EXAMS 1 and 2

Fundamental purposes of the principle of indemnity include which of the following? To reduce physical hazards To prevent the insured from profiting from insurance A) I only B) II only C) both I and II D) neither I nor II Answer: B 2 Which of the following is a fundamental purpose of the principle of indemnity? A) to reduce moral hazard B) to minimize physical hazards C) to settle property insurance losses on a replacement cost basis D) to require deductibles in all property insurance policies Answer: A 3 Sam's furniture was destroyed by a fire. The furniture cost $1200 when it was purchased, but similar new furniture now costs $1800. Assuming the furniture was 50 percent depreciated, what is the actual cash value of Sam's loss? A) $600 B) $900 C) $1200 D) $1800 Answer: B 4 The loss settlement under which of the following supports the principle of indemnity? A) life insurance B) valued policies C) replacement cost property insurance D) actual cash value property insurance Answer: D 5 Under which of the following rules is actual cash value determined by taking into consideration all relevant factors an expert would use to determine the value of the property? A) the circumstantial evidence rule B) the broad evidence rule C) the property indemnity rule D) the objective value rule Answer: B 6 A total loss under a valued policy is settled on the basis of the A) market value of the loss. B) actual cash value of the loss. C) replacement value of the loss. D) amount of insurance covering the loss. Answer: D 7 Which of the following statements describes how losses will be settled if a property insurance policy is written on a replacement cost basis? A) Losses are settled without the applicable deductible. B) Losses are settled without a deduction for depreciation. C) The insurer must replace the damaged or destroyed property in lieu of a cash settlement. D) The policy is converted to a valued policy. Answer: B 8 Which of the following statements about the principle of insurable interest is (are) true? It makes it difficult to measure the amount of an insured's loss. It reduces moral hazard. A) I only B) II only C) both I and II D) neither I nor II Answer: B 9 All of the following will support an insurable interest for purposes of purchasing property and liability insurance EXCEPT A) former ownership of property. B) potential legal liability. C) secured creditors. D) contractual right. Answer: A 10 Which of the following statements about an insurable interest in life insurance is (are) true? It is required of any person named as beneficiary. It may result from a pecuniary (financial) interest. A) I only B) II only C) both I and II D) neither I nor II Answer: B 11 When must an insurable interest legally exist in life insurance? A) only at the time of the insured's death B) only at the inception of the policy C) only at the time the beneficiary is paid D) both at the time of the insured's death and at the inception of the policy Answer: B 12 When must an insurable interest legally exist in property insurance for an insured to receive payment for a loss from the insurer? A) only at the time of the loss B) only at the inception of the policy C) only at the time the loss settlement takes place D) both at the time of the loss and at the inception of the policy Answer: A 13 Sue's office building was damaged by a fire caused by a careless tenant. After paying Sue for the loss, the insurance company sued the tenant to recover its loss. This suit is based on the principle of A) warranty. B) insurable interest. C) utmost good faith. D) subrogation. Answer: D 14 Which of the following statements about subrogation is true? A) Subrogation eliminates adverse selection. B) Subrogation helps to hold down the cost of insurance. C) Subrogation results in violation of the principle of indemnity. D) Subrogation permits a party who caused a loss to avoid responsibility for the loss. Answer: B 15 Which of the following statements about subrogation is true? A) It is used primarily for losses paid under life insurance policies. B) It allows the insurer to sue its own insured who is negligent. C) The insured's right to collect benefits may be forfeited if the insured interferes with the insurer's subrogation rights after a loss occurs. D) The insurer is required to exercise its subrogation rights. Answer: C 16 The principle of utmost good faith is supported by all of the following legal doctrines EXCEPT A) representations. B) warranty. C) subrogation. D) concealment. Answer: C 17 What is the legal significance of a material concealment by an insurance applicant? A) The contract is automatically voided from its inception. B) The contract is voidable at the insurer's option. C) Loss payments are reduced by the degree of the concealment. D) The insurer is immediately entitled to a higher premium. Answer: B 18 What is the legal significance of a material misrepresentation in an insurance application? A) The contract is automatically voided from its inception. B) The contract is voidable at the insurer's option. C) Loss payments are reduced by the degree of the misrepresentation. D) The insurer is immediately entitled to a higher premium. Answer: B 19 A false material statement made by an applicant for insurance is an example of A) concealment. B) breach of warranty. C) lack of offer and acceptance. D) misrepresentation. Answer: D 20 Which of the following statements about a warranty in an insurance contract is (are) true? It is part of the insurance contract. Statements made by an insurance applicant are considered warranties rather than representations. A) I only B) II only C) both I and II D) neither I nor II Answer: A 21 David owns a liquor store in a high-crime area. In order to obtain a reduced insurance premium, David promised to have a burglar alarm operating at the store when the store was closed. This agreement, which was incorporated into the insurance contract, is an example of a A) representation. B) binder. C) rider. D) warranty. Answer: D 22 Which of the following statements about offer and acceptance for insurance contracts is true? A) In property and liability insurance, agents typically do not have the authority to bind coverage. B) In life insurance, the agent can usually accept an offer by immediately binding coverage. C) In property insurance, the offer and acceptance are usually in writing but may be oral. D) In life insurance, completing the application and paying the first premium constitute acceptance of the offer from the insurer. Answer: C 23 Chris applied for life insurance and paid the first premium on Monday. She was given an insurability premium receipt which specified that coverage was effective on the date of the application or the date of the medical exam, whichever is later. She took the medical exam the following Thursday. She was found to be in perfect health. On which day was her coverage effective? A) on Monday, when she completed the application and paid the first premium B) on Wednesday, two days after completing the application and paying the first premium C) on Thursday when she passed the medical exam D) on Saturday, two days after passing the medical exam Answer: C 24 Which of the following statements about consideration in an insurance contract is (are) true? The insured's total consideration is submission of a completed application. The insurer's consideration is the promise to do those things specified in the policy. A) I only B) II only C) both I and II D) neither I nor II Answer: B 25 A contract in which the values exchanged are not equal because chance is involved is called a(n) A) contract of adhesion. B) unilateral contract. C) conditional contract. D) aleatory contract. Answer: D 26 Why are insurance contracts said to be contracts of adhesion? A) The values exchanged by the parties to the contract are not equal. B) One party writes the contract, and the other party must accept the entire contract as written. C) Only one party makes a legally enforceable promise. D) Conditions are placed on the insurer's promise to perform. Answer: B 27 Why does the insured get the benefit of the doubt if an insurance policy contains any ambiguities or uncertainties? A) because insurance contracts are aleatory B) because insurance contracts are unilateral C) because insurance contracts are conditional D) because insurance contracts are contracts of adhesion Answer: D 28 Why can an insurer refuse to pay a claim if an insured fails to abide by the policy provisions? A) because insurance contracts are aleatory B) because insurance contracts are unilateral C) because insurance contracts are conditional D) because insurance contracts are contracts of adhesion Answer: C 29 Which of the following types of insurance policies can usually be assigned without the insurer's consent? Life insurance Property insurance A) I only B) II only C) both I and II D) neither I nor II Answer: A 30 What is the practical effect of an insurance policy being a conditional contract? A) The insurer can refuse to a pay claim if the insured has not complied with all policy provisions. B) The insured can assign the policy only with the insurer's consent. C) The insurer can sue the insured for failure to pay any premiums. D) The insured gets the benefit of the doubt if a policy contains any ambiguities or uncertainties. Answer: A 31 What is the practical effect of an insurance contract being a contract of adhesion? A) The insurer can refuse to pay claims if the insured has not complied with all policy provisions. B) The insured can assign the policy only with the insurer's consent. C) The insurer can sue the insured for failure to pay any premiums. D) The policy is interpreted in the insured's favor if the policy contains any ambiguities or uncertainties. Answer: D 32 All of the following statements about the rules governing agency relationships are true EXCEPT A) An agent must be authorized to act on behalf of a principal. B) An agency agreement may grant certain powers to the agent as well as denying the agent other powers. C) The principal is responsible for the acts of agents only if the acts are criminal. D) Knowledge of the agent is presumed to be knowledge of the principal with respect to matters within the scope of the agency relationship. Answer: C 33 The voluntary relinquishment of a legal right is called A) subrogation. B) adhesion. C) estoppel. D) waiver. Answer: D 34 Frank asked his company's employee benefits director if his group health coverage could be converted to individual coverage. The benefits director said, "Yes, you can convert to an individual policy, and the coverage is identical to your group coverage." Frank quit his job and converted to an individual policy. Six months later he filed a claim. He was dismayed to learn the conversion policy was more limited compared to the group coverage, and his claim was denied. What legal doctrine will allow Frank to bring a successful legal action against his former employer because he was financially harmed due to his reasonable reliance upon a representation