CH#1: General Insurance Q&A

Morale

A person who does not lock the doors or does not repair leaks shows an indifferent attitude. This person presents what type of hazard A) Legal B) Physical C) Morale D) Moral

Commingling

A producer who fails to segregate premium monies from his own personal funds is guilty of A) Commingling B) Larceny C) Embezzlement D) Theft

Contracts of adhesion

Contracts that are prepared by one part and submitted to the other party on a take-it-or-leave-it basis are classified as A) Aleatory contracts B) Binding contracts C) Contracts of adhesion D) Unilateral contracts

Hazards

Events or conditions that increase the chances of an insured loss occurring are referred to as A) Risks B) Perils C) Hazards D) Exposures

Certificate of Authority

In order for an insurer to legally transact insurance, it must obtain which of the following A) Authorization of Power B) Certificate of Authority C) Power of Authority D) Director's Decree

Express authority

The authority granted to an agent through the agent's contract is referred to as A) Absolute authority B) Express authority C) Apparent authority D) Implied authority

Premiums

All of the following are examples of risk retention EXCEPT A) Self-insurance B) Premiums C) Deductibles D) Copayments

Reinsurance System

All of the following are marketing arrangements used by insurers EXCEPT A) Reinsurance System B) General Agency System C) Direct Response Marketing System D) Independent Agency System

Apparent

An agent accepts the premium payment 35 days after it is due, telling the insured that there will not be a problem keeping the policy in force. This is an example of what type of agent authority. A) Assumed B) Apparent C) Express D) Implied

Pure risk

A situation in which a person can only lose or have no change represents A) Pure risk. B) Speculative risk. C) Adverse selection. D) Hazard

A peril

A tornado that destroys property would be an example of which of the following? A) A pure risk B) A loss C) A physical hazard D) A peril

Risks with higher probability of loss seeking insurance more often than other risks

Adverse selection is a concept best described as A) Underwriters slanting the odds in favor of the company B) Poor choices of applicants to be covered C) Only offering coverage to good risks D) Risks with higher probability of loss seeking insurance more often than other risks

The policy may be voided if it can be proven that the applicant was not capable of making a buying decision at the time of application

An agent tries to sell insurance over the phone to an applicant who appears to be confused, but is eventually able to give enough information for the application to be completed. After the policy was issued, the agent talked to the insured's family, and they explained tat the insured was recovering from a surgery and might have been under the influence of medication at the time of application. Which of the following is true A) The policy is not legal; agents cannot sell insurance over the phone B) The policy may be voided if it can be proven that the applicant was not capable of making a buying decision at the time off application C) The policy will remain in force as long as there are no material misrepresentations on the application D) The policy is legal since the applicant was able to give all required information

Concealment

An applicant knowingly fails to communicate information that would help an underwriter make a sound decision regarding coverage. This is an example of A) Concealment B) Waiver C) Fraud D) Breach of warranty

The policy will not be affected

An individual applies for a life policy. Two years ago he suffered a head injury from an accident, so he cannot remember parts of his past, but is otherwise competent. He has also been hospitalized for drug abuse, but does not remember this when applying for insurance. The insurer issues the policy and learns of his history one year later. What will probably happen A) Because the insured is currently not a drug user, his policy will not be affected B) The policy will not be affected C) The policy will be voided D) The insurer will sue the insured for committing fraud

Foreign

An insurance company is domiciled in Montana and transacts insurance in Wyoming. Which term best describes the insurer's classification in Wyoming A) Domestic B) Unauthorized C) Foreign D) Alien

Waiver

An insurance company receives an application with some information missing and issues the policy anyway. What is this called A) Estoppel B) Subrogation C) Aleatory D) Waiver

Direct response marketing

An insurance company sells an insurance policy over the phone in response to a TV ad. Which of the following best describes this act A) Independent agency marketing B) Illegal C) Insurance telemarketing D) Direct response marketing

Lloyd's association

An insurance organization that does not issue insurance policies but provides a meeting place for underwriters to conduct business is known as a A) Capital stock company B) Lloyd's association C) Fraternal society D) Mutual company

Captive agent

An insurance producer who by contract is bound to write insurance for the only one company or group of companies is classified as a/an A) Captive agent B) Solicitor C) Broker D) Independent producer

The insured will need a written consent of the insurer

An insured wants to transfer his person insurance policy to a friend. Under what conditions would this be possible A) It is impossible to transfer a policy B) The insured would have to surrender his policy to the insurer, and his friend could then ask to buy it C) The insured can transfer the policy to hid friend and then notify the insurer of the change D) The insured will need a written consent of the insurer

Consideration

An insurer neglects to pay a legitiment claim that is covered under the terms of the policy. Which of the following insurance principles has the insurer violated A) Consideration B) Good faith C) Representation D) Adhesion

The uncertainty or chance of loss

For the purpose of insurance, risk is defined as A) The uncertainty or chance of loss. B) The certainty of loss. C) The cause of loss. D) An event that increases the amount of loss

Larger

For the reported losses of an insured group to become more likely to equal the statistical probability of loss for that particular class, the insured group must become A) Smaller B) Older C) More active D) Larger

