General Insurance Practice Questions

An insurance solicitor may be employed by how many agents or brokers at any one time? a. 1 b. 3 c. 5 d. 2

A. 1 Explanation The solicitor license must be for the same line or lines of insurance held by the agent or broker who employs them, and a solicitor may be employed by only one agent or broker at any one time.

In the insurance world, a potential for a loss is said to be: a. A risk b. An insurable interest c. A peril d. A hazard

A. A Risk Explanation Risk, simply defined, is uncertainty concerning a loss.

When a homeowner allows wet leaves to remain on his/her sidewalk, this might be considered which of the following? a. A physical hazard b. A morale hazard c. A moral hazard d. A natural hazard

A. A physical hazard Explanation Leaves that have fallen and gotten wet through natural causes are a physical hazard.

What is the term for the idea that some risks are less desirable than average risks, and that these risks tend to seek coverage to a greater extent than more favorable risks? a. Adverse Selection b. Estoppel c. Sharing d. Law of Large Numbers

A. Adverse Selection Explanation Adverse selection is tendency of higher risks to seek or maintain coverage.

The California Financial Information Privacy Act is sometimes known as: a. Cal-GLBA b. CA-HIPAA c. CA-FCRA d. CA-FIPA

A. Cal-GLBA Explanation The California Financial Information Privacy Act is sometimes known as 'Cal-GLBA.'

When both parties to a contract must perform certain duties in order to make the contract enforceable, this is known as a(n) : a. Conditional contract b. Contract of adhesion c. Aleatory contract d. Unilateral contract

A. Conditional Contract Explanation A conditional contract requires that both parties perform certain duties or satisfy certain conditions preceding or subsequent to the issuance of the contract.

The type of producer authority stated in the agency contract is: a. Express b. Implied c. Apparent d. Assumed

A. Express Explanation The Agency Contract, which exists between an insurer and its producer, sets forth the authority granted to the producer. This is referred to as Express Authority because it is explicit in the Agency Contract.

The insurer has the right to rescind a policy due to all of the following expect : a. Failing to pay the premium in full and on time b. Concealment (intentional or unintentional) c. Material breach of warranty d. Material misrepresentation

A. Failing to pay the premium in full and on time Explanation The insurer has the right to rescind a policy due to concealment (intentional or unintentional), material misrepresentation, or material breach of warranty.

A person who handles insurer funds in a trust capacity is a(n) : a. Fiduciary b. Producer c. Agency d. Agent

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

Gasoline stained clothes stored by a furnace are considered a __________. a. Hazard b. Adverse selection c. Severity d. Risk

A. Hazard Explanation Gasoline stained clothes stored by the furnace increase a chance of loss and would be considered a hazard.

Which of the following is not a function of insurance? a. It is designed to be used to protect the insured from dishonest acts 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 protects against uncertainty and reduces anxiety

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

No one may transact insurance in California without a(n) : a. License b. Industry recognized professional designation c. High School diploma d. College degree

A. License Explanation No one may transact insurance in California without a license.

Insuring an automobile is considered which of the following? a. Pure risk b. Speculative risk c. Excluded peril d. Adverse selection

A. Pure Risk Explanation A pure risk is one in which there exists a possibility of loss or no loss, but no possibility of gain.

An agent has authority to do all of the following, except: a. Represent the insured's interest b. Solicit applications on insurer's behalf c. Appoint a solicitor as his or her representative d. Countersign insurance contracts

A. Represent the insured's interest Explanation An agent is primarily the representative of an insurer.

The termination of a contract from the beginning as if it never existed is called : a. Rescission b. Withdrawing c. Refunding d. Reissuing

A. Rescission Explanation Rescission is the termination of a contract from the beginning (as if it never existed).

Self-insurance is an example of which of the following type of risk management? a. Retaining the risk b. Avoiding the risk c. Pooling the risk d. Eliminating the risk

A. Retaining the risk Explanation Self-insurance is an example of retaining the risk.

All of the following are considered incompetent persons under Elements of a Legal Contract, except : a. Retired Persons b. Minors c. Mentally incompetent persons d. People under the influence of drugs or alcohol

A. Retired Persons Explanation Parties to a contract must have legal capacity to enter into the contract. Minors, mentally incompetent persons, and people under the influence of drugs or alcohol are not deemed legally capable.