of fact? A) adhesion B) waiver C) estoppel D) subrogation Answer: C 35 Janice purchased a living room set for $1,000 and insured this furniture on an actual cash value basis. Two years later the living room set was destroyed by a covered peril. At the time of loss, the property had depreciated in value by 25 percent. The replacement cost of the furniture at the time of loss was $1,200. Assuming no deductible, how much will Janice receive from her insurer? A) $900 B) $950 C) $1,000 D) $1,200 Answer: A 36 Jacob sold his house to Shelia for $140,000 in cash. Jacob "threw in" insurance on the house as part of the deal and did not bother telling the insurer that there was a new owner. Four months after Shelia purchased the home, a windstorm damaged the roof. Which of the following legal characteristics of insurance contracts could the insurer use to legally deny payment for the damage to the roof? A) Insurance contracts are unilateral contracts. B) Insurance contacts are contracts of adhesion. C) Insurance contracts are aleatory contracts. D) Insurance contracts are personal contracts. Answer: D 37 Melody's car was damaged when another driver ran a stop sign and hit her car. Melody decided to collect from her own insurer and to let her insurer recoup the loss payment from the negligent driver who hit her. What fundamental legal principle is illustrated in this scenario? A) the principle of utmost good faith B) the principle of insurable interest C) the principle of subrogation D) the principle of reasonable expectations Answer: C 38 When Ben applied for life insurance, he was asked on the application if he smoked or used tobacco products. Ben answered "No." In reality, Ben smokes two packs of cigarettes a day. The policy was issued at the "preferred, nonsmoker rate." If Ben dies 6 months after the policy is issued, upon what grounds will the insurer be able to legally deny the claim? A) warranty B) misrepresentation C) waiver D) concealment Answer: B 39 Robin plans to open a bar in a high-crime area. She had difficulty obtaining insurance for the business. She found an insurer willing to write the coverage, but only if Robin agreed to have a security alarm system in operation at all times when the business is closed. Robin's promise to have a security alarm system operational as a condition of having the insurance coverage in force is a A) binder. B) warranty. C) waiver. D) deductible. Answer: B 40 Dave is an agent for Easy Pay Insurance. Easy Pay insures only high-quality applicants. Dave wanted to earn more commissions, so he sold some policies to applicants he knew were below-average risks. When these policyowners started filing claims, Easy Pay tried to deny the claims stating that Dave had not acted appropriately. Which general rule of agency makes Easy Pay responsible for the claims of the higher-than-average risk policyowners? A) There is no presumption of an agency relationship. B) Agents should be compensated based on the quality of the business they generate. C) A principal is responsible for the acts of its agents who are acting within the scope of their authority. D) An agent must have authority to represent the principal. Answer: C 41 Ted's insurance claim was denied by XYZ Insurance Company. When Ted inquired why the claim was denied, he was told to, "Read the exclusion on page 5 of the policy." Ted read the exclusion. In his opinion, the exclusion was poorly worded and vague. If a court of law agrees with Ted's assessment of the exclusion, Ted may still be able to have his claim paid by the insurer because insurance contracts are A) personal contracts. B) unilateral contracts. C) aleatory contracts. D) contracts of adhesion. Answer: D 42 Mark owns a bar. The bar has a back room where Mark has some slot machines. Mark lets some of his patrons play the machines, and Mark keeps any profits. This type of gambling is illegal where Mark lives. Mark wanted to purchase insurance in case his slot machines were confiscated by the police. Such an insurance contract would not be enforceable. Which requirement needed to form a valid insurance contract is missing? A) consideration B) offer and acceptance C) legal purpose D) competent parties Answer: C 43 Which distinct legal characteristic of insurance contracts states that only the insurer's promise to perform is legally enforceable? A) contracts of adhesion B) unilateral contracts C) aleatory contracts D) personal contracts Answer: B 44 Some courts have ruled that an alternative to "replacement cost less depreciation" should be used to determine the actual cash value of a property loss. Under this alternative, the value of property lost is determined by the price a willing buyer would pay a willing seller for the property in a free market. This method of determining actual cash value is called the A) intrinsic value method. B) valued policy method. C) fair market value method. D) forensic cost method. Answer: C 45 Some states have a law that requires payment of the face amount of insurance to the insured if a total loss to real property occurs from a peril specified in the law. These laws are called A) agreed amount laws. B) replacement cost laws. C) homestead laws. D) valued policy laws. Answer: D 46 The general rule that ambiguity in insurance contracts is construed against the insurer is reinforced by an important legal principle. This principle states the insured is entitled to coverage under a policy that he or she would assume the policy would provide, and exclusions must be conspicuous, plain, and clear. This principle is known as A) the principle of utmost good faith. B) the principle of reasonable expectations. C) the principle of subrogation. D) the principle of indemnity. Answer: B 47 Dave and Meagan Philips borrowed $150,000 from Fifth National Bank to help fund the purchase of a new home. The home serves as collateral for the loan. Fifth National has an insurable interest in the home based on A) potential responsibility for legal liability. B) being a secured creditor. C) expectation of ownership. D) having a contractual right. Answer: B 48 All of the following statements about subrogation are true EXCEPT A) The general rule allows the insurer to recover up to the amount paid to its insured under the policy. B) Subrogation does not apply in life insurance. C) Interfering with the insurer's subrogation rights can jeopardize indemnification of the insured. D) The insurer reserves the right to subrogate against its own insureds. Answer: D 49 Powers specifically conferred on an agent to act on behalf of a principal are A) incidental authority. B) apparent authority. C) implied authority. D) express authority. Answer: D 50 If a third party is led to reasonably believe that an agent is acting within the scope of his/her authority, even though the agent is exceeding his/her authority, the principal may still be bound by the agent's actions. In this case, the agent has bound the principal by A) implied authority. B) apparent authority. C) incidental authority. D) express authority. Answer: B 51 The authority of an agent to perform all incidental acts necessary to fulfill the purposes of the agency agreement is called A) implied authority. B) declared authority. C) apparent authority. D) express authority. Answer: A 52 ABC Life Insurance Company insures both smokers and nonsmokers. Beth lied on her life insurance application, checking the box for "no" in response to the question of whether she smokes cigarettes or uses other tobacco products. Even though Beth smokes 10 to 15 cigarettes each day, the policy was issued at the "preferred nonsmoker rate." Beth's lie is materiel in this case because A) it was in writing on the application. B) it was given with the intent to deceive. C) the policy would have been issued on different terms if the insurer knew the true facts. D) the policy would have been issued for a lower face value if the insurer knew the true facts. Answer: C 53 Bob purchased insurance on his home with an insurer that was not licensed to do business in the state. In this case, which requirement to form a binding insurance contract is lacking? A) exchange of consideration B) offer and acceptance C) legal purpose D) competent parties Answer: D 54 A pharmaceutical company employs a young chemist who is responsible for three new patents last year and for the development of the company's two best-selling drugs. The company purchased a large life insurance policy on the chemist. In this case, the insurable interest requirement was met because of a(n) A) ownership interest. B) close family relationship. C) pecuniary interest. D) economic family relationship. Answer: C 55 Hank bought a farm that had an old barn. He noticed one day that the roof of the barn was swaying in the wind. Hank went to see his insurance agent and he insured the barn for $20,000. The agent didn't ask if the roof might collapse, and Hank didn't say anything about it. One week later there was a strong wind and the roof collapsed. Assuming the insurer can prove it, under what legal grounds could the insurer deny payment of the claim? A) estoppel B) concealment C) warranty D) misrepresentation Answer: B 56 Kim purchased a one-year property insurance policy. She agreed to pay half the premium when she bought the coverage, and the other half six months later. If Kim fails to pay the second premium, the insurer cannot sue her for the premium because insurance contracts are A) unilateral contracts. B) contracts of adhesion. C) personal contracts. D) aleatory contracts. Answer: A 57 Charles Blake told Wendy that he was an agent for Easy Pay Life Insurance Company. He presented no credentials. He asked Wendy some questions about her health and activities, and recorded the answers on scrap paper. He collected a $250 cash premium from Wendy. When Wendy did not receive a policy from Easy Pay, she contacted the company. Easy Pay said they do not have an agent named Charles Blake. Easy Pay is not responsible for Wendy's loss of $250 because A) the principal is never responsible for the acts of its agents. B) there is no presumption of an agency relationship. C) limitations can be placed on the powers of agents. D) knowledge of the agent is assumed to be knowledge of the principal. Answer: B

