AFSB 151 Study Guide
Regina's Rugs has a special credit arrangement. It purchases goods for resale to third parties, and a bank finances the purchase price. The bank secures the loan with a lien on the goods and, when each item is sold, Regina's Rugs pays the lender the full amount due on that item. This arrangement is called Select one: A. A floor plan loan. B. A consignment. C. A special term. D. A bulk transfer.
A. A floor plan loan.
Extending a line of credit to bond a contractor's future projects is particularly useful for which one of the following situations? Select one: A. A larger contractor with frequent bond requests B. A larger contractor with infrequent bond requests C. A smaller contractor with infrequent bond requests D. A smaller contractor with frequent bond requests
A. A larger contractor with frequent bond requests
Reinsurers help primary insurers increase their large-line capacity by Select one: A. Accepting liability for loss exposures that the primary insurer is unwilling or unable to retain B. Supplementing primary insurers' earnings. C. Influencing regulations related to the maximum amount of insurance allowed. D. Providing high layers of insurance above the underlying limits.
A. Accepting liability for loss exposures that the primary insurer is unwilling or unable to retain
Fidelity bond claims Select one: A. Can expose an insurer to waiver of a condition precedent of bond contracts and defamation actions, if they are not handled properly. B. Have variable circumstances; therefore, the fidelity insurer's ultimate loss is rarely fixed when the insured gives notice of the loss. C. Offer protections to the fidelity insurer when a late notice of loss occurs, as late notice is typically a valid defense for the insurer. D. Require a proof of loss filed by the insured before an investigation begins, the claim is verified, and the insured can be confronted.
A. Can expose an insurer to waiver of a condition precedent of bond contracts and defamation actions, if they are not handled properly
When a claim is pending on a cosurety bond, Select one: A. Each cosurety may establish a reserve for its cosurety share of the loss. B. The controlling cosurety is normally obligated to pay the full loss and request reimbursement from the cosureties. C. Each cosurety is allowed to take credit for the reinsurer's share of the reserve that the cosurety establishes. D. The controlling cosurety is not allowed to establish a reserve for any part of the loss.
A. Each cosurety may establish a reserve for its cosurety share of the loss.
An indemnity agreement does what to a surety's rights arising from common law? Select one: A. Extends them B. Eliminates them C. Limits them D. Duplicates them
A. Extends them
Deborah recently accepted a position as a home office underwriter for Jackson Insurance Company. Home office underwriting activities generally include which one of the following? Select one: A. Formulating underwriting policy B. Determining proper coverage C. Classifying risks D. Determining the appropriate rate or price
A. Formulating underwriting policy
Westmoreland Surety, as a contract surety, has loss reserves that are Select one: A. Intended to incur the loss on the surety's balance sheet in the year in which the loss is discovered. B. Based on the principal's estimated costs to complete the project and are usually relatively accurate. C. Increased to account for the percentage of reinsurance collectible on the bond. D. Established on both gross and net bases and include an expense reserve.
A. Intended to incur the loss on the surety's balance sheet in the year in which the loss is discovered.
Which one of the following is true regarding contract bond claims? Select one: A. Issues in a contract bond claim include payment to subcontractors and suppliers as well as the ultimate completion of the construction project. B. The contract bond obligee must prove its right to recover from the surety by producing relevant data about the circumstances that produced the loss. C. Once the surety has appraised the status of the construction contract, changes in the contractor's situation and the contract have no influence on the loss amount. D. A construction contract bond loss is generally fixed at a certain point in time, so the loss amount can be determined quickly and easily.
A. Issues in a contract bond claim include payment to subcontractors and suppliers as well as the ultimate completion of the construction project.
Alex is a contract surety bond underwriter. He expects that a surety producer will perform certain prequalification tasks before submitting a contractor as a prospective bond principal. Which one of the following prequalification responsibilities would include a clear and concise review of the contractor's company history, management, type of work, bidding history, trade and bank credit relationships, and five-year financial trend? Select one: A. Performing a credit analysis B. Selecting a surety C. Compiling financial documents D. Conducting a background investigation
A. Performing a credit analysis
As a surety producer, Beth has developed a favorable percentage of the local bond market and has earned a reputation among local contractors for professional-quality service. She has established which one of the following? Select one: A. Position B. Price C. Product D. Promotion
A. Position
Per risk excess of loss reinsurance covers Select one: A. Property insurance and applies separately to each loss occurring to each risk. B. Liability insurance and applies to each loss occurring from each occurrence. C. Property insurance and applies to the total of all losses occurring from one risk. D. Workers compensation insurance and applies to the total of all losses occurring from one risk.
A. Property insurance and applies separately to each loss occurring to each risk.
Which one of the following types of bonds are the most hazardous license and permit bonds that sureties write? Select one: A. Reclamation and environmental protection bonds B. Compliance bonds with third-party liability C. Forfeiture bonds D. Merchandising and dealer bonds
A. Reclamation and environmental protection bonds
Compliance bonds with third-party liability allow a direct right of action against which party for damages a third party may suffer because of the principal's acts? Select one: A. Surety B. Producer C. Principal D. Bond underwriter
A. Surety
Which one of the following is a true statement regarding the North American Industry Classification System (NAICS)? Select one: A. The NAICS provides business classification codes along with trade line classifications, which indicate business products or services. B. The NAICS classifies businesses based on each type of activity in which a business engages. C. NAICS codes allow for consistent evaluation of business activities and their risks to protect consumers and investor's interests. D. The United States Bureau of Labor Statistics developed the NAICS in cooperation with Brazil and Argentina.
