AINS 24 Chapter 6

A liability loss has the following damages: Medical expenses: $ 10,000 Damages for disfigurement: $ 50,000 Damages for pain and suffering: $ 100,000 What is the amount of special damages? A. $ 10,000 B. $ 50,000 C. $100,000 D. $160,000

$10,000

Summary Jury Trial

An alternative dispute resolution (ADR) method by which disputing parties participate in an abbreviated trial, presenting the evidence of a few witnesses to a panel of mock jurors who decide the case.

Mediation

An alternative dispute resolution (ADR) method by which disputing parties use a neutral outside party to examine the issues and develop a mutually agreeable statement.

Arbitration

An alternative dispute resolution (ADR) method by which the disputing parties use a neutral outside party to examine the issues and develop a settlement, which can be final and binding.

Independent Adjuster

An independent claims representative who handles claims for insurers for a fee.

Reservation of Rights Letter

An insurer's letter that specifies coverage issues and informs the insured that the insurer is handling a claim with the understanding that the insurer may later deny coverage should the facts warrant it.

Insurable Interest

An interest in the subject of an insurance policy that is not unduly remote and that would cause the interested party to suffer financial loss if an insured event occurred.

Third-Party Administrator (TPA)

An organization that provides administrative services associated with risk financing and insurance.

Public Adjuster

An outside organization or person hired by an insured to represent the insured in a claim in exchange for a fee.

Which one of the following allegations in insurance claims handling result from criticisms of claim representatives' actions, sometimes regardless of validity? A. Use of improper valuation techniques allegations B. Unfair rating practices allegations C. Bad faith allegations D. Contract or policy manipulation allegations

C. Bad faith allegations While insurers are accused of unfair rating, contact manipulation or of improper valuation, bad faith allegations remain as one of the most troublesome and controversial issues for claim representatives and insurers.

A person or entity that would suffer a financial loss if property were damaged has A. A contractual interest. B. A discretionary interest. C. A renewable interest. D. An insurable interest.

D. An insurable interest.

Most bad-faith claims arising out of contracts are insurance-related. All of the following explains why this is the case, EXCEPT: A. Insurance contracts involve the public interest and unequal bargaining power. B. Insurers have an implied duty of good faith and fair dealing when settling claims. C. Insurers generally control claim investigation, evaluation, negotiation, and settlement. D. In comparison to other contracts, insurance contracts require a low standard of conduct.

D. In comparison to other contracts, insurance contracts require a low standard of conduct.

The value of an insurance contract in the event of a claim A. Is purely financial. B. Is purely remedial. C. Includes the opportunity to profit. D. Includes peace of mind.

D. Includes peace of mine.

In liability claims, the claimant is referred to as the A. Primary party. B. First party. C. Second party. D. Third party.

D. Third party.

Replacement Cost

The cost to repair or replace property using new materials of like kind and quality with no deduction for depreciation.

Third-Party Claim

A demand against an insured by a person or organization other than the insured or the insurer, seeking to recover damages that may be payable by the insured's liability insurance.

First-Party Claim

A demand by an insured person or organization seeking to recover from its insurer for a loss that its insurance policy may cover.

Special Damages

A form of compensatory damages that awards a sum of money for specific, identifiable expenses associated with the injured person's loss, such as medical expenses or lost wages.

Constructive Total Loss

A loss that occurs when the cost to repair damaged property plus its remaining salvage values equals or exceeds the property's pre-loss value.

Appraisal

A method of resolving disputes between insurers and insureds over the amount owed on a covered loss.

Agreed Value Method

A method of valuing property in which the insurer and the insured agree, at the time the policy is written, on the maximum amount that will be paid in the event of a total loss.

General Damages

A monetary award to compensate a victim for losses, such as pain and suffering, that do not involve specific, measurable expenses.

Claimant

A party that makes a claim and that can be either a first-party claimant or a third-party claimant.

Punitive Damages (Exemplary Damages)

A payment awarded by a court to punish a defendant for a reckless, malicious, or deceitful act to deter similar conduct; the award need not bear any relation to a party's actual damages.