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Risk management is concerned with A) the identification and treatment of loss exposures. B) the management of speculative risks only. C) the management of pure risks that are uninsurable. D) the purchase of insurance only. Answer: A 2 A situation or circumstance in which a loss is possible, regardless of whether a loss occurs, is called a A) deductible. B) loss exposure. C) loss avoidance. D) peril. Answer: B 3 Which of the following is a post-loss risk management objective? A) treating loss exposures in the most economical way B) continuing operations C) reduction of anxiety D) meeting externally imposed legal obligations Answer: B 4 Preloss objectives of risk management include which of the following? Preparing for potential losses in the most economical way Reduction of anxiety A) I only B) II only C) both I and II D) neither I nor II Answer: C 5 A risk manager is concerned with which of the following? Identifying potential losses Selecting the appropriate techniques for treating loss exposures A) I only B) II only C) both I and II D) neither I nor II Answer: C 6 Which of the following is a source of information a risk manager could use to help identify pure loss exposures? A) commodity prices B) physical inspections C) currency exchange rates D) interest rate movements Answer: B 7 Loss severity is defined as the A) probable size of the losses which may occur during some period. B) probable number of losses which may occur during some period. C) probability that any particular piece of property may be totally destroyed. D) probability that a liability judgment may exceed a firm's net worth. Answer: A 8 Loss frequency is defined as the A) probable size of the losses that may occur during some period. B) probable number of losses that may occur during some period. C) probability that any particular piece of property may be totally destroyed. D) probability that a liability judgment may exceed a firm's net worth. Answer: B 9 The worst loss that could ever happen to a firm is referred to as the A) maximum possible loss. B) probable maximum loss. C) frequency of loss. D) severity of loss. Answer: A 10 The worst loss that is likely to happen is referred to as the A) maximum possible loss. B) probable maximum loss. C) frequency of loss. D) severity of loss. Answer: B 11 All of the following statements about avoidance are true EXCEPT A) Certain loss exposures are never acquired. B) Certain loss exposures may be abandoned. C) The chance of loss for certain loss exposures may be reduced to zero. D) It can be used for any loss exposure facing a firm. Answer: D 12 Abandoning an existing loss exposure is an example of A) avoidance. B) retention. C) noninsurance transfer. D) insurance transfer. Answer: A 13 Which of the following conditions is (are) appropriate for using retention? Losses are difficult to predict. The worst possible loss is not serious. A) I only B) II only C) both I and II D) neither I nor II Answer: B 14 Which of the following statements regarding the use of retention is (are) true? Retention is best used for loss exposures that have a low frequency and a high severity. A financially strong firm can have a higher retention level than a firm whose financial position is weak. A) I only B) II only C) both I and II D) neither I nor II Answer: B 15 Which of the following statements about the use of a captive insurance company by a parent firm is true? A) The captive may not write outside, non-parent company, business. B) Captives are not permitted to use reinsurance, so any business insured by the captive stays with the captive. C) The captive may be used to insure loss exposures that the parent firm finds it difficult to insure with private insurers. D) Business placed with the captive is always considered retained risk and is never considered transferred risk. Answer: C 16 Which of the following statements about self-insurance is (are) true? It is a form of planned retention. State law usually prohibits its use for workers compensation. A) I only B) II only C) both I and II D) neither I nor II Answer: A 17 All of the following are potential advantages of retention EXCEPT A) lower expenses. B) increased cash flow. C) encouragement of loss prevention. D) protection from catastrophic losses. Answer: D 18 A restaurant owner leased a meeting room at the restaurant to a second party. The lease specified that the second party, not the restaurant owner, would be responsible for any liability arising out of the use of the meeting room, and that the restaurant owner would be "held harmless" for any damages. The restaurant owner's use of the hold-harmless agreement in the lease is an example of A) retention. B) self-insurance. C) insurance. D) noninsurance transfer. Answer: D 19 All of the following are disadvantages of noninsurance transfers EXCEPT A) The party to whom the potential loss is transferred may be unable to pay. B) The transfer may fail because the contract language is ambiguous. C) The only potential losses that can be transferred are those that are not commercially insurable. D) The noninsurance transfer may be costly. Answer: C 20 ABC Insurance retains the first $1 million of each property damage loss and purchases reinsurance for that part of any property loss that exceeds $1 million. The insurance for property losses above $1 million is called A) excess insurance. B) liability insurance. C) coinsurance. D) primary insurance. Answer: A 21 Which of the following statements about the use of deductibles is (are) true? They represent risk retention by insurance purchasers. They tend to increase the cost of adjusting small claims. A) I only B) II only C) both I and II D) neither I nor II Answer: A 22 Which of the following statements about an excess insurance plan is true? A) The insurer does not participate in a loss until the loss exceeds the amount the firm has decided to retain. B) The insurer pays first up to some specified level; the insured then pays all losses exceeding the insurer's retention level. C) Losses in excess of a specified amount are not covered. D) The insured and insurer share equally in any loss that occurs. Answer: A 23 Factors a risk manager must consider in selecting an insurer include which of the following? The availability of risk management services The financial strength of the insurer A) I only B) II only C) both I and II D) neither I nor II Answer: C 24 An insurance policy specifically written and designed to meet the needs of an insurance purchaser is called a(n) A) manuscript policy. B) bureau policy. C) standard policy. D) excess policy. Answer: A 25 All of the following are disadvantages of using insurance in a commercial risk management program EXCEPT A) There is an opportunity cost because premiums must be paid in advance. B) Considerable time and effort must be spent selecting and negotiating coverages. C) It results in considerable fluctuations in earnings after losses occur. D) Attitudes toward loss control may become lax when losses are insured. Answer: C 26 Which of the following types of loss exposures may be appropriately handled through the purchase of insurance? High-frequency, low-severity loss exposures Low-frequency, high-severity loss exposures A) I only B) II only C) both I and II D) neither I nor II Answer: B 27 Which of the following types of loss exposures are best handled by the use of avoidance? A) low-frequency, low-severity loss exposures B) low-frequency, high-severity loss exposures C) high-frequency, low-severity loss exposures D) high-frequency, high-severity loss exposures Answer: D 28 Low-frequency, low-severity loss exposures are best handled by A) avoidance. B) retention. C) insurance. D) noninsurance transfer. Answer: B 29 All of the following statements about the administration of a risk management program are true EXCEPT A) The risk manager is an important part of a firm's management team. B) A risk management policy statement can be used to educate top executives about the risk management process. C) If a risk management program is properly designed, periodic review of the program is unnecessary. D) In order to properly identify loss exposures, the risk manager needs the cooperation of other departments. Answer: C 30 Cal was just hired as XYZ Company's first risk manager. Cal would like to employ the risk management process. The first step in the process Cal should follow is to A) evaluate potential losses faced by XYZ Company. B) formulate a treatment plan for XYZ Company's loss exposures. C) identify potential losses faced by XYZ Company. D) implement and administer a risk management plan for XYZ Company. Answer: C 31 Members of Mid-South Petroleum Distributors, a trade group, had trouble obtaining affordable pollution liability insurance. The members formed a group captive that is exempt from many state laws that apply to other insurers. This group captive is called a(n) A) reinsurance pool. B) Lloyd's association. C) alien insurer. D) risk retention group. Answer: D 32 Acme Company has three identical manufacturing plants, one on the Texas Gulf Coast, one in southern Alabama, and one in Florida. Each plant is valued at $200 million. Acme's risk manager is concerned about the damage which could be caused by a single hurricane. The risk manager believes there is an extremely low probability that a single hurricane could destroy two or all three plants because they are located so far apart. What is the probable maximum loss associated with a single hurricane? A) $0 million B) $200 million C) $400 million D) $600 million Answer: B 33 Acme Company has three identical manufacturing plants, one on the Texas Gulf Coast, one in southern Alabama, and one in Florida. Each plant is valued at $200 million. Acme's risk manager is concerned about the damage which could be caused by a single hurricane. The risk manager believes there is an extremely low probability that a single hurricane could destroy two or all three plants because they are located so far apart. What is the maximum possible loss associated with a single hurricane? A) $0 million B) $200 million C) $400 million D) $600 million Answer: D 34 Laura Evans is risk manager of LMN Company. Laura decided to retain certain property loss exposures. Which of the following is a method that Laura can use to fund the retained property losses? A) current net income B) private insurance C) noninsurance transfer D) high deductibles Answer: A 35 Parker Department Stores has been hurt in recent months by a large increase in shoplifting losses. Parker's risk manager concluded that while the frequency of shoplifting losses was high, the severity is still relatively low. What is (are) the appropriate risk management technique(s) to apply to this problem? A) retention B) loss prevention C) transfer through insurance D) avoidance Answer: B 36 Barb, who is self-employed, is the main breadwinner for her family. Barb does not have disability income insurance because she has never stopped to consider the impact of a long-term disability upon her family. Barb's treatment of the risk of disability is best described as A) risk transfer. B) passive retention. C) risk avoidance. D) active retention. Answer: B 37 Ryan decided to review his personal risk management program. His car is 10 years old, and he would receive little money from his insurer if the car was damaged or destroyed. Ryan decided to drop the physical damage insurance on the car. From a risk management perspective, dropping the physical damage insurance on the car is best described as A) increasing the use of avoidance in the risk management program. B) increasing the use of noninsurance transfer in the risk management program. C) increasing the use of retention in the risk management program. D) increasing the use of risk control in the risk management program. Answer: C 