A. The NAICS provides business classification codes along with trade line classifications, which indicate business products or services.
In an unlimited cosurety arrangement, the obligee can collect Select one: A. The full loss from any of the cosureties up to the penal sum of the bond. B. A proportionate share of the loss, up to the penal sum of the bond, from each cosurety. C. Each cosurety's predefined share of the loss up to the penal sum of the bond. D. The full loss from any of the cosureties without regard for the penal sum of the bond.
A. The full loss from any of the cosureties up to the penal sum of the bond.
Which one of the following is the only entity or individual that can make a claim against a public official bond? Select one: A. The government body that requires the bond B. The bonded individual C. Members of the general public D. The bonded individual's subordinate
A. The government body that requires the bond
In proper handling of a fidelity loss, when can an insurer begin the loss investigation and when can claims personnel confront the insured? Select one: A. The insurer can begin the investigation, but claims personnel should not confront the insured before the insured has provided an executed proof of loss. B. The insurer cannot begin the investigation until the insured has provided an executed proof of loss; but claims personnel can confront the insured without the proof of loss. C. The insurer can begin the investigation and claims personnel can confront the insured at any time before the insured has provided an executed proof of loss. D. The insurer cannot begin the investigation and claims personnel cannot confront the insured until the insured has provided an executed proof of loss.
A. The insurer can begin the investigation, but claims personnel should not confront the insured before the insured has provided an executed proof of loss.
Which one of the following identifies a section of the Consumer Credit Protection Act that applies to all credit transactions, commercial and personal, without regard to the nature or type of credit or the creditor? Select one: A. Title VII, the Equal Credit Opportunity Act, which prevents creditors from discriminating against applicants on the basis of sex, marital status, race, color, religion, national origin, age, or receipt of public assistance income. B. Title I, the Truth in Lending Act, which ensures a meaningful disclosure of credit terms to consumers C. Title V, the Credit Card Issuance Act, amended by the Credit Card Accountability Responsibility and Disclosure Act of 2009, which controls issuance and misuse of credit cards D. Title II, which prevents organized crime relating to credit extensions
A. Title VII, the Equal Credit Opportunity Act, which prevents creditors from discriminating against applicants on the basis of sex, marital status, race, color, religion, national origin, age, or receipt of public assistance income.
Which one of the following includes sections of the Consumer Credit Protection Act that apply directly to the surety industry? Select one: A. Titles VI and VII B. Titles II, IV, and VI C. Titles I, II, and VI D. Titles I through V
A. Titles VI and VII
The most effective and credible form of promotion for surety producers is Select one: A. Word-of-mouth advertising and referrals from the producer's satisfied clients. B. Free publicity by writing articles for publication or offering quotes. C. Active involvement in construction industry associations. D. Prospecting through unsolicited calls or other informal contact.
A. Word-of-mouth advertising and referrals from the producer's satisfied clients.
Hank is a contract surety bond underwriter. When monitoring the underwriting information of a contractor, an explanation is generally needed if the underwriter notices the contractor's bid reflects a difference from the next highest bid in excess of what percent? Select one: A. 5% B. 10% C. 15% D. 20%
B. 10%
Working capital is calculated as current assets minus current liabilities. All of the following would be considered current assets on a contractor's balance sheet, EXCEPT: Select one: A. Accounts receivable B. Accounts payable C. Inventory D. Cash
B. Accounts payable
As a surety underwriter, Peter must evaluate documents and information that is provided by the principal. Which one of the following documents could alert Peter of questionable assets or cash flow problems? Select one: A. Asset appraisals B. Age of accounts reports C. SEC 10K and 10Q reports D. Commercial insurance policies
B. Age of accounts reports
Which one of the following names a chapter of bankruptcy that contains provisions for corporate reorganizations—a means of preserving the going-concern value of a business enterprise to the benefit of all creditors through the elimination of the factors that created the distress? Select one: A. Chapter 7 B. Chapter 11 C. Chapter 12 D. Chapter 13
B. Chapter 11
In evaluating capacity for continuity planning, the underwriter considers what two factors? Select one: A. Continuity of workforce and continuity of operations B. Continuity of management and continuity of ownership C. Continuity of management and continuity of operations D. Continuity of workforce and continuity of ownership
B. Continuity of management and continuity of ownership
William is the surety producer and Jack is the surety underwriter for Stanton Construction. Stanton Construction is a large contractor that makes frequent bond requests. William and Jack have worked with Stanton Construction for a couple of years, and have an understanding of the contractor's projects and capabilities. Which one of the following could the surety do to strengthen its relationship with Stanton Construction? Select one: A. Restrict performance, payment, and maintenance bonds B. Extend a line of credit for future jobs C. Eliminate complete on-time clauses in contracts D. Eliminate the need for periodic work in progress reports
B. Extend a line of credit for future jobs
A type of reinsurance in which the reinsurer evaluates the submission and can accept or reject it, and which is often called "nonobligatory reinsurance," is Select one: A. Excess of loss reinsurance. B. Facultative reinsurance. C. Treaty reinsurance. D. Pro rata reinsurance.
