Chapter 1

Insurance

A contract in which one party (the insurance company) agrees to indemnify (make whole) the insured party against loss, damage or liability arising an unknown event. Also a transfer of risk of loss. Instead of an individual being effected by unexpected losses, the insureds' losses are transferred over to the company.

Agent/Producer

A legal representative of an insurance company; the classification of producer usually includes agents and brokers; agents are the agents of the insurer.

Reciprocity/Reciprocal

A mutual interchange of rights and privileges.

Applicant or Proposed Insured

A person applying for insurance

What documentation grants express authority to n agent?

Agents contract with the principal.

Distinct Characteristics of an Insurance Contract:

Aleatory- unequal values. Unilateral- One-sided (only one party makes a promise); adhesion = only one party (insurer) prepares a contract and the other party (insured) accepts it as it is.

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?

Aleatory: Insurance contracts are aleatory, which mens there is an exchange of unequal amounts or values. The premium paid by the insured is small in relation to the amount that will be paid by the insurer in the event of a loss.

What is reinsurance?

An agreement between a ceding insurer an assuming insurer. Purpose of reinsurance is to protect insurers against catastrophic losses. The originating company that procures insurance on itself from another insurer is called the ceding insurer ( because it cedes, or gives, the risk to the reinsurer) The other insurer is called the assuming insurer.

In insurance an offer is usually made when

An applicant submits an application to the insurer

What is the definition of a unilateral contract?

An insurance contract is unilateral in that only one of the parties to the contract is legally bound to do anything. In a unilateral contract, only one of the parties to the contract is legally bound to do anything. The insured makes no legally binding promises. However, an insurer is legally bound to pay losses covered by a policy in force.

Broker

An insurance producer not appointed by an insurer and is deemed to represent the client.

Which of the following types of agent authority is also called "perceived authority"?

Apparent: Apparent (also known as perceived authority) is the appearance or the assumption of authority based on the actions, words, or deeds of the principal or because of circumstances the principal created. For example, if an agent uses insurer's stationery when soliciting coverage, an application may believe that the agent is authorized to transact on behalf of the insurer.

If an insurer meets the state's financial requirements and is approved to transact business in the state, it is considered to be :

Authorized.

If an insurer meets the state's financial requirements and is approved to transact business in the state, it is considered what type of insurer?

Authorized: before insurers may transact business in a specific state they must apply for and be granted a license or certificate of Authority from the sate of department of issuance and meet any financial (capital surplus) requirements set by the state. Insurers must obtain a Certificate of Authority prior to transacting business in this state.

Which of the following is the closest term to an authorized insurer?

Before insurers may transact business in a specific state, they must apply for and be granted s license or Certificate of Authority from the state department of license and meet any financial (capital and surplus) requirements set by the state. Insurers who meet the state's financial requirements and are approved to transact business in the state are considered authorized or admitted into the state as a legal insurer. This insurers who have not been approved to do business in the state are considered unauthorized or non admitted. Most states have laws that prohibit unauthorized insurers from conducting business in the state, except through licensed excess and surplus lines brokers.

A producer who fails to segregate premium monies from his own personal funds is guilty of

Commingling:

Hazards

Conditions or situations that increase the probability of an insured loss occurring.

An insurer neglects to play a legitimate claim that is covered under the terms of the policy. Which of the following insurance principles has the insurer violated?

Consideration:.The binding force in any contract is consideration. Considerations of the part of the insured is that payment of premiums and the health representation made in the application. Consideration on the part of the insurer is the promise to pay in the event of loss.

Representations are written or oral statements made by the applicant that are

Considered true to the best of the applicant's knowledge.

Contracts that are prepared by one party snd submitted to the other party on a take it or leave it basis are classified as

Contract of adhesion: The insured does not have any input into the contract, but simply adheres to the contract.

The requirement that agents must account for and promptly remit all insurance funds collected is known as what type of agent responsibility?

Fiduciary Responsibility

The requirement that agents not commingle insurance monies with their own funds is known as

Fiduciary Responsibility: Money collected with respect to an insurance transaction must be held in a position of trust by the agent or broker.

In insurance transactions, fiduciary responsibility means

Handling insurer funds in a trust capacity.

Events or condition that increase the chances of an insured loss occurring are referred to as

Hazards: Conditions such as lifestyle and existing health, or activities such as scuba diving are hazards and may increase the chance of a loss occurring.

Which authority is NOT stated in an agent's contract but is required for the agent to conduct business?

Implied Authority: Implied authority is not written in the agent's contract but is required in order for the agent to conduct business. Implied authority exists because not every single detail of an agents authority can be written.

Which authority is NOT stated in an agents contract but is required for the agent to conduct business?

Implied authority is authority that is not expressed or written into the contract, but which the agent is assumed to have in order to transact the business of insurance for the principal. Implied authority is incidental to and derives from express authority since not every single detail of an agent's authority can be spelled out in the written contract.

