CFFP_1 Module Five Exam

15. Which of the following terms is correctly matched with its definition? Doctrine of waiver: prevents a party from asserting a right to which he or she would otherwise be entitled where, because of his or her own actions or behavior, he or she misled someone (even though unintentionally) who relied on the understanding created thereby to his or her own detriment. Reformation: an equitable remedy by which the original contract entered into by the parties is deemed null from its beginning. Rescission: an equitable remedy by which the written instrument between the parties is changed to express the original intentions of the parties. Adhesion: one party writes the contract, and the other party has no say in the matter-he or she only accepts or rejects the contract. Doctrine of estoppel: a party, by his or her own actions (or the actions of his or her agent), has voluntarily relinquished a known right.

Adhesion: one party writes the contract, and the other party has no say in the matter-he or she only accepts or rejects the contract. This is an accurate description of adhesion.

14. Which one of the following statements about the law of agency is incorrect? A power of attorney is an example of express authority. A telephone call from your client telling you to "take care of that matter" can be considered implied authority. Authority to act as an agent cannot be implied simply because the client fails to object to a series of known, unauthorized acts. An agent can have apparent authority if the principal fails to notify the agent's clients directly, stating that the agent's contract with the principal has been terminated.

Authority to act as an agent cannot be implied simply because the client fails to object to a series of known, unauthorized acts. Authority to act as an agent can be implied if the client fails to object to a series of unauthorized acts known to the client.

30. Insurance policies are contracts of adhesion, which means that they are freely negotiated between the parties. True False

False A contract of adhesion is one in which one party writes the contract and the other party either accepts it as is or rejects it.

29. Because there are two parties to an insurance contract (the insurer and the insured), insurance contracts are said to be bilateral contracts. True False

False An insurance contract is unilateral, not bilateral, because only one party, the policyowner, can enforce its terms. The insurer cannot force the policyowner to pay the premium.

26. Under the doctrine of waiver, a party, by his or her own actions (or those of his or her agent), involuntarily relinquishes or surrenders a known right. True False

False Under the doctrine of waiver, a party, by his or her own actions (or those of his or her agent), voluntarily relinquishes or surrenders a known right.

2. Which of the following are disadvantages of self-insurance? I. the lack of an impartial claims service II. the need to pay state premium taxes III. the elimination of selling costs IV. the need to duplicate services offered by an insurance company I and III only I and IV only II and III only II and IV only I, II, and IV only

I and IV only I is correct; with self-insurance there is a lack of an impartial claims service. IV is correct; with self-insurance there is a need to duplicate services offered by an insurance company-this is a disadvantage. II is incorrect; there is no need to pay state premium taxes with self-insurance-this is an advantage. III is incorrect; elimination of selling costs is an advantage of self-insurance.

22. A financial planner, in dealing with clients, can employ which of the following methods of handling risk? I. risk avoidance II. risk reduction III. risk transfer IV. risk retention I, II, and IV only II, III, and IV only I, III, and IV only I, II, III, and IV

I, II, III, and IV All of these methods may be used by a financial planner to handle liability risk in a client situation.

13. Which of the following are guidelines for self-insurance? I. There should be enough homogeneous exposure units that are geographically dispersed to make losses somewhat predictable and to preclude a catastrophic loss. II. A potential loss should be one that can be covered by the self-insurer's bank line of credit. III. Self-insurers must be able to analyze potential claims, disburse payments to providers, and provide an objective determination of claim validity. IV. Self-insurers must be able to competently manage the self-insurance fund. II and III only I and IV only I, II, and IV only I, III, and IV only

I, III, and IV only I, III, and IV are correct statements about self-insurance. II is incorrect: potential losses should be capable of being covered out of cash flow, not by borrowing.

20. Under the Liability Risk Retention Act of 1986, I. a risk retention group must be willing to engage in all of the activities of an insurance company. II. an insurance company that qualifies as a risk retention group can write insurance for the general public. III. membership in a risk retention group is limited to persons engaged in businesses or activities that share a similar position with regard to a given liability exposure. IV. a risk retention group must prepare a feasibility study that includes a proposed rating structure, an estimate of capital needs, projected financial statements, cost allocation methods, and financial and actuarial plans for operation. III and IV only I and III only II and III only I, III, and IV only

I, III, and IV only Option II is incorrect because risk retention groups can write insurance only for their own member-shareholders.

1. Which of the following are elements of an insurable risk for an insurance company? I. The loss must be catastrophic. II. The loss must be measurable. III. The loss must be accidental. IV. The loss must be inevitable. I and II only I and IV only II and III only II and IV only II, III, and IV only

II and III only II is correct; the loss must be measurable. III is also correct; the loss must be accidental. I is incorrect; the loss must not be catastrophic from the standpoint of the insurance company. IV is incorrect; if the loss were inevitable, the element of risk would not be present, which is a basic requirement for an insurable loss.

