AINS 21 Section C

Malvern Imports has several retail stores in a three-state area. They receive and store imports in a large central warehouse. The risk manager is considering ways to lower the severity exposure due to a fire loss to the warehouse. Which one of the following would most effectively decrease the severity exposure of fire loss to the warehouse?

Separation.

Which one of the following best describes the monitoring and revising step in the risk management process be simply described?

Check to make sure the decisions made are still valid and make changes as needed.

What type of law is specifically designed to protect personal and property rights, as well as contract rights?

Civil law.

In the event of a serious auto accident, what type of law would determine who was at fault?

Common law.

Telephone Company installs fiber-optic cable using a trenching machine that digs a trench, buries the cable, fills in the trench, and reseeds, all in one pass. The trenching machine can install cable in a fifty-home neighborhood in one day. Soon after the trenching machine passes by, a member of the community steps on the trenched area, sinks in, and breaks his leg. This is an example of a liability loss exposure arising out of

Completed operations.

When Joshua purchased his home, he did not tell his insurer that he kept flammable chemicals in his basement for use in a hobby. Joshua is aware that storing the chemicals increases the potential for loss to his home. The fact that the insurer does not have this information is an example of which one of the following?

Concealment of material fact

Individuals and families benefit from effective risk management in which one of the following ways?

Continuing activities following an accident or other loss, and thus reducing inconvenience.

The declarations page of a Personal Auto Policy (PAP)

Shows the name of the insured and the insured's mailing address.

Which one of the following best identifies types of organizations that should be concerned with personnel loss exposures from a manager leaving for another organization?

Sole proprietorships, close corporations, and corporations with separation of ownership and control

Financial management decisions are made during which one of the following steps in the risk management process?

Selecting the appropriate risk management techniques

Which one of the following best describes how effective risk management benefits society?

Causing fewer disruptions in the economic and social environment

To analyze the possible financial consequences of an income loss to his business, Joe estimates his normal revenue and expenses and compares them to his estimated revenue and expenses should a loss occur. Normal Operations Post-Loss Revenue $120,000 $0 Expenses $70,000 $40,000 Net Income $50,000 ($40,000) Based on Joe's estimates, which one of the following represents his projected reduction in net income that could be covered by business income insurance?

$90,000 Business income insurance pays for the reduction in net income, which considers both the net income that would have occurred and the net loss that does occur. Joe's projected net income loss is $90,000: $50,000 he would have realized in normal operations + $40,000 lost in continuing expenses that are not offset by revenue, equals $90,000.

Doug owned a restaurant in Iowa. It is illegal to conduct any type of gambling activity in Iowa. However, business was slow and Doug replaced his restaurant furniture and fixtures with slot machines and poker tables. Doug enters into several contracts. Which one of the following is an example of a contract with a legal purpose?

A contract for life insurance on Doug's life for death by accident.

The liability coverage agreement of the business auto policy states each of the following duties of the insurer, EXCEPT:

A duty to comply with laws and regulations

Auto insured Tom was surprised when he was invited to his mutual auto insurer's election of its board of directors. The information relating to this type of election does not qualify strictly as a specific provision, therefore, it is found in

A miscellaneous provision.

Perils are an important aspect of property insurance. Which one of the following statements is correct with respect to perils?

A peril is the actual means by which property is damaged or destroyed such as fire, lightning, windstorm, hail, or theft.

Under a homeowners policy, if a garage qualifies as an "other structure,"

A separate policy limit would apply to the garage.

The loss of or damage to property can have adverse financial consequences including reduced property value. Which one of the following statements is correct with respect to a reduction in value?

A valuable painting that is repaired after being damaged is likely to have declined in value.

For insurers to utilize pooling most effectively and prevent catastrophic losses, the insured exposure units need to be

independent.

A secured lender (secured creditor)

Acquires conditional rights to property, such as the right to repossess it if loan payments are not made.

The possibility that a retailer might be sued because it used a customer's photo in a sales brochure without the customer's permission is what kind of liability exposure for the retailer?

Advertising

Which one of the following is an example of material misrepresentation by Albert, a businessman applying for property insurance on a building he owns?

Albert tells the insurance agent the building is used to store steel, but it is actually used to store steel drums containing flammable liquids.

Ching is a commercial claim representative who has been assigned a large fire loss. Ching suspects that the insured may not have been completely honest in describing the property before the policy was issued such that coverage for the claim may be denied. In which document might Ching find the representations of the insured regarding the property's description?

Application.

Martha works in the city and drives to work each day. She is concerned about her auto exposures due to driving in the city. If Martha sells her vehicle and begins using public transportation, which one of the following risk management techniques will she be applying to her situation?

Avoidance.

An auto dealer's showroom is destroyed by fire, and the dealer has to temporarily rent an adjacent building to use as a showroom. This is an example of

an extra expense.

The first step in the risk management process is to

identify loss exposure.

One reason professional liability insurance is often provided separately from general liability insurance is that

Coverage for these types of claims is better handled by other liability insurance policies.