B. Facultative reinsurance.
As a fidelity loss control measure, Stanton Industries should require that all employees take an annual vacation of at least how many consecutive days? Select one: A. None B. Five C. Seven D. Fourteen
B. Five
Suzanne, a contract bond underwriter, is reviewing an applicant's financial statements. She wants to evaluate the degree of variability in contract volume, gross profits, overhead, and net profit over a period of time. Which one of the following financial statements should Suzanne review? Select one: A. Statement of retained earnings B. Income statement C. Schedule of contracts in progress D. Balance sheet
B. Income statement
Sureties compete for commercial surety bonds in this category on the basis of service to the agent and to the client and they usually offer substantial price discounts for accounts with larger clients. Which one of these categories of bonds is described? Select one: A. Public official bonds B. License and permit and miscellaneous bonds. C. Court bonds in civil proceedings D. Financial guarantee bonds
B. License and permit and miscellaneous bonds.
he maximum amount of insurance or limit of liability that an insurer will accept on a single loss exposures is called a Select one: A. Loss limit. B. Line. C. Novation. D. Retrocession.
B. Line.
Cosureties on a bond Select one: A. Have no right to individually investigate, negotiate, and resolve claims against the bond or to seek recovery of their individual losses and expenses. B. Often appoint one cosurety as the controlling cosurety to investigate, negotiate, and resolve the same claim and seek recovery of the same losses and expenses. C. Each establish their own reserve for the total estimated loss covered by the cosurety bond, taking credit for the other cosureties' losses. D. Are subject to the same accounting rules for reserves that relate to reinsurers when a claim is pending on a cosurety bond.
B. Often appoint one cosurety as the controlling cosurety to investigate, negotiate, and resolve the same claim and seek recovery of the same losses and expenses.
Which one of the following special characteristics of fidelity bonds is described by the following statement: The nature of the employment relationship provides the employee an opportunity to learn the firm's routines; schedules; and the existence, absence, or relative effectiveness of management controls. Select one: A. Losses can be hidden. B. Property exposed to loss is accessible. C. The probability of severe loss greatly exceeds that in other kinds of crime. D. Management control systems are the primary loss control devices.
B. Property exposed to loss is accessible.
Reinsurers may transfer part of the liability that they have accepted in reinsurance agreements to other reinsurers, known as Select one: A. Cedents. B. Retrocessionaires.. C. Ceding reinsurers. D. Direct insurers.
B. Retrocessionaires..
Which one of the following statements regarding surety compliance with statutes and regulations is true? Select one: A. Courts may interpret any bond or fidelity policy provision to the insured's benefit whether or not it prejudices an insurer's ability to investigate the claim. B. Surety and fidelity contracts are often prescribed by statute or regulation, including requirements for many license and permit bonds, fidelity coverages, and public official bonds. C. Insurance policy forms are often subject to regulatory approval; however, laws cannot affect the enforcement of rights and remedies under the policies. D. When an obligee drafts a surety bond with provisions that are onerous to the surety, if the surety executes the bond without objections, courts will interpret any dispute in the surety's favor.
B. Surety and fidelity contracts are often prescribed by statute or regulation, including requirements for many license and permit bonds, fidelity coverages, and public official bonds.
group that educates the general public, legislative bodies, contractor associations, and others about the benefits of surety bonds is Select one: A. The Surety and Fidelity Association of America (SFAA). B. The National Association of Surety Bond Producers (NASBP). C. The association of producers and underwriters. D. The National Association of Independent Sureties (NAIS).
B. The National Association of Surety Bond Producers (NASBP).
A surety bond credit line covers the contractor's normal, anticipated bond needs. If a special situation develops that would cause a contractor to exceed the credit line, then Select one: A. The contractor is forced to decline the project. Taking on that project would cause the contractor to overextend its resources and default on its bond. B. The contractor and the producer should discuss the merits of the case with the underwriter to determine the desirability of an increased credit line. C. The contractor can seek approval from the producer to extend the credit line to accommodate the project on a one-time basis. D. The contractor can accept this project and exceed the credit line without prior approval after supplying appropriate documentation to the surety underwriter.
B. The contractor and the producer should discuss the merits of the case with the underwriter to determine the desirability of an increased credit line.
J & J Construction has applied for a contract bond with Goshen Surety. Jeremy, the bond underwriter, is the reviewing the contractor's financial statements and schedule of contracts in progress. When looking at the schedule of contracts in progress, he compares the job estimates with profit margins on past jobs that were similar in size, type, and duration. Jeremy notes that the profit margins on the previous jobs are significantly lower than the estimates shown in the current job schedule. This is an indication of which one of the following? Select one: A. The contractor's accountant is trying to deceive the bond underwriter. B. The contracts in progress schedule may reflect an optimistic forecast. C. J & J Construction has more jobs in the current year, than in prior years. D. J & J Construction is requiring its customers pay larger deposits.
