insurance ch2
64. What is the difference between compensation for personal injuries and punitive damages?
Personal injury damages pay for damages to a person=s rights, such as a loss of reputation or release of confidential information. Punitive damages are awards made to plaintiffs as a means of punishing defendants for outrageously offensive acts. Punitive damages imply gross negligence or the total disregard for the plaintiff's safety
63. What are the requirements for a plaintiff to prove negligence against a defendant?
The plaintiff must show 1) the defendant had a legal duty to protect the plaintiff, 2) the defendant failed to perform that duty, 3) an injury was the result of the defendant=s failure to do his or her duty.
62. Given a broad definition of legal liability, what are the three legal categories for describing situations in which one person injures another? Which ones are generally insurable?
The three categories are: torts (a civil wrong done to another), breach of contract (breaking a legally enforceable contract), and criminal wrongs (crimes against society). Many torts are insurable. Criminal wrongs and breaches of contracts are not.
66. What are the requirements for an "ideally" insurable group of exposures?
There are four requirements, from the point of view of the insurer, to make an "ideal" pool of exposures. 1) there must be a large number of homogeneous exposures (characteristics and dollar size) 2) losses have to be accidental and unintentional 3) losses must be measurable, and definite in time and place and of sufficient severity to cause economic hardship, 4) losses cannot have catastrophic potential (point of view of insurer).
10) Which of the following is NOT an example of a speculative risk? a) purchase of an insurance policy (easy) b) investment in common stocks c) operating a business for profit d) investment in banana futures e) playing the state's legal lottery
a
15. Nearly all policies of insurance exclude loss caused intentionally by the insured. This is necessary to meet which of the following requisites of an ideally insurable exposure? a) to control the moral hazard (moderate) b) to control the morale hazard c) the loss must not be subject to the catastrophic hazard d) the loss must be definite and measurable e) to control speculative risk
a
17. Which of the following BEST describes the fundamental difference between insurance and gambling? a) Insurance transfers risk away, while gambling creates a risk where none existed before (moderate) b) Insurance can be purchased anywhere, while gambling can only be done in certain states c) Insurance and gambling are both aleatory activities d) Because insurance is based on the law of large numbers, while gambling is based upon probability and statistics e) Because gambling is an aleatory contract, and insurance is a postulatory contract
a
18. In a world without underwriting, insurance would become __________ because of _____________. a) unfeasible; adverse selection (difficult) b) unfeasible; homogeneity of exposures c) inexpensive; adverse selection d) socially acceptable; government financial incentives e) more desirable; lower prices
a
2) Catastrophic losses are not insured by the private insurance industry because: a) if a truly catastrophic loss occurs, it can threaten the solvency of the insurer (moderate) b) catastrophic losses can result from an individual's moral hazard c) the federal government wants to insure catastrophic losses d) the losses require foreign reinsurance companies to operate in the U.S. e)historically, they have proven to be overly profitable, and thus illegal to insure
a
23. Which of the following statements is false? a) An insurance system can operate successfully even when the members of the system are indifferent to loss (moderate) b) Gambling and insurance are opposites c) American law prohibits using insurance contracts for gambling purposes d) To have a successful insurance system, risk must be reduced by improving the predictability of losses e)Tornado damage is predictable with reasonable accuracy on an annual basis
a
24. In order to establish negligence of the defendant, a plaintiff must show all of the following except: a) a law was broken (easy) b) a legal duty to protect existed c) an injury resulted directly from a breached duty d) a person did not act reasonably e)defendant breached a legal duty
a
31. Assume Gerald is injured because his landlord, Barbara, fails to replace burnedout light bulbs in the hallway of his apartment building. If Gerald sues Barbara for his injury ($500 medical bills) after he trips and falls down the stairs, the basis of the suit most likely would be: a) negligence (moderate) b) intentional interference c) res ipsa loquitur d) breach of contract (lease) e) neglect of public interests
a
36. Daemon went to a health spa, where he was treated with the spa's patented acid treatment. The acid treatment was supposed to make his skin look younger, but instead it caused him a lifethreatening infection, and Daemon almost died. Daemon sued the spa for his injuries. Daemon's attorney was unable to show exactly what the spa did wrong, but the jury ruled in favor of Daemon anyway. What legal doctrine would have allowed this verdict? a) Res ipsa loquitur (difficult) b) Workers' compensation laws c) Vicarious liability d) Attractive Nuisance e) The Avon Ruling
a