What information does not need to be communicated in an insurance contract? a. The financial rating of an insurance company b. The period during which the insurance is to continue c. Information that is material to a risk d. Information not already known by both parties

A. The financial rating of an insurance company Explanation The financial rating of an insurance company does not need to be communicated in an insurance contract.

In California, all of the following are required to be specified in all insurance policies, except: a. The financial rating of the insurer b. A statement of premium or a statement of the basis and rates upon which the final premium is to be determined and paid c. The parties between which the contract is made and period during which the insurance is to continue d. The property or life to be insured

A. The financial rating of the insurer Explanation All are policy specifications, except the financial rating of the insurer.

Concealment, whether intentional or unintentional, on the part of an applicant or insured, permits the insurer to do which one of the following? a. Void the contract from the time the concealment was made b. Bill the applicant or insured for the cost of underwriting the policy and any commissions paid out to the agent c. Charge higher premiums d. Collect back premiums

A. Void the concealment from the time the concealment was made Explanation Concealment, whether intentional or unintentional, on the part of an applicant or insured, permits the insurer to void the contract from the time the concealment was made.

A breach under the Doctrine of Warranty may result in : a. Voidance of the contract b. A nullification of the warranty c. Establishing of a monetary penalty d. A waiver of the provisions of the Warranty

A. Voidance of the contract Explanation A Breach of Warranty is a determination that a statement made as a Warranty is proved to be untrue, whether intended as a falsehood or not, and may void the contract.

Fraud is an intentional act of any of the following, except : a. Warranty b. Concealment c. Deceit d. Misrepresentation used to induce someone to part with something of value

A. Warranty Explanation A warranty is a statement in the application guaranteed true in all respects.

A good example of Risk Reduction might be: a. When one takes action to minimize the severity of a potential loss b. Insuring only those risks that threaten the financial stability of the insured c. The transfer of the risk to an insurance company d. The elimination of the exposure to a specific risk

A. When one takes action to minimize the severity of a potential loss Explanation Risk Reduction involves applying techniques for prevention or reduction of potential loss, such as installing sprinkler systems, burglar alarms, safety guards on machinery, etc.

A cause of loss, such as the theft of a car, is which of the following? a. Occurrence b. A peril c. Accident d. Hazard

B. A peril Explanation Property insurance insures against perils. A peril is a potential cause of loss to property such as fire, windstorm, hail, flood, etc.

The following are all correct, except : a. A physical hazard includes location b. A physical hazard includes an attitude of indifference to loss c. A moral hazard includes dishonesty d. Flammable material near a furnace would be considered a physical hazard

B. A physical hazard includes an attitude of indifference to loss Explanation A physical hazard is a physical condition that increases the likelihood of loss. A morale hazard is an attitude of indifference to loss.

When an insured fails to disclose known facts in an application for insurance, he/she may be guilty of : a. Waiver b. Concealment c. Breach of warranty d. Twisting

B. Concealment Explanation Concealment is the failure to disclose known facts.

All of the following are methods of managing risk, except : a. Retaining the risk b. Contracting the risk c. Avoiding the risk d. Transferring the risk

B. Contracting the risk Explanation Risk may be avoided, transferred, or retained, in addition to being shared or reduced.

Which of the following is used to ass specific property to a policy after it is initially written? a. Binder b. Endorsement c. Representation d. Warranty

B. Endorsement Explanation An endorsement is a policy form that alters or adds to the provisions of the insurance contract.

Which statement defines estoppel? a. Estoppel is the intentional misrepresentation of a material fact b. Estoppel prevents the denial of a fact previously established to be true c. Estoppel is the intentional abandonment of a known right d. Estoppel is the failure to disclose known facts

B. Estoppel prevents to denial of a fact previously established to be true Explanation Estoppel is the principle that prevents an insurer from denying a fact or a promise that has been already settled.

