Chapter 1 - General Insurance Concepts: Idaho
The causes of loss insured against in an insurance policy are known as? A) Hazards B) Perils C) Losses D) Risks
B) Perils - Perils are the causes of loss insured against in an insurance policy.
Define: Insurer (Principal) -
The company who issues an insurance policy.
Define: Premium -
The money paid to the insurance company for the insurance policy.
Define: Insured -
The person covered by the insurance policy. This person may or may not be the policyowner.
Define: Policyowner -
The person entitled to exercise the rights and privileges in the policy.
Events or conditions that increase the chances of an insured loss occurring are referred to as? A) Perils B) Hazards C) Exposures D) Risks
B) Hazards - Conditions such as lifestyle and existing health, or activities such as scuba diving are hazards and may increase the chance of loss occurring.
Define: Applicant or Proposed Insured -
A person applying for insurance.
Events in which a person has both the chance of winning or losing are classified as? A) Pure risk B) Retained risk C) Speculative risk D) Insurable
C) Speculative risk - Speculative risk involves that chance of gain or loss and is not insurable.
Insurance is the transfer of? A) Risk B) Loss C) Hazard D) Peril
A) Risk - Insurance is the transfer of risk of loss from an individual or a business entity to an insurance company.
Define: Broker -
An insurance producer not appointed by an insurer and is deemed to represent the client.
What is the term for the entity that an agent represents regarding contractual agreements with third parties? A) Insured B) Principal C) Client D) Designee
B) Principal - An agent represents the principal, acting on the entity's behalf in contractual agreements with third party.
A situation in which a person can only lose or have no change represents? A) Hazard B) Pure risk C) Speculative risk D) Averse Selection
B) Pure risk - Pure risk refers to situations that can only results in a loss or no change. Pure risk is the only type insurance companies are willing to accept.
Define: Reciprocity/Reciprocal
A mutual interchange of rights and privileges.
What do individuals use to transfer their risk of loss to a larger group? A) Exposure B) Indemnity C) Insurance D) Insurable Interest
C) Insurance - It's the mechanism whereby an insured is protected against loss by a specific future contingency or peril in return for the present payment of premium.
Which of the following would qualify as a competent party in an insurance contract? A) The applicant has a prior felony conviction B) The applicant is intoxicated at the time of application C) The applicant is a 12-year-old student D) The applicant is under the influence of a mind-impairing medication at the time of application
A) The applicant has a prior felony conviction - When an insurer and insured enter into a contract, both parties must be of legal age and mental competent. It is legal for a person convicted of a felony to buy an insurance contract. An intoxicated person, however, may not be mentally competent, a 12-year-old student is considered underage in most states and a person under mind-impairing medication would most likely be mentally incompetent.
What documentation grants express authority to an agent? A) State provisions B) Agent's contact with the principal C) Agent's insurance license D) Fiduciary contract
B) Agent's contact with the principal - The principal grants authority to an agent through the agent's contract.
Following a career change, an insured is no longer required to perform many physical activities, so he has implemented a program where he walks and jogs for 45 minutes each morning. The insured has also eliminated most fatty foods from his diet. Which method of dealing with risk does this scenario describe? A) Avoidance B) Retention C) Reduction D) Transfer
C) Reduction - The insured's change in lifestyle and habits would likely reduce the chances of health problems.
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? A) There must be a sufficient number of homogeneous exposure units to make losses reasonably predictable B) The loss produced by the risk must be definite C) The loss may be intentional D) The loss must not be catastrophic
C) The loss may by intentional - To insure intentional losses would be against public policy.
In forming an insurance contract, when does acceptance usually occur? A) When an insurer receives an application B) When an insured submits and application C) When an insurer's underwriting approves coverage D) When an insurer delivers the policy
C) When an insurer's underwriting approves coverage - In insurance, the offer usually made by the applicant in the form of the application. Acceptance takes place when an insurer's underwriting approves the application and issues a policy.
Which authority is NOT stated in an agent's contract but is required for the agent to conduct business? A) Expressed B) Implied C) Apparent D) Assumed
B) Implied - Implied authority is not written in the agent's contract but is required in order to do business. Implied authority exists because not every single detail of an agent's authority can be written in a contract.
Define: Insurance Policy -
A contract between a policyowner (and/or insurer) and an insurance company which agrees to pay the insured or the beneficiary for loss caused by specific events.
Define: 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.
