Risk Mngt

Denise purchased a dining room set for $2,800 and insured it on an actual cash value (ACV) basis. At the time the dining room set was destroyed by a covered peril, the set was 40 percent depreciated. A replacement set will cost $3,000. Assuming no deductible, how much will Denise collect from her insurer?

$1,800

Janice insured a building valued at $200,000 for $150,000 under a property insurance policy that included an 80 percent coinsurance provision. If a $32,000 insured loss occurs, how much will Janice collect from her insurer, assuming no deductible?

$30,000

Dale and his wife Jenny are legally separated. The couple owns a vacation cabin. Dale purchased a $25,000 property insurance policy on the cabin. Unaware that Dale had purchased this coverage, Jenny purchased a $50,000 property insurance policy on the cabin. While both policies were in force, a $12,000 covered loss occurred. The insurers agreed to settle the claim on a pro rata basis. What is each insurer's liability?

Dale's insurer pays $4,000 and Jenny's insurer pays $8,000.

Which of the following statements about the principle of insurable interest is (are) true? I. In life insurance, the insurable interest requirement must be met only at the time of the loss to receive life insurance proceeds after the insured has died. II. The insurable interest requirement helps to reduce the problem of moral hazard.

II only

Which of the following statements is (are) true about the insuring agreement in an insurance policy? I. The insuring agreement provides a description of the property or activity to be insured. II. The insuring agreement can be written on an "all risks" basis or on a "named-perils" basis.

II only

Which of the following statements is (are) true with regard to insurance fraud? I. Insurance fraud hurts insurers but does not affect policyowners. II. Fraudulent claims are a cost of insurance to society.

II only

Which of the following statements is (are) true with respect to pure risks? I. Pure risks may produce either a profit or a loss. II. Premature death and damage to property caused by a fire are pure risks.

II only

Bill borrowed Linda's car with her permission. Both Bill and Linda have automobile liability insurance with a $100,000 limit. While driving Linda's car, Bill negligently caused an accident. The accident victim was awarded $80,000 in damages. How will this claim be settled, assuming that the policy written by Linda's insurer is primary and Bill's insurance coverage is excess?

Linda's insurer will pay the entire $80,000 claim.

Harris Petroleum, a fuel storage and delivery business, occasionally has difficulty in obtaining affordable pollution liability insurance. Jane Elmore, Risk Manager of Harris Petroleum, decided to form an insurance subsidiary for the purpose of writing pollution liability insurance for Harris Petroleum, as well as other insurance coverages. The insurance subsidiary will be based in Bermuda for regulatory reasons. What is such a subsidiary called?

a captive insurance company

All of the following risks are privately insurable EXCEPT

adverse commodity price movements.

Claire does not own health insurance. For the past two weeks, she has been experiencing sharp abdominal pain. Given her condition, she would like to purchase health insurance. When higher-than-average risks (like Claire) are insured at average premiums, losses are higher than anticipated. What is this problem called?

adverse selection

Which of the following statements about law and the insurance agent is (are) true? I. An insurer is responsible for the acts of its agents when the agents are acting within the scope of the agency agreement. II.Consumers should not assume that an agency relationship exists just because someone claims to represent an insurance company.

both I and II

Which of the following statements is (are) true with respect to endorsements and riders? I. Endorsements and riders are used to amend provisions of insurance contracts. II. If the endorsement or rider conflicts with terms in the underlying contract, the endorsement or rider takes precedence unless it conflicts with the law.

both I and II

Which of the following statements is (are) true with respect to hazards? I. Many physical hazards can be reduced through loss control measures. II. Moral hazard is more serious than morale hazard.

both I and II

Which of the following statements is (are) true with respect to identifying potential loss exposures? I. A physical inspection of company plants and operations can help to identify major loss exposures. II. Historical claims data can help to identify major loss exposures.

both I and II

Which of the following statements is (are) true with respect to the objectives of risk management? I. A pre-loss objective of risk management is the reduction of uncertainty. II. A post-loss objective of risk management is the stabilization of earnings.

both I and II

In which section of an insurance contract will you find provisions that qualify or place limitations on the insurer's promise to perform?

conditions

An insurance contract must be accepted in its entirety and any ambiguity in the contract is construed against the insurer. Because of these characteristics, we can describe insurance contracts as

contracts of adhesion.

In which part of an insurance contract would you find information about the property or activity to be insured?

declarations

Disability income insurance uses a special type of deductible. No benefits are paid during the initial period of disability (e.g. two weeks, a month, five months, etc.). What is this type of deductible, which is expressed in time rather than in dollars, called?

elimination period

When someone reasonably relies upon a representation of fact, what legal doctrine prevents the representation of fact from being retracted if the individual who relied upon the representation of fact would be harmed?

estoppel

A risk that affects the entire economy, or a large number of persons or groups within the economy, is called a(n)

fundamental risk.

