RMI FINAL

Which of the following statements about health savings accounts (HSAs) is true?

Once an individual has reached age 65 or is covered by Medicare, no additional contributions to the HSA may be made.

Under which of the following rules is actual cash value determined by taking into consideration all relevant factors an expert would use to determine the value of the property?

the broad evidence rule

A peril is

the cause of a loss

Objective risk is defined as

the relative variation of actual loss from expected loss.

Under a dram shop law, a business may be held liable for damages resulting from

the sale of alcohol.

Which of the following is a fundamental purpose of the principle of indemnity?

to reduce moral hazard

Exclusions are used in insurance policies for all of the following reasons EXCEPT

to waive policy conditions.

A legal wrong for which the law allows a remedy in the form of money damages is a

tort.

Traditionally, risk has been defined as

uncertainty concerning the occurrence of loss.

Which of the following statements about life insurance policy loans is (are) true?

II only

Which of the following statements about monetary damages awarded by a court is (are) true?

II only

Which of the following statements about universal life insurance is (are) true?

II only

Which of the following statements describes how losses will be settled if a property insurance policy is written on a replacement cost basis?

Losses are settled without a deduction for depreciation

An insurance policy specifically written and designed to meet the needs of an insurance purchaser is called a(n)

Manuscript policy

Which of the following statements about individual disability income policies is true?

Many policies provide or make available a residual disability benefit for persons who are able to work but at a reduced income.

Which of the following statements about term insurance is true?

Most policies can be renewed for additional periods without evidence of insurability.

Which of the following would be a valid reason for an insurer to contest a policy after the contestable period has ended?

The applicant had someone else take the medical examination required for policy approval for her.

Which of the following statements about life insurance settlement options is true?

Under the fixed amount option, the beneficiary can be given the right to increase or decrease the fixed amount.

Which of the following statements about nonforfeiture options found in life insurance policies is true?

Under the reduced paid-up option, no additional premiums must be paid.

All of the following are categories of torts EXCEPT

breach of contract.

Which of the following is a cost/expense that an estate clearance fund is designed to pay?

burial expenses

The purpose of a coordination-of-benefits provision in group health insurance plans is to

determine which plan pays first if more than one plan covers a loss.

To better understand her company's operations, a risk manager asked a production manager to draw a diagram tracing the steps in the production and distribution of the company's products. Such a diagram, which is useful in risk identification, is called a

flowchart.

Compensatory damages include

general damages and special damages.

Loss severity is defined as the

probable size of the losses which may occur during some period.

Eric's property was damaged in an accident. He phoned his agent to see if the loss was covered under his property insurance policy. The agent said, "As long as the cause of loss is not specifically excluded in the policy, the loss is covered." Based on the agent's answer, what type of insuring agreement appears in the policy?

"open-perils" coverage

Mark owns a building that he insured for $90,000. The replacement cost of the building is $100,000. Mark's property insurance policy has an 80 percent coinsurance clause. Ignoring any deductible, if Mark's building is destroyed by a covered peril, how much will Mark receive from his insurer?

$90,000

Janice purchased a living room set for $1,000 and insured this furniture on an actual cash value basis. Two years later the living room set was destroyed by a covered peril. At the time of loss, the property had depreciated in value by 25 percent. The replacement cost of the furniture at the time of loss was $1,200. Assuming no deductible, how much will Janice receive from her insurer?

$900

What is the length of the readjustment period which is considered when the needs approach is used to determine the amount of life insurance to own?

1 to 2 years

Which of the following $100,000 whole life insurance policies, issued by the same company to a man age 32, would require the highest first-year premium?

10-payment whole life

In the context of medical malpractice, what is a "never event"?

A medical error that should never occur.

Dave is an agent for Easy Pay Insurance. Easy Pay insures only high-quality applicants. Dave wanted to earn more commissions, so he sold some policies to applicants he knew were below-average risks. When these policyowners started filing claims, Easy Pay tried to deny the claims stating that Dave had not acted appropriately. Which general rule of agency makes Easy Pay responsible for the claims of the higher-than-average risk policyowners?

A principal is responsible for the acts of its agents who are acting within the scope of their authority.

Ann Parks and Robert Evans jointly own a grocery store. Ann and Robert are both named insureds on the property insurance covering the store, but Ann is the first named insured. Which of the following statements is true with regard to Ann's status as the first named insured?

Ann is responsible for making sure that the premium has been paid.

All of the following statements about the tax treatment of Health Savings Accounts (HSAs) are true EXCEPT

Distributions from a qualified HSA used to fund medical expenses are taxable income.

All of the following are defects which limit the usefulness of the human life value approach in determining the correct amount of life insurance to purchase EXCEPT

Earnings during the individual's productive lifetime are ignored.

All of the following statements about the conversion of a term policy are true EXCEPT

Evidence of insurability is required before a conversion is permitted.

Which of the following statements is (are) true regarding the results of the 2014 study by the Life Insurance Market Research Association (LIMRA) on the adequacy of life insurance owned by households in the United States?

II only

Which of the following statements regarding the use of retention is (are) true? I. Retention is best used for loss exposures that have a low frequency and a high severity. II. A financially strong firm can have a higher retention level than a firm whose financial position is weak.

II only

Which of the following types of loss exposures may be appropriately handled through the purchase of insurance?

II only

Consumer experts typically recommend all of the following rules when buying life insurance EXCEPT

Ignore all factors other than cost.

Which of the following statements is true regarding disability income insurance?

Increasing the elimination period reduces the premium for disability income insurance

Why is a large number of exposure units generally required before a pure risk is insurable?

It enables the insurer to predict losses more accurately.

All of the following statements about current assumption whole life insurance are true EXCEPT

It is a form of participating whole life insurance that pays annual dividends.

Which of the following statements about re-entry term insurance is true?

It permits a lower renewal premium if the insured demonstrates insurability.

All of the following are disadvantages of using insurance in a commercial risk management program EXCEPT

It results in considerable fluctuations in earnings after losses occur.

Which of the following statements about the entire contract clause is true?

It specifies that the life insurance policy and the attached application constitute the complete agreement between the parties.

Which of the following statements about the surrender cost index for measuring the cost of life insurance is true?

It takes the amount and timing of each dividend into consideration.

An insurance company estimates its objective risk for 10,000 exposures to be 10 percent. Assuming the probability of loss remains the same, what would happen to the objective risk if the number of exposures were to increase to 1 million?

It would decrease to 1 percent.

Kate is covered under her employer's group health plan. She is also covered as a dependent under her husband's group health plan. Under the usual coordination-of-benefits provision, how will each company respond to a claim filed by Kate?

Kate's plan is primary, and her husband's plan is excess.

A situation or circumstance in which a loss is possible, regardless of whether a loss occurs, is called a

Loss exposure

Parker Department Stores has been hurt in recent months by a large increase in shoplifting losses. Parker's risk manager concluded that while the frequency of shoplifting losses was high, the severity is still relatively low. What is (are) the appropriate risk management technique(s) to apply to this problem?

Loss prevention

Why are insurance contracts said to be contracts of adhesion?

One party writes the contract, and the other party must accept the entire contract as written.

Which of the following is a result of adverse selection?

Persons most likely to have losses are also most likely to seek insurance at standard rates.

Which of the following is a source of information a risk manager could use to help identify pure loss exposures?

Physical inspections

Kevin has three liability policies which provide for contribution by equal shares if other insurance applies to a loss. How much will each policy pay for a $3,000,000 liability judgment if policy A provides $500,000 of coverage, policy B provides $1,000,000 of coverage, and policy C provides $3,000,000 of coverage?

Policy A will pay $500,000, policy B will pay $1,000,000, and policy C will pay $1,500,000

All of the following statements describe the flexibility available to the owner of a universal life insurance policy EXCEPT

Policy loans are permitted on an interest-free basis.

Some managed care plans use physicians, hospitals, and health care organizations that agree to make medical services available to insureds at discounted fees. Insureds are not required to use these entities, but if they do, health care costs are less than if these entities are not used. Such health care entities are called

Preferred Provider Organizations (PPOs).

Which of the following statements about home service life insurance, which evolved over time from a type of life insurance called industrial life insurance, is true?

Premiums are usually not collected at the insured's home and are remitted directly to the agent or the insurer.

Which of the following statements about subrogation is true? A) Subrogation eliminates adverse selection. B) Subrogation helps to hold down the cost of insurance. C) Subrogation results in violation of the principle of indemnity. D) Subrogation permits a party who caused a loss to avoid responsibility for the loss.

Subrogation helps to hold down the cost of insurance.

Which of the following statements about the guaranteed purchase option is true? A) An insured usually has 24 months to exercise an option. B) The option cannot be exercised until the insured reaches age 40. C) The amount of life insurance that can be purchased at each option is limited to 10 percent of the face amount of the basic policy. D) The additional coverage can be purchased without demonstrating insurability.

The additional coverage can be purchased without demonstrating insurability.

JKL Insurance Company estimates that 14 out of every 100 homeowners it insures will file a claim each year. Last year, JKL insured 200 homeowners. According to the law of large numbers, what should happen if JKL insures 2,000 homeowners this year?

The actual results will more closely approach the expected results.

Which of the following statements about the use of a captive insurance company by a parent firm is true?

The captive may be used to insure loss exposures that the parent firm finds it difficult to insure with private insurers.

Which of the following statements about a decreasing term insurance policy is true?