38 To better understand her company's operations, a risk manager asked a production manager to draw a diagram tracing the steps in the production and distribution of the company's products. Such a diagram, which is useful in risk identification, is called a A) financial statement. B) risk management matrix. C) flowchart. D) risk management audit. Answer: C 39 In reviewing his company's operations, a risk manager noticed that all of the company's finished goods were stored in a single warehouse. The risk manager recommended that the finished goods be divided among three warehouses to prevent all of the finished goods from being destroyed by the same peril. Dividing the finished goods among three warehouses illustrates A) duplication. B) separation. C) insurance. D) noninsurance transfer. Answer: B 40 Which of the following statements about a personal risk management program is (are) true? Insurance and retention are the only techniques used to handle potential losses. The steps in a personal risk management process are the same steps used by businesses. A) I only B) II only C) both I and II D) neither I nor II Answer: B 41 Bev lives in the suburbs and works downtown. She drives to work, and her most direct route to work would require her to pass through an area where carjackings and drive-by-shootings are common. Bev does not drive through this area. Instead, she uses a route which adds 10 minutes to her commute. Which risk management technique is Bev using with respect to the risk of injury while driving through the dangerous area? A) noninsurance transfer B) avoidance C) passive retention D) loss reduction Answer: B 42 Brenda identified all of the pure loss exposures her family faces. Then she analyzed these loss exposures, developed a plan to treat these risks, and implemented the plan. The process Brenda conducted is called A) personal insurance programming. B) personal estate planning. C) personal financial planning. D) personal risk management. Answer: D 43 Which statement about a company's cost of risk is (are) true? Cost of risk includes insurance premiums and retained losses. Reducing the cost of risk increases profitability. A) I only B) II only C) both I and II D) neither I nor II Answer: C 44 A useful measure for an organization to monitor is the total expenditures for treating loss exposures including retained losses, loss control expenses, insurance premiums, and other related expenses. This measure is called the organization's A) cost of capital. B) cost of goods sold. C) cost of risk. D) cost of equity. Answer: C 45 Mark owns a 2006 sedan. The last time Mark renewed his auto insurance, he decided to drop the physical damage insurance on this vehicle. How is Mark dealing with the auto physical damage exposure in his personal risk management program? A) risk transfer B) passive retention C) avoidance D) active retention Answer: D 46 Purchasing health insurance illustrates the use of which personal risk management technique? A) avoidance B) risk transfer C) risk control D) risk retention Answer: B 47 Which of the following statements about captive insurance companies is (are) true? A captive insurance company established by a U.S. company must be domiciled in the United States. A captive insurance company may be owned by several parents. A) I only B) II only C) both I and II D) neither I nor II Answer: B 48 Which of the following is least likely to occur during a "hard" insurance market period? A) difficulty in obtaining insurance B) tightening underwriting standards C) higher insurer profits D) increasing premiums Answer: C 49 Which of the following statements concerning the selection of risk management techniques and insurance market conditions is (are) true? It's easier to purchase affordable insurance during a "soft " market than during a "hard" market. Retention is used more during a "soft" market than during a "hard" market. A) I only B) II only C) both I and II D) neither I nor II Answer: A 50 Discount Department Stores is a national retail chain. The company had one large, central warehouse. At the suggestion of the risk manager, the company decided to build four smaller regional warehouses so that a loss at the central warehouse would not be a catastrophic blow to the company's distribution system. Splitting the inventory between four regional warehouses illustrates which risk management technique? A) duplication B) risk transfer C) separation D) risk avoidance Answer: C 51 Each accounting period, Harris Company Department Store charges a bookkeeping account for its estimated shoplifting losses. The method that Harris Company Department Store uses to fund its retained shoplifting losses is a(n) A) private insurance policy. B) captive insurer. C) credit line. D) unfunded reserve. Answer: D 52 Morris Company self-insures its workers compensation loss exposure. The risk manager of Morris Company is concerned about the possible impact of a single catastrophic claim. She decided to set a retention limit of $500,000 per-claim, and to purchase insurance that will be begin to pay once Morris Company has paid $500,000 on a single claim. The insurance the risk manager purchased is called A) captive insurance. B) excess insurance. C) primary insurance. D) umbrella insurance. Answer: B 53 When Derrick became risk manager of Boller Company, he noticed that the company did not have a clear set of risk management objectives and a clearly-stated risk management philosophy. Derrick developed a written document stating the company's risk management objectives and risk management philosophy. This document is called a risk management A) policy statement. B) manuscript policy. C) manual. D) binder. Answer: A 54 David never stopped to consider the possible consequences of a long-term, permanent, disability. So David did not include disability income insurance in his personal risk management program. David is dealing with the risk of disability through A) passive retention. B) active retention. C) risk control. D) risk avoidance. Answer: A 55 The property and liability insurance industry fluctuates between periods of increasing insurance rates and tight underwriting standards, and decreasing insurance rates and loose underwriting standards. Profitability in the industry follows these cyclical movements. What is this pattern of fluctuations called? A) the claims cycle B) the underwriting cycle C) the business cycle D) the accounting cycle Answer: B 56 The U.S. government is concerned that terrorists might try to crash a vehicle loaded with explosives into a U.S. embassy in a foreign country. Inside the gate to the embassy, they installed steel and cement posts in the road. These posts can be raised up from the ground to form a barrier against suicide bombers. The posts can be lowered back into the ground to allow safe vehicles to pass. This physical barrier system illustrates which risk management technique? A) risk avoidance B) insurance transfer C) loss prevention D) noninsurance transfer Answer: C 57 A college professor stores class grading records on a spreadsheet on her office computer. Each time she updates a grading file she makes a printout and a backup copy of the grading file. The professor is using which risk management method to address the risk of losing her class grading records? A) risk avoidance B) duplication C) separation D) noninsurance transfer Answer: B 58 A risk manager was asked to review all the loss exposures his company faces. The risk manager noted that the company obtained over 90 percent of its raw materials from one supplier. He voiced concern about business interruption if that supplier was closed for some reason. Acting on his recommendation, the company began to purchase raw materials from two other suppliers. Using multiple suppliers illustrates which risk control technique? A) risk avoidance B) duplication C) separation D) diversification Answer: D 59 Melanie was just hired as the risk manager of JKL Company. The company president asked her to make a thorough review of all of the company's loss exposures. Melanie noted that many employees were too heavily invested in stock issued by the company in their 401-k plan. Melanie suggested that the employees change some of their investment holdings to mutual funds that invest in stock issued by different companies. The risk control method that Melanie suggested is A) risk avoidance. B) duplication. C) diversification. D) separation. Answer: C 60 A U.S. athletic equipment company has production plants in several Pacific Rim countries. Each plant is divided into separate production areas using six-foot thick concrete walls. The construction method is designed to prevent fire from spreading from one production area to another. Using thick concrete walls so that fire does not spread to another production area illustrates which risk control method? A) separation B) duplication C) risk avoidance D) diversification Answer: A

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That part of a property and liability insurance contract that contains information about the property or activity to be insured is called the A) declarations. B) insuring agreement. C) exclusions. D) conditions. Answer: A 2 What information is contained in the insuring agreement of an insurance policy? A) a description of the property or life to be insured B) a summary of the major promises of the insurer C) a summary of the obligations of the insured D) a list of the property, losses, and perils that are not covered Answer: B 3 Which of the following statements about "open-perils" coverage is (are) true? All losses are covered except those losses specifically excluded. The burden of proof is on the insured to prove that a loss is covered. A) I only B) II only C) both I and II D) neither I nor II Answer: A 4 The exclusion of flood in a homeowners policy is an example of an A) excluded activity. B) excluded condition. C) excluded property. D) excluded peril. Answer: D 5 Exclusions are used in insurance policies for all of the following reasons EXCEPT A) to reduce moral hazard. B) to waive policy conditions. C) to eliminate coverage for uninsurable perils. D) to eliminate coverage not needed by typical insureds. Answer: B 6 Reasons why a peril may be considered uninsurable and therefore excluded from insurance contracts include which of the following? The losses from the occurrence of the peril may be due to a predictable decline in value. The losses from the occurrence of the peril may be incalculable and catastrophic. A) I only B) II only C) both I and II D) neither I nor II Answer: C 7 The policy provision requiring the filing of proof of loss with the insurer is an example of a(n) A) declaration. B) condition. C) insuring agreement. D) miscellaneous provision. Answer: B 8 Which of the following statements about the definition of the insured is (are) true? In some cases, a person who is not specifically named may be classified as an insured. Under no circumstances can more than one person be named as an insured. A) I only B) II only C) both I and II D) neither