4) Why is a large number of exposure units required for a risk to be insurable? a) it allows the insurer to accurately predict the aggregate dollar amount of loss (moderate) b) it allows for at least some losses to occur c) it reduces the moral hazard d) it guarantees the insurer will make money e)it spreads the losses over fewer insureds
a
43. Credit insurance provides coverage for which of the following parties? a) a lender who is not repaid by borrowers (easy) b) an investor who experiences stock market losses c) a borrower who files for bankruptcy because of a job loss d) an employer that loses business because of labor union strikes e) none of the above
a
1) Which of the following is a result of adverse selection? a) no underwriting is necessary b) the applicants for insurance have a higher probability of loss than the average group of insureds (moderate) c) the federal government must write the insurance d) better insureds are attracted to the group e) large insurers are able to charge lower premiums
b
14. All of the following legal doctrines result in more individuals being held liable for negligence except: a) last clear chance rule b) contributory negligence (difficult) c) comparative negligence d) vicarious liability e) ability to use res ipsa loquitur
b
20. Underwriting might best be defined as: a) The process of taking other people's money under the table and writing it off as a business expense b) The selection of insureds and the pricing of insurance for each insured (easy) c) The determination of coverage after an insured has a claim d) The process of determining whether an insurance company wishes to sell a particular type of insurance coverage e) None of the above is an accurate answer
b
26. In a negligence lawsuit, the main and first function of the jury is to: a) assist the judge in interpreting the law b) determine the facts (moderate) c) decide guilt or innocence d) make sure neither plaintiff nor defendant cheats in presenting their case e)make sure the laws are enforced as they are written
b
27. You have been sued for negligence. Which of the following would not be an appropriate legal defense for you to use? a) contributory negligence on the part of the plaintiff b) res ipsa loquitur (moderate) c) the plaintiff assumed the risk d) the plaintiff suffered no injury as a direct result of your actions e)there was no duty to perform nor was there a breach of that duty
b
28. A plaintiff will generally collect for negligence when all the following characteristics are present except: a) injury is suffered by the plaintiff b) plaintiff breaches a contract with the defendant (easy) c) breach of duty owed the plaintiff d) the breach of the duty caused the injury to the plaintiff e) none of the above; in other words, all of these characteristics will be present
b
29. Landlord Burton did not replace burned out light bulbs in a common hallway of his apartment building. Manuel, a tenant of the building, is injured when he falls down the apartment building's stairs. Manuel sues Burton. Burton's best legal defense would be: a) res ipsa loquitur b) assumption of the risk a reasonable person would get a flashlight or take other precautions (difficult) c) Burton did not intend the injury d) the tenant always has the duty to change the light bulbs e) Burton had no legal duty in this situation
b
3) An ideal insurance system: a) reduces the probability of accidental and fortuitous losses due to increased predictability b) requires the transfer of a large number of exposures to loss to a pool, where a fund exists in advance of losses having to be paid (moderate) c) works well when a large proportion of the participants in the pool submits a claim d) eliminates all hazards e) insures events likely to occur on a group but not on an individual or unit exposed basis
b
34. The "reasonable person" standard changes based upon which one of the following factors? a) the extent and dollar amount of the injury that occurs b) the defendant's professional status relative to the event causing the injury (moderate) c) whether the loss occurred during the policy period d) the insurer's duty to defend the policyholder e)the number of previous lawsuits against the defendant
b
35. Recall that there are three basic types of compensatory damages: bodily injuries, personal injuries, and property damage. Devone=s automobile is struck by a negligent motorist. She suffers bodily injuries that cause her to have $73,000 in medical expenses. She is also unable to work for several weeks, and loses wages of $10,000 in the process. The repair bill to fix her car is $20,000. Choose the true statement from the following answer choices: a) Her medical bills and lost wages are personal injuries b) Her repair bill for her automobile is an example of property damage (difficult) c) Her lost wages are personal injuries, while her medical bills are bodily injuries d) ALL of her losses in this scenario are classified as personal injuries, since they were caused by another person e) If Devone asks for $50,000 for pain and suffering, then that particular portion of her claim for damages is considered a personal injury, while her medical bills and lost wages are bodily injuries
b
38. Suppose you were in a comparative negligence state, and you were suing someone who had injured you. Your total injuries amounted to $100,000, and the jury found that you were only 5% at fault in the incident. How much money would you then be entitled to collect from the defendant? a) $100,000 b) $95,000 (moderate) c) $0 d) $90,000 e) None of the above