The face amount of the policy decreases during the policy period, but the premium remains level.

All of the following statements about ordinary life insurance are true EXCEPT

The face amount of the policy is paid if the insured lives to age 65.

Which of the following statements about indexed universal life insurance is true?

The formula used to determine the additional interest credited to the policy places no limit on the additional interest that can be credited.

Which of the following statements about yearly renewable term insurance is (are) true?

neither I nor II

All of the following requirements must be met to satisfy the doctrine of res ipsa loquitur EXCEPT

The injured party must prove negligence on the part of the defendant.

Which of the following statements about savings bank life insurance is true?

The objective of savings bank life insurance is to provide low-cost insurance to consumers by holding down expenses.

All of the following are disadvantages of noninsurance transfers EXCEPT

The only potential losses that can be transferred are those that are not commercially insurable.

All of the following statements about the rules governing agency relationships are true EXCEPT

The principal is responsible for the acts of agents only if the acts are criminal.

All of the following statements about the requirements to reinstate a lapsed life insurance policy are true EXCEPT

There is no time limit on when the policy may be reinstated.

Under common law, which of the following persons is most likely to be classified as an invitee?

a mail carrier

Which of the following is (are) often consequences of long-term disability?

both I and II

What information is contained in the insuring agreement of an insurance policy?

a summary of the major promises of the insurer

Tim purchased a 10-payment whole life insurance policy 15 years ago. Tim would like to donate this paid-up policy to a charity. Under which policy provision can Tim transfer all ownership rights in the policy to the charity?

absolute assignment

The transfer of all ownership rights in a life insurance policy can be accomplished through a(n)

absolute assignment.

The primary purpose of coinsurance in property insurance is to

achieve equity in rating.

A total loss under a valued policy is settled on the basis of the

amount of insurance covering the loss.

If a third party is led to reasonably believe that an agent is acting within the scope of his/her authority, even though the agent is exceeding his/her authority, the principal may still be bound by the agent's actions. In this case, the agent has bound the principal by

apparent authority.

Under one doctrine, a person who understands the danger inherent in an activity cannot recover damages in the event of injury from the activity. This doctrine is called the

assumption of risk doctrine.

A risk that affects only individuals or small groups and not the entire economy is called a

diversifiable risk.

Five years ago, Shannon decided to start investing monthly in the common stock of ABC Telecom Company. Her financial well-being will be harmed if the price of ABC Telecom stock drops significantly. The risk of investment loss can be reduced if she invests in other companies and other types of financial assets. The risk Shannon faces with regard to her investments is a(n)

diversifiable risk.

A risk manager was asked to review all the loss exposures his company faces. The risk manager noted that the company obtained over 90 percent of its raw materials from one supplier. He voiced concern about business interruption if that supplier was closed for some reason. Acting on his recommendation, the company began to purchase raw materials from two other suppliers. Using multiple suppliers illustrates which risk control technique?

diversification

Melanie was just hired as the risk manager of JKL Company. The company president asked her to make a thorough review of all of the company's loss exposures. Melanie noted that many employees were too heavily invested in stock issued by the company in their 401-k plan. Melanie suggested that the employees change some of their investment holdings to mutual funds that invest in stock issued by different companies. The risk control method that Melanie suggested is

diversification

Unmanned aircraft systems are gaining in popularity. These systems are creating new liability exposures. Unmanned aircraft systems are also known as

drones.

A college professor stores class grading records on a spreadsheet on her office computer. Each time she updates a grading file she makes a printout and a backup copy of the grading file. The professor is using which risk management method to address the risk of losing her class grading records?

duplication

One of the reasons that deductible are used in insurance policies is to

eliminate coverage for small claims.

Mark reviewed his homeowners policy. He learned that his personal property was insured on an actual cash value basis. He would like replacement cost coverage on his personal property. He contacted his agent who said, "I'll simply add an amendment to your contract that changes the basis of recovery to replacement cost." The written provision the agent was referring to is called a(n)

endorsement.

Gina would like to buy a house. She will pay 10 percent of the cost of the house as a down payment and borrow the other 90 percent from a mortgage lender. The home will serve as collateral for the loan. The lender will not make the loan to Gina unless the home is insured. Using insurance to secure the collateral for a loan illustrates which of the following benefits of insurance to society?

enhancement of credit

Which of the following is an example of a noninsurance risk transfer?

entering into a hold-harmless agreement

Cal purchased a whole life policy 6 years ago. The policy requires annual premium payments. Cal forgot to pay the premium that was due 2 weeks ago. He wonders if his life insurance is still in force. Which life insurance policy provision is designed to keep the policy in force for a short time even if the premium payment is late?

grace period

As an alternative to coinsurance, rate discounts can be given as the amount of insurance to value increases. This alternative is called

graded rates.

Gwen purchased an interesting life insurance policy. A minimum interest rate is guaranteed on the cash value, but additional interest may be credited based on the investment performance of a group of common stocks. There is also a cap on the additional interest credited to the policy. Based on this information, what type of life insurance did Gwen purchase?

indexed universal life insurance

The extra expense incurred by a business to stay in operation following a fire is an example of a(n)

indirect loss

Jenna opened a successful restaurant. One night, after the restaurant had closed, a fire started when the electrical system malfunctioned. In addition to the physical damage to the restaurant, Jenna lost profits that could have been earned while the restaurant was closed for repairs. The lost profits are an example of

indirect loss.

The Affordable Care Act requires that most U.S. citizens and legal residents have qualifying health insurance or pay a financial penalty. This provision of the Affordable Care Act is known as the

individual mandate.

A person who enters or remains on the property with the occupant's expressed or implied permission is called (a)n

invitee.

Someone who is asked to come on to the property to benefit the property owner, such as customers at a store or a garbage collector, is classified as a(n)

invitee.

Francis opened a store. She knows that customers who come to the store may be injured on the premises and hold her responsible for their injuries. Under common law, business customers in the store Francis opened are considered

invitees.

Under the Affordable Care Act, if a health insurer does not meet the minimum loss ratio requirement, the insurer must

issue rebates to the people the insurer covered.

All of the following statements about avoidance are true EXCEPT

it can be used for any loss exposure facing a firm.

Trisha was injured when the delivery truck for a local furniture store struck her. The delivery driver claimed the brakes of the delivery truck failed, causing the accident. Trisha filed suit, and in her lawsuit named the delivery driver, the furniture store, the service station responsible for vehicle maintenance, and the manufacturer of the vehicle. Even though the manufacturer of the vehicle may be only 1 percent responsible for the accident, it may be required to pay a large percentage of the damages under the

joint and several liability rule.

In determining insurance limits and deductibles, an important concept is that insurance should be used to pay big losses rather than small losses. The objective is to insure big losses that could cause financial ruin and to exclude small losses that can be budgeted out of current income. This concept is called the

large-loss principle.

ABC Insurance Company sells auto insurance in one state. Recently, the state legislature passed a law that limits the use of an individual's credit history by insurers when selecting applicants to insure. This change in law will increase the possibility of unprofitable results for ABC. This type of hazard is an example of

legal hazard

Some characteristics of the judicial system and regulatory environment increase the frequency and severity of loss. This hazard is called

legal hazard.

The difference between the legal reserve of a whole life policy and the face amount of insurance is the

net amount at risk.

Which method of analyzing the cost of life insurance does not consider the cash value of the policy in the analysis?

net payment cost index

Individual medical expense insurance sold in the Health Insurance Marketplace is characterized by which of the following?

no lifetime benefit limits

Beth purchased a participating life insurance policy 6 years ago. Her life insurance needs have increased, but she has developed a medical condition that makes it impossible for her to purchase more life insurance at affordable premiums. Which dividend option makes sense for Beth to use given her medical condition?

paid-up additions

Which of the following is a common dividend option found in a participating life insurance policy?

paid-up additions

Alex, age 26, purchased a 20-payment whole life insurance policy. After Alex has made 20 premium payments, his life insurance policy is considered

paid-up.

Barb was injured in an auto accident. She was totally disabled and collected disability income benefits for 8 months. She would like to return to work on a part-time basis to see if her recovery is complete. During this period, her insurer will pay reduced disability income benefits. This type of disability is called

partial disability

An earthquake is an example of a(n)

peril

Traditionally, federal state, and local governments could not be sued. This immunity had eroded over time. Today, government units may be liable for injuries arising out of money-making activities. Such activities are called

proprietary functions.

All of the following are potential advantages of retention EXCEPT

protection from catastrophic losses.

A special coverage policy is a policy that

provides open-perils coverage.

Insurance companies collect premiums in advance. Since the premiums collected are not needed to pay losses and expenses immediately, the funds can be loaned to business firms. Because of this fact, insurance benefits society by

providing a source of investment funds.

One requirement for proving that an act was negligent is the existence of an unbroken chain of events between the act and the injury or harm that occurred. This unbroken chain of events is called

proximate cause.

The premature death of an individual is an example of a

pure risk

Jessica is an agent for LMN Life Insurance Company. She met with Brad, who was interested in purchasing life insurance. Jessica explained the various uses of life insurance, including income for Brad's wife during the 1- or 2-year period following Brad's death. This period is known as the

readjustment period.

A contingent beneficiary in a life insurance policy has the right to

receive the policy proceeds if the primary beneficiary dies before the insured.

All of the following are nonforfeiture options found in cash value life insurance policies EXCEPT

reduction of premiums.