I nor II Answer: A 9 All of the following statements about endorsements and riders are true EXCEPT A) They are usually written. B) They can be used to add or delete policy provisions. C) They normally take precedence over other conflicting policy provisions. D) They are primarily used to circumvent legislation requiring specific policy provisions. Answer: D 10 Deductibles are not used in which of the following type of insurance? A) life insurance B) health insurance C) property insurance D) disability income insurance Answer: A 11 One of the reasons that deductible are used in insurance policies is to A) eliminate coverage for small claims. B) place restrictions or limits on the insurer's promise to perform. C) provide broader coverage by increasing the number of perils covered. D) exclude perils that are not insurable. Answer: A 12 The deductible used for automobile collision losses is an example of a(n) A) calendar year deductible. B) elimination period. C) straight deductible. D) aggregate deductible. Answer: C 13 Which of the following statements about a calendar-year deductible is (are) true? It requires the insured to pay a specified amount of each claim regardless of when the claim occurs during the year and regardless of any previous claims during the year. It is used only in policies which cover direct property losses. A) I only B) II only C) both I and II D) neither I nor II Answer: D Answer: D 14 A provision in a disability income insurance policy that requires a person to be disabled for 60 days before receiving benefits is an example of a(n) A) calendar year deductible. B) grace period. C) elimination period. D) probationary period. Answer: C 15 At what point in time must an insured meet the coinsurance requirement in a property insurance policy in order to avoid having to pay a portion of the loss? A) only at the time of loss B) only at the time when the policy is issued C) only at the time of policy application D) both at the time when the policy is issued and at the time of loss Answer: A 16 David owns a commercial building with a replacement cost of $4 million. The building is insured on a replacement cost basis for $2.4 million under a fire insurance policy that has an 80 percent coinsurance clause. How much will David collect if the building sustains a covered fire loss with a replacement cost of $80,000? A) $50,000 B) $60,000 C) $66,667 D) $80,000 Answer: B 17 The primary purpose of coinsurance in property insurance is to A) reduce moral hazard. B) achieve equity in rating. C) minimize problems in settling claims. D) eliminate small losses. Answer: B 18 Which of the following statements about problems arising from the use of a coinsurance clause is (are) true? The amount of insurance should be periodically evaluated to avoid a coinsurance penalty because of inflation. An agreed value coverage option is one method used to solve the problem of values that fluctuate throughout the policy term. A) I only B) II only C) both I and II D) neither I nor II Answer: C 19 Connie has an individual medical expense policy with a $1,000 deductible. She is required to pay 20 percent of covered expenses in excess of the deductible. The insurer will pay 80 percent of expenses in excess of the deductible. If Connie has eligible medical expenses of $26,000, how much will be paid by her insurer? A) $10,000 B) $11,000 C) $20,000 D) $21,000 Answer: C 20 Purposes of the coinsurance clause in health insurance contracts include which of the following? To reduce premiums. To exclude coverage for certain medical procedures. A) I only B) II only C) both I and II D) neither I nor II Answer: A 21 The purpose of other-insurance provisions is to A) eliminate the need for deductibles. B) penalize those insureds who carry inadequate amounts of insurance. C) specify who will pay losses if the insurer is bankrupt. D) preserve the principle of indemnity. Answer: D 22 Lisa has three fire insurance policies on her office building. The policy from company A is for $400,000, and the policies from companies B and C are for $100,000 each. If Lisa has a $360,000 loss, how much of the loss will be covered by each policy if the loss is settled on a pro rata basis by the insurers? A) each policy: $120,000 B) policy A: $160,000; policies B and C: $100,000 each C) policy A: $240,000; policies B and C: $60,000 each D) policy A: $360,000; policies B and C: nothing Answer: C 23 Kevin has three liability policies which provide for contribution by equal shares if other insurance applies to a loss. How much will each policy pay for a $3,000,000 liability judgment if policy A provides $500,000 of coverage, policy B provides $1,000,000 of coverage, and policy C provides $3,000,000 of coverage? A) Each policy will pay $500,000, and Kevin must pay the remaining $1,500,000. B) Policy A will pay $500,000, policies B and C will each pay $1,000,000, and Kevin must pay the remaining $500,000. C) Policy A will pay nothing, policy B will pay $1,000,000, and policy C will pay $2,000,000. D) Policy A will pay $500,000, policy B will pay $1,000,000, and policy C will pay $1,500,000. Answer: D 24 Helen and John both own automobiles on which they carry liability insurance. If Helen is negligent and has an accident while driving John's car with his permission, how will each insurer respond to any liability judgment against Helen? A) The insurers will pay the judgment on a pro rata basis. B) John's insurer will pay on an excess basis if Helen's insurance is insufficient to cover the judgment. C) Helen's insurance will pay on an excess basis if John's insurance is insufficient to cover the judgment. D) The policies will pay the judgment on the basis of contribution by equal shares. Answer: C 25 Kate is covered under her employer's group health plan. She is also covered as a dependent under her husband's group health plan. Under the usual coordination-of-benefits provision, how will each company respond to a claim filed by Kate? A) Kate's plan is primary, and her husband's plan is excess. B) Her husband's plan is primary, and Kate's plan is excess. C) The plan of the person with the birthday earliest in the year pays first, and the other plan is excess. D) Each plan will pay 50 percent of the claim. Answer: A 26 Eric's property was damaged in an accident. He phoned his agent to see if the loss was covered under his property insurance policy. The agent said, "As long as the cause of loss is not specifically excluded in the policy, the loss is covered." Based on the agent's answer, what type of insuring agreement appears in the policy? A) unconditional coverage B) named-perils coverage C) extended-perils coverage D) "open-perils" coverage Answer: D 27 Janet hit a wall causing a large dent in the fender of her car. She was busy at work and delayed reporting the damage to her insurer for 9 months. When she finally reported the claim, her insurer denied payment, stating, "Although such a loss is usually covered, you are required under the terms of the contract to provide prompt notification in case of loss." The prompt notification requirement is an example of a(n) A) declaration. B) definition. C) insuring agreement. D) condition. Answer: D 28 Mark reviewed his homeowners policy. He learned that his personal property was insured on an actual cash value basis. He would like replacement cost coverage on his personal property. He contacted his agent who said, "I'll simply add an amendment to your contract that changes the basis of recovery to replacement cost." The written provision the agent was referring to is called a(n) A) endorsement. B) coinsurance clause. C) binder. D) deductible. Answer: A 29 Under the terms of Jenny's auto insurance policy, she must pay the first $500 of any physical damage loss to her vehicle before her insurer will pay anything. What type of deductible is included in Jenny's auto insurance policy? A) calendar-year deductible B) waiting period C) straight deductible D) aggregate deductible Answer: C 30 Shauna hurt her back and was unable to work. She filed a claim under her disability income insurance policy. Under terms of the policy, a period of time must pass between when the injury occurred and when the insurer begins to replace lost earnings. This time period is called a(n) A) grace period. B) enrollment period. C) probationary period. D) elimination (waiting) period. Answer: D 31 ABC Company insured its building on a replacement cost basis for $700,000 under a property insurance policy that included an 80 percent coinsurance clause. The building had a replacement cost of $1 million when it sustained a $40,000 loss. How much will ABC Company receive from its insurer, assuming no deductible applies? A) $33,333 B) $35,000 C) $36,000 D) $40,000 Answer: B 32 XYZ Company insured its building on a replacement cost basis for $450,000 under a property insurance policy that included an 80 percent coinsurance clause. The building had a replacement cost of $500,000 when it sustained a $50,000 loss. How much will XYZ Company receive from its insurer, assuming no deductible applies? A) $42,500 B) $45,000 C) $50,000 D) $56,250 Answer: C 33 Laura's medical insurance policy includes a $500 deductible. Laura is required to pay 20 percent of covered expenses in excess of the deductible, and her insurer will pay 80 percent of covered expenses in excess of the deductible. Laura was hospitalized and her covered medical expenses were $10,500. How much of the $10,500 will be paid by the insurer? A) $7,500 B) $7,900 C) $8,000 D) $10,000 Answer: C 34 James purchased liability insurance with a $100,000 limit from Insurer A. When Insurer A denied a claim that James thought should be covered, he bought a second liability insurance policy with a $150,000 limit from Insurer B. Before he cancelled the policy with Insurer A, a $60,000 loss occurred. If this loss is settled on a pro rata basis, how much must each insurer pay? A) Insurer A will pay $10,000 and Insurer B will pay $50,000. B) Insurer A will pay $20,000 and Insurer B will pay $40,000. C) Insurer A will pay $24,000 and Insurer B will pay $36,000. D) Insurer A will pay $40,000 and Insurer B will pay $20,000. Answer: C 35 Jane purchased a $50,000 liability insurance policy from Insurer A. Fearing that she did not have enough liability insurance, she purchased an additional $100,000 of liability coverage from Insurer B. As a result of a negligent act, Jane was ordered to pay $75,000 in damages. Assuming the coverage from Insurer A is primary and the coverage from Insurer B is excess, how will this claim be settled? A) Insurer A will pay $50,000 and Insurer B will pay $25,000. B) Insurer A will pay $37,500 and Insurer B will pay $37,500. C) Insurer A will pay $25,000 and Insurer B will pay $50,000. D) Insurer A will pay nothing and Insurer B will pay $75,000. Answer: A 36 The purpose of a coordination-of-benefits provision in group health insurance plans is to A) determine which plan pays first if more than one plan covers a loss. B) determine which health care provider an insured may use for his or