B. Mutual company C. Fraternal benefit society D. Risk retention group

B. A mutual company is mutually owned by the policyholders. Policyholders participate in the company's profits in the form of dividends and each policyholder has voting rights. Stock companies are owned by stock holders. Fraternal benefit societies are non-profit organizations and are member owned. Risk retention groups are group-owned insurers specializing in limited risks such as: theme parks, go-cart tracks, etc.

Which of the elements of a legal contract does an insurance premium payment represent? A. Competent parties B. Consideration C. Legal purpose D. Agreement

B. Considerations are the values that each party to the contract exchange. Example: the insured will consider paying a premium and the insurance company will consider providing a promise to pay in the event of a loss. The considerations or the values exchanged are: Premiums and Promises.

What rating method involves modifying the premium based on the insured's loss experience over a specified period of time? A. Class rating B. Experience rating C. Individual rating D. Schedule rating

B. With experience rating, rates are based on the actual losses during a specified period of the past.

An insurance policy is considered a unilateral contract because: A. It is a contract of unequal value B. It allows either party the right to cancel the policy at anytime for any reason C. The insurance company is the only party that is legally obligated to perform under the insurance contract D. It is considered to be a take to or leave it contract, written without any negotiation between the applicant and the insurer

C. A Unilateral Contract means the insurance company is legally bound to the terms of the contract. The insurer must conform to all the terms of the contract. The Insurer may not cancel the policy EXCEPT: to the extent that the policy conditions specify. The insured may cancel anytime because they are not bound to the contract. The other answers are describing: Aleatory contract and a Contract of Adhesion.

What rating method involves modifying the premium based on the insured's loss experience over a specified period of time? A. Individual rating B. Schedule rating C. Experience rating D. Class rating

C. With experience rating, rates are based on the actual losses during a specified period of the past.

When applying for Homeowners insurance, Mr. Applebee tells his agent that the home is used strictly as a residence. Actually, he manufactures fireworks in the basement at the home. What will happen if the insurance company discovers Mr. Applebee's misrepresentation after the policy is issued? A. Nothing, because the policy is considered a non-cancelable type policy B. Nothing, because the agent should have been more thorough in completing the application C. None of the answers listed D. It will void the policy because Mr. Applebee misrepresented a material fact

D. An insured's misrepresentation of a material fact is grounds for the insurer to void the policy.

Ohio Casualty is doing regular business in Indiana. Within the state of Indiana, Ohio Casualty would be considered a(an): A. Domestic company B. Non-admitted company C. Alien company D. Admitted company

D. Any company wanting to do business in any state would have to seek approval from that states DOI. Upon getting approved, they are considered to be 'Admitted' into the state and authorized to conduct insurance business within that state.

Knowingly withholding material information on an application is: A. Misrepresentation B. Waiver C. Fraud D. Concealment

D. Concealment is the withholding of known facts that are material to the acceptance of risk. A willful or intentional failure to disclose material facts.

Which is NOT considered an insurable loss? A. Fire losses following a lightning strike B. Income losses due to a business' inability to remain open following a covered loss C. Medical costs following a women's fall on a wet Drugstore floor D. Stock Market losses

D. Insurance covers Pure Risk NOT Speculative Risks such as: Gambling, Stock Market, etc.

In a particular state, an insurance company must file policy forms and rates with the state insurance department and wait for official approval before using the new forms and rates. This is an example of a/an: A. Mandatory rates state B. File and use state C. Open competition state D. Prior approval state

D. Prior approval states require that the state review the rates and give the insurer prior approval before they may begin using the rates. File and use states may begin using the rates immediately upon filing them with the state. Some states have mandatory rates that must be used for certain lines of insurance and competition rate states rely on insurance companies to compete for rates considered to be fair and adequate.

A nonexclusive agent: A. Represents more than one insurance company B. Represents the insurer only C. Represents one insurance company as a captive agent D. Represents one company, but is considered to be a salaried agent working in the office only

A. An Independent Agent/Broker is considered to be a nonexclusive agent, where the agent is not captive to any one company. The agent enters into contracts with many insurance companies. The agent never represents the insurer. Broker/Independent agents ALWAYS represent the insured. They are the only producers that represent the insured.

Which of the following is NOT an element of insurability? A. Risk of loss must be catastrophic B. Cost of insurance must be affordable C. Loss must be calculable D. Risk of loss must represent a financial hardship

A. Elements of insurability excludes catastrophic perils. It must be predictable, measureable, calculable, accidental, affordable, and must cause financial hardship.