A factor that can be ignored when determining the cost of life insurance is

settlement options.

Michelle had major abdominal surgery. Months after the surgery, she still did not feel well. When she was operated on again, the surgeon discovered two sponges that were not removed at the conclusion of the first operation. Michelle should be able to collect damages without having to prove negligence under the doctrine of

res ipsa loquitor.

Prior to passage of the Affordable Care Act, insurers could go back to the date a health insurance policy became effective and render the policy void due to a clerical error. This practice, which is prohibited under the Affordable Care Act except in cases of fraud or intentional misrepresentation of a material fact, is called

rescission.

Low-frequency, low-severity loss exposures are best handled by

retention.

One long-term care insurance benefit trigger considers whether the insured needs supervision to protect against threats to health or safety due to memory loss or disorientation. This benefit trigger is referred to as a(n)

severe cognitive impairment trigger.

Which of the following is implied by the pooling of losses?

sharing of losses by an entire group

Which of the following types of families is likely to have the least need for a large amount of life insurance?

single person family

Which of the following is an intentional tort?

slander

One branch of government insurance programs has a number of distinguishing characteristics. These programs are compulsory, they are financed by mandatory contributions rather than general tax revenues, and benefits are weighted in favor of low-income groups. These government insurance programs are called

social insurance programs.

Damages awarded for losses that can be determined or measured are

special damages

The deductible used for automobile collision losses is an example of a(n)

straight deductible.

The Affordable Care Act includes a provision designed to help small employers make health insurance coverage available to their employees. This provision allows small employers to reduce their federal income tax by a percentage of the employer's contribution to health insurance for employees. This subsidy, in the form of reduction of income taxes, is called a

tax credit.

Which of the following dividend options, sometimes called the "fifth dividend option," is not offered by all insurers that sell participating life insurance coverage?

term insurance

Individuals renting out rooms in their home for overnight stays, individuals jointly owing a car with other owners, and individuals who give rides to people who call or text them are creating "new" liability exposures for insurers. The social change that creates these new liability exposures is called

the sharing economy.

Marshall is interested in determining the cost per thousand of his life insurance policy. Which of the following will provide Marshall the most meaningful measure of the cost per thousand dollars per year of his life insurance?

the surrender cost index

Lynn calculated the future value of the first twenty premiums she will pay under her nonparticipating whole life insurance policy. Then she subtracted the cash value after 20 years. Next, she divided this value by the future value annuity due factor for 20 years to arrive at an annual cost of insurance. Finally, she divided the annual cost by the number of thousands of dollars of life insurance purchased to arrive at the cost per thousand per year. Lynn calculated the

the surrender cost per thousand per year.

Under the traditional net cost method, the net cost of life insurance for a given period (e.g., 20 years) is determined by which of the following formulas?

the total premiums for the period less the sum of the total dividends received during the period and the cash value at the end of the period

The property and liability insurance industry fluctuates between periods of increasing insurance rates and tight underwriting standards, and decreasing insurance rates and loose underwriting standards. Profitability in the industry follows these cyclical movements. What is this pattern of fluctuations called?

the underwriting cycle

Charles Blake told Wendy that he was an agent for Easy Pay Life Insurance Company. He presented no credentials. He asked Wendy some questions about her health and activities, and recorded the answers on scrap paper. He collected a $250 cash premium from Wendy. When Wendy did not receive a policy from Easy Pay, she contacted the company. Easy Pay said they do not have an agent named Charles Blake. Easy Pay is not responsible for Wendy's loss of $250 because

there is no presumption of an agency relationship.

Ann is considering the purchase of a life insurance policy with these characteristics: flexible premium payments, the insurance and savings components are separate, the interest rate credited to the cash value is tied to a changing market interest rate but a minimum interest rate is guaranteed, and a monthly administrative fee is charged. Ann is considering buying

universal life insurance.

Some states have a law that requires payment of the face amount of insurance to the insured if a total loss to real property occurs from a peril specified in the law. These laws are called

valued policy laws.

Which of the following statements about individual disability income policies that use a two-part definition of total disability is (are) true?

II only

Malcolm was involved in an auto accident. He was judged to be 20 percent at fault in the accident, and the other party was judged to be 80 percent at fault. Malcolm's actual damages were $40,000. Under a pure comparative negligence rule, how much will Malcolm receive for his injuries?

$32,000

Which of the following statements about long-term care insurance is (are) true?

II only

Which of the following statements about policies sold to preferred risks is (are) true?

II only

Which of the following statements about premature death is (are) true?

II only

Which of the following statements about second-to-die life insurance is (are) true?

II only

Which of the following statements about the immunity of governmental entities is (are) true?

II only

Which of the following statements about the ownership of a life insurance policy is (are) true?

II only

Which of the following statements about variable universal life insurance is (are) true?

II only

Which of the following statements concerning social insurance benefits is (are) correct?

II only

Which of the following statements is (are) true concerning the automatic premium loan provision?

II only

Which of the following statements is (are) true regarding exclusions in life insurance contracts?

II only

Which of the following is a basic characteristic of insurance?

pooling of losses

That part of a property and liability insurance contract that contains information about the property or activity to be insured is called the

Declarations

Which of the following statements about the use of deductibles is (are) true? I. They represent risk retention by insurance purchasers. II. They tend to increase the cost of adjusting small claims.

I only

Which of the following statements about the use of interest-adjusted cost data for comparing life insurance policies is (are) true?

I only

Which of the following statements about the yearly-rate-of-return method (also known as the Belth method) of calculating the yearly rate of return for a life insurance policy is (are) true?

I only

Which of the following statements concerning the selection of risk management techniques and insurance market conditions is (are) true?

I only

Ben is concerned that if he injures someone or damages someone's property he could be held legally responsible and required to pay damages. This type of risk is called a

liability risk.

Kim purchased a one-year property insurance policy. She agreed to pay half the premium when she bought the coverage, and the other half six months later. If Kim fails to pay the second premium, the insurer cannot sue her for the premium because insurance contracts are

unilateral contracts.

Mark owns a 2006 sedan. The last time Mark renewed his auto insurance, he decided to drop the physical damage insurance on this vehicle. How is Mark dealing with the auto physical damage exposure in his personal risk management program?

active retention

The production facility for ABC Manufacturing is located in a flood plain. Although the risk of flood is low, ABC's risk manager is concerned that a flood could damage the plant and equipment. He received bids on flood insurance from two insurance agents, but decided the cost of coverage was too high relative to the risk. So he did not purchase flood insurance. Which risk management technique is ABC using with respect to the risk of flood?

active retention

The loss settlement under which of the following supports the principle of indemnity?

actual cash value property insurance

Roger owns some farmland that he rents to a tenant. The tenant lives in an old farmhouse on the property and raises crops on the land. Roger is concerned about possible legal liability if the tenant injures someone. Roger requires the tenant to have liability insurance and to add himself to the liability coverage through an endorsement. Under the tenant's liability insurance, Roger is a(n)

additional insured.

ABC Appliance offers a warranty requiring an annual fee. The warranty may be purchased at the time of sale or at any time within the first year after the appliance was purchased. The warranty fee after the date of purchase is twice the time-of-purchase fee. When asked why the fee was higher after the date of purchase, ABC's president said, "Buying a warranty is voluntary. We've noted that those who buy the warranty after the purchase date have a greater need for service." Charging the same rate or a lower rate after the date of purchase would expose ABC to what problem that also impacts private insurers?

adverse selection

Ashley opened an all-you-can-eat buffet restaurant. The price per-person was based on what Ashley believed an average restaurant patron would consume. The restaurant began to lose money. Ashley concluded that her patrons had "above average" appetites, and were attracted to her restaurant because they could eat as much as they wanted while being charged an average price. A similar phenomenon exists in insurance markets. This problem is called

adverse selection.

BBB Auto Club provides emergency road service and other services to its members. BBB Auto Club charges a higher membership fee to new members than it charges to members who are renewing their membership. When asked to explain this pricing policy, the auto club president noted, "New members often sign-up prior to taking a long road trip, so we have to charge more as first-year members have higher service utilization rates." A similar phenomenon observed in insurance markets is called

adverse selection.

The tendency for unhealthy people to seek life or health insurance at standard rates is an example of

adverse selection.

A contract in which the values exchanged are not equal because chance is involved is called a(n)

aleatory contract.

Bruce believes a local manufacturer is responsible for contaminating some land he owns. He filed suit against the company. Rather than have the case go to court, the manufacturing company's legal team suggested mediation or arbitration to settle the case. Methods that are employed to resolve legal disputes without litigation, such as mediation, are called

alternative dispute resolution techniques.

All of the following are typical characteristics of individual medical expense coverage EXCEPT

annual benefit limits.

Carelessness or indifference to a loss is an example of

attitudinal hazard.

A homeowner was repairing the deck on the back of his home. He left power tools on the deck when he quit working for the day. A neighbor's child saw the power tools. He came on to the deck, and started to play with a power saw. He cut off two of his fingers. A property owner may be held liable for creating a condition that entices children to enter the property where they are injured under the doctrine of

attractive nuisance.

All of the following are programs to insure fundamental risks EXCEPT

auto physical damage insurance

Bev lives in the suburbs and works downtown. She drives to work, and her most direct route to work would require her to pass through an area where carjackings and drive-by-shootings are common. Bev does not drive through this area. Instead, she uses a route which adds 10 minutes to her commute. Which risk management technique is Bev using with respect to the risk of injury while driving through the dangerous area?

avoidance

Abandoning an existing loss exposure is an example of

avoidance.