Compensatory Damages

A payment awarded by a court to reimburse a victim for actual harm.

Claims Representative

A person responsible for investigating, evaluating, and settling claims.

Nonwaiver Agreement

A signed agreement indicating that during the course of investigation, neither the insurer nor the insured waives rights under the policy.

The insured's washing machine was damaged by a covered loss. At the time of the loss, the actual cash value (ACV) of the machine was $300. Repairs would cost $250. The scrap metal dealer would pay $100 for what remains of it. Which one of the following calculations correctly determines whether or not the washing machine was a constructive total loss? A. $300 ACV - $100 salvage value = $200. This loss was a constructive total loss. B. $300 ACV - $100 salvage value = $200. This loss was not a constructive total loss. C. $300 ACV - $250 repairs = $50. This loss was a constructive total loss. D. $300 ACV - $250 repairs = $50. This loss was not a constructive total loss.

A. $300 ACV - $100 slavage value = $200. This loss was a constructive total loss. This loss was a constructive total loss because it would cost more for the insurer to pay the repair cost of $250 than to pay the ACV and then sell for salvage (net of $200).

In property insurance claims, there is sometimes a question of whether coverage exists or not. In these situations the insurer will send a reservation of rights letter. The purpose of this letter is to advise the insured that A. A coverage problem may exist. B. The claim will be handled by an independent adjuster. C. The policy may not be renewed due to loss frequency. D. The claim is in excess of the deductible.

A. A coverage problem may exist.

All of the following are factors in determining the replacement cost of real property, EXCEPT: A. Actual cash value of the property B. Construction cost per square foot C. Square footage of the property D. Type and quality of the construction

A. Actual cash value of the property

One aspect of good-faith claim handling is the fair evaluation of the claim. A fair approach to evaluating liability claims is for the claim representative to evaluate them A. As if no coverage limit existed. B. From the claimant's perspective. C. As they relate to similar claims with similar coverage and limits. D. By forming a claim committee for the purpose of achieving greater impartiality.

A. As if no coverage limit existed.

The adequacy of the case reserve for a complicated claim should be evaluated A. As new information is obtained. B. At year's end. C. On a weekly basis. D. When the claimant submits a settlement offer.

A. As new information is obtained.

A loss reserve that is assigned to an individual claim is called a A. Case reserve. B. Bulk reserve. C. Third-party reserve. D. Deferred reserve.

A. Case reserve.

All of the following are true, EXCEPT: A. Insurers that are merely negligent in their claim handling face no consequences, regardless of jurisdiction. B. Bad faith might fall somewhere between simple error and outright fraud. C. Some courts look for behavior on the part of the insurer which is arbitrary, reckless, or indifferent or involved intentional disregard. D. Courts attempt to determine the insurer's state of mind when establishing gross misconduct.

A. Insurers that are merely negligent in their claim handling face no consequences, regardless of jurisdiction.

Subrogation is the insurer's right to A. Recover its claim payment from the responsible party. B. Drop a claim in exchange for an agreed amount of money. C. Estimate the value of the damaged property. D. Transfer coverage to a third party.

A. Recover its claim payment from the responsible party.

Work on a new claim begins for the claim representative upon receipt of the notice of loss. The representative obtains initial information and verifies coverage. Next, the representative should A. Set a loss reserve. B. Make an offer to settle the claim. C. Retain causation experts. D. Assign the claim to defense counsel.

A. Set a loss reserve.

Defending liability claims through litigation can be a very long and expensive process. Mediation and arbitration are two common forums for settling claims outside the traditional court system. What is the difference between arbitration and mediation? A. Someone other than the insurer and the claimant decides the case in arbitration. B. The arbitrator's decision is always binding. C. Only one insured and one insurer can be involved in arbitration. D. Solutions are proposed in arbitration to help the parties settle.

A. Someone other than the insurer and the claimant decides the case in arbitration.

A liability adjuster must be concerned with specific, out-of-pocket expenses when evaluating the damages being claimed. The technical term for such expenses is A. Special damages. B. Punitive damages. C. General damages. D. Measurable damages.