Something that increases the risk of loss

Hazard is best defined as A) A deliberate attempt to deceive B) Something that increases the risk of loss C) The uncertainty of loss D) Neglect to communicate a material fact

Reasonable expectations

If a court ordered payment for a loss that was not covered in the policy even if it was clearly worded, it would be ab example of which legal concept A) Nonforfeiture B) Indemnity C) Reasonable expectations D) Cease and desist

Authorized

If an insurer meets the state's financial requirements and is approved to transact business in the state, it is considered to be A) Qualified B) Approved C) Authorized D) Certified

Unilateral

If only one party to an insurance contract has made a legally enforceable promise, what kind of contract is it A) Unilateral B) Adhesion C) Conditional D) A legal (but unethical) contract

Restores an insured person to the same financial state as before the loss

In case of a loss, the indemnity provision in insurance policies A) Pays the insured a percentage of the loss above and beyond the loss. B) Pays the insured as much as 95% of the loss. C) Restores an insured person to the same financial state as before the loss. D) Allows the insured to collect 20% more than the actual loss

When an insurer's underwriter approves coverage

In forming an insurance contract, when does acceptance usually occur A) When an insurer's underwriter approves coverage B) When an insurer delivers the policy C) When an insurer receives an application D) When an insured submits an application

Unilateral

In insurance policies, the insured is not legally bound to any particular action in the insurance contract, but the insurer is legally obligated to pay losses covered by the policy. What contract element does this describe. A) Conditional B) Unilateral C) Unidirectional D) Aleatory

Handling insurer funds in a trust capacity

In insurance transactions, fiduciary responsibility means A) Maintaining a good credit record B) Being liable with respect to payment of claims C) Commingling premiums with agent's personal funds D) Handling insurer funds in a trust capacity

The completed application is submitted

In insurance, an offer is usually made when A) The completed application is submitted B) The insurer approves the application and receives the initial premium C) The agent hands the policy to the policyholder D) An agent explains a policy to a potential applicant

The person must have at least completed secondary education

In terms of parties to a contract, which of the following does NOT describe a competent party A) The person must be mentally competent to understand the contract. B) The person must have at least completed secondary education. C) The person must not be under the influence of drugs or alcohol. D) The person must be of legal age

Putting the client's best interests before their own

In what way can an agent demonstrate a high standard of ethics A) Making enough commissions to cover personal expenses B) Setting and meeting monthly production goals C) Recommending qualified retirement plans to each client D) Putting the client's best interests before their own

The applicant has a prior felony conviction

In which of the following exampled would a contract between an insurer and prospective insured be legal A) The applicant is a 12-year-old student B) The applicant is under the influence of medication at the time of application C) The applicant has a prior felony conviction D) The applicant is intoxicated at the time of application

Reduction

Installing deadbolt locks on the doors of a home is an example of which method of handling risk A) Transfer B) Self-insurance C) Reduction D) Avoidance

The loss may be intetional

Not all losses are insurable, and there are certain requirements that must be met before a risk is proper subject for insurance. These requirements include all of the following EXCEPT A) The loss must not be catastrophic B) There must be a sufficient number of homogeneous exposure units to make losses reasonably predictable C) The loss produced by the risk must be definite D) The loss may be intetional

The cause of loss insured agianst

Peril is most easily defined as A) The cause of loss insured against B) An unhealthy attitude about safety C) The chance of a loss occurring D) Something that increases the chance of loss

Promptly forwarding premiums to the insurance company

Pertaining to insurance, what is the definition of a fiduciary responsibility A) Promptly forwarding premiums to the insurance company B) Helping insureds to file claims C) Performing reviews of insured's coverage D) Offering additional coverage to clients

Consideration

Something of value exchanged between the insurer and the insured is considered an A) Legal capacity B) Consideration C) Offer D) Acceptance

Perils

The causes of loss insured against in an insurance policy are known as A) Perils B) Losses C) Risks D) Hazards

Is not honest about his health on an application for insurance

The insurer may suspect that a moral hazard exists if the policyholder A) Always drives over the speed limit. B) Is not honest about his health on an application for insurance. C) Is prone to depression. D) Is indifferent to activities that may be dangerous.

Utmost good faith

The insurer must be able to rely on the statements in the application, and the insured must be able to rely on the insurer to pay valid claims. In the forming of an insurance contract, this is referred to as A) Implied warranty B) Utmost good faith C) Reasonable expectations D) A warranty

Loss

The reduction, decrease, or disappearance of value of the person or property insured in a policy by a peril insured against is known as A) Exposure. B) Hazard. C) Risk. D) Loss

Fiduciary responsibility

The requirement that agents not commingle insurance monies with their own funds is known as A) Accepted accounting principal B) Fiduciary responsibility C) Premium accountability D) Express authority

Avoidance

The risk management technique that is used to prevent a specific loss by not exposing oneself to that activity is called A) Sharing B) Avoidance C) Transfer D) Reduction

Agent's contract with the principal

What documentation grants express authority to an agent A) Agent's insurance license B) Fiduciary contract C) State provisions D) Agent's contract with the principal