When a business suffers loss of income following a liability suit that causes customers to lose confidence in the business' products, what type of loss has the business suffered?

Damage to reputation.

A taxi firm maintains a few spare vehicles to keep all drivers on the road even if one vehicle needs repair. Which one of the following identifies the risk management technique being used in this example?

Duplication.

Which one of the following is true regarding enterprise-wide risk management (ERM)?

ERM is an approach to managing all of an organization's key risks and opportunities.

Out-of-court settlements are attractive to liability insurers and their policyholders because such settlements

Eliminate the uncertainty about the outcome of the claim.

Which one of the following best describes how effective risk management benefits insurers?

Encourages insurers to create innovative products and offer competitive prices

Which one of the following is the correct term for documents that are used to modify commercial property coverage to meet the specialized needs of particular insureds?

Endorsements.

Which one of the following describes a benefit to businesses of making insurance part of an overall risk management program instead of relying solely on insurance?

Improved access to affordable insurance

Katie and Kevin have a small stream in their back yard. Last year was exceptionally rainy and they were concerned about flood exposures to their home. They recently had a contractor regrade the back yard, building a large berm, which provides a raised barrier to divert the flow of water away from the house. In this situation, Katie and Kevin are using which one of the following risk management techniques?

Loss prevention.

Which one of the following will individuals gain as a benefit of applying sound risk management to automobile loss exposures?

Greater peace of mind.

Gauging the severity of property losses is easier than gauging the severity of liability losses because property losses

Have a calculable value.

Which one of the following statements is correct regarding characteristics of ideally insurable loss exposures?

Ideally, loss exposures should be spread across a large number of similar exposure units within the same period.

Which one of the following lists the steps in the risk management process in the correct order?

Identify loss exposures, analyze loss exposures, examine techniques, select techniques, implement techniques, monitor, and revise the program

Sho Ching is risk manager for Market Sales Company. Market Sales owns a large fleet of autos used by the sales employees. The fleet is insured with $1,000 physical damage deductibles. Sho Ching is concerned about an increasing frequency of auto accidents in recent years. Which one of the following is the best risk management option for addressing the increased frequency of accidents from the fleet of autos?

Implement loss prevention programs

Larger organizations often have a written risk management statement outlining procedures and authority for

Implementing risk management techniques.

In preparation for installing a new alarm system at a business location, Risk Manager Tony Marcelli has consulted with his insurance agent to make sure that appropriate property and liability coverages are in place during installation. Also, Tony wants to be sure the insurer provides the proper insurance credit for the new alarm system. Tony's actions described above are part of which one of the following steps of the risk management process?

Implementing the selected risk management technique.

Net income losses can be caused by which one of the following?

Increases in expenses.

The process of restoring an individual or organization to a pre-loss financial condition is the process of

Indemnification.

Frank and Jan recently married and purchased their first home together. What is an effective way for Frank and Jan to begin identifying the liability loss exposures associated with their new home?

Inspect the home for loss exposures

Jeff recently started a consulting business. One of his concerns is that he will be sued for giving erroneous advice to a client. Which one of the following would most likely be the best risk management technique for Jeff's use in this situation?

Insurance.

Which one of the following can be covered by a floater?

Jewelry.

Jane's son, Joe, is 15-years-old and he will obtain his driver's license this summer when he becomes 16. Joe has expressed an interest in driving Jane's car once he has his license. Jane owns a compact car and is concerned that Joe might be hurt if he is involved in an accident while driving her car. Jane has read reports indicating that people occupying sport utility vehicles suffer less severe injuries when involved in accidents. If Jane trades her compact car in for a sport utility vehicle, which one of the following risk management techniques will she be applying?

Loss reduction.

Which one of the following is a financial consequence of personnel losses to an organization?

Losses to an organization's value caused by negative publicity

In a strict liability case against toothpaste manufacturer Company P, plaintiff Carla claimed that the toothpaste caused enamel erosion which required her to have extensive dental procedures to fix her teeth. In a products liability case based on strict liability, Carla must prove that Company P

Made toothpaste that was dangerously defective when it left the manufacturer.

Rachel is an insurance broker. She has received a sales referral from another broker concerning an airport management company, Airport Ltd. The company plans to operate a large, national airport in a major city and has requested a quote for airport liability coverage. Rachel will probably recommend the use of which one of the following types of policy forms?

Manuscripts.

Risk manager Maria Sanchez is evaluating her employer's current fleet of vehicles to ensure they are roadworthy and determine if any replacements are needed. Maria's activities are part of which one of the following steps in the risk management process?

Monitoring results and revising the risk management program

If an insurer mistakenly writes an insurance policy in a state in which it is not licensed, the insured might later successfully argue on what grounds that the contract is not valid?

No legal capacity to contract

Neighbors Jack and Jerry were visiting and discussing the cost of new vehicles. Jack told Jerry he wanted to buy a $26,000 car but to do so he would have to sell his current auto for $8,000. Jerry said, "I accept your offer." The contract between Jack and Jerry is

Not valid because Jack did not give the offer consideration.

