Chapter 1 Test; General Insurance; Oregon; ExamFX

What is the definition of a unilateral contract?

A) One author; the company wrote the contract; the insured must accept it as written. B) If one party makes a condition, the other party can counteroffer. C) One-sided; only one party makes an enforceable promise. D) Two or more parties go into a contract understanding there may be an unequal exchange of value. Answer: C) One-sided; only one party makes an enforceable promise. ~ An insurance contract is unilateral in that only one of the parties to the contract is legally bound to do anything.

Following a career change, an insured is no longer required to perform many physical activities, so he has implemented a program where he walks and jogs for 45 minutes each morning. The insured has also eliminated most fatty foods from his diet. Which method of dealing with risk does this scenario describe?

A) Reduction B) Transfer C) Avoidance D) Retention Answer: A) Reduction ~ The insured's change in lifestyle and habits would likely reduce the chances of health problems.

In insurance policies, the insured is not legally bound to any particular action in the insurance contract, but the insurer is legally obligated to pay losses covered by the policy. What contract element does this describe?

A) Unilateral B) Unidirectional C) Aleatory D) Conditional Answer: A) Unilateral ~ In a unilateral contract, the insured is not legally bound to do anything. The insurer, however, must pay losses covered by the policy.

Not all losses are insurable, and there are certain requirements that must be met before a risk is a proper subject for insurance. These requirements include all of the following EXCEPT

A) The loss must not be catastrophic. B) There must be sufficient number of homogeneous exposure units to make losses reasonable predictable. C) The loss produced by the risk must be definite. D) The loss may be intentional. Answer: D) The loss may be intentional. ~ To insure intentional losses would be against public policy.

Hazard is best defined as

A) neglect to communicate a material fact. B) a deliberate attempt to deceive. C) something that increases the risk. D) the uncertainty of loss. Answer: C) something that increases the risk. ~ Hazards are conditions or situations that increase the probability of an insured loss occurring.

Which of the following is a statement that is guaranteed to be true, and if untrue, may breach an insurance contract?

A) Indemnity B) Representation C) Warranty D) Concealment Answer: C) Warranty ~ A warranty in insurance is a statement guaranteed to be true. When an applicant is applying for an insurance contract, the statements he or she makes are generally not warranties but representations. Representations are statements that are true to the best of the applicant's knowledge.

Events in which a person has both the chance of winning or losing are classified as

A) Insurable. B) Pure risk. C) Retained risk. D) Speculative risk. Answer: D) Speculative risk. ~ Speculative risk involves the chance of gain or loss and is not insurable.

Which of the following produces evaluations of insurers' financial status often used by state departments of insurance?

A) SEC B) AM Best C) NAIC D) Consumer's guide Answer: B) AM Best ~ AM Best & Company assigns ratings to life, property and casualty insurance companies based upon the financial stability of the insurer.

An insurer neglects to pay a legitimate claim that is covered under the terms of the policy. Which of the following insurance principles has the insurer violated?

A) Adhesion B) Consideration C) Good faith D) Representation Answer: B) Consideration ~ The binding force in any contract is consideration. Consideration on the part of the insured is the payment of premiums and the health representations made in the application. Consideration on the part of the insurer is the promise to pay in the event of loss.

What documentation grants express authority to an agent?

A) Agent's insurance license B) Fiduciary contract C) State provisions D) Agent's contract with the principal Answer: D) Agent's contract with the principal ~ The principal grants authority to an agent through the agent's contract.

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

A) Ambiguities are interpreted in favor of the insured. B) Policies are submitted to the insurer on a take-it-or-leave-it basis. C) Exchange of unequal values. D) Only one of the parties being legally bound by the contract. Answer: C) Exchange of unequal values. ~ An aleatory contract is a contract in which unequal amounts or values are exchanged. The amount of premium the insured pays is much less than the potential loss assumed by the insurer.

To legally transact insurance in this state, an insurer must obtain which of the following?

A) Certificate of Insurance B) Certificate of Authority C) Power of Attorney D) Business entity license Answer: B) Certificate of Authority ~ A Certificate of Authority is required in order to transact insurance.

When transacting business in this state, an insurer formed under the laws of another country is known as a / an:

A) Alien insurer. B) Domestic insurer. C) Foreign insurer. D) Admitted insurer. Answer: A) Alien insurer. ~ Alien insurer is defined as an insurer formed under the laws of another country.

An insurance company is domiciled in Montana and transacts insurance in Wyoming. Which term best describes the insurer's classification in Wyoming?

A) Domestic B) Unauthorized C) Foreign D) Alien Answer: C) Foreign ~ A foreign insurer is domiciled in one state and transacts insurance in another. A domestic insurer transacts insurance in the domicile state (in this case, Montana). An alien insurer is domiciled in one country and transacts insurance in another.

What insurance concept is associated with the names Weiss and Fitch?

A) Index used by stock companies. B) Guides describing company financial integrity. C) Policy dividends. D) Types of mutual companies. Answer: B) Guides describing company financial integrity. ~ Because an insurance company's strength and stability are two very crucial factors in its sustainability, independent rating services have formed to publish regular updates on the financial integrity of different insurance companies. Weiss and Fitch are two of these services, although there are more.

Which statement regarding insurable risks is NOT correct?

A) The insurable risk needs to be statistically predictable. B) An insurable risk must involve a loss that is definite as to cause, time, place, and amount. C) Insureds cannot be randomly selected. D) Insurance cannot be mandatory. Answer: C) Insureds cannot be randomly selected. ~ Granting insurance must not be mandatory, selecting insureds randomly will help the insurer to have a fair proportion of good risks to poor risks. All other statements are true.

In insurance transactions, fiduciary responsibility means

A) Maintaining a good credit record. B) Being liable with respect to payment of claims. C) Commingling premiums with agent's personal funds. D) Handling insurer funds in a trust capacity. Answer: D) Handling insurer funds in a trust capacity. ~ An agent's fiduciary responsibility includes handling insurer funds in a trust capacity.

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

A) express authority B) accepted account principal. C) fiduciary responsibility. D) premium accountability. Answer: C) fiduciary responsibility. ~ Money collected with respect to an insurance transaction must be held in a position of trust by the agent or broker.

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

A) Accepted accounting principal. B) Fiduciary responsibility. C) Premium accountability. D) Express authority. Answer: B) Fiduciary responsibility. ~ Money collected with respect to an insurance transaction must be held in a position of trust by the agent or broker.

Which of the following statements is an accurate comparison between private and government insurers?

A) Private insurers provide insurance in areas where the government will not. B) Private insurers may be authorized to transact insurance by state insurance departments. C) Insurance provided by the government is called federal insurance. D) Private insurers offer fewer lines of insurance than government insurers. Answer: B) Private insurers may be authorized to transact insurance by state insurance departments. ~ Private insurers offer many lines of insurance. Government insurance programs, also known as social insurance, cover areas that private companies cannot or will not, providing programs like Medicare, Social Security, and National Flood Insurance. Government programs are funded with tax dollars and serve national causes, in contrast with private insurers.

Which of the following is NOT a characteristic of an insurable risk?

A) The loss exposure must be large. B) The loss must be catastrophic. C) The loss must be due to chance. D) The loss must be measurable. Answer: B) The loss must be catastrophic. ~ In order to be characterized as pure risk, the loss must be due to chance, definite, measurable, and predictable, but not catastrophic.