b
41. Shanelle travels to Las Vegas, and puts $5,000 on the roulette table, hoping to win big. Which of the following statements is true about this situation? a) Her bet is no different than the one we all make when we buy insurance policies b) She created a risk where none existed before, so this transaction is not insurance (difficult) c) If she called her homeowners' insurance agent before she left on her trip, she could have bought a policy against losing money at the roulette table d) Her bet represents a pure risk e) Both b & d
b
5) Adhering to the principles of risk classification is important for the proper operation of the insurance system. The use of an applicant's personal opinions by underwriters for rating criteria directly violates which guiding principle? a) separation and class homogeneity b) reliability (difficult) c) incentive value d) social acceptability e) the principles of risk classification are not violated
b
8) On average, women live longer than men. If an applicant's gender is ignored in determining life insurance prices: a) men will subsidize women b) women will subsidize men (moderate) c) no subsidization will occur because only group longevity results are valid d) no subsidization will occur because premiums are not based on sex in most cases e)men must pay more for a given amount of coverage under the Federal Civil Rights Act of 1964
b
16. You are applying for homeowners' insurance, and the application for coverage asks if you have ever been convicted of a crime. Why does the insurer care if you have a criminal record? a) It tarnishes the company's image to sell to former convicts b) By law, convicted criminals are not entitled to own property, and thus cannot be issued property insurance policies c) A criminal background, especially one involving destruction or theft of property, indicates that you are a potential moral hazard (moderate) d) Underwriters are notorious for asking personal questions e)Criminal behavior is an excluded peril, except in life insurance
c
19. If insurers didn't practice underwriting, what would happen? a) They would save a lot of time and money by not asking all those nosey questions b) They would make a handsome profit since they would get to sell a lot of insurance to a lot of people c) The insurance mechanism would become unfeasible (moderate) d) The insurance mechanism would become the largest moneymaking venture in the United States e) Most property insurers= combined ratios would decrease dramatically
c
22. If you were a life insurance underwriter, asking which of the following underwriting questions would probably be socially unacceptable to an insurance applicant? a) Have you ever tested positive for HIV? b) Have you smoked any tobacco products within the last year? c) Are you heterosexual, homosexual or bisexual? (moderate) d) Have you traveled to a foreign country within the last ten years? e) How much insurance do you already own?
c
30. Assume a person is severely injured by electricity while trying to remove a kite from the power line after having climbed a power pole without the utility's permission. The injured party sues the power company. All of the following would add to a good defense from the standpoint of the power company except: a) contributory negligence b) assumption of the risk c) the utility company lacked the intention to harm the plaintiff (difficult) d) last clear chance rule under common law e) proper warnings existed
c
37. Suppose you were in a contributory negligence state, and you were suing someone who had injured you. Your total injuries amounted to $100,000, and the jury found that you were only 5% at fault in the incident. How much money would you then be entitled to collect from the defendant? a) $100,000 b) $95,000 c) $0 (difficult) d) $90,000 e) None of the above
c
40. The Terrorism Risk Insurance Act of 2002: a) requires that all life and health insurance policies exclude terrorism from coverage b) is triggered when the Secretary of Defense certifies than act of terrorism has occurred c) requires property and casualty insurers to offer terrorism insurance to all policyholders (difficult) d) expires in the year 2030 e) all of the above
c
42. Which of the following reasons for canceling a wedding would likely NOT be covered by a typical wedding insurance policy? a) bride gets food poisoning b) church suffers a fire loss the day before the wedding c) groom decides he doesn't want to get married (moderate) d) caterer is unable to provide food for the reception e)wedding official becomes ill and cannot perform the service
c
9) Given the requisites of an insurable risk, which of the following exposures would make the best subject of a profitable insurance pool? (Assume a premium appropriate to the exposure is charged, and analyze the exposure from an insurer's standpoint.) a) insuring college students against their GPA falling below a 3.0 b) insuring all the dorms on a single college campus against property damage c) insuring all the lives of college seniors in the U.S. for $10,000 each, without an initial medical exam (difficult) d) insuring students against the theft or disappearance of textbooks e) insuring freshmen against getting "discouraged" and dropping out of college before graduation.