Why can an insurer refuse to pay a claim if an insured fails to abide by the policy provisions?

because insurance contracts are conditional

Why does the insured get the benefit of the doubt if an insurance policy contains any ambiguities or uncertainties?

because insurance contracts are contracts of adhesion

Dave and Meagan Philips borrowed $150,000 from Fifth National Bank to help fund the purchase of a new home. The home serves as collateral for the loan. Fifth National has an insurable interest in the home based on

being a secured creditor.

Bill is attempting to determine how much life insurance to purchase. He has two dependent children and his wife does not work outside of the home. An advisor suggested that Bill should consider Social Security benefits when doing his life insurance planning. One concern in this regard is the period after Social Security benefits to a widow terminate until they resume again. This period is called the

blackout period

The period during which a surviving spouse is ineligible for Social Security benefits is referred to as the

blackout period.

A common situation involving strict liability includes which of the following?

blasting operations

Easy Pay Life Insurance Company allows a term insurance rider to be added to its whole life policies. The result is a policy that offers an increased death benefit with an affordable premium. The general name for such a policy is a(n)

blended policy.

A risk manager is concerned with which of the following? I. Identifying potential losses II. Selecting the appropriate techniques for treating loss exposures

both I and II

Advantages of selecting the paid-up additions dividend option in a life insurance policy include which of the following?

both I and II

Alternative techniques for resolving legal disputes without litigation include which of the following?

both I and II

Disadvantages of life insurance settlement options include which of the following?

both I and II

Factors a risk manager must consider in selecting an insurer include which of the following? I. The availability of risk management services II. The financial strength of the insurer

both I and II

In addition to marketing life insurance, life insurers typically sell which of the following products?

both I and II

Preloss objectives of risk management include which of the following?

both I and II

Purposes of the coinsurance provision in medical expense insurance policies include which of the following?

both I and II

Reasons for NOT purchasing an accidental death benefit rider include which of the following?

both I and II

Reasons why a peril may be considered uninsurable and therefore excluded from insurance contracts include which of the following?

both I and II

Reasons why market, financial, and production risks are often uninsurable include which of the following?

both I and II

Situations under which parents can be held liable for the actions of a child include which of the following?

both I and II

Sources of life insurance dividends include which of the following?

both I and II

The requirement that losses should be accidental and unintentional in order to be insurable results in which of the following?

both I and II

Which of the following are legal obligations of a property owner with respect to an invitee?

both I and II

Which of the following is a reason why premature death may result in economic insecurity?

both I and II

Which of the following is an example of consequential (indirect) loss?

the cost of renting a substitute vehicle while a collision-damaged car is being repaired

Maria's home was damaged by an earthquake. As Maria has open-perils coverage on her home, she was surprised to learn that her loss was not covered. Which section of a property insurance policy specifies which perils, property, and types of losses are not covered?

the exclusions

Risk management is concerned with

the identification and treatment of loss exposures.

A defendant who is only slightly liable may be required to pay the full amount of damages under which of the following?

the joint and several liability rule

According to the law of large numbers, what happens as the number of exposure units increases?

Actual results will more closely approach probable results.

Which of the following statements about disability and disability income insurance is (are) true?

II only

Which of the following statements about dividend options is (are) true?

II only

All of the following statements about optional disability income benefits are true EXCEPT

Adding a return of premium rider results in a lower initial premium.

Steve was involved in an auto accident. Both drivers were partially at fault for the accident. Steve's actual damages were $50,000. He was judged to be 20 percent at fault. If Steve's state has a contributory negligence law, how much will Steve collect?

$0

Steve was involved in an auto accident. Both drivers were partially at fault for the accident. Steve's actual damages were $50,000. He was judged to be 60 percent at fault. If Steve's state has a 51 percent rule for comparative negligence, how much will Steve collect?

$0

Steve was involved in an auto accident. Both drivers were partially at fault for the accident. Steve's actual damages were $50,000. He was judged to be 60 percent at fault. If Steve's state has a pure comparative negligence law, how much will Steve collect?

$20,000

Julian, age 45, would like to determine how much life insurance to purchase using the human life value approach. He assumes his average annual earnings over the next 20 years will be $40,000. Of this amount, $20,000 is available annually for the support of his family. Julian will generate this income for 20 more years and he believes that 5 percent is the appropriate interest (discount) rate. The present value of one dollar payable for 20 years at a discount rate of 5 percent is $12.46. What is Julian's human life value?

$249,200

Sam's furniture was destroyed by a fire. The furniture cost $1200 when it was purchased, but similar new furniture now costs $1800. Assuming the furniture was 50 percent depreciated, what is the actual cash value of Sam's loss?

$900

Which of the following statements about eligibility requirements for qualified Health Savings Accounts (HSAs) is (are) true?

II only

Which of the following statements about the principle of insurable interest is (are) true?

II only

What happens to the premiums for yearly renewable term insurance as an insured gets older?

They increase at an increasing rate.

According to the law of large numbers, what should happen as an insurer increases the number of units insured?

Actual results will more closely approach expected results

Loss control includes which of the following?

Both I and II

Problems with the health care system in the United States that led to implementation of the Affordable Care Act included

Both I and II

Under the Affordable Care Act, which of the following statements are true?

Both I and II

One provision of the Affordable Care Act provides creates in each state a transparent and competitive insurance marketplace where individuals and small firms can purchase affordable and qualified health coverage. This marketplace is called a

Health Insurance Marketplace.

Which of the following statements about comparative negligence laws is (are) true?

II only

Helen and John both own automobiles on which they carry liability insurance. If Helen is negligent and has an accident while driving John's car with his permission, how will each insurer respond to any liability judgment against Helen?

Helen's insurance will pay on an excess basis if John's insurance is insufficient to cover the judgment.

Arguments in favor of reforming the civil justice system include which of the following?

I only

Methods by which insurers may minimize or avoid catastrophic losses include which of the following?

I only

Purposes of the coinsurance clause in health insurance contracts include which of the following?

I only

Which of the following statements about "open-perils" coverage is (are) true?

I only

Which of the following statements about a warranty in an insurance contract is (are) true?

I only

Which of the following statements about endowment insurance policies is (are) true?

I only

Which of the following statements about liability risks is (are) true?

I only

Which of the following statements about life insurance cash values is (are) true?

I only

Which of the following statements about self-insurance is (are) true? I. It is a form of planned retention. II. State law usually prohibits its use for workers compensation.

I only

Which of the following statements about the assignment of a life insurance policy is (are) true?

I only

Which of the following statements about the change of plan provision in a life insurance contract is (are) true?

I only

Which of the following statements about the definition of the insured is (are) true?

I only

Which of the following statements about the elements of negligence is (are) true?

I only

Which of the following statements about the grace period in a whole life insurance contract is (are) true?

I only

Which of the following statements about the legal obligations of a property owner is (are) true?

I only

Which of the following statements about the needs approach for estimating the amount of life insurance to purchase is (are) true?

I only

Which of the following statements is (are) true regarding taxation of life insurance?

I only

Which of the following statements regarding health care expenditures in the United States is (are) true?

I only

Which of the following statements regarding insurance and gambling is (are) true?

I only

Which of the following statements regarding private insurance and government insurance is (are) true?

I only

Which of the following types of insurance policies can usually be assigned without the insurer's consent?

I only

Which statement is true concerning the economic problem of premature death in the United States?

I only

Why might the use of "grades" assigned by a life insurance company rating organization not be a reliable guide for consumers?

I only

An automobile that is a total loss as a result of a collision is an example of which of the following types of risk?

II only

Characteristics of a fortuitous loss include which of the following?

II only

Fundamental purposes of the principle of indemnity include which of the following?

II only

The purchase of term insurance is justified by which of the following circumstances?

II only

Which of the following conditions is (are) appropriate for using retention? I. Losses are difficult to predict. II. The worst possible loss is not serious.

II only

Which of the following statements about a personal risk management program is (are) true?

II only

Which of the following statements about a variable universal life insurance policy is (are) true?

II only

Which of the following statements about an insurable interest in life insurance is (are) true?

II only

Which of the following statements about captive insurance companies is (are) true?

II only

Which of the following statements about chance of loss and risk is (are) true?

II only

Which of the following statements about consideration in an insurance contract is (are) true?

II only

All of the following statements about the administration of a risk management program are true EXCEPT

If a risk management program is properly designed, periodic review of the program is unnecessary.

Which of the following statements about offer and acceptance for insurance contracts is true?

In property insurance, the offer and acceptance are usually in writing but may be oral.

All of the following statements about employer-provided group life insurance are true EXCEPT

Individual evidence of insurability, through a medical exam, is usually required.

Jacob sold his house to Shelia for $140,000 in cash. Jacob "threw in" insurance on the house as part of the deal and did not bother telling the insurer that there was a new owner. Four months after Shelia purchased the home, a windstorm damaged the roof. Which of the following legal characteristics of insurance contracts could the insurer use to legally deny payment for the damage to the roof?

Insurance contracts are personal contracts.

Which of the following statements regarding insurance and hedging is true?

Insurance reduces objective risk while hedging involves only risk transfer and not risk reduction.

All of the following statements about universal life insurance are true EXCEPT

Interest credited to a policy's cash value is taxable for the policyowner in the year credited.

