Insurance Terms and Related Concepts

Four essential elements of negligence

-duty -unbroken chain -breach -injury

Three types of hazards

-physical -moral morale

ACV Formula

Current Replacement Cost-Depreciation= Actual Cash Value

What is the purpose of the coinsurance clause found in property insurance policies

Encourage insurance to Value * In return for the insured's promise to insure the property to some certain percent of its value, the insurer agrees to give the insured a reduced rate per hundred on the insurance and pay partial losses in full.

In case of a loss, the indemnity provision in insurance policies

Restores the 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 an insurance contract.

The legal process that gives the insurer, after payment of a loss, the right to seek recovery from a third party that was responsible for the loss is known as A) Adverse selection. B) Right of rescission. C) Principle of indemnity. D) Subrogation.

Subrogation is a provision found in most insurance policies that gives the insurer, after payment of a loss caused by a third party, the insured's rights to recovery against that third party. The insurer's rights are only to the extent of the loss payment.

Subrogation

Subrogation is the insurer's legal right to seek damages from third parties, after it has reimbursed the insured for the loss. Subrogation is based on the principle of indemnity by preventing the insured from collecting on the loss twice: once from the insurer and a second time from the party that caused the damage.

Replacement Cost

The replacement cost method of loss valuation is contrary to the basic concept of indemnity because following a loss it may provide the insured with a settlement in excess of the property's actual cash value.

A $100,000 house insured on a policy with an 80% coinsurance requirement has a fire that caused $40,000 of damage; the owner has a policy with $60,000 coverage. How much can the owner collect for his loss? A) $20,000 B) $30,000 C) $40,000 D) $60,000 Incorrect! For the total amount of a partial loss to be paid, a house must be insured for at least 80% of its value on the date of loss. In this case, because the house is insured for only $60,000 (75% of the minimum requirement), the policy will pay only 75% of the loss, or $30,000.

B) $30,000 *For the total amount of a partial loss to be paid, a house must be insured for at least 80% of its value on the date of loss. In this case, because the house is insured for only $60,000 (75% of the minimum requirement), the policy will pay only 75% of the loss, or $30,000.

What is a Certificate of Insurance? A) A written document allowing the insurer to inspect the insured's books B) A written document showing the types and amounts of insurance that have been issued to the insured C) A written document obligating the insurer to the person to which the insurance was issued D) A written document naming the insured's beneficiary

B) A written document showing the types and amounts of insurance that have been issued to the insured * A Certificate of Insurance is a written document showing the types and amounts of insurance purchased by the insured; it does not obligate the insurer to the person to which the certificate was issued.

Wilber's house is located 1 mile from the county's new landfill and across the road from the entrance of a rock quarry. To rebuild the house if something happened to it would cost $150,000. But when Wilber tried to sell it, the best offer he received was $80,000. His insurance company will insure the house for only $80,000. How is Wilber's house insured? A) Functional replacement cost B) Market value C) Actual cost value D) Replacement cost

B) Market Value * When insured for market value, it is insured for what a willing buyer would pay prior to a loss. This is different from ACV or replacement cost.

With respect to the business of insurance, a hazard is A) The basic reason for an insured to purchase insurance. B) Any condition or exposure that increases the possibility of loss. C) The risk taken when performing something dangerous. D) The tendency of poorer risks to seek insurance more often than better risks.

B) any condition or exposure that increases the possibility of loss * A hazard is any condition or exposure that increases the possibility of loss occurring. Hazards are generally classified as either physical, moral, or morale.

A policy that insures all property at multiple locations for a single amount is referred to as

Blanket * Blanket coverage provides one limit of insurance for multiple locations or classes of property with the entire limit of insurance available to respond to any loss. No single item is assigned a specific amount of insurance. However, different amounts of insurance may be shown for buildings in general and contents in general.

Insurable interest in the property covered in a policy must be proven A) When a claim is paid. B) At time of application. C) At time of loss. D) When a beneficiary is changed.

C) At time of loss * Between the time a policy is issued and a loss occurs, ownership may have changed, mortgages may have been put into place, etc. Therefore, in property and casualty insurance, insurable interest must exist at the time of loss.

Lily is driving her car through a residential area. She loses control of the car, and crashes into Max's front porch. Max, who was sitting on the porch, is injured. Lily's liability insurance policy has a limit set at $500,000. This amount applies to the total of damages for any bodily injury and property damage resulting from one accident. Which type of limit of liability does Lily have? A) Aggregate B) Per occurrence C) Combined single D) Split

C) Combined Single * Combined single is a single dollar limit of liability applying to the total of damages for bodily injury and property damage combined resulting from one accident or occurrence.

