OH P&C Chapter 2

D) stock company.

A company owned by the holders of its capital stock best describes a(n) A) foreign company. B) alien company. C) mutual company. D) stock company.

D)Represents more than one insurance company

A nonexclusive agent: A) Represents only direct writers B) Is a captive agent C) Works for a solicitor D)Represents more than one insurance company

C) attorney-in-fact.

A reciprocal exchanges functions in a manner similar to that of a mutual insurer and is managed by a(n) A) chartered property casualty underwriter. B) professional management service. C) attorney-in-fact. D) attorney-ex-officio.

C) loss.

A reduction in the value of an asset is known as a A) hazard. B) peril. C) loss. D) exposure.

A) Fraternal

A social organization which is licensed to issue insurance only to its members is an example of which type of insurer? A) Fraternal B) Reciprocal C) Stock D) Mutual

C) warranty. QUESTION RATIONALE A warranty is an absolute, literal fact that can be relied on all of the time.

A statement that can be relied on all of the time is called a(n) A) implied response. B) representation. C) warranty. D) all of the choices presented

B) reciprocal.

A unincorporated group of individuals sharing risk and managed by an attorney-in-fact is a A) mutual insurer. B) reciprocal. C) fraternal. D) surplus lines insurer.

C) selection against the company QUESTION RATIONALE Adverse selection involves an insurer being selected by an applicant with a greater-than-average chance of loss, like flood insurance. Insurers must carefully screen out these applicants with sound underwriting criteria.

Adverse selection is best characterized by what phrase? A) selection against both the company and the individual B) selection against an individual C) selection against the company D) none of the choices presented

B) Exclusive/captive

Agent Michelle is under contract with the ABC insurance company to represent and sell insurance only for ABC. This is an example of what type of agency system? A) Direct writer B) Exclusive/captive C) Direct response D) Independent

D) catastrophic perils. QUESTION RATIONALE In order for a risk to be insurable, it must fit into a large number of homogenous units, losses must be measurable and uncertain and they must cause an economic hardship. Catastrophic perils cannot be measured so they are not an element of an insurable risk.

All of the following are elements of an insurable risk, EXCEPT A) losses causing economic hardship. B) ascertainable losses. C) non catastrophic losses. D) catastrophic perils.

D) How much insureds are willing to pay

All of the following are taken into consideration when an insurer sets rates for insurance, except: A) Profit B) The cost of doing business C) The cost of losses that will be paid D) How much insureds are willing to pay

C) installing a smoke detector.

An example of loss reduction is A) increasing prices to cover shoplifting losses. B) selling an automobile and never driving again so you cannot possibly cause an auto accident, thereby reducing your chances of ever being sued. C) installing a smoke detector. D) demanding your tenant name you, the landlord, as additional insured on the tenant's insurance policy.

B) a company.

An individual licensed as an agent in his state represents A) the National Association of Insurance Commissioners. B) a company. C) an insured. D) a reciprocal.

D) alien insurer.

An insurance company organized under the laws of another country best describes a(n) A) unauthorized insurer. B) domestic insurer. C) foreign insurer. D) alien insurer.

D) Contract of adhesion

An insurance policy drafted by the company and offered to the insured for acceptance or rejection without negotiation is called a: A) Unilateral contract B) Personal contract C) Contract of subrogation D) Contract of adhesion

D) The insurance company is the only party that is legally obligated to perform under the insurance contract

An insurance policy is considered a unilateral contract because: A) The insurance company writes the policy provisions with little or no input from the insured B) The policy does not provide any benefit to the insured unless a claim is paid C) The insured must comply with certain conditions of the policy for a claim to be paid D) The insurance company is the only party that is legally obligated to perform under the insurance contract

B) foreign insurer.

An insurer authorized to solicit insurance business in this state and having its principal office in another state best describes a(n) A) stock insurer. B) foreign insurer. C) alien insurer. D) domestic insurer.

