General Insurance Principles

An insurer must notify its current customers of its privacy policies or practices at least once every how often?

12 months

Which statement is correct about representations and warranties in insurance contracts?

A warranty is guaranteed to be true.

When an insurer employs field agents, who is responsible for delivering a new policy to a policyholder?

Agent

Which of the following describes an agent's fiduciary responsibilities?

An agent must act in the best interests of insureds, applicants, and appointing insurers.

Which of the following statements about utmost good faith in insurance contracts is correct?

Both the insured and insurer must act in utmost good faith.

An insurance company keeps a policy in force only if the policyowner pays the premium because the policy is what kind of a contract

Conditional

Which statement is correct about the types of insurance sales systems?

Direct response companies sell insurance to consumers without the use of a licensed producer.

Federal law requires that businesses fairly and accurately report consumer information through what piece of legislation?

Fair Credit Reporting Act

Life and health insurance companies regulate themselves through each of the following entities or organizations EXCEPT:

Financial Industry Regulatory Authority

An insurance company with a home office in Wisconsin that does business in Illinois is a domestic company in Wisconsin. What kind of company is it in Illinois?

Foreign

A policyowner intentionally misstates material information on an insurance application to get coverage for a lower premium. This kind of deception is:

Fraud

Ross collects a policy's first premium with an application for insurance. The next day he learns that the customer canceled the policy. What must Ross do with the premium?

He should see that the funds are remitted to the customer as soon as possible.

Tim paid only the first premium for his health insurance policy before he was diagnosed with cancer. Nevertheless, the insurance company paid all of the expenses for his medical treatment. Which characteristic of an insurance policy resulted in the insurer paying much more than the premium it received?

It is an aleatory contract.

Zelda, a producer selling health insurance, assures a prospective applicant that the insurance company she represents is backed by the protections of the Pennsylvania Life and Health Insurance Guaranty Association. What is true about this kind of assurance?

It is prohibited at all times.

Which is not an example of a hazard?

John takes medication to control high blood pressure.

Which of the following presents a situation of pure risk?

Knowing that his family depends on his income, Franklin wants to insure his life.

Although most insurance policies are personal contracts between the insurer and the policyowner, which type is not a personal contract?

Life insurance

Which entity does not rate the solvency of insurance companies?

Lloyd's of London

Sarah applies for a $1 million life insurance policy from ABC Insurance Company. ABC counters by offering to insure her for $200,000 and asks her for a written response. Sarah tells her agent that she accepts the counteroffer. Which statement is correct?

No binding contract is formed until ABC gets Sarah's written acceptance.

A policyowner repeatedly declines the opportunity to increase her disability income policy benefits through its benefit increase rider. She suffers a loss that would have been covered under the rider. May she sue the insurance company to increase the policy benefit?

No, because the policyowner waived her right to exercise the rider benefit when the opportunity to do so was available to her.

file a notice of appointment with the Department

Protection from damages resulting from a lawsuit brought by an insurance customer against an insurance producer for breach of fiduciary duties would be covered under what kind of policy?-errors and omissions insurance

Which does not rate the financial strength of insurance companies?

Securities and Exchange Commission

Abby lives in Ohio, where she is licensed as an insurance producer. She wants to apply for a nonresident license in Pennsylvania. Which of the following conditions must she satisfy?

She must show her Ohio license is in good standing.

Which statement is correct about insurance regulation?

State governments primarily regulate the insurance industry, and the federal government regulates some aspects of it.

Mark knowingly exceeds his actual authority when dealing with a client. His actions cause a loss to the insurance company he represents. Which statement is correct?

The company may be liable for Mark's actions.

Why do courts interpret ambiguities in an insurance contract in favor of the policyowner?

The contract's terms are drafted by the insurer and not negotiated with the policyowner.

What happens if an insured stops paying premiums for an insurance policy?

The insurance company is released from its promise to pay benefits and the contract expires.

Which statement about apparent authority is correct?

The insurer is responsible for an agent's conduct while acting with apparent authority.

Tim applies for a life insurance policy. His agent gives him a receipt conditioned on Tim's passing a physical exam to meet underwriting standards. Tim passes the physical exam but dies before the policy is issued. Which of the following is correct?