In property insurance, actual cash value is defined as which of the following? A) Stated value of the property as shown on the declaration B) The actual amount of a loss payable, less the policy deductible C) Replacement cost at the time of the loss, less depreciation D) Market value of the property at the time of the loss

C) Replacement cost at the time of the loss, less depreciation * A loss valuation method used in many property forms is determined by today's replacement cost minus depreciation for age and obsolescence.

Replacement cost is defined as A) The market value of property of like kind and quality. B) Full replacement of property with like kind and quality, less an allowance for physical deterioration and depreciation. C) Payment of the full policy limits in the event of a total loss. D) Full replacement of property at its current cost, new and without reduction for depreciation.

D) Full replacement of property at its current cost, new and without reduction for depreciation. * Replacement cost policies do not consider depreciation if the proper amount of insurance is maintained. Policies that provide replacement cost coverage require that the amount of insurance written be 80% or more of the replacement cost of the property at the time of loss.

Which insurance principle states that if a policy allows for greater compensation than the financial loss incurred, the insured may only receive benefits for the amount lost? A) Stop-loss B) Limited Benefits C) Reasonable Coverage Expectations D) Indemnity

D) Indemnity *The principle of indemnity stipulates that the insured can only collect the amount of their loss, in the event that their policy would allow for a greater benefit to be collected.

All of the following are factors in the determination of actual cash value EXCEPT A) Type and quality of property. B) Age of the property. C) Replacement cost. D) Insurance premium paid.

D) Insurance Premium Paid * ACV is a valuation method in which the value of property is determined using the replacement cost for property of like kind and quality, minus depreciation. The original cost is not a factor.

All of the following are true regarding deposit premium EXCEPT A) It could be adjusted by the audit. B) It must be paid in advance. C) It is an estimated premium paid at the policy issue. D) It is 50% of the actual premium.

D) It is 50% of the actual premium *Deposit premium is an estimated premium paid in advance at the time the policy is issued that may be adjusted by the audit based on actual exposures.

Which of the following does the term "proximate cause" refer to? A) Injury that leads to a monetary compensation B) Duty of the defendant to act C) Reason for filing a lawsuit D) Negligence that leads to an injury

D) Negligence that leads to an injury * Proximate cause is reasonably foreseeable act or event that results in an injury or damage. Negligence may often be the proximate cause of the damage; without it, the accident would not have happened. This is also called direct liability.

What type of insurance policy insures against all risks of loss that are not specifically excluded by the policy? A) Specified peril policy B) Binder policy C) Named peril policy D) Open peril policy

D) Open Peril Policy * Open peril (special) policies cover everything except what they say they don't. Named peril policies cover only perils named in them.

What are the two types of compensatory damages? A) Pure and speculative B) Tort and general C) Normal and punitive D) Special and general

D) Special and General *Compensatory damages are intended to compensate someone for both tangible and intangible elements of a loss. Special damages are for the actual measurable losses, i.e. value of property or medical bills. General damages cannot be specifically measured in dollars, i.e. pain and suffering.

Events in which a person has both the chance of winning or losing are classified as A) Insurable. B) Pure risk. C) Retained risk. D) Speculative risk.

D) Speculative Risk *Speculative risk involves the chance of gain or loss and is not insurable. (i.e gambling)

An insured's 9-year-old son threw a ball, accidentally breaking a neighbor's plate glass window. The insured was found legally liable for the cost of replacing the window. This is an example of A) Intervening cause. B) Juvenile delinquency. C) Absolute liability. D) Vicarious liability.

D) Vicarious Liability *Under vicarious liability, an insured may be held responsible for the acts of other family members or independent contracts engaged by the insured to perform work.

An insured is applying for a casualty insurance policy. One of the conditions of the policy allows the insurance company to inspect the insured's books at the end of the policy term to make sure sufficient premium has been collected for the exposure she plans to insure. Which condition is part of the insured's policy?

Deposit premium audit *Deposit premium audit is a condition that allows an insurer to inspect the insured's books at the end of the policy term to make sure sufficient payment has been collected for the exposure.

The causes of loss insured against in an insurance policy are known as

Perils *Perils are the causes of loss insured against in an insurance policy.

Greg owns several buildings, each at a different location and insured on a separate policy. What type of coverage does Greg have?

Specific *Specific insurance provides a specific amount of coverage for each property. A blanket insurance policy provides coverage for more than one property with a single limit of coverage.

Property insurance that provides $100,000 coverage for a building and $50,000 coverage for personal property at a single location is called

Specific Coverage *One location is insured for a specific amount of insurance on the structure and contents.