If an individual faces the risk of economic loss in the event of property damage, this represents the principle of: a. Subrogation b. Insurable interest c. Limit of recovery d. Indemnity

B. Insurable Interest Explanation Typically, if there is a pure risk of financial loss, there is an insurable interest.

Insurance is designed to provide protection against which of the following? a. Involuntary risk b. Pure risk c. Certain risk d. Speculative risk

B. Pure Risk Explanation In Pure Risk, the only consideration is the possibility of loss or no loss. The contrast is Speculative risk, which entails a chance of gain as well as a chance of loss.

Which type of risk involves the possibility of loss or gain? a. Stable b. Speculative c. Insurable d. Pure

B. Speculative Explanation A speculative risk is one where there is the possibility of gain or loss.

Which of the following is true about a Stock Insurance Company? a. Any insurance company whose home office is in this state and is incorporated in this state b. The company is directed by officers and directors and has a stated amount of capital stock owned by stockholders c. Policyholders own the insurance company d. An insurance company whose home office is in some other state, but does business in this state

B. The company is directed by officers and directors and has a stated amount of capital stock owned by stockholders Explanation A Stock Insurance Company is owned by its stockholders.

Which of the following is not an element of an ideally insurable risk? a. The loss must be quantifiable b. The loss must be catastrophic c. The loss must be accidental d. Risks must include a large number of homogeneous units

B. The loss must be catastrophic Explanation Insurers want to avoid catastrophic perils.

Which insurance company department is responsible for risk selection : a. Claims b. Underwriting c. Actuarial d. Sales

B. Underwriting Explanation The Underwriting Department is responsible for risk selection.

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

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

All of the following statements regarding a warranty are correct, except : a. A warranty is either expressed or implied b. A warranty may relate to past, present, or future c. An implied warranty is stipulated in the contract and is considered a fact d. Failure to comply with a warranty breaches a contract

C. An implied warranty is stipulated in the contract and is considered a fact Explanation An expressed warranty is a statement stipulated in the policy relating to the insured risk that is a fact.

What type of funds received from a client must be maintained in a trust account at a bank or depository in California? a. Cash b. Securities c. Fiduciary d. Foreign

C. Fiduciary Explanation Fiduciary funds received must be maintained in a trust account at a bank or depository in California.

All of the following are true of insurance, except: a. It protects against uncertainty b. It is a means of sharing loss c. It eliminates risk d. It transfer risk

C. It eliminates risk Explanation Insurance transfers, but does not eliminate risk.

When writing the application for homeowners insurance, B's agent asked him if he had any theft losses in the past 3 years. B answered 'no', despite the fact that he was a theft victim 3 times in the past 3 years. B is guilty of which of the following? a. Representation b. Unilateral statement c. Misrepresentation d. Waiver

C. Misrepresentation Explanation Misrepresentation is a false statement in the application.

Policyowner P has just finished painting the interior walls in his home, and stores leftover paint thinner in the basement near the furnace. What kind of hazard does the stored paint thinner present? a. Peril b. Moral c. Physical d. Morale

C. Physical Explanation The storing of paint thinner near a furnace is a physical hazard, since it increases the chance of fire.

An oral or written statement made at the time of application or before issuance of the policy that is believed to be true to the best of the knowledge of the applicant is called a(n): a. Absolute warranty b. Disclosure c. Representation d. Implied warranty

C. Representation Explanation Representations are an oral or written statement made at the time of application or before issuance of the policy that is believed to be true to the best of the knowledge of the applicant.

All of the following are restricted from entering into an insurance contract, except: a. Mentally incompetent persons b. Minors c. Retired persons d. People under the influence of drugs or alcohol

C. Retired Persons Explanation Persons without legal capacity to enter an agreement are minors, the mentally incompetent, and those under the influence of an intoxicant.

All of the following are characteristics of a Mutual Insurance Company, except: a. Profits may be returned as policy dividends b. They provide insurance to members c. Stockholders have ownership d. A policyholder votes for the Board of Directors

C. Stockholders have ownership Explanation A Mutual Insurance Company is owned by its policyholders, and does not have stockholders. Some mutual insurance companies require policyowners to be members of an underlying organization.

