Chapter 1

a. representations.

When an applicant for a homeowners insurance policy lists the address, size, and description of his home, he is providing: a. representations. b. factual misrepresentations. c. the declarations page. d. misrepresentations.

d. Janie loses a month of rental income when her tenant must move out while repairs are made to the home.

When record-breaking rainfall causes severe flooding in Janie's home town, Janie's rental property suffers extensive damage. Which of the following is an indirect loss? a. Janie must hire a contractor to reinforce a damaged retaining wall in the backyard of her rental unit. b. Janie's tenant has to replace his sofa that was damaged by the water. c. Janie must pay to have the wood floors replaced in her rental unit. d. Janie loses a month of rental income when her tenant must move out while repairs are made to the home.

b. Res Ipsa Loquitur.

A passenger on a commercial airline flight was injured when the plane crashed due to a mechanical problem. In court, the injured passenger's lawyer could invoke the doctrine of: a. Contributory negligence. b. Res Ipsa Loquitur. c. Comparative negligence. d. Assumption of Risk.

c. The insurer pays $100,000; the aggregate limit is now $200,000; and ABC Masonry must pay $50,000.

ABC Masonry, Inc. has an aggregate liability policy with limits of 100,000/300,000. One day, an accident at a construction site leads to $150,000 in damage to public property. Assuming the cause of loss is covered under ABC Masonry's liability policy, how will this claim be paid? a. The insurer pays $150,000 and the aggregate limit is still $300,000. b. The insurer pays $150,000 and the aggregate limit is now $200,000. c. The insurer pays $100,000; the aggregate limit is now $200,000; and ABC Masonry must pay $50,000. d. The insurer pays $100,000; the aggregate limit is still $300,000; and ABC Masonry must pay $50,000. 21 / 39

b. Endorsements

Charlotte's son just turned 16 and got his driver's license. She wants him to be covered, so she adds him to her auto insurance policy. Where would this addition be found in Charlotte's policy? a. Insuring agreement b. Endorsements c. Exclusions d. Conditions

a. a peril.

During a violent summer storm in Tulsa, a bolt of lightning hits Mr. Jones' house, damaging a large portion of the roof. In this case, the insurer would call the lightning bolt a: During a violent summer storm in Tulsa, a bolt of lightning hits Mr. Jones' house, damaging a large portion of the roof. In this case, the insurer would call the lightning bolt a: a. a peril. b. a hazard. c. a risk. d. a loss. b. a hazard. c. a risk. d. a loss.

c. tortfeasor.

Ginger, under the mistaken impression that Jackie made a lewd gesture at her, attacks and injures Jackie after a soccer game. When Jackie takes Ginger to court, Ginger is the: a. accuser. b. plaintiff. c. tortfeasor. d. felon.

b. plantiff In this case, Jackie is the plaintiff. In a civil court case, the party who suffers personal injury or property damage is known as the plaintiff. The party accused of committing a tort is known as the defendant, or tortfeasor.

Jackie files a lawsuit against Ginger after Ginger's three-year-old daughter ruins Jackie's laptop during a flight. When they go to court, Jackie is the: a. tortfeasor b. plaintiff c. tort d. defendant

d. The tornado

Jane's shed burns to the ground during a tornado, when the high winds break a wall of the shed, knocking over a lantern inside. What is the proximate cause of the loss? a. Fire b. The lantern c. Wall collapse d. The tornado

b. The insurer will pay the claim because of the implied waiver they have made by not canceling Jason's policy the previous times he was late with his payments.

Jason's auto policy states that the insurer may cancel coverage if a premium is more than 30 days late. However, Jason is currently more than 30 days late, and has been so five times in the last year, and his insurer has done nothing about it. When Jason gets into an accident and files a claim, which of the following is most likely to happen? a. The insurer will deny the claim and cancel Jason's policy because of the implied waiver they have made by not canceling his policy the previous times he was late with his payments. b. The insurer will pay the claim because of the implied waiver they have made by not canceling Jason's policy the previous times he was late with his payments. c. The insurer will deny the claim and cancel Jason's policy because he is more than 30 days late with his payment. d. The insurer will pay the claim because of the express waiver they have made by not canceling Jason's policy the previous times he was late with his payments.

d. special damages.