A condition that increases the chance of loss is called a(n)

hazard.

The first step in the risk management process is to

identify potential losses.

Kyle opened a sporting goods store. After a fire damaged the store, Kyle was forced to close the business for four weeks while repairs were completed. The loss of profits that could have been earned if the business had remained open is best described as a(n)

indirect (consequential) loss.

The assignment of property insurance by the seller of the property to the purchaser of the property is only valid if the insurer approves the assignment. The reason that the insurer must approve the assignment of a property insurance policy is that

insurance contracts are personal contracts.

All of the following are methods used to pay retained losses EXCEPT

insurance.

All of the following risk treatment techniques are classified as risk control methods EXCEPT

insurance.

Franklin is concerned that if he damages someone else's property or injures someone, he will have to pay a large damage award. What kind of insurance can Franklin purchase to protect himself against such claims?

liability insurance

An individual may commit an act that results in bodily injury or damage to someone's property. A court of law may order the person responsible for the wrongful act to pay damages to the party who was injured. This type of risk is called the

liability risk.

Dean's Discount Store has been experiencing problems with shoplifting losses. Dean decided to install a camera monitoring system and to use magnetic price tags on products. If a tag is not demagnetized before the product bearing the tag leaves the store, an alarm bell sounds. These measures are examples of

loss control.

When Maria applied for a life insurance policy, she answered "No" in response to the question "Have you visited a doctor for any reason during the previous 12 months?" In fact, Maria visited a doctor five weeks ago after experiencing chest pains. She was referred to a specialist who determined that Maria has severe heart disease. If Maria dies shortly after the life insurance policy is issued, upon what grounds will the insurer be successful in denying the claim?

misrepresentation

Which of the following statements is (are) true with respect to insurance and gambling? I. Insurance is simply a wager that if a loss occurs, you'll be paid for the loss. II. Both gambling and insurance are socially productive.

neither I nor II

Rather than purchasing computers and software, ABC Company entered into a lease agreement with Computer Solutions Company (CSC). Under terms of the lease, CSC provides computers and software and is responsible for damage to the computers and software. ABC uses the lease to shift responsibility for hardware and software losses to CSC. ABC's use of the lease illustrates which method of dealing with risk?

noninsurance transfer

The relative variation between expected losses and actual losses is called

objective risk.

The spreading of losses incurred by a few individuals over a larger group, so that average loss is substituted for actual loss, is known as

pooling of losses.

Exclusions are found in insurance policies for all of the following reasons EXCEPT

pure risks are not privately insurable.

All of the following are benefits of insurance to society EXCEPT

reduces insurance company operating expenses.

Tindall Company manufactures electronic components. Managers of the company are considering several diversification options. One possibility is production of prescription drugs. When Tindall Company managers learned of the potential legal liability that could result from the manufacture and sale of prescription drugs, the managers rejected the idea and decided to consider other diversification options. How did Tindall Company choose to deal with the risk of legal liability arising from the manufacture and sale of prescription drugs?

risk avoidance

All of the following are burdens of risk on society EXCEPT

risk forces individuals to practice loss control.

A written document that outlines the risk management objectives of a firm, as well as company policy with respect to the treatment of loss exposures, is called a

risk management policy statement.

A publishing company solicits manuscripts for publication. The publishing company is concerned that an author might plagiarize material and that the person who was plagiarized might sue the publisher. To address this risk, the contract with the author includes a hold-harmless agreement. Through this agreement, the author, rather than the publisher, is held liable for plagiarism. In this situation, the publisher is using the hold-harmless agreement as what type of risk treatment measure?

risk transfer

Government insurance programs include insurance designed to deal with complex economic problems that are difficult to insure privately. These programs are compulsory, and the right to benefits is based upon past contributions or coverage under the program. These programs, which include workers compensation and social security, are called

social insurance programs.

Kyle purchased collision insurance on his new car. While Kyle was driving home from work, another driver failed to stop at a stop sign and hit Kyle's car. Kyle phoned his insurance agent and reported the accident. The agent said, "Don't worry, Kyle, we'll pay to get your car fixed. And after we pay for the damage to your car, we will try to collect from the driver who damaged your car." The process the agent described is called

subrogation.

All of the following are ideal requirements that must be met for a risk to be privately insurable EXCEPT

the loss should be within the insured's control.

Risk managers must consider the range of outcomes that could occur. The worst loss that is likely to happen is called

the maximum probable loss.

Property insurance contracts have all of the following distinct legal characteristics EXCEPT

they are bilateral contracts.

Deductibles are used for all of the following reasons EXCEPT

to reduce loss control efforts.

Insurers use a process of selecting and classifying insurance applicants to prevent individuals who have a higher-than-average probability of loss from obtaining insurance at average rates. This process is called

underwriting.

For a legally binding property insurance contract to be in force, all of the following elements are necessary EXCEPT

written document.