The policy will pay the death benefit

Which is true about warranties in an insurance contract?

They are guaranteed to be true

How do independent agents differ from captive agents?

They can sell policies for several insurers.

Tori has a health insurance policy from ABC Insurers. ABC denies a claim because Tori failed to notify it in a timely manner of the loss. Tori argues that the policy's instructions on filing claims are confusing. A court that reviews the policy's instructions will probably resolve any ambiguities in favor of:

Tori

Which of the following is a characteristic not usually found outside the context of insurance contracts?

Unilateral

Alex sold an insurance policy before his license lapsed and earned a commission on the sale. Is he entitled to a commission if the policy is renewed?

Yes, because he was licensed when the policy was sold.

While taking an insurance application, Betty recommends backdating it so that the proposed insured will appear to be a year younger on the form. Can Betty do this?

Yes. Backdating is permitted if it is for six months or less and authorized by the insurer.

An agent who sells insurance for an insurance company that does not have a certificate of authority to operate in the state represents:

a non-admitted insurer

Which person would not be considered competent to enter into an insurance contract?

a person under the influence of alcohol

During the underwriting period, an insurance company can provide the applicant with limited, temporary coverage through either a conditional receipt or:

a temporary insurance receipt

In an agency relationship between the agent and the insurance company, which of the following is not a type of authority granted to the agent?

absolute authority

When taking an insurance application, what should an agent try to accomplish?

accuracy, thoroughness, and clarity

Jennifer applied for a $500,000 whole life insurance policy. The insurer issued the policy but classified her as a substandard risk, which cost her a higher premium. Which type of policy delivery is recommended in this situation?

actual delivery

Because the insurance company and the insurance applicant do not negotiate the terms of an insurance policy, the policy is what kind of contract?

adhesion

An innocent misstatement of age or sex on an insurance application would most likely result in:

adjustment of policy benefits

Which is a non

admitted insurance company?

Jeremy has had an individual health insurance policy for many years because of his family's history of cancer. The tendency of someone like Jeremy to buy and maintain insurance is known as:

adverse selection

After paying the initial premium for a disability income policy, Suri was injured in an accident. She received disability income payments for the next 12 months. These payments were far more than the amount of the premium she paid. This is characteristic of contracts that are:

aleatory

ABC Insurance Company fires Renee, a producer. She continues to interview prospects, make sales presentations with company materials, and collect premiums. When dealing with Renee, the prospects believe that she has what kind of authority from ABC?

apparent

An agent for ABC Insurance Company meets with a client. The agent shows the client ABC's sample policies, refers to the ABC rate book, and gives the client an ABC business card. The client assumes that ABC has appointed the agent to represent it. What kind of authority does the agent have?

apparent authority

For a life insurance contract to be enforceable, which of the following must be legally competent to enter into the agreement?

applicant and insurer

In forming the insurance contract, who gives something of value as consideration?

applicant and insurer

Which action by an agent would legally bind the insurance company that the agent represents?

authorized acts

What is not required to obtain an insurance producer's license?

character assessment

As a field underwriter, what does an agent do for the insurance company?

collect information from an applicant

The act of deliberately withholding material facts when applying for insurance is called:

concealment

An agent who recommends the replacement of an insurance policy with another is not required to discuss which of these with the prospect?

cost of similar policies from competing insurers

Which is not an element of all legal contracts?

counteroffer

When meeting with a prospect to discuss life insurance, Agent Tyler makes disparaging comments about the financial stability and reputation of a competitor to dissuade the prospect from purchasing its policies. Which unfair trade practice has Agent Tyler committed?

defamation

A valid insurance contract does not require:

disinterested witnesses

Which of the following terms categorize insurers by their location or domicile?

domestic, foreign, and alien

Jerry's life insurance policy instructs him to pay the premium to the insurer's home office. However, he has sent his payments to his agent for many years, and the agent has forwarded them to the insurer. What legal principal will prevent the insurer from now requiring that Jerry send the premiums to the home office?

estoppel

Jim's policy expired due to nonpayment of premium. His agent sends him a statement the following month without noting the lapse. If Jim pays the premium and later suffers a loss for which he files a claim, what will prevent the insurer from denying the claim?