Which of the following is a specification that must be included in an insurance contract? a. Information already known by both parties b. Information that should be known by both parties c. The risks insured against d.Information of a party's own judgement upon the matters of a contract

C. The risks insured against Explanation All insurance contracts must include a statement of the premium, or a statement of the basis and rates upon which the final premium was determined, the property or life insured, the interest of the insured or property, the risks insured against, and the period during which the insurance is to continue.

Which of the following is a physical hazard? a. Dishonesty on the part of an insured b. The storage of flammables in a fireproof container c. Uneven pavement in a sidewalk d. An insured's attitude that good housekeeping is not important

C. Uneven pavement in a sidewalk Explanation A physical hazard is a physical condition that increases the probability of loss to the property.

A good example of Risk Reduction might be: a. The elimination of the exposure to a specific risk b. Insuring only those risks that threaten the financial stability of the insured c. When one takes action to minimize the severity of a potential loss d. The transfer of the risk to an insurance company

C. When one takes action to minimize the severity of a potential loss Explanation Risk Reduction involves applying techniques for prevention or reduction of potential loss, such as installing sprinkler systems, burglar alarms, safety guards on machinery, etc.

The California Financial Information Privacy Act provides for all of the following as compared to the GLBA, except: a. Consumers ave the final say in the sharing of their information b. Financial profiling of consumers is greatly restricted c. Penalties for identity theft perpetrators are doubled d. An opt-out standard concerning information sharing with unrelated third parties

D. An Opt-Out standard concerning information sharing with unrelated third parties Explanation The California Financial Information Privacy Act provides that the Opt-Out provisions of GLBA were changed to an Opt-In standard concerning information sharing with unrelated third parties.

A person can purchase an insurance policy to cover losses from all the following, except: a. Sudden and direct damage to property by natural causes b. Loss of property through burglary or theft c. Loss of assets through tort actions brought against the person d. An operation of drug smuggling

D. An operation of drug smuggling Explanation A contract, including the insurance contract, is void if it is based on an illegal purpose or contrary to public policy. It will not be recognized by a court or enforceable by either party.

The Law of Large Numbers provides that : a. Small certain losses are substituted for large uncertain losses b. As the number of insured units increases, loss decreases c. If funds are insufficient to pay claims, the insured is assessed additional premium d. As the number of insured units increases, predictability of losses improves

D. As the number of insured units increases, predictability of losses improves Explanation The larger the sample is, the more accurate the prediction is.

A person who for compensation and on behalf of another person, can transact insurance with, but not on behalf of an insurance company is considered a? a. Surplus Lines Agent b. Producer c. Solicitor d. Broker

D. Broker Explanation A person who, for compensation and on behalf of another person, transacts insurance (other than life, disability or health insurance) with, but not on behalf of an insurance company, is an insurance broker.

Which of the following defines risk? a. Amount of loss b. Cause of loss c. Financial interest in property d. Chance of loss

D. Chance of loss Explanation The chance of loss is the definition of risk.

The insurance contract is said to be a contract of Utmost Good Faith, because: a. The insurer has drawn up the contract and, therefore, there is no intent to deceive b. Concealment of known facts on the part of the insured will void the contract c. The insured must warrant that his/her representations are true d. Each party is entitled to rely upon the representations of the other that there is nothing concealed or dishonest

D. Each party is entitled to rely upon the representations of the other that there is nothing concealed or dishonest Explanation A contract of insurance is not just a matter of ordinary commercial good faith, but also one of the utmost good faith. It is assumed that this good faith exists in both parties to the contract.

Which of the following powers describes the authority stated in an agent's agency contract? a. Apparent Powers b. Implied c. Assumed d. Express

D. Express Explanation The Agency Contract, which exists between an insurer and its producer, sets forth the powers that are granted to the producer. These powers are referred to as Express Powers because they are expressed in the Agency Contract.