B. The contracts in progress schedule may reflect an optimistic forecast.
A fiduciary bond form has no cancellation provision. Therefore, the term of the bond continues until which one of the following events occurs? Select one: A. The fiduciary completes the nonclerical critical tasks. B. The court has relieved the fiduciary of all responsibilities. C. After a reasonable time period, regardless of whether the fiduciary has completed the nonclerical critical tasks. D. The court has relieved the fiduciary of the responsibility of completing the nonclerical critical tasks.
B. The court has relieved the fiduciary of all responsibilities.
Under a bid bond, if the bid is accepted and the principal refuses to enter into the contract or fails to provide the additional required bonds, subject to the penal amount of thebond, the obligee is generally entitled to be paid Select one: A. The revised amount of the principal's bid after additions for miscalculations that resulted in the bond default. B. The difference between the amount of the principal's bid and the next lowest bid the obligee finally accepts. C. The amount of the bid for the next lowest bidder, which the obligee finally accepts. D. The amount of the principal's bid, as accepted by the obligee, with no additions or subtractions.
B. The difference between the amount of the principal's bid and the next lowest bid the obligee finally accepts.
Because most bonds are "joint and several liability" documents, the obligee can recover losses from Select one: A. Either the principal or the surety. B. The principal or the surety, or from both. C. Only the surety. D. Only the principal.
B. The principal or the surety, or from both.
Which one of the following statements is true regarding subrogation when a contract default has occurred and when the principal has admitted to it? Select one: A. Obligees cannot refuse to pay the principal's creditors and instead claim offsets for debts owed to them by the principal, including damages allegedly due on the project. B. The surety's most important right acquired through subrogation is the right of the obligee to use the contract consideration to complete the contract. C. The unpaid and unearned contract money is part of the contractor's property and may be used to satisfy the principal's debts. D. If the surety directly or indirectly remedies the contract defaults, it has no claim to any of the obligee's rights.
B. The surety's most important right acquired through subrogation is the right of the obligee to use the contract consideration to complete the contract.
Which one of the following in a bond applicant's personal and employment history provides the surety underwriter with evidence of good character? Select one: A. Numerous occupations B. Timely trade payment record C. Contractor's organization D. Work in progress
B. Timely trade payment record
Which one of the following statements is true regarding financial reporting to reinsurers? Select one: A. When the primary surety establishes a reserve, it advises each reinsurer involved in the reserve that it is established and discloses the net reserve amount. B. When a primary surety establishes reserves, it determines a reinsurance recoverable reserve and notes in the records that reinsurance reserves have reduced posted reserves. C. State insurance laws and regulations do not permit primary sureties to take credit for the reinsurer's share of the reserves. D. Primary sureties may reduce losses and expenses paid by an account receivable only when the final loss payment is made and all receivables have been billed to the reinsurer.
B. When a primary surety establishes reserves, it determines a reinsurance recoverable reserve and notes in the records that reinsurance reserves have reduced posted reserves.
Courts often order attachment bonds to secure property when which one of the following individuals is within the court's jurisdiction? Select one: A. A resident defendant B. A resident plaintiff C. A nonresident defendant D. A nonresident plaintiff
C. A nonresident defendant
Anthony is the surety producer for Coyle Construction (CC). CC has a pre-set annual surety credit line of $5 million/$30 million. About 3 months into the fiscal year, the contractor is bidding on an $8 million job and needs a bid bond. Which one of the following correctly describes Anthony's responsibility as the surety producer? Select one: A. Anthony should arrange a back-up surety with adequate capacity because CC appears to be outgrowing the capacity of the current surety. B. Anthony should execute the bid bond because it is within the $30 million annual line of credit. C. Anthony should seek underwriting approval before executing the bid bond because it falls outside the $5 million job contract limit. D. Anthony should execute the bid bond, but will need to seek approval if CC is awarded the job.
C. Anthony should seek underwriting approval before executing the bid bond because it falls outside the $5 million job contract limit.
A contractor's percentage-of-completion estimates Select one: A. Run the risk of declining over time, thereby reducing a contractor's ultimate profits. B. Are disregarded by sureties because they are based on calculations of the contractor and are subject to manipulations that make the contractor's financial status appear favorable. C. Are based on the contractor's ability to estimate the cost to complete the project and recognize income and profit as they accrue during the project. D. Are determined by an accounting method devised to estimate profits on construction projects that have been completed.
C. Are based on the contractor's ability to estimate the cost to complete the project and recognize income and profit as they accrue during the project.
Which one of the following explains why a surety does not impose its own limitations on a public official bond? Select one: A. Because not enough of these bonds are sold to have a sufficient confidence level to be actuarially sound B. Because the bond form is standardized C. Because the law prescribes conditions for claims D. Because the bonds are sold in a highly competitive market
C. Because the law prescribes conditions for claims
According to the law, companies that write credit enhancement financial guarantees Select one: A. Follow stringent underwriting policies and rarely experience loss. B. Receive leads from government departments that require credit enhancement guarantees. C. Cannot write any other type of insurance within that company. D. Must specialize in municipal bond guarantees.
C. Cannot write any other type of insurance within that company.
Gina is a surety bond underwriter for Southern Surety. When evaluating an applicant/principal for a surety bond, she considers both subjective and objective factors. Which one of the following is an important subjective factor for Gina to consider? Select one: A. Credit history B. Financial reports C. Character. D. Bank letter of credit
C. Character.
A basic type of bond that involves all situations in which sureties guarantee performance of obligations that generally do not arise from contracts is Select one: A. Nonstatutory bonds. B. Fidelity surety bonds. C. Commercial surety bonds D. Contract surety bonds.