19. Which one of the following is not an advantage of self-insurance? It eliminates insurance company selling costs. It avoids state premium taxes. It reduces the overall risk involved. It reduces costs by eliminating or reducing insurance company profit.

It reduces the overall risk involved. Self-insurance does nothing to reduce the overall risk involved. Options (a), (b), and (d) are advantages of self-insurance.

21. Which one of the following statements about personal liability is correct? An individual can be sued only for amounts up to the limits of his or her liability insurance. An individual should have liability insurance coverage equal to the value of his or her assets because insurance proceeds can be fully substituted for his or her assets. Liability is independent of insurance coverage; a judgment can claim all amounts under the limits of available liability insurance in addition to all of one's assets. An individual's future income cannot be attached to pay any balance due after a liability claim has exceeded both the client's assets and his or her insurance coverage.

Liability is independent of insurance coverage; a judgment can claim all amounts under the limits of available liability insurance in addition to all of one's assets. This statement is correct. A liability judgment is not related to insurance coverage. It could take both the assets and the amounts available under the insurance coverage.

12. Which one of the following statements about insurance underwriting is not correct? The insurance company creates risk categories and establishes guidelines that, if followed when selecting risks to be insured, will minimize the possibility of problems. The insurance company trains and positions a person to screen all risks proposed for insurance to make sure they meet the established underwriting guidelines. The insurance agent performs an initial screening to determine whether the applicant fits within the general underwriting guidelines. Persons seeking insurance coverage who do not meet normal underwriting guidelines cannot obtain coverage.

Persons seeking insurance coverage who do not meet normal underwriting guidelines cannot obtain coverage. This is an incorrect statement about insurance underwriting. Persons seeking insurance coverage who do not meet normal underwriting guidelines may still qualify for coverage if (1) they can provide a reasonable explanation for why the risk does not fall within these guidelines and (2) they are willing to pay an increased premium.

5. What is one legal requirement for an enforceable insurance contract? The parties to the contract must give up goods or services of equal value. The applicant must be given the right to alter or change provisions in the contract. The applicant must be considered a competent party to make a valid contract. The insured must be of majority age for the contract to be valid. The performance of the contract cannot be contingent on the occurrence of an event that is subject to chance.

The applicant must be considered a competent party to make a valid contract. An applicant must be considered mentally competent to make a valid contract.

23. Which one of the following is not a requirement of an enforceable contract? There must be valid consideration. The contract must be in writing. There must be an offer and an acceptance. The contract must have a legal object.

The contract must be in writing. An enforceable contract does not have to be written unless it is stipulated by legal statute regarding the requisite contract form (written in most states for real estate, oral for most, etc.). However, written contracts are more easily enforced.

6. What is one characteristic of an insurance contract? The insurer and the insured exchange dollars of equal value. It is a bilateral contract. The insurer receives the benefit of the doubt in interpretations of ambiguity in the contract. The insured must meet certain conditions in order to collect for losses. The insured has the right to change policy provisions unilaterally.

The insured must meet certain conditions in order to collect for losses. The insured must meet certain conditions in order to collect for losses, conditions such as reporting the loss promptly after it occurs, providing written proof of loss, cooperating with the insurer, etc.

7. The doctrine of waiver provides for which one of the following remedies in settling insurance contract disputes? The insurer may alter the contract provisions upon notifying the policyholder. The insurer may void the contract in cases of misrepresentation. The insurer may be held to any relinquishment of a contractual right. The insurer may be held only to those terms written in the contract. The insurer will not be allowed to contradict any prior position taken in court.

The insurer may be held to any relinquishment of a contractual right. If the insurer relinquishes a contractual right that it would otherwise be entitled to, it may be held to that relinquishment in subsequent claims. In other words, the doctrine of estoppel will likely be applied when an insurer has previously waived a contractual right.

11. Which one of the following statements about the purchase of insurance is not correct? Insurance covering exposures with potentially catastrophic financial impact should be purchased first. The large loss principle holds that large losses should be avoided. The probability that a loss may or may not occur is less important than the possible size of the loss. If something is highly unlikely to occur, the cost of insuring against a potential loss from the occurrence would generally be quite low.

The large loss principle holds that large losses should be avoided. This is an incorrect statement of the large loss principle. The large loss principle is correctly stated in (a).

24. Legal authority for a financial planner to act as agent for a client may be implied if the client fails to object to a series of unauthorized acts by the agent/planner that are known by the client. True False

True Authority can be implied if the principal fails to object to a series of unauthorized acts by the agent/planner that the principal knows about.