A. Special damages.

Many homeowners policies include an appraisal provision that describes a dispute resolution process involving two appraisers and an umpire. Which one of the following statements concerning this appraisal process is true? A. The amount of a loss in dispute is established if both appraisers agree on the amount. B. Only the insured can demand an appraisal in the event of a disagreement. C. The appraisal process determines whether coverage applies to a loss. D. The insurer pays all expenses associated with the appraisal process.

A. The amount of a loss in dispute is established if both appraisers agree on the amount.

Brad is a claim representative and has received a claim from an insured. The insured backed his car into a post and slightly damaged the bumper. Brad does a quick estimate and sees that the damage probably does not even exceed the insured's deductible, so he puts the claim aside to work on a larger more complicated claim. After four weeks of hearing nothing, the insured eventually gets upset and contacts Brad's manager and the state insurance department. Which one of the following best addresses the question of whether Brad's actions likely constitute a violation of the states unfair claims practices act? A. Yes, because most of these laws generally prohibit failure to acknowledge and promptly respond to communications about a claim. B. Yes, because most of these laws require that insurers contact the insured about a claim within one week of first receiving the claim report. C. No, because Brad has not officially declined the claim or told the insured that the amount of the claim is less than the insured's deductible and therefore is not subject to these laws. D. Yes, because most of these laws prohibit claim representatives from making their own estimates as to the damage incurred and require that a licensed estimator make the estimate.

A. Yes, because most of these laws generally prohibit failure to acknowledge and promptly respond to communications about a claim.

Mini-Trial

An alternative dispute resolution (ADR) method by which a case undergoes an abbreviated version of a trial before a panel or an adviser who poses questions and offers opinions on the outcome of a trial, based on the evidence presented.

An insurance company employee who investigates the scene of a loss; meets with insureds, claimants, lawyers, and others; and inspects damage is most accurately called A. A third-party administrator. B. A field claim representative. C. An independent adjuster. D. An adjusting agent.

B. A field claim representative.

An insurance contract is designed to be all of the following in the event of a claim, EXCEPT: A. A financial mechanism that can benefit policyholders and other claimants B. A means to provide a profit to the insured C. A means to afford peace of mind to the insured D. A way to restore a claimant to pre-loss condition

B. A means to provide a profit to the insured

Juanita is the senior claim officer for Worthy Insurance Company, which uses the claim audit as a performance measure for its claim operations. Claim audits usually evaluate both quantitative and qualitative factors. Which one of the following factors is qualitative for Juanita and her staff? A. Percentage of recovery from subrogation B. Accurate evaluation of insured's liability C. Average claim settlement value by claim type D. Accuracy and completeness of data entry

B. Accurate evaluation of insured's liability

Worthley Insurance Company uses claim audits to ensure compliance with best practices. These audits evaluate both quantitative and qualitative factors. Which one of the following factors that Worthley evaluates is a qualitative factor? A. Timeliness of reserving B. Accurate evaluation of insured's liability C. Average claim settlement value by claim type D. Accuracy of data entry

B. Accurate evaluation of insured's liability

If an insured submits a claim for a seven-year-old refrigerator that was damaged due to lightning, the adjuster will probably factor in an allowance for wear and tear. This is called A. Replacement cost. B. Depreciation. C. Stated amount. D. Agreed amount.

B. Depreciation

In a constructive total loss, the property cannot be repaired A. For less than salvage value minus actual cash value. B. For less than actual cash value minus anticipated salvage value. C. For less than subrogation value minus salvage value. D. For less than salvage value minus agreed value.

B. For less than actual cash value minus anticipated salvage value.

When insurers willingly pay what they owe on all claims, a positive attitude naturally flows down through management and affects claim representatives' communication with the public. This positive attitude flow is part of A. The Model Unfair Claims Practices Act. B. Good faith claim handling. C. State regulatory requirements. D. Common law compliance.

B. Good faith claim handling.

The best description of a first-party claim is a claim A. Made by the liable party against the policyholder. B. Made by the policyholder against the insurer. C. Made by the insurer against the policyholder. D. Made by the policyholder against someone to whom the policyholder may be liable.