estoppel

The Commissioner of Insurance cannot suspend or revoke an agent's license for which of the following reasons?

failing to meet projected sales goals

Which of the following is NOT an unfair claims settlement practice if committed by an insurance company in Pennsylvania?

failing to promptly settle a claim for which liability is uncertain

Which describes the type of relationship based on trust that exists between the insurer and its appointed agent?

fiduciary

The Commissioner of Insurance can examine the business transactions, accounts, and records of insurers and producers as often as necessary but must do so at least once in how many years?

five

While meeting with her insurance customer, Ben, Ann sees that he is chain smoking. Yet he notes on his application that he is a nonsmoker. What should Ann do at this point in the application process?

insist that Ben be truthful and avoid misrepresentation

Which party makes the only enforceable promise in an insurance contract?

insurance company

Why would a business self

insure instead of buying an insurance policy?-to insure against frequent low-severity losses

If the parties disagree over the meaning of an insurance contract's terms, courts will usually interpret these terms in favor of the:

insured

What kind of misrepresentation on an insurance application gives the insurer reason to terminate a policy?

material fact

Which information is not to be included in the first part of an insurance application?

medical information

A person who smokes heavily and drinks alcohol to excess exhibits what kind of an insurance risk?

moral hazard

The amount of the benefit paid under an indemnity policy can never be:

more than the loss or the policy's face amount, whichever is less

An insurer sends a premium statement to a former policyowner. However, the policy has lapsed for non

payment of premiums. Believing that the policy is still in effect, the policyowner pays the premium, which the insurer accepts. The insured then suffers a loss and makes a claim on the policy. What legal doctrine prevents the insurer from denying the claim?

Which is not a common source of underwriting information that an insurer uses?

peer references

While completing an application for a health insurance policy, Dan discloses his partial blindness. The insurer will treat this blindness as a:

physical hazard

The laws of agency govern the relationship between:

principal and agent

Genevieve wants to renew her Pennsylvania insurance producer's license. Which of the following is not a condition for renewal?

report of insurance sales made in last two years

A client's answers on an application for insurance are considered to be:

representations

The statements that an applicant makes in an application for an insurance policy are treated as:

representations

The statements that an applicant makes on an application for insurance are treated as:

representations

Emily postpones buying a life insurance policy, believing that her family will use its savings to pay her final expenses if she dies prematurely. Which method is she using to deal with risk?

retention

Which of the following transactions requires an insurance producer to have more than one insurance license?

selling variable life insurance

Which type of insurance company pays dividends to its stockholders?

stock company

According to the laws of agency, an insurance agent appointed by an insurance company acts on behalf of:

the appointing insurer

John owns a life insurance policy. The policy insures Mary, his wife. This is possible through what kind of policy ownership?

third-party

Why does an insurance company issue a conditional receipt to a new policyowner?

to cover the proposed insured before the policy is issued

Which of the following best describes the purpose for the laws of agency?

to govern the authority granted agents to represent insurers

Which of the following is not a duty that an agent owes to an insurance applicant?

to offer a rebate on the premium

Which of the following is not a requirement for an insurance agent?

to request referrals from a client

The term used to describe the voluntarily surrender of a known right is:

waiver

When does an insurance policy take effect?

when the first premium is paid

All of the following are examples of an agent's responsibilities toward an applicant EXCEPT:

waiving payment of the policy's first premium

Because an applicant for an insurance policy cannot negotiate the terms of the policy, the policy is what kind of contract?

Adhesion

Which is not correct about the agency contract between the insurance company and the agent it appoints to represent it?

The principal has express authority; the agent does not

All of the following are elements of an insurable risk EXCEPT: 1. Losses resulting from the insured peril must be potentially catastrophic. 2. Any losses resulting from the insured peril must be definable as to time, cause, and location. 3. The insured peril must be outside of the insured's control. 4. The loss must be measurable.

