Basic Concepts - Section 1 Quiz

Alcoholism is an example of a:

Moral hazard (Hint: Moral hazards concern the persons ethics and habits. Alcoholism and drug addition are considered to be moral hazards)

A hazard that deals with attitudes, behavior and habits is an example of:

Moral hazard (Hint: Moral hazards deal with attitudes, behavior, and habits. Examples of moral hazards are drug abuse, dishonest claims, alcoholism, smoking, and driving over the speed limit)

What is the term that describes balancing preferred risks with poor risks, and average risks in the middle?

Profitable distribution of exposures (Hint: Balancing preferred risks with poor risks and average risks in the middle creates a profitable distribution of exposures)

The price of insurance for each exposure is referred to as:

Rate (Hint: Rate is the price of insurance for each exposure unit)

Which of the following is false?

Materiality of concealment is judged different than materiality of a misrepresentation (Hint: Materiality of a misrepresentation or concealment is determined the same)

A representation in an insurance contract qualifies as:

Am implied warranty (Hint: A representation cannot qualify an express provision in a contract of insurance but it may qualify as an implied)

An insurance contract promises to pay benefits based upon a future uncertainty such as death, or illness describes which feature of an insurance contract?

Aleatory (Hint: An aleatory contract is one where the benefit that is to be paid is contingent upon an uncertain future event (claim). An aleatory contract is defined as a mutual agreement in which the effects, in respect to both losses and advantages, depend on an uncertain event)

Which of the following statements is incorrect concerning warranties?

An implied warranty is must be included in the contract or some document signed by the insured and made part of the contract (Hint: An implied warranty is not in writing. It is an expressed warranty that must be included in the contract or some document signed by the insured)

Which of the following is not correct concerning warranties?

An implied warranty must be included in a document signed by the insured and made part of the contract (Hint: An implied warranty is not in writing. An express warranty is in writing and must be in application or some document signed by the insured and made part of the contract)

For an insurance contract to be enforceable, which of the following parties must be considered competent?

Applicant (Hint: The applicant must be competent. The insured and beneficiary need not be considered competent if they are not the same person as the applicant)

Insurance is a contract whereby one undertakes to indemnify another against:

Damage (Hint: According to the California Code of Insurance, Insurance is a contract whereby one undertakes to indemnify another against loss, damage or liability arising from a contingent or unknown event)

Balancing poor risk with preferred risk, with the average or standard risk being in the middle is known as what?

Distribution of exposures (Hint: A profitable distribution of risk exposures exists when poor and preferred risk are balanced, with stand risk making them up the middle)

For an insurance contract, utmost good faith means:

Each party relies upon the truthfulness of the other (Hint: Utmost good faith means each party has a reasonable expectation that the other party is not attempting to conceal or disguise relevant information and material facts)

Which of the following describes the situation when one party intentionally gives false information in order to benefit from unlawful gain?

Fraud (Hint: Fraud accurs when one party intentionally gives false information in order to benefit from unlawful gain)

A condition that leads to a loss is known as a:

Hazard (Hint: Hazards are conditions that increase or lead to possibility or severity of a loss)

The following information does NOT need to be communicated in a contract EXCEPT:

Information the other party deems confidential (Hint: The following information does not need to be communicated in a contract: a) known information; b) information that should be known; c) information the other party waives

When can a representation be altered or withdrawn?

It can be altered or withdrawn before the insurance is issued (Hint: A representation can be altered or withdrawn only before the insurance is issued)

Regarding the materiality of representations and concealment which is true?

It is determined by the effect of the facts on each party to the contract in determining his or her estimate of the disadvantages of the contract (Hint: If not knowing placed either party at a disadvantage then the representation or concealment was material. Materiality = how is it determined

The function of insurance is best described as:

It spreads financial risk over a large group so as to minimize the loss to any one individual (Hint: The purpose of insurance is to have losses of a few paid by the contributions of many who are exposed to the same risk)

The principle used as the basis for establishing probability of losses occurring in the insurance industry is:

Law of large number (Hint: The greater the number the more predictable the loss. If the insurer takes large enough number of past losses then it can predict future losses which allows them to set appropriate premiums)

Which of the following statements in regards to representations is false?

