Chapter 1 Exam

Insurance Agents or Producers are licensed individuals appointed to transact insurance through a(n): A - Brokerage firm B - Business entity C - Insurance company D - Insurance agency

C - Insurance company Insurance Agents or Producers are licensed individuals appointed, by and on behalf of an insurer, to transact insurance through an admitted insurance company.

Which of the following is a characteristic of a Mutual Insurance Company? A - A policyholder is a voting member on the Board of Directors B - Dividends are returned profits C - Members are provided insurance by the company D - Stockholders have ownership

C - Members are provided insurance by the company A mutual insurer is owned by its members (not stockholders) and dividends are a return of unused premium (not a return of profit). Although policyholders are the owners of a mutual insurer, they are not voting members of the Board of Directors. Members are provided insurance by the company.

Which term is defined as the probability of loss? A - Peril B - Negligence C - Risk D - Liability

C - Risk Risk is the probability of loss.

In the insurance world, a potential for a loss is said to be: A - An insurable interest B - A peril C - A hazard D - A risk

D - A risk Risk, simply defined, is uncertainty concerning a loss.

When an insurance policy is not clear, the court will usually interpret in favor of the insured because: A - The policy is a Conditional contract B - The policy is an Aleatory contract C - The policy is a Bilateral contract D - The policy is a Contract of Adhesion

D - The policy is a Contract of Adhesion A Contract of Adhesion is a contract between two parties that does not allow for negotiation, i.e. take it or leave it. An insurance policy, drawn up by the insurer, is such a contract. Any ambiguity in the contract is construed against the party who drew it up.

A Board of Directors, elected by the policyholders, directs the company operations in which type of insurer? A - Mutual B - Reciprocal C - Stock D - Fraternal

A - Mutual A mutual company is owned by its policyholders.

In California, any person that manufactures and sells insurance coverage by way of insurance policies or contracts may be an: A - Agent B - Agency C - Insurer D - Insured

C - Insurer Insurers manufacture and sell insurance coverage by way of insurance policies or contracts.

Which of the following describes both the premium paid by the insured and the promise by the insurer to pay a covered loss and defend the insured in a lawsuit? A - Acceptance B - Consideration C - Legal Purpose D - Offer

B - Consideration Consideration is the term used to describe the rights, money, promises or property exchanged between the parties as part of a contract transaction.

Insurance Agents or Producers are licensed individuals appointed to transact insurance through a(n): A - Insurance agency B - Insurance company C - Business entity D - Brokerage firm

B - Insurance company Insurance Agents or Producers are licensed individuals appointed, by and on behalf of an insurer, to transact insurance through an admitted insurance company.

Which of the following best defines a hazard? A - It eliminates the chance of loss B - It increases the chance of loss C - It increases the amount of loss D - It is a cause of loss

B - It increases the chance of loss A hazard increases the likelihood of loss occurring.

A hazard is best defined as: A - A reduction in, decrease in, or disappearance of, value B - Something that increases the chance of a loss C - The possibility of a loss D - The loss itself

B - Something that increases the chance of a loss Hazards increase the chance of loss.

Which kind of contract is defined as an unequal exchange in value? A - Personal B - Unilateral C - Adhesion D - Aleatory

D - Aleatory An insurance policy is an aleatory contract because the insurer's obligation to pay a loss depends on uncertain events.

A person who handles insurer funds in a trust capacity is a(n): A - Producer B - Agency C - Agent D - Fiduciary

D - Fiduciary A fiduciary is a person who handles insurer funds in a trust capacity.

A person or entity that buys insurance for protection from loss of life or disability is a(n): A - Insurer B - Broker C - Beneficiary D - Insured

D - Insured An insured is a person or entity that buys insurance for protection from loss of life or disability.

A false statement in the application for insurance is ___________. A - Unilateral B - Misrepresentation C - Concealment D - Representation

B - Misrepresentation A misrepresentation can render the contract void if the misrepresentation is material to the risk.

Which type of risk involves the possibility of loss or gain? A - Stable B - Pure C - Insurable D - Speculative

D - Speculative A speculative risk is one where there is the possibility of gain or loss.