An insured relocated to another state for work. However, she still owns and insures a house in this state, but has had no one living in it for 3 months. She is also storing some of furniture and clothes in the house. From the insurance standpoint, the insured's house is considered

Unoccupied *Unoccupancy refers to an insured structure in which no people have been living or working within the required period of time, but the structure contains contents.

A building is insured, but no one has lived or worked in it for 10 years. The building is completely empty of any furniture or personal belongings. From an insurance standpoint, the building is considered

Vacant *An insured structure in which no people have been living or working and no contents have been stored for the period of time required as stated in the policy (usually 60 days) constitutes vacancy.

Liability imposed on one party as a result of the actions of another person (i.e., parent/child, employer/employee) is known as

Vicarious Liability

Moral Hazard

refer to those applicants that may lie on an application for insurance, or in the past, have submitted fraudulent claims against an insurer

The insured has violated the contract without the knowledge of the mortgage holder. After a loss..

the insured cannot collect but the mortgage holder will still be paid *Mortgagees have insurable interest in the property for which they loaned the money for purchase. Therefore, they will still be paid their interest in the loss even though the insured does not get paid because they violated the contract.

What is most likely to occur if it is determined by the audit that the deposit premium was too high?

the insured will receive a return premium * If the audit shows that the initial (deposit) premium to the insured was too high (the exposures were over-estimated), the insured will receive a return premium.

Physical Hazard

those arising from material, structural, or operational features of the risk, apart from the persons owning or managing it

An insured's building has an actual cash value of $200,000, and he has insured the property for $120,000 with an 80% coinsurance clause. A $40,000 loss occurs. How much will the policy pay?

$30,000 * This insured only carried 75% of the amount of insurance he had agreed to carry ($120,000 of the agreed $160,000), so the insurer will pay only 75% of the loss, or $30,000. If the insured had carried the required amount of insurance, partial losses would be paid in full. In the event of a total loss, the face of the policy would be paid. If the full amount is not carried, divide the actual amount carried by the amount that should be carried (the coinsurance amount), and multiply it by the loss.

An insured's roof cost $4,000 when installed 5 years ago. It has been damaged by hail and must be replaced. The new roof will cost $6,000 at today's prices. If the roof has been depreciating at $200 per year and his policy is ACV, how much will it pay toward the insured's new roof?

$5,000

An insurance policy specifies that it will pay $600 for a specific loss. The policyowner suffers a loss of $535. How much will the policy pay?

$535 * Applying the principle of indemnity, the insurer will pay the actual cost of the loss, up to the limit stated in the policy. In this case, the insurer will pay $535.

Three years ago, an insured moved to an unfurnished apartment. She bought new furniture that cost $9,000. Last week, there was a fire in the apartment that destroyed the furniture. Replacement cost is $10,500. The adjuster told the insured her furniture depreciated $2,500. If insurance is written on an actual cash value basis, how much will it pay for the loss?

$8,000

Coinsurance/Insurance to Value The coinsurance clause states that, in consideration of a reduced rate, the insured agrees to maintain a certain minimum amount of insurance on the insured property. This encourages the insured to insure the property closer to its full value. In case of a partial loss, the insurer will pay the partial loss in full if the insured has maintained the required percentage of insurance with relation to the value of the property. If the amount of insurance maintained is less than the coinsurance clause requirement, the insurer will only pay the percent of the loss that the insurance bears in relation to the amount of insurance that should have been carried. In the event of a total loss, the coinsurance clause does not operate, and the face amount of the policy is paid. (Insurance Carried ÷ Insurance Required) X Loss Amount = Loss Payment The insurance to value provision, usually found in homeowners policies, provides a replacement cost settlement to the policyholder who carries adequate insurance, which means that the property is insured to the exact dollar amount or percentage of value. If the amount of insurance is less than the value assumed in the premium rate calculation, the insured would still be indemnified at least to the amount of the actual cash value of the loss.

(Insurance Carried ÷ Insurance Required) X Loss Amount = Loss Payment

Which of the following definitions best defines accident?

A sudden, unplanned and unexpected event, not under the control of the insured, resulting in injury or damage neither expected nor intended * "Accident" is best defined as a sudden, unplanned or unexpected event, not under the control of the insured, resulting in injury or damage neither expected nor intended.

Which of these is defined as the maximum limit of coverage available under a liability policy during a policy year, regardless of the number of claims that may be made or the number of accidents that may occur? A) Aggregate limit of liability B) Combined single limit of liability C) Per occurrence limit of liability D) Split limit of liability

A) Aggregate limit of liability * Aggregate limit is the maximum limit of coverage available under a liability policy during a policy year, regardless of the number of claims that may be made or the number of accidents that may occur.