C. Commercial surety bonds
Working capital is the conventional measure of a firm's liquidity. By accounting standards, working capital is calculated as Select one: A. Current assets plus current liabilities B. Current assets divided by current liabilities C. Current assets minus current liabilities D. Current liabilities less current assets
C. Current assets minus current liabilities
Which one of the following categories of court bonds is written primarily on the basis of an attorney's character and reputation for trustworthiness? Select one: A. Public official bonds B. Municipal bond guarantees C. Fiduciary bonds D. Judicial bonds
C. Fiduciary bonds
Under a public official bond guaranteeing the honesty of a treasurer, Select one: A. He or she could be held liable for depositing collections in a non-interest-bearing account. B. He or she must furnish a bond that guarantees the faithful performance of duties. C. He or she must account for the cash that he or she holds while in office. D. He or she could be held liable for investing collections in an interest-bearing account.
C. He or she must account for the cash that he or she holds while in office.
As the new risk manager for Stanton Construction, Julie is trying to establish a successful contractor-producer-underwriter relationship. She realizes that it is in the contractor's best interest to ensure that the underwriter and producer remain fully informed. All of the following is necessary information that Julie should provide to the underwriter and producer, EXCEPT: Select one: A. Reliable financial information B. Work in progress and future projects C. Her education and work history D. Contractor's business plan
C. Her education and work history
Public official bonds are written for principals who have administrative duties but do not handle money and who Select one: A. Frequently default on their obligations so their sureties demand collateral to counter losses. B. Are seen as insurers of public funds and held liable for loss by any cause, including by an act of God. C. Include commissioners, assessors, judges, coroners, town clerks, engineers, and auditors. D. Are held liable for loss by burglary, robbery, or any cause except an act of God.
C. Include commissioners, assessors, judges, coroners, town clerks, engineers, and auditors.
Smith Enterprises is a national plastics distributor with property values in excess of $20 million spread throughout the country. Smith Enterprises wants to insure all of its property exposures with the same insurer. Which function of reinsurance would be most beneficial to Smith's primary insurer? Select one: A. Provide catastrophe protection. B. Stabilize loss experience C. Increase large-line capacity D. Provide underwriting guidance
C. Increase large-line capacity
The fidelity loss control measure of divided responsibilities, under which employees who regularly handle cash do not also handle merchandise, is impractical for some small businesses. To address this situation, which of the following practices should the employer perform? Select one: A. Insist on annual vacations B. Reconcile bank accounts monthly C. Make frequent spot checks D. Conduct periodic audits
C. Make frequent spot checks
Jonathan served as the Parks and Recreation Commissioner for his township for many years. After he retired, it was discovered that the accounts had not been kept up to date over the last 18 months and could not be reconciled. Jonathan's public official bond paid for the discrepancy in funds. This is an example of which one of the following types of performance problems that a public official bond would cover? Select one: A. Embezzlement B. Misfeasance C. Nonfeasance D. Malfeasance
C. Nonfeasance
Keith claimed that his brother Charlie had unlawfully taken possession of his car. Keith was required to secure a bond in order to take the car back until the court rendered a decision. The bond guarantees that the car will remain in the same condition and will not be sold or otherwise disposed of. Which one of the following types of bond was Keith required to obtain? Select one: A. Mechanic's lien bond B. Injunction bond C. Replevin bond D. Attachment bond
C. Replevin bond
he surety bond three-party relationship, the party who guarantees fulfillment of the obligation and who will either perform the obligation or pay the costs for its fulfillment is the Select one: A. Principal. B. Obligee. C. Surety. D. Third-party beneficiary.
C. Surety.
A replenishment of policyholders' surplus provided by the ceding commission paid to the primary insurer by the reinsurer is Select one: A. The capacity ratio. B. Large-line capacity. C. Surplus relief. D. A portfolio.
C. Surplus relief.
Which one of the following identifies the government entity that has added specific requirements to meet the guidelines set out under Regulation B and provides explanations and clarifications? Select one: A. The United States House of Representatives B. The United States Congress C. The Federal Reserve Board D. The Federal Trade Commission
C. The Federal Reserve Board
The contract surety indemnity agreement is Select one: A. Used for large, strong companies with infrequent or relatively benign bond needs. B. Used to incorporate a parental omnibus agreement. C. The form most surety professionals think of when they hear the term "GAI" (general agreement of indemnity). D. Used for admiralty bonds.
C. The form most surety professionals think of when they hear the term "GAI" (general agreement of indemnity).
Which one of the following statements is true regarding the principal as a source of underwriting information for bonding? Select one: A. Principals usually overstate their positive attributes and diminish the negative aspects of their operations, which the underwriter perceives as a sign of confidence and success. B. A compilation or another statement that the principal personally develops for the underwriter rarely contains questionable or inaccurate information and requires no confirmation. C. The principal is the primary source of direct information, including identification, historical, management, financial, bank, and performance information. D. Principals usually hide negative operation and credit information in the application process, so the underwriter must dig into many resources to locate accurate information.