18. Two of the practical implications of the underwriting process are (1) that the planner must be prepared to explain to the underwriter the reasons for situations that seem out of the ordinary, and (2) that there are definite limits on the amount of insurance that can be obtained for the client, regardless of what the client is willing to pay. True False

True These are two of the practical implications of the underwriting process.

27. Which one of the following statements about reformation is not correct? Reformation is an equitable remedy by which the written instrument between the parties is changed to express the original intentions of the parties. Before a contract can be reformed, it must be shown that there was a mutual mistake (or a unilateral mistake coupled with actual or equitable fraud by the other party), duress, or related misconduct. The purpose of reformation is not to change the contract but to make the writing expressing the contract conform to what was originally intended. With the equitable remedy of reformation, the original contract is deemed null from its beginning.

With the equitable remedy of reformation, the original contract is deemed null from its beginning. With reformation, the original contract is not considered null from its beginning. This is true of rescission-not of reformation. Reformation is an equitable remedy by which the written instrument is changed to express the original intention of the parties. Before a contract can be reformed, it must be shown that there was a mutual mistake, duress, or related misconduct. And its purpose is not to change the contract but to make the writing expressing the contract conform to what was originally intended.

25. For a planner to be considered "negligent" (by failing to conduct himself or herself in a professional manner and causing harm to another), all of the following elements must be present except a written contract. a legal duty to conform to a certain standard of conduct. a failure to conform to a certain standard of conduct. a causal connection between an action and the resulting harm. actual loss, damage, or harm.

a written contract. A written contract is not necessary. A legal duty to conform to a certain standard of conduct, a failure to conform to that standard, a causal connection between an action and the resulting harm, and actual loss, damage, or harm are the relevant elements.

17. Each of the following is a part of the insurance underwriting process except seeing if the exposure meets the requirements of an insurable risk. determining how the insurance should be priced. determining what competing insurance companies are charging for the same risks. determining if it is practical for the insurer to provide insurance against this particular risk.

determining what competing insurance companies are charging for the same risks. This is not part of the underwriting process. While an insurer may, in pricing the product, consider information about the competition's premiums, the most important consideration is the expected losses as determined by an actuary plus company expenses and profit.

28. The named sections of an insurance policy include all of the following except an insuring agreement. conditions. inclusions. declarations. exclusions.

inclusions. This is not a section of an insurance policy. The insuring agreement, the conditions section, the declarations section, and the exclusions section are all sections of an insurance policy.

8. Which one of the following correctly matches a legal term to an example of the term? criminal act: manufacturing of explosives intentional tort: libel negligence: battery strict liability: arson absolute liability: assault

intentional tort: libel Libel is an example of an intentional tort.

16. Which one of the following is not one of the three basic types of risk exposure? loss of an asset, loss of use of an asset, and other asset-related exposures liability based on contract law related to an asset or activity liability based on criminal law for a loss resulting from use of an asset or from an activity

liability based on criminal law for a loss resulting from use of an asset or from an activity This is not one of the three basic types of risk exposure facing clients. The three types are asset-related risk, liability based on contract law, and liability based on tort law.

9. Barbara Barnett left her car parked on top of a hill while visiting at a friend's house. Unfortunately, she forgot to apply her emergency brake and her car rolled down the hill, injuring two children who were playing. Which one of the following doctrines may influence Barbara's liability in this situation? assumption of risk strict liability intentional negligence negligence attractive nuisance

negligence Barbara, by failing to apply her emergency brake at the top of a hill, was negligent.

10. Which one of the following methods of handling risk is not accurately paired with an example of that risk management method? risk avoidance: terminating a line of business risk retention: subcontracting risk transfer: insurance risk sharing: incorporation risk reduction: installation of a heat-activated sprinkler system

risk retention: subcontracting These are not accurately paired. Subcontracting is an example of risk transference.

3. Rhonda Lennon is a stuntwoman. She currently is filming a movie in which she has to run through a burning building. The film company has taken out a disability policy on her and makes her wear a special fireproof suit during the scene. Which one of the following answers gives the two methods of handling risk being used by the film company (as specifically identified in the preceding paragraph)? risk transference and risk reduction risk retention and risk reduction risk avoidance and risk sharing risk sharing and risk transference risk avoidance and risk retention

risk transference and risk reduction By taking out the disability policy, the film company was using risk transference. By requiring Rhonda to wear a special fireproof suit during the scene, it was using risk reduction.

4. Which one of the following is a reasonable application of a rule of risk management? insure low-risk, low-cost potential losses first consider each loss that may result from separate perils instead of the overall loss consider the probable chance of a loss occurring instead of its possible size substitute reasonable insurance premiums for large uncertain costs cover all possible losses

substitute reasonable insurance premiums for large uncertain costs This is a basic rule of risk management.