In property and casualty insurance, what is the term for the amount of a loss that the insured must cover out of pocket, and the insurer will only pay for the additional amount of the loss above this limit? A) Deductible B) Self-insured retention C) Coinsurance D) Primary amount

A) Deductible *In property insurance, the amount of loss retained by the insured is called the deductible; in liability insurance, it is called retention. Most property coverages include a deductible; most liability policies do not include retention.

All of the following statements describe Strict Liability EXCEPT A) It is imposed on defendants engaged in hazardous activities. B) Claimants may need to provide proof that a product defect caused an injury. C) It is imposed regardless of fault. D) It is applied in product liability cases.

A) It is imposed on defendants engaged in hazardous activities * Strict liability is commonly applied in product liability cases. The business is then liable for defective products, regardless of fault or negligence.

Which of the following is NOT an element of negligence? A) Libel B) Duty C) Breach D) Unbroken chain

A) Libel * There are four essential elements of negligence: duty, breach, injury, and unbroken chain. Libel is a type of intentional tort.

Which of the following coverages in Dwelling and Homeowners policies is for indirect losses? A) Loss of use B) Dwelling C) Structures D) Contents

A) Loss of Use *Loss of use coverage applies only after a direct loss caused by a covered peril has occurred.

Which of the following types of valuation works best for property whose value does not fluctuate much?

Agreed Value * Agreed value works best for items whose value does not fluctuate much. When a loss occurs, the policy pays the agreed value as specified on the policy schedule, regardless of the insured item's appreciation or depreciation.

In which of the following types of property valuation will the policy pay the full value as specified on the policy schedule, regardless of the insured property's appreciation or depreciation?

Agreed Value *Agreed value is a property policy with a provision agreed upon by the insurer and insured as to the amount of insurance that represents a fair valuation for the property at the time the insurance is written. When a loss occurs, the policy pays the agreed value as specified on the policy schedule, regardless of the insured property's appreciation or depreciation.

If a liability policy had split limits of 100/300/100, what is the maximum amount that would be payable in the event of injury to a single person? A $500,000 B $100,000 C $200,000 D $300,000

B) $100,000 * The first limit shown, $100,000, is the most the policy will pay for bodily injury to any one person.

A beauty parlor burns to the ground. What type of loss is this to the owner? A) Consecutive B) Direct C) Consequential D) Specific

B) Direct *Damage caused by a peril that is insured against is classified as direct loss.

Payment for medical expenses, loss of wages, funeral expenses, or the cost to repair or replace damaged property are known as what type of compensatory damages? A) General B) Special C) Tort D) Normal

B) Special *The two classes of compensatory damages that may be awarded are special and general damages. Special damages are tangible damages that can be specifically measured in dollar amounts (such as out-of-pocket expenses for medical, miscellaneous expenses, and loss of wages).

An insured owns a building that is valued at $400,000. To comply with the 80% coinsurance provision of his insurance policy, how much should he insure the property for? A) 100% of the market value B) $400,000 C) $32,000 D) 80% of the property's replacement cost or more

D) 80% of the property's replacement cost or more * The coinsurance clause states that, in consideration of a reduced rate, the insured agrees to maintain a certain minimum amount of insurance on the insured property. In the event of a covered loss, insurance is designed to pay replacement cost minus depreciation.

A tornado that destroys property would be an example of which of the following? A) A pure risk B) A loss C) A physical hazard D) A peril

D) A Peril *A peril is the cause of loss insured against in an insurance policy.

What type of liability does a person who owns a swimming pool have? A) Vicarious B) Implied C) Direct D) Absolute

D) Absolute *Any conduct that is inherently dangerous (swimming pools, using explosives, keeping wild animals) imposes absolute liability. The claimant does not have to prove anything.

All of the following statements concerning coinsurance are true, EXCEPT A) It is used to help adequacy and equity in rates. B) The insured agrees to maintain insurance equal to some specified percentage of the value of the property. C) If the insurance carried is less than required, the insurance may not cover the whole loss. D) The coinsurance formula also will be applied to total losses.

D) The coinsurance formula also will be applied to total losses * In the event of a total loss, the coinsurance clause does not operate, and the face amount of the policy is paid.

Which of the following does NOT contain an automatic reinstatement provision? A) General liability written with an aggregate limit B) Business Automobile liability C) Personal automobile liability with split limits D) homeowners

General Liability Written with an aggregate limit * An aggregate limit is reduced by the payment of claims. It is possible for an insured to run out of coverage before the expiration of the policy. Aggregate limits are restored on the anniversary date of the policy

Which insurance principle states that if a policy allows for greater compensation than the financial loss incurred, the insured may only receive benefits for the amount lost?