C. The principal is the primary source of direct information, including identification, historical, management, financial, bank, and performance information.
Which one of the following statements regarding legal research and unfair claims practices acts is true? Select one: A. Unfair claims practices acts can prevent sureties from adequately investigating fidelity and surety claims so that standards for prompt settlement or denial can be met. B. Even when fidelity and surety businesses are not affected by unfair claims practices laws that originate from individual consumers' concerns, state lawmakers require that they adhere to these laws. C. Unfair claims practices acts prohibit sureties and insurers from misrepresenting pertinent facts or policy provisions relating to coverages at issue. D. Because sureties can retain attorneys experienced in the fidelity and surety legal matters, claims personnel do not require knowledge of legal rules and theories that govern such coverage and liability.
C. Unfair claims practices acts prohibit sureties and insurers from misrepresenting pertinent facts or policy provisions relating to coverages at issue.
Except in the case of a forfeiture bond, if the principal defaults, the surety will pay Select one: A. The amount of the obligee's actual loss, or the bond penalty, whichever is more. B. The bond penalty, regardless of the obligee's actual loss amount. C. Up to the bond penalty, but no more than the obligee's actual loss amount D. The amount of the obligee's actual loss, minus the bond penalty.
C. Up to the bond penalty, but no more than the obligee's actual loss amount
Under the Fair Credit Reporting Act, which one of the following indicates circumstances under which a consumer reporting agency can legally furnish a consumer credit report? Select one: A. As a response to a request from an individual who seeks the information for personal (nonbusiness) reasons, such as the parents of a consumer's fiancée B. As a response to a potential creditor seeking all bankruptcy information as part of an application for credit that is less than $150,000 C. As a response to a written request from the spouse of a consumer who is the subject of the report D. As a response to a court order or a written request of the consumer who is the subject of the report
D. As a response to a court order or a written request of the consumer who is the subject of the report
Which one of the following statements regarding fidelity bond claims is true? Select one: A. Mishandling of funds by people or entities not employed by the insured, such as auditors, lawyers, or financial institutions, cannot be pursued by the insurer as a source of recovery. B. There are no time limits for bringing claims under a fidelity bond, so an insurer does not need to be concerned about whether the loss was discovered during the policy term. C. The insured's prompt notice of loss and the fidelity's prompt investigation has no impact on the insurer's liability, the cause of loss, or the insured's minimization of damages. D. By promptly investigating a bond loss, an insurer may discover that it has recourse against persons or entities whose conduct caused or contributed to the loss, but is not relevant to the proof of loss.
D. By promptly investigating a bond loss, an insurer may discover that it has recourse against persons or entities whose conduct caused or contributed to the loss, but is not relevant to the proof of loss.
Which one of the following statements regarding fidelity bond claims is true? Select one: A. There are no time limits for bringing claims under a fidelity bond, so an insurer does not need to be concerned about whether the loss was discovered during the policy term. B. The insured's prompt notice of loss and the fidelity's prompt investigation has no impact on the insurer's liability, the cause of loss, or the insured's minimization of damages. C. Mishandling of funds by people or entities not employed by the insured, such as auditors, lawyers, or financial institutions, cannot be pursued by the insurer as a source of recovery. D. By promptly investigating a bond loss, an insurer may discover that it has recourse against persons or entities whose conduct caused or contributed to the loss, but is not relevant to the proof of loss.
D. By promptly investigating a bond loss, an insurer may discover that it has recourse against persons or entities whose conduct caused or contributed to the loss, but is not relevant to the proof of loss.
Contract bond claims Select one: A. Require that, once the claim is made, the construction project and all affiliated activity, such as materials and other resource delivery, must be halted until the loss is determined and paid. B. Generally require that the surety consult fewer sources to determine the bond loss than are required when investigating commercial surety and fidelity claims. C. That are not handled promptly are not affected by variables such as the construction project, materials, and weather conditions. D. Can raise questions as to fault in the loss, whether the bonded principal or the obligee was responsible.
D. Can raise questions as to fault in the loss, whether the bonded principal or the obligee was responsible.
Which of these is one of the three factors that are focused on the contractor and are considered when underwriting contract bonds for construction? Select one: A. Creativity B. Confidence C. Consideration D. Capacity
D. Capacity
Each one of the following steps is performed toward the beginning of the development of a contract surety business plan EXCEPT: Select one: A. Identify market threats and opportunities B. Use the company's mission statement to guide plans and decisions C. Identify primary competitors' strengths and weaknesses D. Change goals and action steps as the agency's strengths and market conditions change
D. Change goals and action steps as the agency's strengths and market conditions change
Which one of the following statements regarding gathering information for surety claims is true? Select one: A. Principals and obligees are usually more cooperative after the claim has been paid than during the information-gathering process. B. Separate information gathering sessions—to help resolve questions of liability and to determine the possibility of enforcing rights the surety acquired—is more efficient and productive than one session. C. When gathering claims information, the producer is the best source of evidence for recovery from others. D. Claims personnel can gather most of the needed information for a surety claim by applying the questions of who, what, when, where, why, and how to the claim.
D. Claims personnel can gather most of the needed information for a surety claim by applying the questions of who, what, when, where, why, and how to the claim.