her care. C) determine if the calendar-year deductible has been satisfied by the insured. D) determine if the employee is eligible for coverage under the group health plan. Answer: A 37 As an alternative to coinsurance, rate discounts can be given as the amount of insurance to value increases. This alternative is called A) graded rates. B) agreed value coverage. C) retrospective rating. D) manual rating. Answer: A 38 Mark owns a building that he insured for $90,000. The replacement cost of the building is $100,000. Mark's property insurance policy has an 80 percent coinsurance clause. Ignoring any deductible, if Mark's building is destroyed by a covered peril, how much will Mark receive from his insurer? A) $80,000 B) $90,000 C) $101,250 D) $112,500 Answer: B 39 A special coverage policy is a policy that A) has no exclusions. B) provides open-perils coverage. C) provides coverage under special conditions. D) has coverage for multiple lines of insurance. Answer: B 40 The section of the insurance policy that includes provisions that qualify or limit the insurer's promise to perform is the A) definitions. B) insuring agreement. C) exclusions. D) conditions. Answer: D 41 An elimination (waiting) period is an example of a(n) A) exclusion. B) deductible. C) other-insurance provision. D) coinsurance provision. Answer: B 42 Roger owns some farmland that he rents to a tenant. The tenant lives in an old farmhouse on the property and raises crops on the land. Roger is concerned about possible legal liability if the tenant injures someone. Roger requires the tenant to have liability insurance and to add himself to the liability coverage through an endorsement. Under the tenant's liability insurance, Roger is a(n) A) additional insured. B) first-named insured. C) second-named insured. D) other insured. Answer: A 43 Maria's home was damaged by an earthquake. As Maria has open-perils coverage on her home, she was surprised to learn that her loss was not covered. Which section of a property insurance policy specifies which perils, property, and types of losses are not covered? A) the declarations B) the exclusions C) the conditions D) the insuring agreement Answer: B 44 In determining insurance limits and deductibles, an important concept is that insurance should be used to pay big losses rather than small losses. The objective is to insure big losses that could cause financial ruin and to exclude small losses that can be budgeted out of current income. This concept is called the A) law of large numbers. B) efficient loss-cost concept. C) large-loss principle. D) retention-transfer tradeoff. Answer: C 45 An insurance policy provision that specifies how a property loss will be settled if more than one property insurance policy covers the loss is the A) insuring agreement provision. B) loss settlement provision. C) other insurance provision. D) coinsurance provision. Answer: C 46 Property insurance policies contain declarations, conditions, definitions, exclusions, and an insuring agreement. However, some policy terms, such as subrogation, cancellation, other insurance, and assignment do not fall into these categories. The part of an insurance contract in which these provisions can be found is the A) endorsements. B) binders. C) conditions. D) miscellaneous provisions. Answer: D 47 Ann Parks and Robert Evans jointly own a grocery store. Ann and Robert are both named insureds on the property insurance covering the store, but Ann is the first named insured. Which of the following statements is true with regard to Ann's status as the first named insured? A) Any loss settlement is paid to Ann only. B) Ann is responsible for making sure that the premium has been paid. C) Ann can assign the policy without the consent of the insurer. D) Ann can waive policy conditions. Answer: B 48 Maggie purchased a life insurance policy. She was concerned that if she became disabled, she would no longer be able to pay the premiums. Her agent added an amendment of the policy stating that if she became disabled, future premium payments would be waived. Such an amendment to a life insurance policy is called a(n) A) binder. B) rider. C) warranty. D) schedule. Answer: B 49 Homeowners insurance policies usually cover resident relatives of the named insured who are under age 24 and who are full-time students away from home. Under the homeowners policy, these full-time students are considered A) first named insureds. B) second named insureds. C) other insureds. D) additional insureds.

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Traditionally, risk has been defined as A) any situation in which the probability of loss is one. B) any situation in which the probability of loss is zero. C) uncertainty concerning the occurrence of loss. D) the probability of a loss occurring. Answer: C 2 Objective risk is defined as A) the probability of loss. B) the relative variation of actual loss from expected loss. C) uncertainty based on a person's mental condition or state of mind. D) the cause of loss. Answer: B 3 An insurance company estimates its objective risk for 10,000 exposures to be 10 percent. Assuming the probability of loss remains the same, what would happen to the objective risk if the number of exposures were to increase to 1 million? A) It would decrease to 1 percent. B) It would decrease to 5 percent. C) It would remain the same. D) It would increase to 20 percent. Answer: A 4 Uncertainty based on a person's mental condition or state of mind is known as A) objective risk. B) subjective risk. C) objective probability. D) subjective probability. Answer: B 5 The long-run relative frequency of an event based on the assumption of an infinite number of observations with no change in the underlying conditions is called A) objective probability. B) objective risk. C) subjective probability. D) subjective risk. Answer: A 6 Which of the following statements about a priori probabilities is correct? A) They are subjective probabilities based on ambiguity in the way probability is perceived. B) They are subjective probabilities that may vary among individuals because of factors such as age, gender, education, and the use of alcohol. C) They are objective probabilities that can be determined by deductive reasoning. D) They are objective probabilities that can be determined by subjective reasoning. Answer: C 7 An individual's personal estimate of the chance of loss is a(n) A) objective probability. B) objective risk. C) subjective probability. D) a priori Answer: C 8 A peril is A) a moral hazard. B) the cause of a loss. C) a condition that increases the chance of a loss. D) the probability that a loss will occur. Answer: B 9 An earthquake is an example of a(n) A) moral hazard. B) peril. C) physical hazard. D) objective risk. Answer: B 10 Dense fog that increases the chance of an automobile accident is an example of a A) speculative risk. B) peril. C) physical hazard. D) moral hazard. Answer: C 11 Faking an accident to collect insurance proceeds is an example of A) physical hazard. B) objective risk. C) moral hazard. D) attitudinal hazard. Answer: C 12 Carelessness or indifference to a loss is an example of A) physical hazard. B) objective probability. C) moral hazard. D) attitudinal hazard. Answer: D 13 Some characteristics of the judicial system and regulatory environment increase the frequency and severity of loss. This hazard is called A) moral hazard. B) physical hazard. C) attitudinal hazard. D) legal hazard. Answer: D 14 Taylor Tobacco Company is concerned that the company may be held liable in a court of law and ordered to pay a large damage award to a smoker harmed by the company's cigarettes. The characteristics of the judicial system that increase the frequency and severity of loss are known as A) moral hazard. B) particular risk. C) speculative risk. D) legal hazard. Answer: D 15 A name that encompasses all of the major risks faced by a business firm is A) financial risk. B) speculative risk. C) enterprise risk. D) pure risk. Answer: C 16 Which of the following statements about financial risk is (are) true? Enterprise risk does not include financial risk. Financial risk is easily addressed through the purchase of insurance. A) I only B) II only C) both I and II D) neither I nor II Answer: D 17 One of the speculative financial risks considered in an enterprise risk management program is the risk of loss because of adverse changes in commodity prices, interest rates, foreign exchange rates, and the value of money. This risk is called A) property risk. B) financial risk. C) strategic risk. D) operational risk. Answer: B 18 Katelyn was just named Risk Manager of ABC Company. She has decided to create a risk management program which considers all of the risks faced by ABC—pure, speculative, operational, and strategic—in a single risk management program. Such a program is called a(n) A) financial risk management program. B) enterprise risk management program. C) fundamental risk management program. D) consequential risk management program. Answer: B 19 A pure risk is defined as a situation in which there is A) only the possibility of loss or no loss. B) only the possibility of profit. C) a possibility of neither profit nor loss. D) a possibility of either profit or loss. Answer: A 20 The premature death of an individual is an example of a A) pure risk. B) speculative risk. C) nondiversifiable risk. D) physical hazard. Answer: A 21 Which of the following statements about speculative risks is true? A) They are almost always insurable by private insurers. B) They are more easily predictable than pure risks. C) They may benefit society even though a loss occurs. D) They involve only a chance of loss. Answer: C 22 An automobile that is a total loss as a result of a collision is an example of which of the following types of risk? Speculative risk Diversifiable risk A) I only B) II only C) both I and II D) neither I nor II Answer: B 23 All of the following are programs to insure fundamental risks EXCEPT A) federally subsidized flood insurance. B) auto physical damage insurance. C) Social Security. D) unemployment insurance. Answer: B 24 All of the following are examples of personal risks EXCEPT A) poor health. B) unemployment. C) premature death. D) loss of business income. Answer: D 25 Which of the following is a reason why premature death may result in economic insecurity? Additional expenses associated with death may be incurred. The income of the deceased person's family may be inadequate to meet its basic needs. A) I only B) II only C) both I and II D) neither I nor II Answer: C 26 Which of the following is (are) often consequences of long-term disability? Continuing medical expenses Loss or reduction of employee benefits A) I only B) II only C) both I and II D) neither I nor II Answer: C 27 Which of the following is an example of consequential (indirect) loss? A) the theft of a person's jewelry B) the destruction of a firm's manufacturing plant by an earthquake C) the cost of renting a substitute vehicle while a collision-damaged car is being