c
11) From the viewpoint of an insurer, the prerequisites of an ideally insurable risk include all the following except: a) the loss must be capable of being determined and measured b) there must be a large, homogeneous group of exposure units c) the loss should not be subject to catastrophic hazard d) the peril should be such that the probability of loss is high (moderate) e) the loss is not controlled by the insured
d
12) "Subsidization" in an insurance pool means: a) the bad risks (poor drivers) pay more for insurance than good risks (good drivers) b) the premiums collected by the insurers don't adequately cover the losses experienced by the pool c) those who experience losses have their premiums raised d) exposures that should be charged higher insurance rates are averaged in a pool so that the good as well as bad exposures pay the same rate (moderate) e) losses are experience rated
d
21. If you were a life insurance underwriter, which of the following underwriting criteria would you MOST prefer to use because of its reliability? a) the applicant=s response to the question AHave you ever tested positive for HIV?@ b) the applicant=s response to the question AHave you smoked any tobacco products within the last year?@ c) the opinion of the patient=s family doctor as to the overall health of the patient d) the results of blood and urine tests taken by your company=s own physicians (moderate) e) a reference from a family member or close personal friend
d
25. All of the following adds to the defense or provides an excuse for the defendant in a legal liability claim except: a) showing that there was no legal duty to protect the plaintiff b) showing that the plaintiff assumed the risk c) showing that the plaintiff had the last clear chance to avoid the accident d) showing that the defendant did not mean to cause the loss (difficult) e)showing that there was no injury
d
32. Which one of the following lists presents the three categories of "legal liability" as broadly defined? a) breach of contract, res ipsa loquitur, torts b) criminal wrongs, product liability, intentional interference c) torts, breach of contracts, liability without fault d) breach of a contract, tort, criminal wrongs (moderate) e) breach of a contract, intentional interference, liability without fault
d
39. Which of the following is NOT a tort? a) Battery b) Assault c) Negligence d) Breaking a contractual agreement (moderate) e) None; in other words, all of the above are torts
d
6) An insurance applicant dying from cancer is not likely to be insured because: a) the loss is not definite as to time and place b) the probability of loss varies daily, ultimately reaching 1.0 c) the loss would be catastrophic for the insurer d) the loss is certain to occur and the price for coverage would be uneconomical (moderate) e) a premium cannot be calculated
d
7) All the following are necessary for an ideally insurable loss exposure except: a) large number of homogeneous exposures b) losses must be accidental and unintentional from the point of view of the insured c) losses must be measurable d) low probability of loss (moderate) e)losses must be noncatastrophic from the point of view of the insure
d
13) In which of the following insurance pools would there be no subsidization? a) fire insurance b) life insurance c) automobile insurance d) inland marine insurance e)there would be subsidization in all of these pools (moderate)
e
33. Damages awarded to compensate for pain and suffering are called: a) extraordinary damages b) personal injuries c) punitive damages d) exemplary damages e) bodily injuries (moderate)
e
46. Competition would totally eliminate subsidization in insurance pools if there were no regulator restricting competition between insurance companies.
f
48. Most speculative risks are insurable.
f
49. An insurance pool needs a small group of similar exposures for predictive accuracy
f
55. A breach of contract legally is known as a "tort."
f
56. The plaintiff in a negligence suit is the party who allegedly injured the defendant.
f
57. The last clear chance is a modification of the statutory contributory negligence rule.
f
58. If assumption of the risk is established it means the defendant usually must pay for damages.
f
61. You can collect for your own injuries under a liability policy.
f
68. List and briefly explain the principles of risk classification.
1) separation and class homogeneity the pool should be characteristically the same and not intermixed with other classes, 2) reliability the criteria should not be subject to easy manipulation, 3) incentive value the criteria should encourage good behavior (to produce lower losses and premiums), 4) social acceptability the criteria does not violate societal norms of classification.
67. What is adverse selection? Explain why insurers are concerned about adverse selection.
Adverse selection occurs when insurance coverage is purchased and all relevant information is not disclosed, (asymmetric information) causing rates to be inadequate. Insurers are concerned about it because it causes subsidization. Applicants would apply for coverage if the rates were low relative to the exposure causing future premium increases and discouraging good insureds to stay
65. Explain the difference between gambling and insurance.
Gambling and insurance are opposite in the way that objective risk changes. In gambling, there is no risk before the game is entered. Once the gambling situation is entered, risk increases where once there was no risk. With insurance, there is risk before the transaction is entered. Risk declines or is eliminated (shifted to the insurer) when the contract is entered leaving certainty.
69. What are the two broad categories of the private insurance industry? Break down the broad categories into their main parts.
The private insurance industry is broken into two main industries the life industry and the nonlife industry. The life insurance industry is broken into life insurance, annuities and health insurance. The nonlife area is broken into fire, marine, bonding, and casualty.
45. Insurance works best when it is sold to those who expect the greatest losses.
f
44. One reason insurable losses must be definite is to allow measurability of the losses
t
47. Gambling creates a risk where none existed before, while insurance reduces an already existing risk
t
50. The items in an insurance pool must be similar to reduce subsidization.
t
51. Insured losses ideally should be accidental losses.
t
52. One reason catastrophes are difficult to insure is because the damage is so unpredictable
t
53. Subsidization in insurance pools occurs if a 40 year old male is charged the same life insurance premium as a 20 year old male.
t
54. Volcanoes have catastrophic loss potential because they are limited in geographic impact.
t
59. A person can be found negligent even though his failure to perform some act was unintentional.
t
60. Res ipsa loquitur means "the thing speaks for itself."
t