C) mutual insurer. QUESTION RATIONALE Insurers owned by the policyholders and not stockholders is known as a mutual insurer. If they show a profit, policyholders may receive a dividend.

An insurer that is owned by the policyholders and may pay a dividend to those policyholders if the company shows a profit, is known as a A) stock insurer. B) surplus lines insurer. C) mutual insurer. D) reciprocal insurer.

C) unauthorized insurer.

An insurer who has not been issued a Certificate of Authority by the Superintendent of Insurance for the state is most likely a(n) A) domestic insurer. B) alien insurer. C) unauthorized insurer. D) admitted insurer.

A) Risk retention group

An insurer whose activity consists of assuming and spreading risks among its members is known as: A) Risk retention group B) Pure offshore captive C) Reinsurer D) Insurance purchasing group

B) domestic insurer.

An insurer whose main home office is domiciled in the state where they write business is known as a A) alien insurer. B) domestic insurer. C) foreign insurer. D) surplus lines insurer.

B) surplus lines insurer. QUESTION RATIONALE Surplus lines companies can charge whatever they want and their policies can say whatever they want. They are NOT authorized to do business in the state and therefore not subject to state approved policy forms, rules and rates.

An unauthorized company writing business in the state that is not subject to state approved policy forms, rates, or rules is known as a A) mutual insurer. B) surplus lines insurer. C) stock insurer. D) reciprocal insurer.

D) the deliberate omission of a material fact from the agent or the company.

Concealment is defined as A) giving one word answers to the agent. B) having someone else fill out your insurance application. C) answering incorrectly on an insurance application. D) the deliberate omission of a material fact from the agent or the company.

C) payment of the premium. QUESTION RATIONALE Consideration in a contract is the item of value that a party brings to the contractual relationship.

In a property insurance contract, an insured's consideration is the A) recommendation of protection. B) selection of proper coverage. C) payment of the premium. D) promise to pay.

A) Law of Large Numbers. QUESTION RATIONALE Insurers need to collect from a large number of people to pay for the claims of a few people. The larger the number of risks insured the more accurate the claim predications become. This is the basis of the Law of Large Numbers.

Insurers must be able to predict with reasonable accuracy the number and the amounts of losses they can expect. This is the principle of A) Law of Large Numbers. B) Indemnity. C) Utmost Good Faith. D) Adhesion.

C) apparent

Kim shows up at the agent's office to pay her premium on her policy that cancelled last night. The agent accepts the premium and Kim believes her policy is paid. This is an example of what kind of agent authority? A) implied B) expressed C) apparent D) assumed

A) Alien insurer

Los Lobos insurance company is incorporated in Mexico, they write some business in the United States. In each state, Los Lobos would be referred to as a/an: A) Alien insurer B) Domestic insurer C) Foreign insurer D) Captive insurer

D) Fraternal Benefit Society insurer. QUESTION RATIONALE Since Mike belongs to the club, (Fraternity=Fraternal) he is eligible for the insurance program written by a Fraternal Benefit Society.

Mike belongs to the Loyal Order of Moose lodge #3441. He enrolls in the insurance program through the lodge. The insurer offering coverage is a A) reciprocal insurer. B) stock insurer. C) mutual insurer. D) Fraternal Benefit Society insurer.

B) Unilateral Contract.

Only one of the parties, the insurer, can be legally bound to honor their promise. This is an example of a A) Aleatory Contract. B) Unilateral Contract. C) Contract of Utmost Good Faith. D) Contract of Adhesion.

A) Select applicants

Producers or agents are typically granted the authority by an insurer to: A) Select applicants B) Reject insurance risks C) Waive policy exclusions D) Modify policy conditions

D) Conditional Contract.

Rules have to be followed in order for an insurance contract to work. This is an example of a A) Contract of Utmost Good Faith. B) Unilateral Contract. C) Contract of Adhesion. D) Conditional Contract.

A) Principle of Indemnity.