Which of the following statements is true regarding an automatic premium loan provision?

Its purpose is to prevent a policy from lapsing because of nonpayment of premium.

All of the following statements about risk retention are true EXCEPT

Its use is most appropriate for low-frequency, high-severity types of risks

Which of the following statements about limited-payment life insurance is true?

Its use may be appropriate if a person wants paid-up life insurance during retirement.

The Affordable Care Act has a provision that expands a public assistance program designed to make health coverage available to low-income individuals by increasing the maximum amount of income that can be earned and still qualify for benefits. As a result, millions of individuals are eligible for coverage under this program. This public assistance program is called

Medicaid

All of the following statements about individual disability income policies are true EXCEPT

Most disability income insurance policies contain an elimination period of 10 or fewer days.

All of the following statements about long-term care insurance are true EXCEPT

Premiums can be reduced by electing shorter elimination periods.

Which of the following statements about speculative risks is true?

They may benefit society even though a loss occurs.

All of the following are burdens to society because of the presence of risk EXCEPT

Risk provides an incentive for people to engage in loss control.

Which of the following is least likely to occur during a "hard" insurance market period?

higher insurance profits

Which of the following statements regarding convertible term insurance is true?

The annual premium for the cash value coverage is lower if an original-age conversion is used than if an attained-age conversion is used.

Which of the following statements describes how the net payment cost index differs from the surrender cost index?

The cash value is ignored.

From the standpoint of the insurer, which of the following is a characteristic of an ideally insurable risk?

The chance of loss must be calculable.

Which of the following statements about the assignment of a life insurance policy is true?

The insurer must be notified of any assignment or the death proceeds will be paid to the named beneficiary.

All of the following statements about subrogation are true EXCEPT

The insurer reserves the right to subrogate against its own insureds.

If insurers were to provide indemnification for losses that were deliberately caused, which characteristic of ideally insurable risks would not be met?

The loss must be accidental and unintentional.

From the viewpoint of the insurer, all of the following are characteristics of an ideally insurable risk EXCEPT

The loss should be catastrophic.

XYZ Insurance Company writes coverage for most perils which can damage property. XYZ, however, does not write flood insurance on property located in flood plains. Which requirement of an ideally insurable risk might be violated if XYZ wrote flood insurance on property located in flood plains?

The loss should not be catastrophic.

What is the legal significance of a material concealment by an insurance applicant?

The contract is voidable at the insurer's option.

What is the legal significance of a material misrepresentation in an insurance application?

The contract is voidable at the insurer's option.

Which of the following statements is true regarding return of premium term insurance?

The coverage is expensive and is not free when time value of money is considered.

Which of the following statements regarding the accidental death benefit rider (also known as double indemnity) is true?

The death benefit is doubled only if an accidental injury is the direct cause of death and death occurs prior to a specified age.

According to the law of large numbers, what should happen as an insurance company increases the number of loss exposures that it insures?

The difference between actual and expected results should decrease.

Which of the following statements about the waiver-of-premium provision in life insurance is true?

The disability must occur before a stated age, such as 65, for premiums to be waived.

All of the following are requirements that must be satisfied before premiums are waived under a waiver-of-premium provision EXCEPT

The insured must satisfy a 2-year waiting period.

Which of the following statements about subrogation is true? A) It is used primarily for losses paid under life insurance policies. B) It allows the insurer to sue its own insured who is negligent. C) The insured's right to collect benefits may be forfeited if the insured interferes with the insurer's subrogation rights after a loss occurs. D) The insurer is required to exercise its subrogation rights.

The insured's right to collect benefits may be forfeited if the insured interferes with the insurer's subrogation rights after a loss occurs.

What is the practical effect of an insurance policy being a conditional contract?

The insurer can refuse to a pay claim if the insured has not complied with all policy provisions.

Which of the following statements about an excess insurance plan is true?

The insurer does not participate in a loss until the loss exceeds the amount the firm has decided to retain.

All of the following statements about the interest settlement option are true EXCEPT

The minimum guaranteed interest rate is usually equal to the prime rate.

Which of the following statements about the guaranteed purchase option is true? A) It is usually available with term insurance policies. B) The premium when an option is exercised is based on the insured's age at the time the original policy was issued. C) The option permits the insured to purchase specified amounts of life insurance in the future even if the insured has become uninsurable. D) If a guaranteed purchase option expires without being used, it can be exercised at a later date.

The option permits the insured to purchase specified amounts of life insurance in the future even if the insured has become uninsurable.

What is the practical effect of an insurance contract being a contract of adhesion?

The policy is interpreted in the insured's favor if the policy contains any ambiguities or uncertainties.

Which of the following statements about life insurance policy loans is true?

The policyholder must pay interest on a life insurance policy loan.

Which of the following statements about variable life insurance is true?

The policyowner has the option of investing the cash value in several investment accounts.

Which statement is true regarding the advanced premium tax credits for individuals and families under the Affordable Care Act?

The tax credit is based on income and is designed to limit the amount spent on health insurance premiums to make the insurance affordable.

Life insurance policy proceeds can be paid to a trustee upon the death of the insured. All of the following statements concerning payment of proceeds to a trustee are true EXCEPT

The trustee is not permitted to accept a fee for rendering services.

Which of the following statements about a priori probabilities is correct?

They are objective probabilities that can be determined by deductive reasoning.

All of the following statements about endorsements and riders are true EXCEPT

They are primarily used to circumvent legislation requiring specific policy provisions

Which of the following statements about mandatory provisions in individual health insurance policies is true?

Under the reinstatement provision, a health insurance policy that has lapsed can be put back in force.

Which of the following is implied by the requirement that a loss should be determinable and measurable to be insurable?

both I and II

Which of the following statements about a typical accidental death benefit rider is (are) true?

both I and II

Which of the following statements about accelerated death benefits riders is (are) true?

both I and II

Which of the following statements about hedging is (are) true?

both I and II

Which of the following statements about high deductible health insurance plans is (are) true?

both I and II

Which of the following statements about problems arising from the use of a coinsurance clause is (are) true?

both I and II

Which of the following statements about the Linton yield is (are) true?

both I and II

Which of the following statements about the insurance industry as a source of investment funds is (are) true?

both I and II

Which of the following statements about the traditional net cost method of measuring the cost of life insurance is (are) true?

both I and II

Which of the following statements about torts is (are) true?

both I and II

Which of the following statements concerning individual medical expense insurance is (are) correct?

both I and II

Which of the following statements is (are) true concerning benefit payments under long-term care insurance?

both I and II

Which of the following statements regarding insurance and hedging is (are) true?

both I and II

Which statement about a company's cost of risk is (are) true?

both I and II

Which statement about the incontestable clause is true?

both I and II

Bob purchased insurance on his home with an insurer that was not licensed to do business in the state. In this case, which requirement to form a binding insurance contract is lacking?

competent parties

Hank bought a farm that had an old barn. He noticed one day that the roof of the barn was swaying in the wind. Hank went to see his insurance agent and he insured the barn for $20,000. The agent didn't ask if the roof might collapse, and Hank didn't say anything about it. One week later there was a strong wind and the roof collapsed. Assuming the insurer can prove it, under what legal grounds could the insurer deny payment of the claim?

concealment

The policy provision requiring the filing of proof of loss with the insurer is an example of a(n)

condition

Janet hit a wall causing a large dent in the fender of her car. She was busy at work and delayed reporting the damage to her insurer for 9 months. When she finally reported the claim, her insurer denied payment, stating, "Although such a loss is usually covered, you are required under the terms of the contract to provide prompt notification in case of loss." The prompt notification requirement is an example of a(n)

condition.

The section of the insurance policy that includes provisions that qualify or limit the insurer's promise to perform is the

conditions.

The cost-of-living rider typically bases increases in the policy face value on changes in the

consumer price index.

Which of the following is a post-loss risk management objective?

continuing operations

Ted's insurance claim was denied by XYZ Insurance Company. When Ted inquired why the claim was denied, he was told to, "Read the exclusion on page 5 of the policy." Ted read the exclusion. In his opinion, the exclusion was poorly worded and vague. If a court of law agrees with Ted's assessment of the exclusion, Ted may still be able to have his claim paid by the insurer because insurance contracts are

contracts of adhesion.

Tamara purchased a term insurance policy when she had high life insurance needs and limited income. Now Tamara can afford whole life insurance. What term life insurance provision will permit Tamara to switch her term insurance to whole life insurance without having to show that she is still insurable?

conversion provision

A useful measure for an organization to monitor is the total expenditures for treating loss exposures including retained losses, loss control expenses, insurance premiums, and other related expenses. This measure is called the organization's

cost of risk

Marcus is concerned that inflation will erode the purchasing power of the face value of his life insurance policy. His agent suggested that Marcus add a provision that allows him to purchase one-year term insurance equal to the percentage change in the consumer price index without having to demonstrate insurability. This provision is called a(n)

cost-of-living rider.

The effect of an annual out-of-pocket limit in an individual medical expense policy is to

cover 100 percent of eligible medical expenses after an insured has incurred a specified amount of annual out-of-pocket expenses.

Dave purchased a life insurance policy. The policy is nonparticipating and the cash values are based on the insurer's present mortality, investment, and expense experience. After 2 years, the insurer will recalculate the premium based on the mortality, investment, and expense experience at that time. Dave purchased

current assumption whole life.