repaired D) the vandalism of a person's automobile Answer: C 28 The extra expense incurred by a business to stay in operation following a fire is an example of a(n) A) fundamental risk. B) speculative risk. C) direct loss. D) indirect loss. Answer: D 29 Which of the following statements about liability risks is (are) true? Future income and assets can be attached to pay judgments if inadequate insurance is carried. There is an upper limit on the amount of loss. A) I only B) II only C) both I and II D) neither I nor II Answer: A 30 All of the following are burdens to society because of the presence of risk EXCEPT A) The size of an emergency fund must be increased. B) Risk provides an incentive for people to engage in loss control. C) Society is deprived of certain goods and services. D) Mental fear and worry are present. Answer: B 31 Loss control includes which of the following? Loss reduction Loss prevention A) I only B) II only C) both I and II D) neither I nor II Answer: C 32 Following good health habits can be categorized as A) loss prevention. B) risk retention. C) noninsurance transfer. D) personal insurance. Answer: A 33 From the insured's perspective, the use of deductibles in insurance contracts is an example of A) risk transfer. B) risk control. C) risk avoidance. D) risk retention. Answer: D 34 The use of fire-resistive materials when constructing a building is an example of A) risk transfer. B) risk control. C) risk avoidance. D) risk retention. Answer: B 35 All of the following statements about risk retention are true EXCEPT A) It may be used intentionally if commercial insurance is unavailable. B) It may be used passively because of ignorance. C) Its use is most appropriate for low-frequency, high-severity types of risks. D) Its use results in cost savings if losses are less than the cost of insurance. Answer: C 36 Which of the following is an example of a noninsurance risk transfer? A) not engaging in dangerous activities B) entering into a hold-harmless agreement C) installing smoke detectors in your home D) using nonflammable building material when constructing a house Answer: B 37 Curt borrowed money from a bank to purchase a fishing boat. He purchased property insurance on the boat. Curt had difficulty making loan payments because he did not catch many fish, and fish prices were low. Curt intentionally sunk the boat, collected from his insurer, and paid off the loan balance. This scenario illustrates the problem of A) adverse selection. B) moral hazard. C) nondiversifiable risk. D) attitudinal hazard. Answer: B 38 Jenna opened a successful restaurant. One night, after the restaurant had closed, a fire started when the electrical system malfunctioned. In addition to the physical damage to the restaurant, Jenna lost profits that could have been earned while the restaurant was closed for repairs. The lost profits are an example of A) direct loss. B) nondiversifiable risk. C) speculative risk. D) indirect loss. Answer: D 39 Brad started a pest control business. To protect his personal assets against liability arising out of the business, Brad incorporated the business. Brad's use of the corporate form of organization to shield against personal liability claims illustrates A) fundamental risk. B) noninsurance transfer. C) risk retention. D) objective risk. Answer: B 40 ABC Insurance Company plans to sell homeowners insurance in five Western states. ABC expects that 8 homeowners out of every 100, on average, will report claims each year. The variation between the rate of loss that ABC expects to occur and the rate of loss that actually occurs is called A) objective probability. B) subjective probability. C) objective risk. D) subjective risk. Answer: C 41 Williams Company installed smoke detectors, a sprinkler system, and fire extinguishers in its new manufacturing facility. These devices are all examples of A) risk control. B) noninsurance transfer. C) risk avoidance. D) risk retention. Answer: A 42 Which of the following statements about hedging is (are) true? Hedging is a form of risk transfer. Hedging is used to address the risk of unfavorable price fluctuations. A) I only B) II only C) both I and II D) neither I nor II Answer: C 43 Cathy's car hit a patch of ice on the road. The car skidded off the road and hit a tree. The presence of ice on the road is best described as a(n) A) peril. B) subjective risk. C) physical hazard. D) indirect loss. Answer: C 44 Jim and Paula Franklin started a dry cleaning business. The business may be successful or it may fail. The type of risk that is present when either a profit or loss could occur is called A) pure risk. B) subjective risk. C) nondiversifiable risk. D) speculative risk. Answer: D 45 Ben is concerned that if he injures someone or damages someone's property he could be held legally responsible and required to pay damages. This type of risk is called a A) speculative risk. B) liability risk. C) nondiversifiable risk. D) property risk. Answer: B 46 MLX Drug Company would like to market a new hypertension drug. While the Food and Drug Administration (FDA) was testing the drug, it discovered that the drug produced a harmful side effect. When MLX learned of the FDA's test result, MLX abandoned its plan to produce and distribute the drug. MLX's reaction illustrates A) risk avoidance. B) hedging. C) risk transfer. D) risk retention. Answer: A 47 ABC Insurance Company sells auto insurance in one state. Recently, the state legislature passed a law that limits the use of an individual's credit history by insurers when selecting applicants to insure. This change in law will increase the possibility of unprofitable results for ABC. This type of hazard is an example of A) physical hazard. B) legal hazard. C) moral hazard. D) attitudinal hazard. Answer: B 48 All of the following are characteristics of the liability risk that most people face EXCEPT A) a lien may be placed on your income and assets to satisfy a legal judgment. B) substantial legal expenses may be incurred defending the claim. C) there is no upper limit on the amount of the loss. D) owning liability insurance eliminates the possibility of being held legally liable. Answer: D 49 Which of the following statements about chance of loss and risk is (are) true? If the chance of loss is identical for two groups, the objective risk must be the same. Two individuals may perceive differently the risk inherent in a given activity. A) I only B) II only C) both I and II D) neither I nor II Answer: B 50 A risk that affects only individuals or small groups and not the entire economy is called a A) diversifiable risk. B) pure risk. C) speculative risk. D) nondiversifiable risk. Answer: A 51 Which of the following is an example of a commercial risk? A) the risk of insufficient retirement income B) the loss of business income C) the risk of premature death D) the risk of being unemployed Answer: B 52 A special form of planned retention by which part or all of a give loss exposure is retained by the firm is called A) hedging. B) self-insurance. C) passive retention. D) noninsurance transfer. Answer: B 53 The production facility for ABC Manufacturing is located in a flood plain. Although the risk of flood is low, ABC's risk manager is concerned that a flood could damage the plant and equipment. He received bids on flood insurance from two insurance agents, but decided the cost of coverage was too high relative to the risk. So he did not purchase flood insurance. Which risk management technique is ABC using with respect to the risk of flood? A) active retention B) noninsurance transfer C) passive retention D) avoidance Answer: A 54 A student who has skipped many classes and not studied the course material was surprised to learn there was a test when he showed-up for class. The student's mental uncertainty about whether or not he will pass the test is called A) objective risk. B) objective probability. C) subjective probability. D) subjective risk. Answer: D 55 Rapid inflation, cyclical unemployment, war, hurricanes, and floods are all examples of A) diversifiable risks. B) physical hazards. C) nondiversifiable risks. D) speculative risks. Answer: C 56 Five years ago, Shannon decided to start investing monthly in the common stock of ABC Telecom Company. Her financial well-being will be harmed if the price of ABC Telecom stock drops significantly. The risk of investment loss can be reduced if she invests in other companies and other types of financial assets. The risk Shannon faces with regard to her investments is a(n) A) enterprise risk. B) diversifiable risk. C) pure risk. D) nondiversifiable risk. Answer: B 57 Frazier Electric keeps a paper copy of business records at the company's headquarters. The company also has two back-up copies of business records stored in electronic files. The electronic files are kept in the event the paper records are damaged or destroyed. The back-up files illustrate which of the following risk control techniques? A) loss prevention B) loss reduction C) diversification D) duplication Answer: D 58 Rather than storing all of its finished goods in a single location, Davis Company divides the finished goods between two warehouses. This simple risk control technique which is designed to limit losses should a warehouse fire occur is called A) duplication. B) risk transfer. C) separation. D) loss prevention. Answer: C 59 Some members of Congress are concerned that if one or two large U.S. banks fail, it could lead to the collapse of the entire U.S. financial sector. This risk is called A) objective risk. B) systemic risk. C) enterprise risk. D) subjective risk. Answer: B