Sam is injured at work, he turns the claim into his personal health insurance, his wife's insurance since he is a covered spouse, and workers compensation. Sam is upset when he cannot collect from all three policies. This is an example of the A) Principle of Indemnity. B) Contract of Adhesion. C) Contract of Utmost Good Faith. D) Aleatory Contract.

D) Department of Insurance.

Sarah wants to find out how financially sound her insurance company is. She can check all of the following sources, EXCEPT A) Standard and Poors. B) Moodys. C) AM Best Company. D) Department of Insurance.

B) the doctrine of adhesion. QUESTION RATIONALE The customer is "stuck" with the way the policy is worded, so any vague wording will be ruled in the customer's favor. This is the doctrine of adhesion.

Since the policy is written by the insurer and the insured has no input in the wording, any vagueness or ambiguity will always be ruled in favor of the insured. This is known as A) a unilateral policy. B) the doctrine of adhesion. C) the doctrine of utmost good faith. D) the indemnification agreement.

C) peril. QUESTION RATIONALE Anything that will cause a loss is known as a peril. Fire, lightning and wind are examples of perils.

Something that will cause a loss is a A) exposure. B) risk. C) peril. D) hazard.

B) admitted/authorized insurer. QUESTION RATIONALE Applying for a certificate of authority to operate in the state and agreeing to abide by the laws and regulations of that state describes an admitted /authorized insurer in the state.

Swamp Mutual obtains a certificate of authority to do business in the state and agrees to abide by the state laws regulating the insurance business. Swamp Mutual is a(n) A) surplus lines insurer. B) admitted/authorized insurer. C) non admitted/unauthorized insurer. D) mutual insurer.

A) express QUESTION RATIONALE Express authority is what the agent contract says an agent can or cannot do while representing the insurer. "official authority" is a nonsense term.

The agent contract with an insurance company is an example of what type of agent authority? A) express B) official C) apparent D) implied

C) exposure. QUESTION RATIONALE Risk is the chance that a loss will occur. The amount of risk presented by the insured is the exposure. Underwriting will determine if that is something the insurer is willing to accept and what to charge in premium for it.

The amount of risk presented by the insured to the insurer is known as A) hazard. B) predictability. C) exposure. D) losses.

A) representations.

The answers on an insurance application are best described as A) representations. B) warranties. C) the expression of an opinion. D) feedback.

D) Aleatory Contract.

The insured pays a small premium and the insurer promises to pay a large amount if a covered loss occurs. This is an example of a A) Unilateral Contract. B) Contract of Utmost Good Faith. C) Contract of Adhesion. D) Aleatory Contract.

D) Contract of Utmost Good Faith.

The insurer relies on the application information to be truthful and the insured relies on the insurer to be truthful and fair in the claim settlement. This is an example of a A) Contract of Adhesion. B) Aleatory Contract. C) Unilateral Contract. D) Contract of Utmost Good Faith.

D) waiver.

The voluntary relinquishment or abandonment of a legal right under a valid contract is a(n) A) adhesion. B) estoppel. C) warranty. D) waiver.

D) Doctrine of Reasonable Expectations.

Theresa has a fire and has no idea where she put her property insurance policy. She hopes this loss is covered under the A) Aleatory Contract. B) Contract of Utmost Good Faith. C) Contract of Adhesion. D) Doctrine of Reasonable Expectations.

D) direct writer/response.

Tom sees an ad on TV for car insurance inviting him to use the web or call a toll free number for information. The insurer is using which of the following marketing distribution systems A) independent agent. B) captive agent. C) vending machines. D) direct writer/response.

B) insurance.

Transferring risk by accumulating funds best describes the concept of A) insurable interest. B) insurance. C) indemnity. D) occurrence.

B) uncertainty of loss QUESTION RATIONALE Not knowing for certain if an individual will suffer a financial loss defines risk. Risk can be further categorized as pure risk (chance of loss only) or speculative risk (chance of gain or loss).