The risk management technique that is used to prevent a specific loss by not exposing oneself to that activity is called? A) Reduction B) Sharing C) Avoidance D) Transfer
C) Avoidance - Risk avoidance is elimination of risk of loss by avoiding any exposure to an event that could give rise to such loss.
All of the following are examples of risk retention EXCEPT? A) Deductibles B) Copayments C) Self-Insurance D) Premiums
D) Premiums - Retention is a planned assumption of risk, or acceptance of responsibility for the loss by an insured through the use of deductibles, copayments, or self-insurance.
When an insured makes truthful statements on the application for insurance and pays the required premium, it is known as which of the following? A) Acceptance B) Consideration C) Legal purposes D) Contract of adhesion
B) Consideration - Consideration is something of value that each party give to the other. The consideration on the part of the insured is the payment of premium and the representations made in the application.
Which of the following types of agent authority is also called "perceived authority"? A) Apparent B) Express C) Implied D) Fiduciary
A) Apparent - Apparent authority (also known as perceived authority) is the appearance of the assumption of authority based on actions, words, or deeds of the principal or because of circumstances the principal created.
Which of the following is NOT an essential element of an insurance contract? A) Agreement B) Legal purpose C) Counteroffer D) Consideration
C) Counteroffer - In order for insurance contracts to be legally binding, they must have four essential elements; agreement (offer and acceptance), consideration, competent parties, and legal purposes. Counteroffer is not required.
For the purpose of insurance, risk is defined as? A) The cause of loss B) An event that increases the amount of loss C) The uncertainty or chance of loss D) The certainty of loss
C) The uncertainty or chance of loss - Risk, or chance of loss occurring, is the basic reason for buying insurance.
An individual was involved in a head-on collision while driving home one day. His injuries were not serious, and he recovered. However, he decided that in order to never be involved in another accident, he would not drive or ride in a car ever again. Which method of risk management does this describe? A) Reduction B) Sharing C) Retention D) Avoidance
D) Avoidance - Avoidance is the method of risk management by which a person tries to eliminate risk of loss by avoiding any exposure to an event that could give rise to such loss. Risk avoidance is effective but seldom practical.
Insurance is a contract by which one seeks to protect another from? A) Loss B) Exposure C) Uncertainty D) Hazards
A) Loss - Insurance will protect a person, business or entity from loss.
A person who does not lock the doors or does not repair leaks shows an indifferent attitude. This person presents what type of hazards? A) Morale B) Moral C) Legal D) Physical
A) Morale - A morale hazard is someone who has an indifferent attitude towards an insurance company. Someone that is careless or irresponsible behavior because they know it will be covered by their insurance.
An insured stated on her application for life insurance that she had never had a heart attack, when in fact she had a series of minor heart attacks last year for which she sought medical attention. Which of the following will explain the reason a death benefit claim is denied? A) Utmost Good Faith B) Estoppel C) Material misrepresentation D) Wavier
C) Material misrepresentation - A material misrepresentation will affect whether or not a policy is issued. If the insured had been truthful, it is very likely that the policy would not be issued.
An insurer neglects to pay a legitimate claim that is covered under the terms of the policy. Which of the following insurance principles has the insurer violated? A) Good Faith B) Representation C) Adhesion D) Consideration
D) Consideration - The binding force in any contract is consideration. Consideration on the part of the insured is the 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.
Which of the following are the authorities that an agent can hold? A) Express and Implied B) Apparent and Allowed C) Authorized and Admitted D) Primary and Secondary
A) Express and Implied - The powers and authorities that an agent holds are express and implied. Apparent authority is the appearance of, or the assumption of, authority based on actions, words, or deeds of the principal or because of circumstances the principal created.
In case of a loss, the indemnity provision in insurance policies? A) Restores an insured person to the same financial state as before the loss B) Allows the insured to collect 20% more than actual loss C) Pays the insured a percentage of the loss above and beyond the loss D) Pays the insured as much as 95% of the loss
A) Restores an insured person to the same financial state as before the loss - Indemnity (sometimes referred to as reimbursement) is a provision in an insurance policy that states that in the event of loss, an insured or a beneficiary is permitted to collect only to the extent of the financial loss, and is not allowed to gain financially because of the existence of the insurance contract.
Which of the following is an example of a producer's fiduciary duty? A) The obligation to tell the truth to the best of one's knowledge B) The trust that a client places in the producer in regard to handling premiums C) An obligation to state every known fact about the privacy the producer is selling D) A duty to base all transactions upon the principal of Utmost Good Faith
B) The trust that a client places in the producer in regard to handling premiums - An agent acts in a fiduciary capacity, based upon trust and confidence, when handling the financial affairs of their customers, including handling the premiums.