1. Losses resulting from the insured peril must be potentially catastrophic.

The tendency of a person diagnosed with a serious illness to try to buy life or health insurance is known as: 1. adverse selection 2. risk avoidance 3. concealment 4. exposure reduction

1. adverse selection

From an insurance perspective, the term "loss exposure" means: 1. the extent to which an insurer is subject to a possible loss 2. the extent to which an insurer discloses its marketing practices 3. the extent to which an insurer discloses the components making up its policy premium rates 4. the extent to which insurers are required to open their financial books for public inspection

1. the extent to which an insurer is subject to a possible loss

To be considered insurable, a risk (and the potential loss it represents) must meet which one of the following requirements? 1. The loss must be definable as to time, cause, and location. 2. The loss must be catastrophic. 3. The loss must be certain to occur. 4. The loss cannot be measurable.

1.. Loss must be definable as to time, cause and location

All the following statements regarding perils and hazards are correct EXCEPT: 1. A peril is the immediate cause of a loss and is the event that insurance protects against. 2. Smoking cigarettes is an example of a peril. 3. Indifference to loss is an example of a hazard. 4. A hazard is a condition that raises the chance of a peril occurring.

2. Smoking cigarettes is an example of peril

From an insurance risk perspective, an applicant engaging in adverse selection is demonstrating which type of hazard? 1. legal hazards 2. morale hazard 3. physical hazard 4. moral hazard

4. moral hazard

A person who refuses to engage is risky activities like rock climbing for fear of injury or death is demonstrating which risk management technique? 1. risk reduction 2. risk sharing 3. risk retention 4. risk avoidance

4. risk avoidance

Which of the following best illustrates risk transfer?

Anita buys health insurance to protect herself in case of serious illness.

When may an Insurance company call a consumer on the Do Not Call list?

The insurer has an existing relationship with the consumer.

Which condition must exist for a risk to be considered insurable?

The loss must be ascertainable.

Which is not necessary to create a legal contract?

Warranty

Fran has an agency contract with ABC Insurance Company to represent the company. The contract gives her express authority to perform certain duties. Which is correct with respect to Fran's actions?

When she acts within her authority, she binds the company by her actions.

To qualify for an insurance producer's license, a person must have all of the following EXCEPT:

a college degree

When holding insurance premiums and other funds, agents must act in what role?

a fiduciary capacity

Agent Jill received a letter from the Department of Insurance asking her to submit verification of having completed the continuing education requirements for the previous licensing period. Three weeks later, the Department sent another letter. Which penalty may the Department impose if Jill still has not responded to its request one month later?

a fine of up to $100 per day per violation

Blackstone Insurers is incorporated in New York, where it also has a certificate of authority to transact insurance. What type of insurer is Blackstone in New York?

admitted insurer

Sam's contract with the insurer he represents authorizes him to solicit insurance applications. Which of the following is implied by Sam's authority?

authority to contact prospective clients to arrange sales meetings

Which is not a necessary element of a legally enforceable contract?

beneficiary

An insurable risk is not:

catastrophic

William buys a $250,000 life insurance policy. He worries that he will not have coverage during the policy review and underwriting period. Which will cover William during this time?

conditional insurance receipt

Carol applies for a $250,000 life insurance policy. Her agent gives her a document that provides limited coverage during the underwriting period. What is this document?

conditional receipt

Stacey is a captive agent for Best Rates Insurance Company. Her agency contract gives her permission to print and use business cards with the company's logo and submit applications for its policies. Which type of authority does Stacey have to take these actions?

express

Suppose an agent's contract with the insurer gives the agent permission to sell and solicit business for the insurer. What kind of authority does the contract grant to the agent?

express

Adam is an independent agent and solicits policies for several insurers. What kind of relationship does he have with each insurer?

fiduciary

Agents must act in the best interests of applicants and insureds. What does this require them to do?

give all important information about a proposed policy

An insurance company sends a proposed insurance policy to an applicant with instructions to accept the policy in writing by December 15 or it will be withdrawn. What must the applicant do to accept the policy?

give written notice on or before December 15

Which is not among an agent's responsibilities to an applicant?

helping write an applicant's insurance policy

Sandra and David orally agree that she will pay him $25,000 to set fire to her ex

husband's house. Which statement is correct?-The contract is unenforceable because its purpose is illegal.