What best describes the concept of risk? A) amount of loss B) uncertainty of loss C) cause of loss D) result of loss

C) written agreement QUESTION RATIONALE Oral contracts are acceptable in many states; having the contract in writing is not necessarily required. Common sense, however, points out the difficulties of enforcing the terms of the contract unless they are written.

What does NOT need to be present in order for a contract to be legally binding to both parties? A) offer and acceptance B) legal purpose C) written agreement D) consideration

D) reasonable inference QUESTION RATIONALE An agent's overall authority stems from three separate sources: express-authority granted by the company in an oral or written agreement (e.g., contract with insurer); implied-authority the public may believe an agent to have (e.g., if an agent issues policies, it is reasonable to expect the agent also issues endorsements); and apparent-authority created when action or inaction by the insurer gives the impression that the authority exists (e.g., binding authority).

What is NOT a type of agent authority? A) apparent B) implied C) express D) reasonable inference

D) adverse selection

What is NOT an essential element of a contract? A) consideration B) legal purpose C) competent parties D) adverse selection

C) all of the choices presented QUESTION RATIONALE Risk management techniques are methods for dealing with the impact and consequences of loss. Avoidance eliminates the chance of loss. Transfer shifts the responsibility to pay for the loss to someone else. Retention involves absorbing the consequences of the loss yourself.

What is a risk management technique for dealing with the consequences of loss? A) retention B) transfer C) all of the choices presented D) avoidance

A) all of the choices presented

What is an element of a legal contract? A) all of the choices presented B) competent parties C) legal purposes D) consideration

C) both application and all statements made in it and initial premium paid to the sales representative QUESTION RATIONALE Valuable consideration is exchanged in a contract. The applicant gives the statements in the application as well as the premium dollars, while the insurance company gives its promise to pay in the event of a future loss.

What represents valuable consideration on behalf of the insured? A) application and all statements made in it B) neither application and all statements made in it nor initial premium paid to the sales representative C) both application and all statements made in it and initial premium paid to the sales representative D) initial premium paid to the sales representative

C) reinsurance QUESTION RATIONALE Reinsurance is a form of insurance that occurs between insurers when the reinsurer agrees to accept all or a portion of a risk covered by another company.

When insurers agree in advance to offer certain types of risks to reduce the risk of a catastrophic loss and a re-insurer agrees to accept them, what has occurred? A) treaty re-insurance B) reciprocal re-insurance C) reinsurance D) facultative re-insurance

A) groups of individuals who band together to accept risks and are responsible for the risks they accept

Which of the following best describes a Lloyd's Association and Risk Retention Groups? A) groups of individuals who band together to accept risks and are responsible for the risks they accept B) domestic insurers writing high risk auto insurance C) alien insurers D) insurers authorized to do business in the state

A) sharing in claim costs

Which of the following is a method for managing risk? A) sharing in claim costs B) claim submission C) being responsible for someone else's actions D) being truthful on an insurance application

B) Barry thinks he should buy insurance on his house because a neighbor's home was once hit by lightning

Which of the following would be considered an insurable risk? A) Tina plans to leave her valuable necklace on the bus so she can report the loss and buy a new one with the insurance money. B) Barry thinks he should buy insurance on his house because a neighbor's home was once hit by lightning C) All of the people in the area of the San Andreas earthquake fault would like to buy insurance from the Equitable insurance company to cover possible loss by earthquake D) Tim wants to insure his $2000 barn against fire loss and an annual cost of $1500

D) Risk of loss is a speculative risk

Which one of the following is NOT an element of insurability? A) Cost of insurance must be affordable B) Risk of loss must represent a financial hardship C) Loss must be calculable D) Risk of loss is a speculative risk

A) applicant QUESTION RATIONALE The applicant submits a request for insurance, thus the offer. The home office underwriter either accepts the application as applied for or issues a counteroffer, which is either accepted or rejected by the applicant.

Who makes the offer in an insurance contract? A) applicant B) agent C) home office underwriter D) insurance company