Guides describing company financial integrity

What insurance concept is associated with the names Weiss and Fitch A) Guides describing company financial integrity B) Policy dividends C) Types of mutual companies D) Index used by stock companies

One-sided: only one party makes an enforceable promise

What is a definition of a unilateral contract? A) One author: the company wrote the contract; the insured must accept it as written. B) If one party makes a condition, the other party can counteroffer. C) One-sided: only one party makes an enforceable promise D) Two or more parties go into a contract understanding there may be an unequal exchange of value

An insurer with a home office in another state

What is a foreign insurer A) An insurer with licensed agents who are citizens in more than one county B) An insurer with a home office in another state C) An insurer with a home office in another country D) An insurer with licensed agents doing business in other countries

A statement by the applicant that, upon discovery, would affect the underwriting decision of the insurance company

What is a material misrepresentation? A) Any misstatement by the producer B) Concealment C) A statement by the applicant that, upon discovery, would affect the underwriting decision of the insurance company D) Any misstatement made by an applicant for insurance

Reinsurance

What method do insurers use to protect themselves against catastrophic losses A) Reinsurance B) Indemnity C) Pro rata liability D) Risk management

Concealment

What term best describes the act of withholding material information that would be crucial to an underwriting decision A) Concealment B) Withholding C) Leading D) Breach of warranty

Transfer

When an individual purchases insurance, what risk management technique is he or she practicing A) Avoidance B) Sharing C) Retention D) Transfer

Consideration

When an insured makes truthful statements on the application for insurance and pays the required premium. it is known as A) Legal purpose B) Contract of adhesion C) Acceptance D) Consideration

Conditional

When both parties to a contract must perform certain duties and follow rules of conduct to make the contract enforceable, the contract is A) Conditional. B) Aleatory. C) Personal. D) Unilateral

Foreign

When doing business in this state, an insurance company that is formed under the laws of another state is known as which type of insurer A) Nonadmitted B) Foreign C) Domestic D) Alien

Implied

Which authority is NOT stated in an agent's contract but is required for the agent to conduct business A) Implied B) Apparent C) Assumed D) Express

Aleatory

Which of the following best describes the concept that the insured pays a small amount of premium for a large amount of risk on the part of the insurance company A) Subrogation B) Warranty C) Aleatory D) Adhesion

Fraternal benefit society

Which of the following entities is not an insurer but an organization formed to provide insurance benefits for members of an affiliated lodge or religious organization A) Stock company B) Reciprocal association C) Fraternal benefit society D) Mutual company

Reciprocal

Which of the following insurance options would be considered a risk-sharing arrangement A) Surplus lines B) Reciprocal C) Stock D) Mutual

Stock

Which of the following insurers are owned by stockholders who have the usual rights of ownership, including the right of voting A) Reciprocal B) Fraternal C) Stock D) Mutual

The loss must be catastrophic

Which of the following is NOT a characteristic of an insurable risk A) The loss must be catastrophic B) The loss must be due to chance C) The loss must be measurable D) The loss exposure must be large

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

Which of the following is NOT a goal of risk retention A) To minimize the insured's level of liability in the event of loss B) To reduce expenses and improve cash flow C) To increase control of claim reserving and claims settlements D) To fund losses that cannot be insured

Warranty

Which of the following is a statement that is guaranteed to be true, and if untrue, may breach an insurance contract A) Concealment B) Indemnity C) Representation D) Warranty

The trust that a client places in the producer in regard to handling premiums

Which of the following is an example of a producer's fiduciary duty A) An obligation to state every known fact about the policy the producer is selling B) A duty to base all transactions upon the principle of Utmost Good Faith C) The obligation to tell the truth to the best of one's knowledge D) The trust that a client places in the producer in regard to handling premiums

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

Which of the following is an example of apparent authority of an agent appointed by an insurer A) The agent puts up a sign with the insurer's logo without express permission B)The agent accepts a premium payment after the end of the grace period C)The agent accepts a premium payment during the grace period D)The agent has business cards and stationery printed

Driving recklessly

Which of the following is considered to be a morale hazard A) Engaging in illegal activities B) Driving recklessly C) Smoking D) Working as a firefighter

Loss

Which of the following is the basis for a claim against an insurance policy A) Material change B) Hazard C) Misrepresentation D) Loss

AM Best

Which of the following produces evaluations of insurers' financial status often used by state departments of insurance A) SEC B) AM Best C) NAIC D) Consumer's guide

Insureds cannot be randomly selected

Which statement regarding insurable risks is NOT correct A) Insurance cannot be mandatory B) The insurable risk needs to be statistically predictable C) An insurable risk must involve a loss that is definite as to cause, time, place, and amount D) Insureds cannot be randomly selected

Reciprocal insurance

Which type of insurance is based on mutual agreements among subscribers A) Reinsurance B) Reciprocal insurance C) Mutual insurance D) Limited liability

Policyholders

Who might receive dividends from a mutual insurer A) Stockholders B) Agents C) Policyholders D) Subscribers