The process of evaluating a risk for the purpose of issuing insurance coverage is: A - Adverse selection B - Loss exposure C - Risk sharing D - Underwriting

D - Underwriting Underwriting is the process by which an insurer evaluates a risk for the purpose of issuing insurance coverage.

All of the following are true, except: A - A representation is a statement made in the application by the insured, which is guaranteed B - Under a unilateral contract, only one party is legally bound to future performance C - Proximate cause is the immediate or actual cause of a loss D- Reserves are accounting measurements of insurer's future obligations to the policyholder

A - A representation is a statement made in the application by the insured, which is guaranteed Representations are statements made by the insured that are true to the best of the insured's knowledge, but not guaranteed.

In an insurance contract the value that each party gives the other is said to be the: A - Consideration B - Subject matter C - Offer D - Acceptance

A - Consideration Consideration can take the form of money, goods, a promise to do something, or anything else that changes the legal position of the party. A contract cannot exist without consideration being given by both sides.

An individual faces the risk of economic loss in the event of property damage because of which of the following? A - Insurable interest B - Subrogation C - Limit of recovery D - Indemnity

A - Insurable interest Typically, if there is a risk of financial loss, there must be an insurable interest.

Which of the following states the parties to an insurance contract? A - The policyowner/insured and the insurance company B - The producer/agency and the insurance company C - The agent/agency and the insured D - The beneficiary and the insurance carrier

A - The policyowner/insured and the insurance company The parties to a life insurance contract are the policyowner/insured and the insurance company.

In an insurance contract the ___________ is something of value that is exchanged by the parties to the contract. A - Offer B - Consideration C - Condition D - Acceptance

B - Consideration Consideration can take the form of money, such as the premium an insured pays, or a promise to do something, such as the promise by the insurance company to pay for covered losses.

Which of the following risks may be protected against by insurance? A - Speculative risk B - Pure Risk C - Intentional Risk D - Catastrophic risk

B - Pure Risk A pure risk is one that may only result in a loss or no loss. Because there is no chance of gain, the risk is insurable. A catastrophic risk (e.g. nuclear explosion) is not generally insurable because the losses would be too great for a private insurer to underwrite.

Gambling is considered which of the following types of risk? A - Stable B - Speculative C - Pure D - Insurable

B - Speculative A speculative risk is one with both the possibility of gain or loss.

Under what circumstances is an insurer permitted not to communicate information which otherwise would be required? A - The insured deems it immaterial B - The insured waives the right to receive communication C - It is too costly for the insurer to provide D - The information is too complicated for the insured to completely understand

B - The insured waives the right to receive communication When a party waives its right to receive communication, the insurer is permitted not to communicate required information.

A policy is issued for a premium of $500 per year, but a condition that would have caused the premium to be substantially more was misrepresented in the application. This information is deemed by the insurer to be: A - Warrantied B - Non-disclosed C - Material D - Waived

C - Material A statement is material if its disclosure or lack of disclosure would change the insurer's decision to issue a policy for the same premium.

What does a material misrepresentation mean to an insurer? A - The insurers agent's training must be re-examined B - The insurer charged too little in premium C - The insurer may not have issued coverage if the correct information had been communicated D - The insurer's errors and omission coverage may or may not allow them to cover the claim

C - The insurer may not have issued coverage if the correct information had been communicated A material misrepresentation means the insurer would not have issued coverage, or the policyowner would not have accepted the policy, if the correct information had been communicated.

Which of the following is not a function of insurance? A - It protects against uncertainty and reduces anxiety B - It transfers risk from the insured to the insurer C - It is the substitution of a small certain expense for a large uncertain loss D - It is designed to be used to protect the insured from dishonest acts

D - It is designed to be used to protect the insured from dishonest acts The function of insurance is to protect the insured's assets against loss by insurable perils.

Which of the following risks may be protected against by insurance? A - Speculative risk B - Intentional Risk C - Catastrophic risk D - Pure Risk

D - Pure Risk A pure risk is one that may only result in a loss or no loss. Because there is no chance of gain, the risk is insurable. A catastrophic risk (e.g. nuclear explosion) is not generally insurable because the losses would be too great for a private insurer to underwrite.

Which type of risk involves the possibility of loss or gain? A - Insurable B - Stable C - Pure D - Speculative

D - Speculative A speculative risk is one where there is the possibility of gain or loss.