Chapter 1-A: What's Insurance?

Which of the following is NOT a requirement for a legally binding contract? A. There must be a legal purpose. B. There must be mutual consent. C. It must be a notarized document. D. Both parties must bring something of value.

C. It must be a notarized document.

The purpose of the principle of indemnity is: A. to transfer the risk of financial loss from one party to another. B. to transfer the right to collect a debt from one party to another. C. to prevent an insured from making a profit on a loss. D. to prevent an insurer from making a profit on a loss.

C. to prevent an insured from making a profit on a loss.

Which of the following refers to being restored to the financial condition you were in before a loss? A. Restoration B. Estoppel C. Subrogation D. Indemnification

D. Indemnification

Which of the following best defines premium? A. Transfer of risk of financial loss from one party to another B. A legally enforceable agreement between parties C. A legal agreement providing temporary evidence of insurance until a policy is issued D. The fee paid by the insured in exchange for an insurance policy

D. The fee paid by the insured in exchange for an insurance policy.

If covered by an insurance policy, an insured may be indemnified for all of the following except: A. hotel bills. B. property repairs. C. rental cars. D. home remodels.

D. home remodels

Mark incurred $8,000 damage to his car in an accident. He received $8,000 from his insurance company and $4,000 from the other driver. By receiving a profit from the loss, Mark could be in violation of: A. the principle of profit and loss. B. the principle of financial status. C. the principle of financial restoration. D. the principle of indemnity.

D. the principle of indemnity.

What is a reserve, in insurance terms? A. A pool of collected premiums that the insurer sets aside to pay claims B. A set of rules governing how the insurance industry should work C. A group of policyholders who pay into the same pool of premiums D. The amount of revenue that the insurer sets aside to pay employee salaries

A. A pool of collected premiums that the insurer sets aside to pay claims

How can insurance companies afford to pay for an individual's catastrophic loss? A. The insurer collects premiums from all policyholders and pools them to pay the claims of the few. B. The insurer will deny claims if it doesn't have enough money in the bank. C. The insurer will only pay up to the amount already collected from each insured. D. The insurer puts each insured's premium payments into an interest-bearing account, which is then used to pay for that insured's claims, if they occur.

A. The insurer collects premiums from all policyholders and pools them to pay the claims of the few.

Greg plays trombone in his school band during football games. During a rally song in the stands one day, Greg annoys one of the opposing team's fans, who grabs his $400 trombone and hurls it down the bleachers, completely destroying it. Greg's insurance pays him $400 to replace the trombone, but then the opposing team's coach also offers to replace the instrument, at whatever the cost. So Greg orders a new $3,200 trombone and has the opposing team's athletic department absorb the cost. Which principle has Greg violated? A. The principle of indemnity B. The principal of the opposing team C. The principle of consideration D. The principle of legal purpose

A. The principle of indemnity

Which of these scenarios is NOT an example of indemnification? A. When trying to renew her dog's license, Ellen has to pay a penalty to the city for letting its rabies vaccination lapse. B. Joe-Bob forces his son Ted to pay their neighbor $500 after Ted breaks the neighbor's $500 TV. C. XYZ insurance pays $300 to rent a car for Hugh while Hugh waits for his own car to be repaired. D. Alice's insurer pays to rebuild her house after it burns down.

A. When trying to renew her dog's license, Ellen has to pay a penalty to the city for letting its rabies vaccination lapse.

Which of the following best defines "insurer"? A. A legally binding contract in which the insurance company agrees to pay for specified losses in exchange for premiums. B. A company, group, or government agency offering financial protection. C. An individual or organization that pays premiums in exchange for protection. D. Transfer of the risk of financial loss from one party to another.

B. A company, group, or government agency offering financial protection.

Which of the following best describes insurance? A. Restoration to the previous financial condition, no more, no less B. An economic device used to protect against the risk of unforeseen and extraordinary financial loss C. Transfer of right to collect a debt from one entity to another D. A legally enforceable agreement between parties

B. An economic device used to protect against the risk of unforeseen and extraordinary financial loss