Laura Evans is risk manager of LMN Company. Laura decided to retain certain property loss exposures. Which of the following is a method that Laura can use to fund the retained property losses?

current net income

Michael wants to make sure that life insurance proceeds are available to pay his outstanding mortgage balance if he dies. He purchased a type of life insurance in which the amount of coverage gradually declines, just as his outstanding mortgage balance gradually declines. This type of life insurance is called

decreasing term insurance.

An elimination (waiting) period is an example of a(n)

deductible.

The first step in "shopping for life insurance" is to

determine if you need life insurance.

Frazier Electric keeps a paper copy of business records at the company's headquarters. The company also has two back-up copies of business records stored in electronic files. The electronic files are kept in the event the paper records are damaged or destroyed. The back-up files illustrate which of the following risk control techniques?

duplication

All of the following are proposed solutions to the medical malpractice problem EXCEPT

eliminating arbitration panels to resolve disputes.

All of the following are examples of tort reform proposals EXCEPT

eliminating caps on noneconomic damages.

Shauna hurt her back and was unable to work. She filed a claim under her disability income insurance policy. Under terms of the policy, a period of time must pass between when the injury occurred and when the insurer begins to replace lost earnings. This time period is called a(n)

elimination (waiting) period.

All of the following are benefits to society that result from insurance EXCEPT

elimination of moral hazard.

A provision in a disability income insurance policy that requires a person to be disabled for 60 days before receiving benefits is an example of a(n)

elimination period.

When using the needs approach, several "special needs" should be considered. One special need is money to cover unexpected events, such as major car repairs, dental bills, or home repairs. Money set aside for this purpose is called a(n)

emergency fund.

The doctrine of respondeat superior applies to a(n)

employer's liability for a negligent employee.

Which of the following may give rise to imputed negligence?

employer-employee relationships

A name that encompasses all of the major risks faced by a business firm is

enterprise risk

Katelyn was just named Risk Manager of ABC Company. She has decided to create a risk management program which considers all of the risks faced by ABC—pure, speculative, operational, and strategic—in a single risk management program. Such a program is called a(n)

enterprise risk management program.

Al was named the beneficiary in his mother's life insurance policy. His mother died during the contestable period. The insurer denied payment, citing a material misrepresentation on the application. Al believes the insurer should pay the claim because the misrepresentation occurred on the application, and the application is not part of the formal agreement between the insurer and the policyholder. Which provision protects the insurer by making the application part of the formal agreement between the parties to the contract?

entire contract clause

A life insurance contractual provision protects the beneficiary by not permitting the insurer to introduce outside information to deny payment of the claim. Such outside information might be notes that the agent took while the insured completed the application. This contractual provision is the

entire contract clause.

The Affordable Care Act requires all new medical expense plans to provide a comprehensive set of coverages and services. This comprehensive set of coverages and services that must be provided are called

essential health benefits.

A common use of second-to-die life insurance is

estate planning.

Liability may arise because of a method of collecting oil or natural gas. Under this collection method, a high-pressure flow of fluid is injected underground. This collection method is called

hydraulic fracturing.

Frank asked his company's employee benefits director if his group health coverage could be converted to individual coverage. The benefits director said, "Yes, you can convert to an individual policy, and the coverage is identical to your group coverage." Frank quit his job and converted to an individual policy. Six months later he filed a claim. He was dismayed to learn the conversion policy was more limited compared to the group coverage, and his claim was denied. What legal doctrine will allow Frank to bring a successful legal action against his former employer because he was financially harmed due to his reasonable reliance upon a representation of fact?

estoppel

ABC Insurance retains the first $1 million of each property damage loss and purchases reinsurance for that part of any property loss that exceeds $1 million. The insurance for property losses above $1 million is called

excess insurance

Morris Company self-insures its workers compensation loss exposure. The risk manager of Morris Company is concerned about the possible impact of a single catastrophic claim. She decided to set a retention limit of $500,000 per-claim, and to purchase insurance that will be begin to pay once Morris Company has paid $500,000 on a single claim. The insurance the risk manager purchased is called

excess insurance

A legal reserve in life insurance is a result of

excess premiums in the early policy years being invested at compound interest.

The exclusion of flood in a homeowners policy is an example of an

excluded peril

ABC Insurance Company calculated the amount that it expected to pay in claims for each policy sold. Rather than selling the insurance for the amount it expected to pay in claims, ABC added an allowance to cover the cost of doing business, including commissions, taxes, and acquisition expenses. This allowance is called a(n)

expense loading.

The premium that insurance companies charge does not cover the cost of expected losses only. The premium must also cover the cost of compensating agents and other costs of doing business. The amount added to the pure premium to cover these costs is called the

expense loading.

Powers specifically conferred on an agent to act on behalf of a principal are

express authority.

If a life insurance policy lapses for nonpayment of premiums, and the policyholder has not elected another option, which nonforfeiture option usually goes into effect in most policies?

extended term insurance

Which of the following is a standard nonforfeiture option?

extended term insurance

The net amount at risk for an ordinary life insurance policy is the difference between the

face amount of the policy and the legal reserve.

Some courts have ruled that an alternative to "replacement cost less depreciation" should be used to determine the actual cash value of a property loss. Under this alternative, the value of property lost is determined by the price a willing buyer would pay a willing seller for the property in a free market. This method of determining actual cash value is called the

fair market value method.

A discount store chain is concerned that cashiers might steal money from cash registers. To provide protection against theft by the cashiers, the discount store chain can purchase a

fidelity bond.

One of the speculative financial risks considered in an enterprise risk management program is the risk of loss because of adverse changes in commodity prices, interest rates, foreign exchange rates, and the value of money. This risk is called

financial risk

Jane purchased a life insurance policy on her own life and named her daughter, Cheryl, as beneficiary. Cheryl has a history of not managing money well. Jane wants the death benefit paid to Cheryl in monthly installments over 20 years. Which settlement option should Jane pre-select for Cheryl?

fixed period

All of the following will support an insurable interest for purposes of purchasing property and liability insurance EXCEPT

former ownership of property.

James was injured in an auto accident caused by another motorist's negligence. He received severe facial lacerations and injured his back in the accident. In payment for his pain, suffering, and disfigurement, losses which cannot be specifically itemized, James will receive

general damages.

Which of the following is a form of casualty insurance?

general liability insurance

Inland marine insurance provides coverage for

goods being shipped on land.

Ellen purchased a health insurance policy. Under the provisions of the Affordable Care Act, which of the following renewal provisions must the insurer use in the policy?

guaranteed issue

Because of the Affordable Care Act, all new medical expense plans that offer individual and group coverage must accept all individuals and employers in the state who apply for coverage. These insurers are required to continue to renew the coverage at the option of the individual or plan sponsor. Thus, under the Affordable Care Act, the renewal provision is

guaranteed issue.

Malcolm would like to purchase life insurance. He is concerned that he might need additional life insurance in the future and that he might be uninsurable at that time. What provision can Malcolm add to his life insurance policy that will permit him to purchase additional life insurance at specified times in the future without providing evidence of insurability?

guaranteed purchase option

Kevin has an individual disability income policy that his insurer agrees to keep in force until age 60. However, the company has the right to increase the premium each year for the underwriting class in which Kevin has been placed. Which renewal provision is found in Kevin's policy?

guaranteed renewable

Which of the following types of loss exposures are best handled by the use of avoidance?

high-frequency, high-severity loss exposures

Cal was just hired as XYZ Company's first risk manager. Cal would like to employ the risk management process. The first step in the process Cal should follow is to

identify potential losses faced by XYZ Company.

The authority of an agent to perform all incidental acts necessary to fulfill the purposes of the agency agreement is called

implied authority.

Under certain conditions, the wrongful acts of one person can be attributed to another person. This practice is called

imputed negligence.

Greta purchased a long-term care policy. Under a typical policy, Greta's eligibility for benefits may be triggered by

inability to perform activities of daily living.

To calculate a human life value, it is necessary to deduct certain costs from a person's average annual earnings. These costs include

income taxes.

Bruce lied about his health history when he purchased a life insurance policy. He died 3 years after the policy was issued. Which life insurance policy provision will require the life insurer to pay the beneficiary even though Bruce lied on the application?

incontestable clause

All of the following are social costs associated with insurance EXCEPT

increased cost of capital.

The Affordable Care Act has provisions that improve the quality of health care and lower costs. All of the following are examples of these provisions EXCEPT

increasing the number of medical specialists and reducing the number of primary care physicians.

Ryan decided to review his personal risk management program. His car is 10 years old, and he would receive little money from his insurer if the car was damaged or destroyed. Ryan decided to drop the physical damage insurance on the car. From a risk management perspective, dropping the physical damage insurance on the car is best described as

increasing the use of retention in the risk management program.

Louise was in a hurry and tried to cross the street in the middle of the block rather than at a street corner. A car struck her. Even though Louise placed herself in danger, she may still be able to collect for her injuries if the driver had an opportunity to avoid hitting her but failed to do so. This rule is called the

last clear chance rule.