B. Made by the policyholder against the insurer.

Marvin suffered a fire loss at his residence. The claim representative valued several antiques at a very low price. Marvin refuses to settle his claim with his insurer. Which one of the following is Marvin's recourse? A. Marvin's only recourse is to sue the insurer for coverage and damages to the property. B. Marvin may follow the appraisal provision in the policy to settle the dispute over the value of the damaged property. C. Marvin may obtain a quote from a certified antique dealer to determine the value the insurer must pay. D. Marvin may choose to arbitrate the value of the antiques before a judge.

B. Marvin may follow the appraisal provision in the policy to settle the dispute over the value of the damaged property.

An important aspect of acknowledging a claimant's bodily injury liability claim, upon first contact, is to try to obtain information on the A. Claimant's medical history. B. Nature and extent of the injury. C. Claimant's accident history. D. Claimant's sources of additional income.

B. Nature and extent of the injury.

Jorgen is a claim supervisor who is devising a new response plan for his employer so that it can handle catastrophe claims more effectively. All of the following are factors he should consider, EXCEPT: A. Retaining independent adjuster firms B. Requesting that personnel staff temporary claim offices without pay. C. Increasing the role of producers through increased settlement authority D. Giving the policyholder the benefit of any doubt as to the valuation of property

B. Requesting that personnel staff temporary claim offices without pay.

The insurer's rights to recover and sell or otherwise dispose of insured property on which the insurer has paid a total loss are called A. Fiduciary rights. B. Salvage rights. C. Constructive rights. D. Catastrophe rights.

B. Salvage rights.

Adjuster Toni is evaluating damages in a bodily injury liability claim where she has determined that the insured is completely at fault for the accident. The claimant suffered a sprain and strain injury to his neck. His special damages total $1,500. He was out of work for a week, was disabled and prevented from performing some regular activities for a month, and attended physical therapy for six weeks. In assessing general damages, Toni should A. Multiply the amount of special damages of $1,500 by three as a rule of thumb, and pay $4,500. B. Use past cases which are similar as a guide. C. Consider what she would want to be paid if she were in claimant's shoes. D. Multiply $1,500, the amount of special damages, by six, the number of weeks of physical therapy, and pay $9,000.

B. Use past cases which are similar as a guide.

Property insurers are subject to the possibility of many claims occurring from a single event and straining their resources. This type of event is called A. An accident. B. An occurrence. C. A catastrophe. D. A simulation.

C. A catastrophe

Compensatory damages represent A. Out-of-pocket expenses. B. Non-economic loss. C. Actual harm suffered. D. Damages to deter others from committing wrongful acts.

C. Actual harm suffered.

Jerry is an experienced claim adjuster who handles claims for Jackson Insurance Company during hurricane season when Jackson's staff adjusters need assistance. Jerry is A. A public adjuster. B. A third-party adjuster. C. An independent adjuster. D. A hurricane adjuster.

C. An independent adjuster.

Which one of the following statements is true regarding elements of good-faith claim handling? A. A claim file's medical bills, doctors' reports, and other information on each claimant should be in chronological order. B. Once contact with the insured is made, the claim representative should acknowledge and assign the claim. C. Claim representatives should use policy provisions, such as arbitration clauses, when applicable, to resolve disputes over the settlement amount. D. Generally, the first activity of the insurer in the claim handling process involves two functions—investigating the claim and concluding the claim.

C. Claim representatives should use policy provisions, such as arbitration clauses, when applicable to resolve disputes over the settlement amount.

Which one of the following concerning claim status reports is true? A. Claim status reports are not vital to an insurer because the reports are usually read only by insurance department employees. B. Claim status reports are not vital to an insurer because the reports are used only as a method of illustrating work that needs to be done by the claims adjuster. C. Claim status reports are vital to an insurer because the reports advise the insurer how the claim is progressing on periodic basis. D. Claim status reports are vital to an insurer because the reports provide work for the claim representatives, rounding out their written and verbal skills.