Representations can be altered or withdrawn after issuance of the contract (Hint: Representations are oral or written statements made at the time of application or before policy issuance, therefore they may only be withdrawn or altered before the contract is issued)

What is rescission?

Rescission is the revocation of a contract (Hint: Rescission is the revocation of a contract)

Underwriting is a process of:

Selecting, classifying, rating and determining coverages (Hint: Underwriting if the process is risk selection, classification, rating and determination of coverages)

Which of the following are the main types of risks?

Speculative and pure (Hint: There are two main types of risk: pure risk and speculative risk)

Insurable interest is best described as:

The policyowner must expect to suffer a loss when the insured dies or becomes disabled (Hint: Insurance interest requires that the policyowner be expected to benefit from the insured's continuing to live or enjoying good health or to suffer a loss when the insured dies or is disabled. An insurable interest must exist between the applicant and the insured. It does not need to exist between the applicant and the beneficiary)

What is meant by the term adverse selection?

The tendency of people with greater than average exposure to loss to purchase insurance (Hint: Adverse selection is when those more likely to have a loss purchase and keep their policies to a greater extent that those less likely to have a loss. This creates a disproportionate amount of losses to the insurer)

Which of the following is NOT part of a contract that is enforced by the law?

Tort law (Hint: For a contract to be enforced by the law it must contain these four elements: offer and acceptance, consideration, competent parties, and legal purpose)

In regards to insurance, risk can be defined as:

Uncertainty regarding loss (Hint: Risk is the possibility, uncertainty, or chance of loss. Insurance replaces this uncertainty with guarantees)

________ involves the exchange of a premium for a promise, which means that the insurer is the only party making a legally enforceable promise to pay a claim

Unilateral Contract (Hint: A unilateral contract involves the exchange of a premium for a promise, which means that the insurer is the only party making a legally enforceable promise to pay a claim. The insured is not legally responsible to continue paying premiums. A bilateral contract has an exchange of a promise for a promise)

A relinquishment of a known right is considered to be?

Waiver (Hint: Relinquishment or abandonment of a known right is considered a waiver)

Which of the following becomes part of the contract, is guaranteed to be true, and if untrue, may be grounds for rescinding the policy?

Warranty (Hint: Warranties are statements guaranteed to be true in all respects)

What are the four major elements of a contract?

agreement, competent parties, legal purpose, consideration (Hint: The four major elements of a contract are: agreement, competent parties, legal purpose, and consideration)

A hazard is best defined as:

anything that increase the chance of loss or severity of loss due to a peril (Hint: A Hazard is anything that increases the chance of loss or severity of loss due to a peril)

When large numbers of similar risks are combined in a group future claims become more:

predictable (Hint: According to the law of large numbers the larger within a group the more predictable the loss)

A peril is:

the actual cause of the loss (Hint: A Peril is the actual cause of the loss. Some examples are common perils are fire, wind, hail, collision with another car, theft, etc)

For insurable interest to exist:

the insured must establish that they actually own something to be insured (Hint: Insurable interest means that the insured must establish that they actually own something before they can insure it. This means that the insured has the possibility that they will suffer financial loss)

The law of large numbers is a principal that basically says:

the larger the amount of information gathered, the more reliable that information will be (Hint: The law of large numbers is a principle that basically says, the larger the amount of information gathered, the more reliable that information will be)

Ideally Insurance Risk means:

the risk is financially within reason and is reasonable to insure (Hint: The term ideally insurable risk means that the risk is financially within reason and is reasonable to insure)

Risk is:

the uncertainty or chance of a loss occurring (Hint: Risk is the uncertainty or chance of a loss occurring)