The authority specifically given to an agent, either orally or in writing, by the principal is called: A. Express authority B. None of the answers listed C. Implied authority D. Apparent authority

A. Expressed authority is stated in writing in an agents contract. It can also be expressed orally as in the insurer giving oral instructions over the phone to an agent. Implied authority is that which the public assumes the agent has because the agent has brochures, applications, and forms. This gives the implication that they are the insurance company. Apparent authority is, exercising authority which is not given by the insurer and the insurer does nothing to change the public impression that such power exists.

What is the purpose of the Fair Credit Reporting Act? A. To give the consumer recourse if the insurance is denied on the basis of a credit report B. To protect the insurance company's right to privacy, not allowing an insured any access to information that the insurer has complied regarding the insured C. To permit the insurer to report any past due premiums to the credit bureaus D. To allow the insurance company to share any information gathered on the insured with the credit bureaus

A. If the insured is denied coverage on the basis of a credit report, the Fair Credit Reporting Act states that the insured must be notified and allowed to obtain the information in the file. If the information is incorrect, the agency must correct it.

If a homeowners insured carries an amount of insurance on his home equal to at least 80% of the replacement cost of the dwelling, then what is the rule of indemnification that applies if the home is destroyed? A. The insured may be indemnified for the replacement value of the property, up to the policy limits B. The insured will be indemnified for 80% of the depreciated value of the property C. The insured will be indemnified 80% of the actual cash value of the property, regardless of the policy limits D. The insured may be indemnified for the entire replacement value of the property, regardless of the policy limits

A. In the Homeowners policy, losses to the dwelling and other structures are paid at replacement cost as long as the insured carries an amount of insurance equal to or greater than 80% of the building's replacement cost at the time of loss.

Property policies provide coverage only if there is insurable interest at the _____. A. Time of loss B. Time the policy is issued C. Time the application is signed D. Time the claim is to be paid

A. Insurable interest in a property policy MUST exist at the time of the loss.

Which of the following is NOT one of the required elements of a legal contract? A. Declarations B. Offer and acceptance C. Legal purpose D. Competent parties

A. The declarations are part of the policy structure, (DICE). The elements of a legal contract must have the following: Agreement, which is the Offer and acceptance, Considerations, Competent parties, and Legal Purpose.

Two parties enter into an insurance agreement, the applicant does not provide honest disclosure of the information required in the application or the insurer does not describe the terms of the contract fully. Which of the following doctrine applies? A. Utmost Good Faith B. Contract of Adhesion C. Fraud and False Statements D. Fair Credit Reporting Act of 1971

A. This is another legal interpretation that affects an insurance contract. Either party could violate this doctrine. Utmost Good Faith Doctrine requires that BOTH parties provide Full, Fair, and Honest disclosure regarding the application and the terms of the policy.

Statements on insurance applications that must represent the absolute truth are: A. Warranties B. Guarantees C. Material statements D. Representations

A. Warranteed statements are guaranteed statements, however, there is no such term as guaranteed statements. Representations are statements believed to be true to the best of your knowledge. Material statements pertain to whether the statements made on application are material to the acceptance of risk.

What is a hazard? A. A cause of a loss B. An increase in the possibility that a loss might occur C. Any event that results in a loss D. An example of risk transfer

B. A hazard is something that increases the chance of a loss occurring.

When an insurance company uses another company to cover part of the risk it is called: A. Risk management B. Reinsurance C. Risk prevention D. Adverse selection

B. Reinsurance is 'Risk Sharing'. Your company is the ceding company, they then cede part or share part of the risk with the reinsurance companies to spread their risk out further in the event of a catastrophic loss.

Which of the following principles states that in forming an insurance contract, both parties have a responsibility to the other? A. Doctrine of Indemnity B. Doctrine of Utmost Good Faith C. Doctrine of Reasonable Expectations D. Doctrine of Ambiguities

B. The Doctrine of Utmost Good Faith is where both parties bargain in good faith making full, fair and honest disclosure. The applicant is honest on the application and the insurer is providing full, fair disclosure of the policy terms.

An insurance policy is prepared by the insurance company, with little or no input from the insured. This means that an insurance policy is a/an: A. Indemnity contract B. Adhesion contract C. Conditional contract D. Aleatory contract

B. The proposed insured applies, the insurance company prepares the contract and offers it to the insured. The insured does not participate in determining the policy's terms at all. It is considered to be a 'take it or leave it' contract, without negotiation.