The risk of loss may be classified as? A) Certain risk and uncertain risk B) Named risk and un-named risk C) High risk and low risk D) Pure risk and speculative risk
D) Pure risk and speculative risk - Speculative risks involve uncertainty as to whether the final outcome will be gain or loss. Speculative risks are generally uninsurable.
Hazard is best defined as? A) Something that increases the risk of loss B) The uncertainty of loss C) Neglect to communicate a material fact D) A deliberate attempt to deceive
A) Something that increases the risk of loss - Hazards are conditions or situations that increase the probability of an insured loss occurring.
The insurer may suspect that a moral hazard exists if the policyholder? A) Is different to activities that may be dangerous B) Always drives over the speed limit C) Is not honest about his health on an application for insurance D) Is prone to depression
C) Is not honest about his health on an application for insurance - Moral hazards refers to those applicants that may lie on an application for insurance, or in the past, have submitted fraudulent claims against an insurer.
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
B) Driving recklessly - Morale hazards arise from a state of mind that causes indifferent to loss, such as carelessness.
Which authority is NOT stated in an agent's contract but is required for the agent to conduct business? A) Express B) Implied C) Apparent D) Assumed
B) Implied - 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 agent's authority can be written in a contract.
An insurance contract must contain all of the following to be considered legally binding EXCEPT? A) Beneficiary's consent B) Offer and acceptance C) Consideration D) Competent parties
A) Beneficiary's consent - The four essential elements of all legal contracts are offer and acceptance, competent parties, and legal purposes.
Which statement regarding insurable risk is NOT correct? A) Insured cannot be randomly selected B) Insurance cannot be mandatory C) The insurable risk needs to be statistically predictable D) An insurance risk must involve a loss that definite as to cause, time, place, and amount
A) Insured cannot be randomly selected - Granting insurance must not be mandatory, selecting insured randomly will help the insurer to have a fair proportion of good risks to poor risks. All other statements are true.
In what way can an agent demonstrate a high standard of ethics? A) Putting the client's best interests before their own B) Making enough commissions to cover personal expenses C) Setting and meeting monthly production goals D) Recommending qualified retirement plans to each client
A) Putting the client's best interest before their own - The needs of the client(s) are the priority to a highly ethical agent.
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) Risk B) Loss C) Exposure D) Hazard
B) Loss - Loss if the reduction, decrease, or disappearance of value of the person or property insured in a policy by a peril insured against.
An individual's tendency to be dishonest would be indicative of a? A) Physical Hazard B) Moral Hazard C) Morale Hazard D) Pure Hazard
B) Moral Hazard - Applicants that are dishonest in completing an application for insurance or submitting fraudulent claims would be deemed a moral hazard and could be uninsurable from an underwriting stand point.
Installing deadbolt locks on the doors of a home is an example of which method of handling risk? A) Self-Insurance B) Reduction C) Avoidance D) Transfer
B) Reduction - Steps taken to prevent losses from occurring are called risk reduction.
If a court ordered payment for a loss that was not covered in the policy even if it was clearly worded, it would be an example of which legal concept? A) Cease and desist B) Nonforfeiture C) Indemnity D) Reasonable expectations
D) Reasonable expectations - If, because of advertising or sales literature or statements by an agent, an insured could reasonably expect the coverage, the courts have held that the insurer must provide that coverage.
Which of the following is NOT the consideration in a policy? A) Something of value exchanged between parties B) The premium amount paid at the time of application C) The promise to pay covered losses D) The application given to a prospective insured
D) The application given to a prospective insured - Consideration is something of value that is transferred between two parties to from a legal contract.
Which of the following is NOT a goal of risk retention? A) To reduce expenses and improve cash flow B) To increase control or claim reserving and claims settlements C) To fund losses that cannot be insured D) To minimize the insured's level of liability in the event of loss
D) To minimize the insured's level of liability in the event of loss - Retention usually results from three basic desires of the insured: to reduce expenses and improve cash flow, to increase control of claim reserving and claim settlements, and to fund losses that cannot be insured.
Because an agent is using stationery with the logo of an insurance company, applicants for insurance assume that the agent is authorized to transact on behalf of that insurer. What type of agent authority does this describe? A) Apparent B) Express C) Implied D) Assumed
A) Apparent - Apparent authority (also known as perceived authority) is the appearance or the assumption of authority based on the actions, words, and deeds of the principal or because of circumstances the principal created.