Which of the following is not a remedy available to the Pennsylvania Commissioner of Insurance for committing an unfair method of competition?

imprisonment

What type of contract are medical expense insurance policies?

indemnity contracts

In an insurance transaction, what does the applicant give to the insurer as consideration in exchange for the insurer's promise to cover the risk?

initial premium

Which two parties form a contract for life insurance?

insurer and policyowner

An applicant for an insurance policy submits an application without the first premium. By doing so, what has the applicant done?

invited the insurer to make an offer

An insurance policy provides financial protection against:

losses caused by perils

Jana applies for a life insurance policy and submits the initial premium with her application to Acme Insurers. Acme offers her a modified policy at a higher premium. By doing so, Acme Insurers has:

made a counteroffer to Jana

An applicant for a $500,000 whole life insurance policy pays the initial premium when submitting the application. By doing this, the applicant has:

made an offer to the insurer

For a misrepresentation to affect the validity of an insurance policy, it must be:

material

While reviewing a life insurance policy issued by her home office, Angela notices that the premium is much higher than she quoted her client. The policy also has features that the client did not request. What should Angela do?

not present the policy to the insured until the home office reviews the policy and recalculates the premium

With respect to the insurance contract, the insurance company and the applicant are, respectively, the:

offeree and offeror

Because they are aleatory contracts, insurance policies:

often award disproportionately large benefits due to chance events

A prospective insured gives an agent a completed life insurance application with the first premium payment. What must the agent now give the applicant?

premium receipt

When an insurance company appoints an agent to represent it, who are the parties to the agency relationship?

principal and agent

Which is not a means of regulating the insurance business?

producer peer review

Insurance agents are often called:

producers

Which of the following is NOT a power granted to the Pennsylvania Commissioner of Insurance?

prosecuting individuals for violating the insurance laws

Which entity spreads the cost of losses among its members by having each member pay a pro

rata share of these losses?-reciprocal insurer

An agent assures an insurance applicant that she will be insured for a certain amount. If the coverage is denied and the applicant relied on the agent's assurance to her detriment, the insurer could be liable to the applicant on the basis of:

reasonable expectations

John buys a $1 million life insurance policy. He dies two years later and the insurer pays the $1 million benefit. Even though the premiums never came close to the benefit amount, the insurer pays the full benefit because the insurance policy is type of contract?

valued contact

Jane asks her insurance agent to stop notifying her when her policy is due for renewal, and to notify her attorney instead. What has Jane done by giving up this right to get this notice?

waived a right

Statements that are guaranteed to be true are known as:

warranties

What is the mathematical concept of probability that helps insurers estimate the statistical likelihood of mortality or morbidity losses at any given age? 1. law of probability 2. actuarial principle 3. law of large numbers 4. underwriting principle

3. Law of large numbers

Lucy is applying for an individual health insurance policy and discloses that she is diabetic, which is considered which of the following? 1. morale hazard 2. critical hazard 3. physical hazard 4. moral hazard

3. physical hazard

BBC Insurers filed premium rates for its new line of variable products on January 15. Within how many days must the Commissioner approve or disapprove the rates?

30

Jeff is a licensed insurance producer in both New York and Pennsylvania. He is charged with embezzlement in New York, and his first pretrial hearing is set for March 1. He must notify the Pennsylvania Commissioner of Insurance of this charge within how many days of the hearing?

30 days

As a risk management technique, which of the following best illustrates risk transfer? 1. John refuses to buy life insurance because he figures he has enough money in his savings to pay for his burial when he dies. 2. Carol eats a healthy diet and exercises regularly, hoping that doing so will keep her healthy. 3. Sheila refuses to drink alcoholic beverages if she expects to drive a car afterward. 4. Robert purchases life insurance because he figures doing so is far less expensive than trying to save all the money his survivors would need upon his death.

4. Robert purchases life insurance because he figures doing so is far less expensive than trying to save all the money his survivors would need upon his death.

Tom is a career agent of ABC Insurance Company. He sells insurance products only for ABC. Tom is a:

Captive agent

An agent acting on behalf of an insurance company even though these acts are not specified in the agent's contract with the company but are necessary to carry out the company's express authority, exercises what kind of authority?

Implied

A life insurance application asks Steven whether he has had heart problems. He does not answer the question even though he had heart surgery three years ago because he is afraid his application will be denied. Steven's failure to give his entire medical history is:

a concealment