Owners of most small businesses provide sureties with financial reports that Select one: A. Are audited (but limited by the auditor). B. Are fully audited (and unqualified). C. Are audited (but qualified by the auditor). D. Contain the same data they give to their banks to apply for loans.
D. Contain the same data they give to their banks to apply for loans.
Sally is the plaintiff in a court case. After losing her case in a lower court, she is appealing the judgment to a higher court. As the plaintiff, she is required to obtain an appeal bond. An appeal bond for the plaintiff's case guarantees the payment of which one of the following? Select one: A. Judgment B. Interest C. Court costs D. Costs of the appeal
D. Costs of the appeal
As a loss control practice concerning large public official bonds, a surety may ask for which one of the following to confirm that the governmental body has established an approved list of banks? Select one: A. Declaration of designation B. Depository of funds and securities C. Declaration of funds and securities D. Designation of depository
D. Designation of depository
In bonds under this classification, the surety pays the entire bond penalty if the principal fails to complete the obligations. Which one of the following bond classifications is described? Select one: A. Compliance bonds B. Compliance bonds with third-party liability. C. Tax or fee bonds D. Forfeiture bonds
D. Forfeiture bonds
Which one of the following statements regarding a surety's capacity is true? Select one: A. The surety producer should not introduce a backup surety to the contractor until the original surety's capacity is exceeded and action is required. B. A surety's capacity grows with the contractor's job size and complexity, so a surety producer should not need to arrange a backup surety. C. A surety producer seeks to place a contractor with a surety that has a backup surety on retainer so that the contractor does not outgrow the original surety's capacity. D. If a contractor appears to be outgrowing the surety's capacity, the producer should arrange a backup surety with adequate capacity to replace the first surety before reaching capacity.
D. If a contractor appears to be outgrowing the surety's capacity, the producer should arrange a backup surety with adequate capacity to replace the first surety before reaching capacity.
Westmoreland Surety, as a contract surety, has loss reserves that are Select one: A. Increased to account for the percentage of reinsurance collectible on the bond. B. Established on both gross and net bases and include an expense reserve. C. Based on the principal's estimated costs to complete the project and are usually relatively accurate. D. Intended to incur the loss on the surety's balance sheet in the year in which the loss is discovered.
D. Intended to incur the loss on the surety's balance sheet in the year in which the loss is discovered.
Which one of the following is true regarding contract bond claims? Select one: A. A construction contract bond loss is generally fixed at a certain point in time, so the loss amount can be determined quickly and easily. B. Once the surety has appraised the status of the construction contract, changes in the contractor's situation and the contract have no influence on the loss amount. C. The contract bond obligee must prove its right to recover from the surety by producing relevant data about the circumstances that produced the loss. D. Issues in a contract bond claim include payment to subcontractors and suppliers as well as the ultimate completion of the construction project.
D. Issues in a contract bond claim include payment to subcontractors and suppliers as well as the ultimate completion of the construction project.
Which one of these categories of court bonds is underwritten on the basis of the principal's financial capacity? Select one: A. Public official bonds B. Reclamation bonds C. Fiduciary bonds D. Judicial bonds
D. Judicial bonds
The underwriter must address the contract provisions for completing the work on time. Which one of the following is one of the standard solutions if the contractor does not complete the work on time? Select one: A. Liquidated penalty B. Penalty damages C. Liquidated clause D. Liquidated damages
D. Liquidated damages
Kevin is surety bond underwriter, who specializes in contract bonds. When evaluating a contractor's capacity, he likes to review the performance records for jobs completed in the past 5 years, and the contractor's work program for current and future jobs. Which one of the following would most likely cause Kevin to conduct a more careful underwriting evaluation? Select one: A. Future jobs of similar size and complexity to completed jobs B. Completed jobs lasting 6-12 months C. Completed jobs coming in close to the initial estimate D. Multi-year future jobs in new geographical areas
D. Multi-year future jobs in new geographical areas
As a contract bond underwriter, Julian strives to maintain a successful contractor-producer-underwriter relationship. He is in frequent contact with the producer and contractor, and visits project sites with them. The contractor may also allow Julian to be in contact with the contractor's accountant, banker, and commercial insurance producer. Which one of the following attributes of a successful contractor-producer-underwriter relationship does this illustrate? Select one: A. Strong convictions B. Common goal C. Open communication D. Ongoing dialogue
D. Ongoing dialogue
Which one of the following attributes of the contractor-producer-underwriter relationship requires periodic visits to the contractor's office, visits to project sites with the contractor, and meetings with the contractor's key people concerns? Select one: A. Mutual understanding and trust B. Communication C. Common interests D. Ongoing dialogue
D. Ongoing dialogue
A surety bond is a written document in which one party guarantees a second party's Select one: A. Payment to a third party for the second party's failure to earn enough funds to repay the third party. B. Answer to a third party for the second party's failure to resolve the third party's deficiency. C. Satisfaction to a third party for the second party's failure to provide the requested collateral. D. Performance to a third party for the second party's failure to fulfill an obligation.