Jerrod is awarded $4000 in a court case after Ollie accidentally starts a fire and burns down his detached garage. This award is an example of: a. statutory damages. b. general damages. This is an example of special damages. Special damages are a type of compensatory damages. They award money for tangible, economic losses. General damages award money for intangible losses. c. punitive damages. d. special damages.

c. $62,000

John has purchased a homeowners insurance policy with a percentage deductible based on the total limit of insurance for his home. John insures his home for $600,000, and the policy includes a 3% deductible. A huge thunderstorm passes through one night and blows the roof off his house. The insurance company estimates that covered damage totals $80,000. How much indemnification should John expect for the losses to his roof? a. $80,000 b. $77,600 c. $62,000 d. $18,000

c. Conditions

Josephine's gas station suffered severe damage when one of the fuel tanks caught fire and exploded. After completing his inspection, the adjuster determines that Josephine's claim is not covered because she did not have automatic shut-offs for the fuel tanks. If this safety measure was in fact required in order for coverage to apply, where might Josephine find it in the policy? a. Declarations b. Exclusions c. Conditions d. Endorsements

d. a legal hazard. The award is a legal hazard. A legal hazard is an increased chance of loss due to legal action.

Last month, an elderly man slipped and fell on a cracked, uneven icy sidewalk on Mulberry Street. He sued the homeowner and was awarded $60,000. The insurers of other properties on Mulberry Street would consider this award to be: a. a moral hazard. b. a morale hazard. c. a physical hazard. d. a legal hazard.

c. the government.

Sovereign immunity restricts an individual's ability to file a lawsuit against: a. a defendant. b. an individual or organization that deals with dangerous instrumentalities. c. the government. d. an insurance company.

d. holds a person liable for his actions regardless of how much care he demonstrates.

Strict liability: a. does not hold up in a court of law. b. releases an individual from liability in dealing with dangerous objects. c. holds an individual to a lower level of responsibility. d. holds a person liable for his actions regardless of how much care he demonstrates.

d. Statutory

The city of Hillsdale passed a law dictating that all dogs must wear collars with tags. This is an example of what kind of law? a. Unfair b. Tort c. Common d. Statutory

c. allowing the lender to cancel the insurance policy at any time.

The conditions page in an insurance contract may allow a lender all of the following provisions EXCEPT: a. promising to give the lender notice if the policy is canceled, reduced, or has expired without payment. b. allowing a lender to be listed as a payee on the policy. c. allowing the lender to cancel the insurance policy at any time. d. permitting the lender to pay the policy premium if the insured fails to do so to maintain coverage.

a. to prevent an insurer from making a profit on a loss.

The purpose of the principle of indemnity is: a. to prevent an insurer from making a profit on a loss. b. to transfer the right to collect a debt from one party to another. c. to transfer the risk of financial loss from one party to another. d. to prevent an insured from making a profit on a loss.

c. $400,000

To meet the 80% level of co-insurance required by his lender, Tom discovers he must insure his home for at least $320,000. What is the value of Tom's home? a. $256,000 b. $320,000 c. $400,000 d. $440,000 That is incorrect. If $320,000 is 80% of the value of Tom's home, you can calculate that value with the following equation: $320,000 = (0.8) x (home value). Divide $320,000 by 0.8, and the answer is $400,000, the value of Tom's home.

d. A pool of collected premiums that the insurer sets aside to pay claims

What is a reserve, in insurance terms? a. A group of policyholders who pay into the same pool of premiums b. The amount of revenue that the insurer sets aside to pay employee salaries c. A set of rules governing how the insurance industry should work d. A pool of collected premiums that the insurer sets aside to pay claims

a. Replacement cost minus total depreciation

What is the formula for actual cash value? a. Replacement cost minus total depreciation b. Original cost minus total depreciation c. Fair market value minus annual depreciation d. Replacement cost minus annual depreciation

d. Matt has already received indemnification from his insurer.

When Zach intentionally burned down Matt's restaurant, Matt's insurer paid the claim and then pursued subrogation. Matt is furious about the incident and wants to sue Zach. Why is it NOT possible for Matt to sue Zach? a. Zach may not be tried for the same thing twice. b. Matt was not present at the time of the fire. c. Zach is protected by the Statute of Limitations. d. Matt has already received indemnification from his insurer.

a. When a defendant does not answer a complaint

When would a default judgment occur? a. When a defendant does not answer a complaint b. In cases that involve an intentional tort c. When an insurer sends a reservation of rights d. When a defendant submits an answer

a. Buying a lottery ticket

Which of the following activities is considered a speculative risk? a. Buying a lottery ticket b. Flying in an airplane c. Driving a car d. Leaving your jewelry on a bed stand

b. The fee paid by the insured in exchange for an insurance policy

Which of the following best defines premium? a. A legal agreement providing temporary evidence of insurance until a policy is issued b. The fee paid by the insured in exchange for an insurance policy c. A legally enforceable agreement between parties d. Transfer of risk of financial loss from one party to another

d. The possibility of damage or loss Exposure refers to how likely it is that a loss will occur. A condition that increases the possibility of a loss is called a hazard.