C. Claim status reports are vital to an insurer because the reports advise the insurer how the claim is progressing on periodic basis. The progress of the claim is recorded as is requests for reserve changes, requests for assistance and settlement authority, if the amount payable exceeds the claim adjuster's authority.

Because insurers control how claims are resolved, courts reason that insurers should be responsible for the outcome of their claim handling if they have acted in bad faith. Therefore, courts hold insurers to a higher standard of conduct to A. Encourage insurers to be equitable in all insurance transactions. B. Encourage insurers to keep rates accurate, fair, and reasonable. C. Discourage insurers from abusing their position of power. D. Discourage insurers from deceiving the public in marketing and advertising practices.

C. Discourage insurers from abusing their position of power.

One way for claim managers to help maintain an insurer's underwriting profit is to A. Retain high-priced experts whenever possible. B. Achieve the lowest settlements possible. C. Establish appropriate spending policies. D. Grant claim staff complete autonomy as to spending decisions.

C. Establish appropriate spending policies.

In handling catastrophe claims, insurers should do all of the following, EXCEPT: A. Use abbreviated claim handling procedures B. Increase settlement authority of producers C. Increase record keeping requirements D. Settle all questions of property valuation in favor of the policyholder

C. Increase record keeping requirements

A goal of the claims function is to support the profit goal of the A. Insured. B. Claimant. C. Insurer. D. Policyholder.

C. Insurer.

In an auto accident where serious bodily injuries are involved, the most difficult part of the claim handling process will probably be A. Verifying coverage. B. Determining cause of loss C. Negotiating and settling the claim. D. Determining insurable interest.

C. Negotiating and settling the claim.

One of the greatest challenges for an insurer dealing with a catastrophe is staffing. All of the following are likely responses to this challenge, EXCEPT: A. Identifying and training staff from non-claim areas to assist. B. Establishing relationships with independent adjusters to help manage overflow. C. Purchasing catastrophe reinsurance. D. Bringing in catastrophe teams of claim representatives from other regions.

C. Purchasing catastrophe reinsurance.

In the claim evaluation process, specific, out-of-pocket expenses are called A. Compensatory damages. B. General damages. C. Special damages. D. Negotiated damages.

C. Special damages.

In good-faith claim handling, the insurer should give consideration to the insured's interests A. That are less than that given to a third party claimant's interests. B. That are no less than the government-mandated threshold for the government in which the litigation occurs. C. While remaining impartial to all aspects. D. That are greater than that given to the insurer's interests.

C. While remaining impartial to all aspects.

Actual Cash Value (ACV)

Cost to replace property with new property of like kind and quality less depreciation.

The most typical third-party bad-faith claim alleges A. Breach of contract. B. Bad-faith claims made against the first-party policyholder relating to coverage issues. C. Failure of a claim representative to divulge details of a loss investigation that would lead to an increased claim payment to the insured. D. An improper failure to settle a third party's liability claim within policy limits followed by a verdict that exceeds the policy limits.

D. An improper failure to settle a third party's liability claim within policy limits followed by a verdict that exceeds the policy limits.

Most insurers give some producers the authority to pay claims up to a certain amount. In this role, producers function much like A. A field claim representative. B. An independent adjuster. C. A public adjuster. D. An inside claim representative.

D. An inside claim representative.

Insurers handling catastrophe claims should be prepared for A. Claimants who are not eager to assert their rights. B. Mortgagees that are eager to abbreviate their procedures. C. News media eager to promote aggressive behavior. D. Claimants who are aggressive in their pursuit of settlement.

D. Claimants who are aggressive in their pursuit of settlement.

Which one of the following is an example of general damages? A. Hospital expenses B. Lost wages C. Prescription costs D. Compensation for disfigurement

D. Compensation for disfigurement

Damages for disfigurement are a form of A. Out-of-pocket damages. B. Punitive damages. C. Special damages. D. General damages.

D. General damages.

Damages for the loss of the ability to bear children are a form of A. Out-of-pocket damages. B. Punitive damages. C. Special damages. D. General damages.