Other than for money, for what primary reasons or types of reasons would an internationally based American organization's employees be kidnapped or held for ransom?

Political reasons.

Interest that may accrue on damages before a judgment has been rendered is

Prejudgment interest.

Analyzing the potential frequency and severity of a loss exposure enables the risk manager to

Prioritize loss exposures.

Kid Smart manufacturing makes a line of childrens toys. The possibility that a child may be injured because of a defect in a Kid Smart toy is what type of liability loss exposure for this toy manufacturer?

Products.

In property insurance, the term "property in transit" refers to which one of the following?

Property while being transported by trucks, cars, buses, trains, airplanes, and ships

Recruiting, interviewing, and training a new employee who replaces a worker who has just resigned are examples of which one of the following types of financial consequences flowing from personnel losses?

Replacement costs.

John Young is a risk manager of a medium-size business with both auto and real property exposures. John is looking for ways to save money on insurance premiums. John should consider

Retaining some or all of the auto physical damage exposures.

Documents that can become part of an insurance policy include all of the following, EXCEPT:

Summary of available coverage options

Joan has a business auto policy written as specified causes of loss coverage. Which one of the following losses would be covered as auto physical damage?

The cost to repaint a vehicle after it has been vandalized

Adhering to the characteristics of an ideally insurable loss exposure in selling insurance help assure that

The insurer is able to charge a premium that the insured can afford to pay.

If Katie purchases auto insurance from an out-of-state insurer without a license to sell insurance in Katie's state, the policy may be an invalid contract because

The insurer was not legally competent to make the agreement.

Which one of the following best describes the coverage usually provided under a commercial property insurance policy?

The policy's definition of building includes additions that are either completed or under construction, as well as materials and supplies used for constructing the additions.

An accurate measure of loss frequency is important because

The proper treatment of the loss exposure often depends on how frequently the loss is expected to occur.

All of the following are true with regard to the listing of a named insured on a property insurance policy, EXCEPT:

The secured lender (mortgagee) for a building is usually the named insured on a policy covering the building.

In managing loss exposures using the risk management process, the key to identifying loss exposures is

Understanding how the household or organization operates.

Wanlett Enterprises has a risk manager who is charged with making sure the organization has the necessary property and liability insurance policies in place to respond to hazard risks that were identified over twenty years ago. Wanlett still creates and manufactures the same products it did decades ago. Which one of the following is true given this scenario?

Wanlett is mostly concerned with pure, as opposed to speculative risks.

Which one of the following is an element of a loss exposure?

a cause of loss.

An insurer has decided to take an extremely narrow interpretation of a property insurance policy provision to limit the number of loss payments it will need to make. It realizes that its interpretation is probably wrong, but it knows that individual insured's loss amounts will be small, such that most insureds will not take the trouble to file lawsuits against it. The insurer may be violating the principle that an insurance policy is

a contract of utmost faith.

Dr. Donna Jenkins is a research chemist for PharmaCon, a large pharmaceutical company. Last year, she was responsible for 12 of the 14 patents awarded to PharmaCon. Clearly, the future prospects of the company would be damaged if Dr. Jenkins died or became severely disabled. In risk management parlance, Dr. Jenkins is considered

a key employee.

Ling has noticed that her neighbor has recovered money for two homeowners property claims and an auto damage claim he has filed in recent years. Ling has been paying insurance premiums for many years and has never suffered a loss or made a claim. She feels that her insurance contracts over the years have been worthless to her. What Ling does not understand is that she has been paying premiums in exchange for

a promise of protection.

Self-contained policies

address complete coverage needs.

John was involved in a serious accident that included injuries to the other party, and charged with driving while intoxicated. The actions that are likely to be brought against John are

civil and criminal.

For a contract to be enforceable, something of value must be exchanged. The thing of value exchanged is called

consideration.

Because the insurance company usually determines policy wording and the insured has little choice but to "take it or leave it," an insurance contract is a

contract of adhesion.

The policy numbers, inception, and expiration dates of all attached forms and endorsements are found in the policy

declarations.

Products liability loss exposures arise out of injuries or damage that result from an organization's

defective product.

A net income loss exposure is a condition that presents the possibility of loss caused by a reduction in net income. In a given time period, net income equals revenue minus

expenses and income taxes.

Most claims-made policies contain a retroactive date, which is

he date on or after which injury or damage must occur in order to be covered.

A broad statement of an insurer's promises to the insured may be found in a policy's

insuring agreement.

Broad pollution coverage is not typically included in liability policies primarily as an attempt to

keep premiums reasonable.

The difference between an organization's total revenues and its total expenses is

net income.

Traditionally, the risk management professional's role has been associated with loss exposures related to

pure risk.

A business buys multiple small warehouses to minimize the effects of a single loss. This is an example of

separation.

Agencies, such as the Federal Trade Commission, state public utility commissions, and local zoning boards, derive their authority from

statutory law.

Risk management concepts in one form or another apply

to all companies and families.