Which of the following best describes the insurance concept of "exposure"? a. The reduction in value of an insured item b. A condition that increases the possibility of a loss c. The cause of damage or loss d. The possibility of damage or loss

d. Unilateral Contract

Which of the following describes a contract in which only one party makes a promise to perform? a. Utmost Good Faith Contract b. Personal Contract c. Aleatory Contract d. Unilateral Contract

a. Jim, who regularly eats at Big Ed's Steak House because it's his favorite restaurant.

Which of the following does NOT have an insurable interest in Big Ed's Steak House, a local restaurant? a. Jim, who regularly eats at Big Ed's Steak House because it's his favorite restaurant. b. ABC Bank, which holds the mortgage on Big Ed's Steak House. c. Ed's partner, Bill, who owns 49% of the restaurant. d. Ed, who owns 51% of the restaurant.

d. A man slips inside a grocery store and injures himself.

Which of the following incidents would a liability insurance policy cover? a. A fire damages the back bedroom of your house. b. A man crashes his car into his own fence. c. The company van is stolen from your warehouse. d. A man slips inside a grocery store and injures himself.

b. An insurable risk must have guaranteed protection from damage.

Which of the following is NOT a qualification of an insurable risk? a. An insurable risk must have a quantifiable value. b. An insurable risk must have guaranteed protection from damage. c. An insurable risk must have definable parameters. d. An insurer must be able to charge premiums high enough to pay out claims.

d. Kevin's insurance policy covers him for losses to his new car, even though he sold his truck, which was previously covered under his policy, to Bill. An insurance policy is a personal contract, which means coverage follows the person, not the property. Kevin will still have his policy after selling his truck.

Which of the following is true? a. Kevin's auto insurance policy protects his car from damage. b. Kevin's auto insurance policy now covers Bill, who bought Kevin's truck. c. When Kevin sold his truck to Bill, he lost his auto insurance coverage. d. Kevin's insurance policy covers him for losses to his new car, even though he sold his truck, which was previously covered under his policy, to Bill.

a. Indemnification

Which of the following refers to being restored to the financial condition you were in before a loss? a. Indemnification b. Subrogation c. Restoration d. Estoppel

b. It is the result of an unconscious behavior.

Which of the following statements about a moral hazard is FALSE? a. A moral hazard increases risk. b. It is the result of an unconscious behavior. c. It is a hazard caused by human behavior. d. It is reckless behavior because of security offered by insurance.

a. Maintaining property values allows your neighbor to have an insurable interest in your house.

Which of the following statements about insurable interest is FALSE? a. Maintaining property values allows your neighbor to have an insurable interest in your house. b. When a renter leases your house, your insurable interest in the home remains. c. Purchasing an insurance policy on your home helps protect your insurable interest in the home. d. A wife can have an insurable interest in her husband's life.

a. Estoppel protects the insured party from an insurer who initially approves coverage, but then later denies coverage after the insured pays for repairs.

Which of the following statements about the principle of estoppel is TRUE? a. Estoppel protects the insured party from an insurer who initially approves coverage, but then later denies coverage after the insured pays for repairs. b. Estoppel essentially guarantees no increases in the policyholder's premiums after a policy term expires. c. Estoppel allows an insurer to change the coverage in an insurance policy without the policyholder's consent. d. Estoppel protects the insurer from the effects of a warranty.

d. The larger the number of units insured, the more accurately the insurer can predict the number of claims from that group.

Which of the following statements best describes the Law of Large Numbers? a. The larger the amount an insurance company can charge in premiums, the less likely a policyholder will file a claim. b. The larger the number of insurance policies written, the higher the profit for the insurer. c. The larger the number of insurance policies written, the more an insurer will pay out. d. The larger the number of units insured, the more accurately the insurer can predict the number of claims from that group.

a. The concept of utmost good faith only applies to the insured.

Which of the following statements is NOT true about an insurance policy? a. The concept of utmost good faith only applies to the insured. b. An insurance policy actually protects the policyholder's financial interests in the insured item, not the insured item itself. c. Ambiguities in contracts of adhesion often favor the insured. d. The insurer holds the balance of power in the creation of an insurance policy.

c. $0 Liability coverage does not have a deductible. Since Roxanne caused the damage, Ben would file a third-party claim against Roxanne's auto liability coverage. There is no deductible, so Roxanne would not have to pay anything.

While making a right-hand turn from the right lane, Ben is sideswiped by Roxanne, totaling the car he bought new 12 years ago for $15,000. Roxanne is judged to be at fault. She has an auto policy with a $500 deductible on her collision coverage. Assuming Ben's car depreciates at a rate of $1,100 a year, how much will Roxanne have to pay out of pocket when Ben files a claim against her insurer for the damages? a. $1,800 b. $500 c. $0 d. $1,100