D. Performance to a third party for the second party's failure to fulfill an obligation.
Ellen was planning a large family reunion at a local park. She wanted to reserve the picnic tables, and have use of the restrooms at the park. As a prerequisite to using the park, the township required that Ellen obtain a commercial surety bond. Which one of the following types of surety bond would Ellen be required to obtain? Select one: A. Fiduciary bond B. Public official bond C. License bond D. Permit bond
D. Permit bond
The information that the surety underwriter organizes for the background investigation of a principal includes Select one: A. Data about all of the principal's employees, such as their names, ages, race, responsibilities, experience, employment histories, education, credit histories, and business affiliations. B. Identification information, including the principal's name; age; race; religion; address; phone number; tax identification number; marital status; and spouse's employer, race, and religion. C. Performance information on the largest contract the contractor was awarded, the contract amount, whether it was completed as agreed, and whether the contractor defaulted on its bonds. D. Public information, including the principal's legal filings, such as lawsuits, judgments, tax liens, bankruptcies, reorganizations, and Uniform Commercial Code filings.
D. Public information, including the principal's legal filings, such as lawsuits, judgments, tax liens, bankruptcies, reorganizations, and Uniform Commercial Code filings.
Reinsurers and cosureties Select one: A. Are both allocated a certain amount as their share of the reserves, and they may expect recoveries up to that extent. B. Perform their reporting function based on their arrangements with the primary surety with respect to risks on which claims are pending. C. Must be aware of the provisions of the primary surety's excess of loss treaties to determine whether they apply to each case. D. Require reports from the primary surety that a claim has arisen and that reserves, if any, have been established.
D. Require reports from the primary surety that a claim has arisen and that reserves, if any, have been established.
WP Hospitality hired Green Builders to build a new hotel. As part of the contract, WP Hospitality required that Green Builders obtain a surety bond to guarantee that it would pay all subcontractors for their labor and materials. The payment bond was obtained from Blue Surety. Which one of the following is a potential third-party beneficiary in this surety relationship? Select one: A. WP Hospitality B. Blue Surety C. Green Builders D. Subcontractors
D. Subcontractors
To reach a reasonable rate of return for their bond risks, Select one: A. Agents often reduce their own commissions to reduce the price of the surety bonds. B. Sureties deny as many claims as possible without attracting the attention of state insurance departments. C. Sureties commonly target at least a 30 percent underwriting profit. D. Sureties pay competent underwriters and agents competitive salaries and commissions.
D. Sureties pay competent underwriters and agents competitive salaries and commissions.
Which one of the following characteristics is unique under American personal suretyship compared with corporate suretyship? Select one: A. This form of suretyship was subject to common law. B. This form of suretyship was subject to statutory law. C. Surety bonds were required to be in writing. D. Sureties were protected by laws that were favorable to them.
D. Sureties were protected by laws that were favorable to them.
A pre-set credit line has which one of the following benefits? Select one: A. The surety underwriter must approve any contract that falls within the established credit line, limits, terms, or conditions before execution of a bid bond. B. The surety's regional offices have authority to approve bonds that exceed the pre-set credit line and can avoid referring the applications to their home office. C. The credit line is contingent on no material change occurring to the contractor's financial status and management, and it is extended to all types of jobs throughout the United States. D. The limit enables the surety producer to service the contractor's normal bond needs more effectively and within the terms and conditions of the credit line.
D. The limit enables the surety producer to service the contractor's normal bond needs more effectively and within the terms and conditions of the credit line.
Under a per occurrence excess of loss treaty, the attachment point and the reinsurance limit apply to Select one: A. Each loss arising from a single event affecting one or more policies. C. All losses from a single event affecting liability and property insurance within the same policy. D. The total losses arising from a single event affecting one or more policies.
D. The total losses arising from a single event affecting one or more policies.
Surety claims against principals who appear to have resources to pay the claims can be referred to the principals and indemnitors who can respond before the surety must pay and before the surety seeks indemnification from them. This practice is called Select one: A. Exoneration. B. Look-see money distribution. C. Quia timet. D. The vouching-in procedure.
D. The vouching-in procedure.
Which one of the following is the producer's ultimate objective in the contractor-producer-underwriter relationship? Select one: A. To be as responsive as possible to the contractor's needs B. To be as responsive as possible to the contractor's needs while presenting business that considers the surety's underwriting standards to be advisory only C. To be as responsive as possible to the contractor's needs while presenting business that is exactly compliant with the surety's underwriting standards D. To be as responsive as possible to the contractor's needs while presenting business that is reasonably consistent with the surety's underwriting standards
D. To be as responsive as possible to the contractor's needs while presenting business that is reasonably consistent with the surety's underwriting standards
Which one of the following statements regarding legal research and unfair claims practices acts is true? Select one: A. Even when fidelity and surety businesses are not affected by unfair claims practices laws that originate from individual consumers' concerns, state lawmakers require that they adhere to these laws. B. Unfair claims practices acts can prevent sureties from adequately investigating fidelity and surety claims so that standards for prompt settlement or denial can be met. C. Because sureties can retain attorneys experienced in the fidelity and surety legal matters, claims personnel do not require knowledge of legal rules and theories that govern such coverage and liability. D. Unfair claims practices acts prohibit sureties and insurers from misrepresenting pertinent facts or policy provisions relating to coverages at issue.
D. Unfair claims practices acts prohibit sureties and insurers from misrepresenting pertinent facts or policy provisions relating to coverages at issue.