Taylor Tobacco Company is concerned that the company may be held liable in a court of law and ordered to pay a large damage award to a smoker harmed by the company's cigarettes. The characteristics of the judicial system that increase the frequency and severity of loss are known as

legal hazard

Mark owns a bar. The bar has a back room where Mark has some slot machines. Mark lets some of his patrons play the machines, and Mark keeps any profits. This type of gambling is illegal where Mark lives. Mark wanted to purchase insurance in case his slot machines were confiscated by the police. Such an insurance contract would not be enforceable. Which requirement needed to form a valid insurance contract is missing?

legal purpose

Bert purchased a life insurance policy 4 years ago. He inadvertently stated that he was 1 year younger than his actual age. If Bert dies today, how much will the insurance company pay?

less than the policy face value

Janet is the beneficiary of her uncle's $200,000 life insurance policy. When her uncle died, Janet selected a settlement option that pays monthly benefits for as long as she lives. If Janet dies before receiving $200,000, payments will continue to a contingent beneficiary until a total of $200,000 has been paid. What settlement option did Janet select?

life income with guaranteed total amount

Deductibles are not used in which of the following type of insurance?

life insurance

Which of the following is an example of private insurance?

life insurance

A life insurance policyholder may no longer need life insurance. Such a policyholder may sell the policy to a third party for more than its cash value. The purchaser becomes the new beneficiary and is responsible for subsequent premium payments. Such a financial transaction is called a(n)

life settlement

Which of the following is a noneconomic cost associated with premature death?

loss of a parental role model

All of the following are examples of personal risks EXCEPT

loss of business income

The U.S. government is concerned that terrorists might try to crash a vehicle loaded with explosives into a U.S. embassy in a foreign country. Inside the gate to the embassy, they installed steel and cement posts in the road. These posts can be raised up from the ground to form a barrier against suicide bombers. The posts can be lowered back into the ground to allow safe vehicles to pass. This physical barrier system illustrates which risk management technique?

loss prevention

Following good health habits can be categorized as

loss prevention.

The worst loss that could ever happen to a firm is referred to as the

maximum possible loss.

Property insurance policies contain declarations, conditions, definitions, exclusions, and an insuring agreement. However, some policy terms, such as subrogation, cancellation, other insurance, and assignment do not fall into these categories. The part of an insurance contract in which these provisions can be found is the

miscellaneous provisions.

When Ben applied for life insurance, he was asked on the application if he smoked or used tobacco products. Ben answered "No." In reality, Ben smokes two packs of cigarettes a day. The policy was issued at the "preferred, nonsmoker rate." If Ben dies 6 months after the policy is issued, upon what grounds will the insurer be able to legally deny the claim?

misrepresentation

A false material statement made by an applicant for insurance is an example of

misrepresentation.

A whole life insurance policy in which premiums are reduced for an initial period (e.g. 3 years) and are higher thereafter is an example of a

modified life policy.

Faking an accident to collect insurance proceeds is an example of

moral hazard

Curt borrowed money from a bank to purchase a fishing boat. He purchased property insurance on the boat. Curt had difficulty making loan payments because he did not catch many fish, and fish prices were low. Curt intentionally sunk the boat, collected from his insurer, and paid off the loan balance. This scenario illustrates the problem of

moral hazard.

LMN Insurance sells homeowners insurance. The LMN homeowners policy combines property and casualty insurance in the same contract. Insurance policies combining property and casualty coverage in the same contract are called

multiple-line policies.

Failure to exercise the degree of care required by law to protect others from harm is called

negligence

Consumer experts typically recommend which of the following rules when purchasing life insurance?

neither I nor II

Which of the following statements about a calendar-year deductible is (are) true?

neither I nor II

Which of the following statements about beneficiary designations is (are) true?

neither I nor II

Which of the following statements about life income settlement options is (are) true?

neither I nor II

Which of the following statements is (are) true concerning settlement options?

neither I nor II

Which of the following statements about financial risk is (are) true?

neither I or II

Rapid inflation, cyclical unemployment, war, hurricanes, and floods are all examples of

nondiversifiable risks.

A restaurant owner leased a meeting room at the restaurant to a second party. The lease specified that the second party, not the restaurant owner, would be responsible for any liability arising out of the use of the meeting room, and that the restaurant owner would be "held harmless" for any damages. The restaurant owner's use of the hold-harmless agreement in the lease is an example of

noninsurance transfer.

Brad started a pest control business. To protect his personal assets against liability arising out of the business, Brad incorporated the business. Brad's use of the corporate form of organization to shield against personal liability claims illustrates

noninsurance transfer.

Heather sued Robert for injuries suffered in an automobile accident. Based on the facts presented, the jury concluded that Heather was 40 percent at fault in the accident and Robert was 60 percent at fault. Under the common law doctrine of contributory negligence, the jury should award Heather

nothing

The long-run relative frequency of an event based on the assumption of an infinite number of observations with no change in the underlying conditions is called

objective probability

A special form of planned retention by which part or all of a give loss exposure is retained by the firm is called

self-insurance.

ABC Insurance Company plans to sell homeowners insurance in five Western states. ABC expects that 8 homeowners out of every 100, on average, will report claims each year. The variation between the rate of loss that ABC expects to occur and the rate of loss that actually occurs is called

objective risk.

Chris applied for life insurance and paid the first premium on Monday. She was given an insurability premium receipt which specified that coverage was effective on the date of the application or the date of the medical exam, whichever is later. She took the medical exam the following Thursday. She was found to be in perfect health. On which day was her coverage effective?

on Thursday when she passed the medical exam

When must an insurable interest legally exist in life insurance?

only at the inception of the policy

At what point in time must an insured meet the coinsurance requirement in a property insurance policy in order to avoid having to pay a portion of the loss?

only at the time of loss

When must an insurable interest legally exist in property insurance for an insured to receive payment for a loss from the insurer?

only at the time of the loss

A pure risk is defined as a situation in which there is

only the possibility of loss or no loss.

Most family heads need substantial amounts of life insurance. However, with limited income, money spent on life insurance reduces the amount of discretionary income available for other high-priority needs. What an insured person gives up when he or she purchases life insurance instead of using the premium dollars for other purposes is called the

opportunity cost of buying life insurance.

An insurance policy provision that specifies how a property loss will be settled if more than one property insurance policy covers the loss is the

other insurance provision.

Homeowners insurance policies usually cover resident relatives of the named insured who are under age 24 and who are full-time students away from home. Under the homeowners policy, these full-time students are considered

other insureds.

Which life insurance policy provision specifies that it is the policyholder, and not the insured or beneficiary, who possesses all contractual rights while the policy is in force?

ownership clause

All of the following are characteristics of the liability risk that most people face EXCEPT

owning liability insurance eliminates the possibility of being held legally liable.

The inability of the insured to perform some but not all of the important duties of his or her occupation is called

partial disability.

Barb, who is self-employed, is the main breadwinner for her family. Barb does not have disability income insurance because she has never stopped to consider the impact of a long-term disability upon her family. Barb's treatment of the risk of disability is best described as

passive retention

David never stopped to consider the possible consequences of a long-term, permanent, disability. So David did not include disability income insurance in his personal risk management program. David is dealing with the risk of disability through

passive retention

One tort reform proposal is capping noneconomic damages. Noneconomic damages include

payment for pain and suffering.

A pharmaceutical company employs a young chemist who is responsible for three new patents last year and for the development of the company's two best-selling drugs. The company purchased a large life insurance policy on the chemist. In this case, the insurable interest requirement was met because of a(n)

pecuniary interest.

Brenda identified all of the pure loss exposures her family faces. Then she analyzed these loss exposures, developed a plan to treat these risks, and implemented the plan. The process Brenda conducted is called

personal risk management.

Cathy's car hit a patch of ice on the road. The car skidded off the road and hit a tree. The presence of ice on the road is best described as a(n)

physical hazard.

Dense fog that increases the chance of an automobile accident is an example of a

physical hazard.

Lisa has three fire insurance policies on her office building. The policy from company A is for $400,000, and the policies from companies B and C are for $100,000 each. If Lisa has a $360,000 loss, how much of the loss will be covered by each policy if the loss is settled on a pro rata basis by the insurers?

policy A: $240,000; policies B and C: $60,000 each

When Derrick became risk manager of Boller Company, he noticed that the company did not have a clear set of risk management objectives and a clearly-stated risk management philosophy. Derrick developed a written document stating the company's risk management objectives and risk management philosophy. This document is called a risk management

policy statement

Which of the following types of risks is normally uninsurable by private insurers?

political risks

A group of farmers agreed that if any farmer suffered a property loss, the loss would be spread over the entire group. In this way, each farmer is responsible for the average loss of the group rather than the actual loss that each farmer sustained. Which characteristic of insurance is embodied in this agreement?

pooling of losses

Prior to passage of the Affordable Care Act, insurance policies typically contained a provision excluding coverage for impairments that were present or were treated during a specified period prior to the effective date of the policy. This provision is a(n)

preexisting-conditions clause.

The human life value is defined as the

present value of the family's share of a deceased breadwinner's future earnings.

The purpose of other-insurance provisions is to

preserve the principle of indemnity.

Beth's disability income insurance policy provides benefits for accidental death, dismemberment, and loss of sight. The maximum amount payable under this benefit is known as the

principal sum.

Loss frequency is defined as the

probable number of losses that may occur during some period.

The worst loss that is likely to happen is referred to as the

probably maximum loss

Which of the following types of risks best meets the requirements for being insurable by private insurers?

property risks

Lionel purchased a $200,000 ordinary life insurance policy when he was 25 years old and had significant life insurance needs. Now Lionel is 50. His mortgage is almost paid-off and his children have left home and are financially independent. Lionel no longer wants to pay premiums, but he would like to have some permanent life insurance in force. Which nonforfeiture option could Lionel employ to meet these objectives?

reduced paid-up insurance

An insurance company that sells earthquake insurance in an area where earthquakes are possible has subjected itself to the risk of insolvency if a severe earthquake occurs. An insurer can safely sell earthquake insurance in this area if it shifts the risk of catastrophic loss to another insurer. The shifting of insured risk from one insurer to another insurer is called

reinsurance.