Which statement defines a peril? a. It is defined as a risk of financial loss b. It is a condition that may increase a loss c. It is an indirect loss d. It is the specific cause of loss

D. It is the specific cause of loss Explanation A peril is defined as the specific cause of a loss.

What happens if an insurer exercises its right to rescind a policy? a. It results in a premium refund to the policyowner/insured in an amount hat is age dependent b. Due to the circumstances which led up to the rescission the insurer is permitted to keep all premiums paid c. The insurer must refund any premiums received in excess of its cost of underwriting d. It results in a refund of premiums since the contract is not valid

D. It results in a refund of premiums since the contract is not valid Explanation Canceling (rescinding) the policy back to the inception of the contract results in a refund of premiums since the contract is not valid

Disclosure or lack of disclosure in a statement that would change an insurer's decision to issue a policy for the same premium is considered: a. False b. Estoppel c. Waived d. Material

D. Material Explanation 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.

Which one of the following funds is considered to have been stolen and can result in his/her punishment under the law if an agent puts to personal use? a. Expense reimbursements b. First year commissions received c. Renewal commissions received d. Premiums collected

D. Premiums Collected Explanation Premiums collected must be kept separate and not be commingled because using these funds for personal use is considered theft and punishable by law.

Which of the following risks is protected by insurance? a. Speculative risk b. Certain risk c. Involuntary risk d. Pure risk

D. Pure Risk Explanation The contrast is Speculative risk, which entails a chance of gain as well as a chance of loss.

An alarm system installed in a home is considered which of the following ways to manage risk? a. Avoidance b. Transfer c. Retention d. Reduction

D. Reduction Explanation The home alarm system may reduce the chance of loss, but not entirely prevent it.

Which of the following is not within an agent's authority? a. Completing applications on insurer's behalf b. Accepting premiums on behalf of the insurer c. Providing quotes d. Representing the insured in an insurance transaction

D. Representing the insured in an insurance transaction Explanation An agent represents an insurer. A broker represents the insured.

Which risk management type shifts the risk of loss to a larger homogeneous group? a. Risk Assumption b. Risk Avoidance c. Risk Reduction d. Risk Transfer

D. Risk Transfer Explanation Risk transfer involves transfer of the risk, such as to an insurance company.

Under what circumstances is an insurer permitted not to communicate information which otherwise would be required? a. It is too costly for the insurer to provide b. The insured deems it immaterial c. The information is too complicated for the insured to completed understand d. The insured waives the right to receive communication

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

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

D. The insurer may not have issued coverage if the correct information had been communicated Explanation 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 states the parties to an insurance contract? a. The beneficiary and the insurance carrier b. The agent/agency and the insured c. The producer/agency and the insurance company d. The policyowner/insured and the insurance company

D. The policyowner/insured and the insurance company Explanation The parties to an insurance contract are the policyowner/insured and the insurance company.

Under the California Financial Information Privacy Act all of the following are ways or reasons a financial institution is permitted to share consumer's personal financial information, except: a. Sharing customer data between affiliates in a single line of business under the same regulators b. With law enforcement in the course of an investigation and subject to orders of the court c. To comply with provisions of the USA PATRIOT Act d. To increase company revenue with more targeted marketing campaigns the consumer is likely to want or need

D. To increase company revenue with more targeted marketing campaigns the consumer is likely to want or need Explanation Under the California Financial Information Privacy Act a financial institution has the authority to share consumer's personal financial information for transactions in which it is 'necessary to effect, administer or enforce a transaction requested or authorized by the consumer and with the consent of or at the direction of the consumer.'

Which insurance company department is responsible for risk selection : a. Actuarial b. Sales c. Claims d. Underwriting

D. Underwriting Explanation The Underwriting Department is responsible for risk selection.

Which of the following constitutes the acceptance of an offer? a. When the applicant completes the application b. When the agent assures the applicant he or she will be covered c. When the insurer make a counteroffer d. When an insurer issues a binder

D. When an insurer issues a binder Explanation The issuance of a binder is indication of the acceptance of an offer.