Indemnity *The principle of indemnity stipulates that the insured can only collect the amount of their loss, in the event that their policy would allow for a greater benefit to be collected.

For the reported losses of an insured group to become more likely to equal the statistical probability of loss for that particular class, the insured group must become

Larger *According to the Law of Large Numbers, the larger a group becomes, the easier it is to predict losses. Insurers use this law in order to predict certain types of losses and set appropriate premiums.

Which of the following does the term "proximate cause" refer to?

Negligence that leads to an injury * Proximate cause is reasonably foreseeable act or event that results in an injury or damage. Negligence may often be the proximate cause of the damage; without it, the accident would not have happened. This is also called direct liability.

An insured carries a property policy on her home in the amount of $250,000. A bank is shown as the mortgagor in the policy. Last month the insured made her final mortgage payment, but did not remove the bank from the policy. In the event of a covered loss to her home, how much will the bank receive?

Nothing * Because the bank does not have a financial interest in the house at the time of loss, they will receive nothing.

Losses caused by continuous or repeated exposure to conditions resulting in injury persons or damage to property that is neither intended nor expected is the definition of which of the following terms?

Occurence *An occurrence includes those losses caused by continuous or repeated exposure to conditions resulting in injury persons or damage to property that is neither intended nor expected.

An insured has a liability policy that sets the amount for all claims that arise from a single incident at $50,000. Which type of limit of liability does this insured's policy have?

Per Occurence * Per occurrence sets the amount for all claims that arise from a single incident at a certain number

What type of damages may be awarded by the court to create disincentives that discourage behavior that is deemed highly undesirable by society?

Punitive *Punitive damages are a form of punishment, intended to serve as an example to others to discourage undesirable behavior.

A situation in which a person can only lose or have no change represents

Pure Risk *Pure risk refers to situations that can only result in a loss or no change. Pure risk is the only type insurance companies are willing to accept.

The risk of loss may be classified as

Pure risk and speculative risk * Pure risks involve the probability or possibility of loss with no chance for gain. Pure risks are generally insurable. Speculative risks involve uncertainty as to whether the final outcome will be gain or loss. Speculative risks are generally uninsurable.

Which method of loss valuation is contrary to the basic concept of indemnity?

Replacement Cost

Which of the following is used in the formula for calculating the actual cash value of a property?

Replacement Cost *The actual cash value (ACV) method of valuation reinforces the principle of indemnity because it recognizes the reduction of value of property as it ages. To calculate ACV, depreciation is subtracted from the current replacement cost.

When the amount of insurance written in a property policy is not subject to any coinsurance provision and that amount is paid in the event of a covered loss, the coverage is said to be written as

Stated Amount *In stated amount coverage, the value of the insured property is determined at the time the policy is written. In the event of a loss, that amount is paid without regard to any coinsurance provision. (However, if the loss is less than total, the insurer has salvage rights with the insured having first right of refusal of the salvage.)

The transfer of an insured's right to seek damages from a negligent party to the insurer is found in which of the following clauses?

Subrogation *After an insured accepts payment from the insurer, they have been indemnified. Insurance policies require the insured to transfer any right to recovery to the insurer so that it may seek recovery up to the amount paid as loss.

For the purpose of insurance, risk is defined as A) The uncertainty or chance of loss. B) The certainty of loss. C) The cause of loss. D) An event that increases the amount of loss.

The uncertainty or chance or loss * Risk, or the chance of loss occurring, is the basic reason for buying insurance.

When a parent is required to pay for damages caused by his or her children, this is an example of

Vicarious Liability *When one party is held liable for act of another party, it is called vicarious liability. Employers are responsible for employees acting within the scope of their employment. Parents sometimes are held responsible for acts of their children.

Which of the following best expresses the purpose of a stated value contract? A) To establish the value of property subject to loss by theft or robbery B) To provide a maximum limit for which the insurance company may become liable in casualty losses C) To pre-establish the amount of coverage available for property items that are difficult to value D) To ensure that the principle of indemnification applies

c) To pre-establish the amount of coverage available for property items that are difficult to value *The value of the insured items is determined at the time the policy is written, not at the time of loss.

Morale Hazard

refers to an increase in the hazard presented by a risk, arising from the insured's indifference to loss because of the existence of insurance ( e.g. I'm not going to bother fixing this. if It breaks my insurance will pay to replace it.)

Negligence may be defined as

the failure to use reasonable and prudent care *Just because something bad happens does not mean there was negligence. Negligence is when the failure to use proper care results in injury or damage.