Apex Insurance Company wrote a large number of property insurance policies in an area where earthquake losses could occur. When the president of Apex was asked if she feared that a severe earthquake might put the company out of business, she responded, "Not a chance. We transferred most of that risk to other insurance companies." An arrangement by which an insurer that initially writes insurance transfers to another insurer part or all of the potential losses associated with such insurance is called

reinsurance.

One provision of the Affordable Care Act is designed to benefit young adults up to age 26. This provision allows these young adults to

remain covered under their parents' health insurance policies.

Maggie purchased a life insurance policy. She was concerned that if she became disabled, she would no longer be able to pay the premiums. Her agent added an amendment of the policy stating that if she became disabled, future premium payments would be waived. Such an amendment to a life insurance policy is called a(n)

rider

MLX Drug Company would like to market a new hypertension drug. While the Food and Drug Administration (FDA) was testing the drug, it discovered that the drug produced a harmful side effect. When MLX learned of the FDA's test result, MLX abandoned its plan to produce and distribute the drug. MLX's reaction illustrates

risk avoidance

Williams Company installed smoke detectors, a sprinkler system, and fire extinguishers in its new manufacturing facility. These devices are all examples of

risk control

The use of fire-resistive materials when constructing a building is an example of

risk control.

Members of Mid-South Petroleum Distributors, a trade group, had trouble obtaining affordable pollution liability insurance. The members formed a group captive that is exempt from many state laws that apply to other insurers. This group captive is called a(n)

risk retention group.

From the insured's perspective, the use of deductibles in insurance contracts is an example of

risk retention.

Purchasing health insurance illustrates the use of which personal risk management technique?

risk transfer

Tom and Nancy Boyle provide financial support for their two children. In addition, they provide financial support for Tom's aged father and Nancy's aged mother. The Boyle family can be described as a

sandwiched family

A U.S. athletic equipment company has production plants in several Pacific Rim countries. Each plant is divided into separate production areas using six-foot thick concrete walls. The construction method is designed to prevent fire from spreading from one production area to another. Using thick concrete walls so that fire does not spread to another production area illustrates which risk control method?

separation

In reviewing his company's operations, a risk manager noticed that all of the company's finished goods were stored in a single warehouse. The risk manager recommended that the finished goods be divided among three warehouses to prevent all of the finished goods from being destroyed by the same peril. Dividing the finished goods among three warehouses illustrates

separation.

Rather than storing all of its finished goods in a single location, Davis Company divides the finished goods between two warehouses. This simple risk control technique which is designed to limit losses should a warehouse fire occur is called

separation.

Discount Department Stores is a national retail chain. The company had one large, central warehouse. At the suggestion of the risk manager, the company decided to build four smaller regional warehouses so that a loss at the central warehouse would not be a catastrophic blow to the company's distribution system. Splitting the inventory between four regional warehouses illustrates which risk management technique?

seperation

James was injured in an auto accident caused by another motorist's negligence. To reimburse him for his hospital bills and lost earnings, items which can be specifically itemized, James will receive

special damages.

Jim and Paula Franklin started a dry cleaning business. The business may be successful or it may fail. The type of risk that is present when either a profit or loss could occur is called

speculative risk

One tort reform permits manufacturers to assert that as long as the product conformed to the prevailing technology and production methods at the time it was produced, it cannot be considered a defective product today. This defense is called the

state of the art defense.

Under the terms of Jenny's auto insurance policy, she must pay the first $500 of any physical damage loss to her vehicle before her insurer will pay anything. What type of deductible is included in Jenny's auto insurance policy?

straight deductible

Under state workers compensation programs, employers may not use common law defenses to defend against claims of workers who are injured on the job. In such cases, proof of a worker's injury is proof of responsibility of the employer. Because of this characteristic, workers compensation is an example of

strict (absolute) liability.

A situation in which a person is held legally liable even though fault or negligence cannot be proven is an example of

strict liabilty

An individual's personal estimate of the chance of loss is a(n)

subjective probability.

A student who has skipped many classes and not studied the course material was surprised to learn there was a test when he showed-up for class. The student's mental uncertainty about whether or not he will pass the test is called

subjective risk

Uncertainty based on a person's mental condition or state of mind is known as

subjective risk.

Sue's office building was damaged by a fire caused by a careless tenant. After paying Sue for the loss, the insurance company sued the tenant to recover its loss. This suit is based on the principle of

subrogation.

The principle of utmost good faith is supported by all of the following legal doctrines EXCEPT

subrogation.

All the following are common exclusions in a medical expense insurance policy EXCEPT

surgeons' fees.

Some members of Congress are concerned that if one or two large U.S. banks fail, it could lead to the collapse of the entire U.S. financial sector. This risk is called

systemic risk.

All of the following are elements of negligence EXCEPT

the ability to pay damages

Jan was injured in a work-related auto accident. She sued the other driver, and the case went to court. While questioning Jan, the defendant's lawyer asked if her injuries and lost earnings were covered under workers compensation. Jan's lawyer objected to the question. The judge ruled the question was improper and instructed the jury to disregard the question. Based on the judge's reaction to the question, which of the following rules is in force where this trial took place?

the collateral source rule

Nancy was injured when she drove her car through a stop sign and was struck by Philip's car. Philip saw Nancy and could have stopped. However, he failed to do so since he had the right-of-way. Nancy can recover damages from Philip under which of the following legal doctrines?

the last clear chance rule

Which of the following is an example of a commercial risk?

the loss of business income

What major feature distinguishes a participating policy from a nonparticipating policy?

the payment of dividends

Which of the following pieces of information is needed to calculate a person's human life value?

the person's cost of self-maintenance.

ABC Life Insurance Company insures both smokers and nonsmokers. Beth lied on her life insurance application, checking the box for "no" in response to the question of whether she smokes cigarettes or uses other tobacco products. Even though Beth smokes 10 to 15 cigarettes each day, the policy was issued at the "preferred nonsmoker rate." Beth's lie is materiel in this case because

the policy would have been issued on different terms if the insurer knew the true facts.

Mary is interested in comparing life insurance policies. Rather than looking at the cost per thousand, she would like to compare the rate of return earned on the savings portion of the policy. Which of the following would be of the most interest to Mary?

the policy's Linton Yield

Amy purchased a life insurance policy with the intent of committing suicide to pay all the debts that were burdening her family. If she commits suicide 9 months after the policy is purchased, and the insurer is able to prove that her death was a suicide, how much will be paid by the insurance company?

the premiums paid for the policy C) the policy's cash value

The general rule that ambiguity in insurance contracts is construed against the insurer is reinforced by an important legal principle. This principle states the insured is entitled to coverage under a policy that he or she would assume the policy would provide, and exclusions must be conspicuous, plain, and clear. This principle is known as

the principle of reasonable expectations.

Melody's car was damaged when another driver ran a stop sign and hit her car. Melody decided to collect from her own insurer and to let her insurer recoup the loss payment from the negligent driver who hit her. What fundamental legal principle is illustrated in this scenario?

the principle of subrogation

What is the intent of the family purpose doctrine?

to impose liability on the owner of an automobile for the negligence of immediate family members operating the automobile

All of the following are methods used to fund the Affordable Care Act EXCEPT

tort reform measures that reduce medical malpractice claims.

Each accounting period, Harris Company Department Store charges a bookkeeping account for its estimated shoplifting losses. The method that Harris Company Department Store uses to fund its retained shoplifting losses is a(n)

unfunded reserve

Which distinct legal characteristic of insurance contracts states that only the insurer's promise to perform is legally enforceable?

unilateral contracts

All of the following are historical reasons for the increase in health care expenditures in the U.S. EXCEPT

universal health insurance coverage.

Carl would like to purchase life insurance. He would also like to invest in a mutual fund. An agent told Carl about a form of life insurance in which Carl could select where the saving component is invested. This form of life insurance has fixed premiums and the cash value is not guaranteed. This type of life insurance is called

variable life insurance.

The practice of buying the life insurance policy of a terminally ill insured at a discount is referred to as a

viatical settlement.

Becky is considering the purchase of a whole life policy on her own life. She is concerned that if she becomes disabled, paying premiums will become a burden. Which provision can Becky attach to her life insurance policy to address this concern?

waiver-of-premium provision

The voluntary relinquishment of a legal right is called

waiver.

David owns a liquor store in a high-crime area. In order to obtain a reduced insurance premium, David promised to have a burglar alarm operating at the store when the store was closed. This agreement, which was incorporated into the insurance contract, is an example of a

warranty.

Robin plans to open a bar in a high-crime area. She had difficulty obtaining insurance for the business. She found an insurer willing to write the coverage, but only if Robin agreed to have a security alarm system in operation at all times when the business is closed. Robin's promise to have a security alarm system operational as a condition of having the insurance coverage in force is a

warranty.

Adverse selection occurs

when applicants with a higher-than-average chance of loss seek insurance at standard rates.

Under the needs approach, when is the dependency period of a surviving spouse assumed to end?

when the youngest child reaches age 18

Which of the following is classified as casualty insurance?

workers compensation insurance