Which of the following describes an insurance company doing business in a state other than the one where it is incorporated? A. Admitted B. Domestic C. Foreign D. Alien

C. A foreign company is any company operating in any state that its home office is not located. A domestic company operates in the state in which its home office is incorporated. An alien company operates in another country. An admitted company is licensed and approved to operate in a state.

All of the following are true regarding the Fair Credit Reporting Act, EXCEPT: A. Credit report may be used to obtain financial and moral status of an applicant B. If a person has been denied insurance because of the credit report they have recourse and can review the report for accuracy and demand it be corrected C. If the report had corrections made, the insurer is required to issue the application D. Protects consumers right to privacy making certain data is confidential and properly used and requires the agent provide a notice at application that they can review the files

C. The Fair Credit Reporting Act protects consumers who are rejected for coverage on the basis of a credit report and protects consumers right to privacy. It may be used to obtain the moral status of an applicant and if denied insurance on the basis of the report, they have recourse and can review the file for accuracy and demand it be corrected. It CANNOT require an insurer to issue a policy.

The Fair Credit Reporting Act applies to applicants who are rejected for insurance coverage on the basis of: A. A report from the Medical Information Bureau B. An unfavorable health report C. A credit report D. None of the answers listed

C. The Fair Credit Reporting Act protects consumers who are rejected for coverage on the basis of a credit report.

If an insured purchased an insurance policy and suffered a claim and then found that the policy would not pay the claim as the insured thought it would, which of the following doctrines would apply? A. Principle of Indemnity B. Utmost Good Faith C. Reasonable Expectations D. Insurable Interest

C. This doctrine applies to the legal terms used to defend a policyowner. It applies to what policyowners and beneficiaries should expect from an insurance contract. Reasonable expectations of policyowners and beneficiaries will be honored even though strict terms of the policy do not support these expectations. This would be used by an attorney as a defense against an insurance company that denies benefits that seem to violate the Reasonable Expectations Doctrine.

A mutual insurance company is owned by its: A. Stockholders B. Members C. Subscribers D. Policyholders

D. A Mutual company is mutually owned by the policyholders. Policyholders participate in the company's profits in the form of dividends and each policyholder has voting rights. Stock companies are owned by stock holders, fraternal benefit societies are member owned, and reciprocal companies are owned by subscribers. In essence, Subscribers, Members and Policyholders are all very similar in that they all own policies and they each participate in ownership of the company.

A company established in England doing business in Alabama would be considered by Alabama residents to be a(n): A. Domestic company B. Foreign company C. All of the answers listed D. Alien company

D. An insurance company operating in any country other than the one where its home office is located would be considered to be an 'Alien' company in that country.

Ohio Casualty is doing regular business in Indiana. Within the state of Indiana, Ohio Casualty would be considered a(an): A. Alien company B. Non-resident company C. Domestic company D. Foreign company

D. An insurance company operating in any other state than the state where its home office is incorporated would be considered a foreign insurer. It is Domestic ONLY in the one state that its home office is located. It is Alien if out of the country.

All of the following are Elements of Insurable Risk, except: A. Loss is accidental B. Loss is calculable C. Loss is predictable D. Loss in indeterminable

D. The Elements that determine if a risk is an Insurable are: Accidental, Measureable, Calculable, Hardship (must cause financial hardship), Exclude Catastrophic Perils, Affordable (cost of insurance) and Predictable.

The principle that states that an insured should be restored to approximately the same financial position after a loss as before is known as: A. Adhesion B. Insurable interest C. Reinsurance D. Indemnity

D. The principle of indemnity is to restore the insured to the same financial condition as before the loss occurred, not to profit, not to gain. Adhesion is a take it or leave it contract, without negotiation, reinsurance is risk sharing, and insurable interest specifies that the insured must be facing the possibility of economic loss in the event of property damage.

Agent Ma'Chelle is under contract with the XYZ Insurance Company to represent and sell insurance only for XYZ. This is an example of what type of agency system? A. Independent Agent B. Direct Writer C. Direct Mail D. Exclusive/captive

D. Under the Exclusive agency system, the insurer contracts with agencies. Each agency is owned by the general agent who then provides support staff, office space and office equipment. This agent and staff are under a captive contract to sell insurance only for that insurance company. The support staff are actually employees of the general agent, not the insurance company.