Chapter 1: General Insurance

In order for contracts to be legally binding they must have 4 essential elemets

1. Agreement-offer and acceptance 2. Consideration 3. Competent parties; and 4. Legal purpose

Indemnity

A provision in an insurance policy that states that in the event of loss, an insured or beneficiary is permitted to collect only to the extent of the financial loss and is not allowed to gain financially because of the existence of an insurance contract.

Aleatory contract

An exchange of unequal amounts or values( i dont pay the amount of worth for my car every month)

Personal contract

Between the insurance company and the individual

Managerial system

Branch manager(supervises agents), salaried, agents can be insurers employees or independent contractors

Whats the binding force in any contract ?

Consideration

When an insured makes truthful statements on the application for insurance and pays the required premium, it is known as which of the following?

Consideration

An insurance company sells an insurance policy over the phone in response to a TV ad. Which of the following best describes this act?

Direct Response Marketing

Avoidance

Eliminating exposure to a loss. Example if a person wanted to avoid the risk of being killed in an airplane crash, he would stay away from airplanes.

The risk of loss may be classified as?

Pure Risk and Speculative Risk

Representations and Misrepresentations

Representations are statements believed to be true for the best of ones knowledge, but are not guaranteed to be true. Untrue statements are considered misrepresentations and could void the contract.

Conditional Contract

Requires that certain conditions to be met

Pure risk

Situations that only result in a loss or no change. There is no opportunity for financial gain. Pure risk is the only of risk that insurance companies are willing to accept.

Government insurance programs

Social security, medicare, medicaid, federal crop insurance, and national flood insurance

Law of large numbers

States that the larger the number of people with a similar exposure to loss the more predictable actual losses will be.

Which of the following is an example of apparent authority of an agent appointed by an insurer?

The agent accepts a premium payment after the end of the grace period.

Peril

The causes of loss insured against in an insurance policy

Adverse selection

The insuring of risks that are more prone to losses than the average risk. Insurance companies have an option to refuse or restrict coverage for bad risks or charge them a higher rate for insurance coverage.

Transfer

The most effective way to handle risk is to transfer it, commonly by insurance.

Retention

The planned assumption of risk by an insured through the use of deductibles, co payments, or self insurance. The purpose of retention is to reduce expenses and improve cash flow, or to increase control of claim reserving and claims settlements and to fund for losses that cannot be insured.

Loss

The reduction, decrease, or disappearance of value of the person or property insured in a policy, caused by a named peril.

Risk

The uncertainty or chance or a loss occuring

Unilateral contract

only one of the parties to the contact is legally bound to do anything.

Stock comapines

owned by the stockholders who provide the capital necessary to establish and operate the insurance company and who share in an profits or losses.

Contract of adhesion

prepared by one of the parties (insurer) and accepted or rejected by the other party(insured)

Warranty

A warranty is an absolutely true statement upon which the validity of the insurance policy depends. Breach of warranties are grounds for voiding the policy or a return on the premiums.

Events or conditions that increase the chances of an insured loss occurring are referred to as

Hazards

When would a misrepresentation of the insurance application be considered fraud?

If it is intentional and material

What is insurance?

Insurance is a contract in which one party (insurance company) agrees to indemnify (make whole) the insured party against loss, damage or liability arising from an unknown event. Insurance transfers the risk of loss from an individual or business entity to a insurance company, which in turn spreads the cost of un-expected losses to many individuals.

Speculative risk

Involves the opportunity for either loss or gain. An example is gambling. these types of risk are not insurable.

Estoppel

Is a legal process that can be used to prevent a party to a contract from re-asserting a right or privilege after that right or privilege has been waived. Estoppel is a legal consequence of a waiver.

Direct response marketing system

No agents, company advertisements directly to consumers. Consumers apply directly to company.

Exclusive agency system/captive agents

One agent represents one company, exclusive, commissions on personal sales, renewals can only be placed with the appointing insurer

Independent agency system/american agency system

One independent agent represents several companies, non inclusive, commissions on personal sales, business renewal with any company.

Mutual Companies

Owned by the policy owners and issue participating policys.

A participating policy may do which of the following?

Pay dividends to the policy owner

Which of the following is not a goal of risk retention?

To minimize the insured's level of liability in the event of loss.

When an individual purchases insurance, what risk management technique is he or she practicing?

Transfer

In forming an insurance contract, when does acceptance usually occur?

When in an insurer's underwriter approves it

Hazard

conditions or situations that increase the probability of an insured cost occurring.

Fraud

is the intentional misrepresentation or intentional concealment of a material fact used to induce another party to and or refrain from making a contract, or to deceive or cheat a party. Fraud is ground for voiding a contract.

Which of the following best describes the aleatory nature of an insurance contract?

Exchange or unequal values

The authority granted to an agent through the agent's contract is referred to as?

Express authority

Which of the following is NOT a government insurance program?

Federal Deposit Insurance Corporation (FDIC)

The requirement that agents not commingle insurance monies with their own funds is known as?

Fiduciary responsibility

General agency system

General agent-entrepreneur represents one company, exclusive, compensation and commissions, appoints sub agents.

Consideration

Is something of value that each party gives to the other.

Concealment

Is the legal term for the intentional withholding of information of a material fact that is crucial in making a decision. May void policy

Waiver

Is the voluntary act of relinquishing a legal right, claim or privilege.

For the reported losses of an insured group to become more likely to equal the statistical probability of loss for that particular class, the insured group must become?

Larger

Sharing

Method of dealing with risk for a group of individual group of persons or businesses with the same or similar exposure to loss to share the losses that occur within that group

Reduction

lessing the possibility or severity of a loss.