D. General damages.

Mira raised chickens in a coop that she constructed in her backyard. Due to her careless smoking, the coop was destroyed by fire. She submitted a claim to her homeowners insurer, which assigned an adjuster. This is the adjuster's first claim involving a building detached from a dwelling. Assuming the adjuster has established Mira's insurable interest in the property, which one of the following should the adjuster be asking next? A. Was the chicken coop constructed within the standards of the local building code? B. How old is the chicken coop? C. How many chickens died in the fire? D. Is the damaged property covered by the policy?

D. Is the damaged property covered by the policy?

The best description of a third-party claim is a claim A. Made by the liable party against the policyholder. B. Made by the policyholder against the insurer. C. Made by the insurer against the policyholder. D. Made against the policyholder by someone to whom the policyholder may be liable.

D. Made against the policyholder by someone to whom the policyholder may be liable.

Despite the unique challenges and variations from case to case, the last step in the claim handling process is usually A. Determining cause of loss. B. Determining the amount of damages. C. Verifying coverages. D. Negotiating and settling.

D. Negotiating and settling.

In order to expedite claim handling during a catastrophe, an insurer will consider all of the following modifications to procedures, EXCEPT: A. Temporarily increasing claim handling authority for producers B. Making advance payments to policyholders C. Using abbreviated claim handling procedures D. Suspending the use of independent adjusting firms

D. Suspending the use of independent adjusting firms

All of the following explain when the use of independent adjusters might be advantageous, EXCEPT: A. Insurers may use independent adjusters for specific types of losses, for example, aircraft accidents, in which specialized expertise is required to settle the claim. B. In the case of a catastrophic loss such as a hurricane, an insurer may not have sufficient staff to manage the claim volume and may temporarily depend upon independent adjusters to handle the excess. C. In some areas it is not economically feasible to set up remote claim offices and in these areas insurers may depend on independent adjusters to handle their insureds' losses. D. The insured may retain an independent adjuster after becoming dissatisfied with the pace of negotiations with the insurer.

D. The insured may retain an independent adjuster after becoming dissatisfied with the pace of negotiations with the insurer. Independent adjusters handle claims for insurers for a fee, not for insureds.

All of the following correctly describe reasons for the use of independent adjusters, EXCEPT: A. Insurers may use independent adjusters when special skills and expertise are needed, for example to investigate aircraft accidents. B. In the case of a catastrophic loss such as a hurricane, an insurer may not have sufficient staff to manage the large number of claims, and may use independent adjusters. C. In some areas it is not economically feasible to set up claim offices, and insurers may contract with independent adjusters to handle claims in these remote areas. D. The insured may retain an independent adjuster if settlement negotiations with the insurer are not progressing satisfactorily.

D. The insured may retain an independent adjuster if settlement negotiations with the insurer are not progressing satisfactorily. Independent adjusters handle claims for insurers for a fee, not for insureds)

People who handle claims fall into a number of categories. Those who handle claims, keep claim records, and perform statistical analysis on behalf of self-insureds are called A. Claim managers. B. Independent adjusters. C. Staff claim representatives. D. Third-party administrators.

D. Third-party administrators.

Lou is a claim manager at a small property-casualty insurance company. Lou takes pride in the fact that because of his leadership, his company has gained a public reputation for resisting legitimate claims. Ultimately, this reputation A. Satisfies the mandate of regulators. B. Makes the company's policies more marketable. C. Supports his company's profit goals. D. Undermines the effectiveness of his company's advertising.

D. Undermines the effectiveness of his company's advertising.

Damages

Money claimed by, or a monetary award to, a party who has suffered bodily injury or property damage for which another party is legally responsible.

Salvage Rights

The insurer's rights to recover and sell or otherwise dispose of insured property on which the insurer has paid a total loss or a constructive total loss.

Subrogation

The process by which an insurer can, after it has paid a loss under the policy, recover the amount paid from any party (other than the insured) who caused the loss or is otherwise legally liable for the loss.

Depreciation

The reduction in value caused by the physical wear and tear or technological or economic obsolescence of property.