Which insurance principle states that if a policy allows for greater compensation than the financial loss incurred, the insured may only receive benefits for the amount lost?

Indemnity: the principle of indemnity stipulated that the insured can only collect the amount of the loss even in the policy is written with greater benefits.

Which statement regarding insurable risk is NOT correct?

Insured cannot be randomly selected. Granting insurance must not be mandatory, selecting insureds randomly will help the insurer to have a fair proportion of good risks to poor.

Speculative Risk

Involves the opportunity for either loss or gain. An example is gambling. These types of risks are not insurable.

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

Larger: According to the law of numbers, the larger a group becomes, the easier it is to predict losses. Insurers use this law in order to predict certain types of losses and set premiums. As the number of people in a risk pool increases, future losses become more predictable.

Insurance is a contract by which one seeks to protect another from

Loss: Insurance is. contract in which one party (insurance company) agrees to indemnify (make whole) the insured party against loss, damage or liability arising from an unknown event.

An individuals tendency to be dishonest would be indicative of a

Moral hazard: An applicant that is dishonest in completing an application for insurance or submitting fraudulent claims would be deemed a moral hazard and could be uninsurable from an underwriting standpoint.

A situation in which a person can only lose or have no change represents:

Pure risk: is the only type of risk that insurance companies are willing to accept.

Which services are associated with Standard&Poor's and AM Best?

Rating the financial strength of insurance companies. Following independent rating services- AM Best Fitch Standard and Poor's Moody's Weiss

Which type of insurance is based on mutual agreements among subscribers?

Reciprocal Insurance: A reciprocal is an insurance resulting from an interchange of reciprocal agreements of indemnity of among persons known as subscribers.

Installing deadbolt locks on the doors of a home is an example of which method of handling risk?

Reduction: steps taken to prevent losses from occurring. Reduction would include actions such as installing smoke detectors in our homes, having an annual physical to detect health problems early, or perhaps making a change in our life styles.

Pure Risk

Refers to situations that can only result in a loss or no change. No opportunity for financial gain. Only type of risk that insurance companies are willing to accept.

What method do insurers use to protect themselves against catastrophic losses?

Reinsurance This is a method where the reinsurer indemnifies the ceding insurer for part or all of the losses it sustains related to a policy issued previously.

In case of a loss, the indemnity provision in insurance policies

Restores an insured person to the same financial state as before the loss. Indemnity means insured cannot recover more the their loss.

Insurance is the transfer of

Risk: Insurance is the transfer of risk of loss from an individual to an insurance company, which, in turn, spreads the costs of unexpected losses to many individuals.

Moral Hazards

Tendencies towards increased risk. Involve evaluating the character and reputation of the proposed insured. Refer to those applicants who may lie on an application for insurance, or in the past, have submitted fraudulent claims against an insurer.

Which of the following would qualify as a competent party in an insurance contract?

The applicant has a prior felony conviction. The parties to a contract must be capable of entering into a contract in the eyes of the law. Generally, this requires that both parties be of legal age, mentally competent to understand the contract, and not under the influence of drugs or alcohol.

Peril is most easily defined as

The cause of loss insured against

Insurer (Principal)

The company who issues an insurance policy.

Not all losses are insurable, and there are certain requirements that must be met before a risk is a proper subject for insurance. These requirements include all of the following EXCEPT

The loss may be intentional.

Premium

The money paid to the insurance company for the insurance policy.

Insured

The person covered by the insurance policy. This person may or may not be the policyowner.

Policy Owner

The person entitled to exercise the rights and privileges in the policy.

In terms of parties to a contract, which of the following does NOT describe a competent party?

The person must have at completed secondary education. The partied to a contract must be capable of entering into a contract in the eyes of the law. Generally, this requires that both parties be of legal age, mentally competent to understand the contract, and not not under the influence of drugs or alcohol.

In insurance policies, contract ambiguities are automatically rules in favor of the insured. What privilege does the insurer have in order to balance this?

The right to determine the wording of a policy.

Risk

The uncertainty or chance of a loss occurring. Two types of risks. Pure and Speculative.

Which of the following is NOT a goal of risk retention?

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

Which of the following is a statement that is guaranteed to be true, and if untrue, may breach an insurance contract?

Warranty in insurance is a statement guaranteed to be true.

Captive Agent

an insurance agent who represents only one insurance company and who is, in effect, an employee of that company

Morale Hazard

carelessness or indifference to a loss because of the existence of insurance

Waiver

giving up ones known right or privilege. Ex: an insurance company receives an application with some information missing and issues the policy anyway.

Physical Hazard

individual characteristics that increases the chances of the cause of loss

Concealment

occurs when a person withholds a material fact that is crucial to making a decision. In insurance, this involves withholding information that would be crucial to underwriting decisions.