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Which of the following is a basic characteristic of insurance? A) pooling of losses B) avoidance of risk C) payment of intentional losses D) certainty about specific losses that will occur Answer: A 2 Which of the following is implied by the pooling of losses? A) sharing of losses by an entire group B) inability to predict losses with any degree of accuracy C) substitution of actual loss for average loss D) increase of objective risk Answer: A 3 According to the law of large numbers, what happens as the number of exposure units increases? A) Actual results will increasingly differ from probable results. B) Actual results will more closely approach probable results. C) Nondiversifiable risk will decrease. D) Objective risk will increase. Answer: B 4 According to the law of large numbers, what should happen as an insurer increases the number of units insured? A) The amount the insurer expects to pay in claims should decrease. B) Underwriting expenses should decrease. C) Actual results will more closely approach expected results. D) The insurer's profitability should become more variable. Answer: C 5 Characteristics of a fortuitous loss include which of the following? The loss is certain to occur. The loss occurs as a result of chance. A) I only B) II only C) both I and II D) neither I nor II Answer: B 6 From the viewpoint of the insurer, all of the following are characteristics of an ideally insurable risk EXCEPT A) The loss must be accidental. B) The loss should be catastrophic. C) The premium must be economically feasible. D) There must be a large number of exposure units. Answer: B 7 From the standpoint of the insurer, which of the following is a characteristic of an ideally insurable risk? A) The loss must be intentional. B) There must be a small number of unique loss exposures. C) The chance of loss must be calculable. D) The loss must be indeterminable. Answer: C 8 Why is a large number of exposure units generally required before a pure risk is insurable? A) It prevents the insurer from losing money. B) It eliminates intentional losses. C) It minimizes moral hazard. D) It enables the insurer to predict losses more accurately. Answer: D 9 The requirement that losses should be accidental and unintentional in order to be insurable results in which of the following? Decrease in moral hazard More accurate prediction of future losses A) I only B) II only C) both I and II D) neither I nor II Answer: C 10 Which of the following is implied by the requirement that a loss should be determinable and measurable to be insurable? The loss must be definite as to place. The loss must be definite as to amount. A) I only B) II only C) both I and II D) neither I nor II Answer: C 11 Methods by which insurers may minimize or avoid catastrophic losses include which of the following? The use of reinsurance Concentrating coverage written in one geographic region A) I only B) II only C) both I and II D) neither I nor II Answer: A 12 Which of the following types of risks best meets the requirements for being insurable by private insurers? A) most market risks B) property risks C) financial risks D) political risks Answer: B 13 Reasons why market, financial, and production risks are often uninsurable include which of the following? The potential to produce a catastrophic loss is great. The chance of loss cannot be accurately estimated. A) I only B) II only C) both I and II D) neither I nor II Answer: C 14 Which of the following types of risks is normally uninsurable by private insurers? A) personal risks B) property risks C) liability risks D) political risks Answer: D 15 Which of the following is a result of adverse selection? A) The insurer's financial results will be substantially improved. B) Persons most likely to have losses are also most likely to seek insurance at standard rates. C) It is unnecessary for the insurance company to use underwriting. D) Insurance can be written only by the federal government. Answer: B 16 The tendency for unhealthy people to seek life or health insurance at standard rates is an example of A) moral hazard. B) fundamental risk. C) attitudinal hazard. D) adverse selection. Answer: D 17 Which of the following statements regarding insurance and gambling is (are) true? Insurance is used to handle existing pure risks, while gambling creates a new speculative risk. Insurance usually involves risk avoidance, while gambling typically involves only risk reduction. A) I only B) II only C) both I and II D) neither I nor II Answer: A 18 In addition to marketing life insurance, life insurers typically sell which of the following products? Retirement annuities Disability income insurance A) I only B) II only C) both I and II D) neither I nor II Answer: C 19 Inland marine insurance provides coverage for A) goods being shipped on land. B) premature death of members of the armed forces. C) goods being shipped on ocean-going vessels. D) liability exposures of nonprofit organizations. Answer: A 20 Which of the following is classified as casualty insurance? A) workers compensation insurance B) fire insurance C) marine insurance D) life insurance Answer: A 21 Which of the following is a form of casualty insurance? A) fire insurance B) general liability insurance C) inland marine insurance D) ocean marine insurance Answer: B 22 Which of the following statements regarding private insurance and government insurance is (are) true? Private insurance programs include life and health insurance and property and liability insurance. Social insurance programs are government insurance programs that are voluntary and financed entirely by contributions from covered employers. A) I only B) II only C) both I and II D) neither I nor II Answer: A 23 All of the following are benefits to society that result from insurance EXCEPT A) less worry and fear. B) elimination of moral hazard. C) indemnification for loss. D) loss prevention. Answer: B 24 Which of the following statements about the insurance industry as a source of investment funds is (are) true? These funds result in a lower cost of capital than would exist in the absence of insurance. These funds tend to promote economic growth and full employment. A) I only B) II only C) both I and II D) neither I nor II Answer: C 25 All of the following are social costs associated with insurance EXCEPT A) insurance company operating expenses. B) fraudulent claims. C) inflated claims. D) increased cost of capital. Answer: D 26 A group of farmers agreed that if any farmer suffered a property loss, the loss would be spread over the entire group. In this way, each farmer is responsible for the average loss of the group rather than the actual loss that each farmer sustained. Which characteristic of insurance is embodied in this agreement? A) pooling of losses B) fortuitous losses C) risk avoidance D) indemnification Answer: A 27 XYZ Insurance Company writes coverage for most perils which can damage property. XYZ, however, does not write flood insurance on property located in flood plains. Which requirement of an ideally insurable risk might be violated if XYZ wrote flood insurance on property located in flood plains? A) There must be a large number of similar exposure units. B) The loss should not be catastrophic. C) The chance of loss must be calculable. D) The losses must be determinable and measurable. Answer: B 28 ABC Appliance offers a warranty requiring an annual fee. The warranty may be purchased at the time of sale or at any time within the first year after the appliance was purchased. The warranty fee after the date of purchase is twice the time-of-purchase fee. When asked why the fee was higher after the date of purchase, ABC's president said, "Buying a warranty is voluntary. We've noted that those who buy the warranty after the purchase date have a greater need for service." Charging the same rate or a lower rate after the date of purchase would expose ABC to what problem that also impacts private insurers? A) excessive premiums B) reduced claims C) bad investments D) adverse selection Answer: D 29 Insurance companies collect premiums in advance. Since the premiums collected are not needed to pay losses and expenses immediately, the funds can be loaned to business firms. Because of this fact, insurance benefits society by A) enhancing credit. B) providing a source of investment funds. C) indemnifying losses. D) providing an incentive for loss prevention. Answer: B 30 LMN Insurance sells homeowners insurance. The LMN homeowners policy combines property and casualty insurance in the same contract. Insurance policies combining property and casualty coverage in the same contract are called A) mono-line policies. B) multi-year policies. C) multiple-line policies. D) manuscript policies. Answer: C 31 One branch of government insurance programs has a number of distinguishing characteristics. These programs are compulsory, they are financed by mandatory contributions rather than general tax revenues, and benefits are weighted in favor of low-income groups. These government insurance programs are called A) welfare programs. B) social insurance programs. C) casualty insurance programs. D) private insurance programs. Answer: B 32 Gina would like to buy a house. She will pay 10 percent of the cost of the house as a down payment and borrow the other 90 percent from a mortgage lender. The home will serve as collateral for the loan. The lender will not make the loan to Gina unless the home is insured. Using insurance to secure the collateral for a loan illustrates which of the following benefits of insurance to society? A) enhancement of credit B) reduction of fear and worry C) source of investment funds D) incentives for loss prevention Answer: A 33 ABC Insurance Company calculated the amount that it expected to pay in claims for each policy sold. Rather than selling the insurance for the amount it expected to pay in claims, ABC added an allowance to cover the cost of doing business, including commissions, taxes, and acquisition expenses. This allowance is called a(n) A) policyowner dividend. B) premium. C) expense loading. D) rate credit. Answer: C 34 JKL Insurance Company estimates that 14 out of every 100 homeowners it insures will file a claim each year. Last year, JKL insured 200 homeowners. According to the law of large numbers, what should happen if JKL insures 2,000 homeowners this year? A) The total number of claims filed by JKL policyowners should decrease. B) The total dollar value of claims will decrease. C) The average size of loss will decline in value. D) The actual results will more closely approach the expected results. Answer: D 35 Apex Insurance Company wrote a large number of property insurance policies in an area where earthquake losses could occur. When the president of Apex was asked if she feared that a severe earthquake might put the company out of business, she responded, "Not a chance. We transferred most of that risk to other insurance companies." An arrangement by which an insurer that initially writes insurance transfers to another insurer part or all of the potential losses associated with such insurance is called A) hedging. B) speculating. C) reinsurance. D) loss avoidance. Answer: C 36 According to the law of large numbers, what should happen as an insurance company increases the number of loss exposures that it insures? A) Fewer losses should be expected to occur. B) The amount of premiums needed to cover losses should decrease. C) The volatility of the insurance company's underwriting results should increase. D) The difference between actual and expected results should decrease. Answer: D 37 Which of the following statements regarding insurance and hedging is (are) true? Insurance involves the transfer of an insurable risk while hedging handles risk that is typically uninsurable. Insurance transactions can reduce objective risk, while hedging typically involves only risk transfer and not risk reduction. A) I only B) II only C) both I and II D) neither I nor II Answer: C 38 Ashley opened an all-you-can-eat buffet restaurant. The price per-person was based on what Ashley believed an average restaurant patron would consume. The restaurant began to lose money. Ashley concluded that her patrons had "above average" appetites, and were attracted to her restaurant because they could eat as much as they wanted while being charged an average price. A similar phenomenon exists in insurance markets. This problem is called A) legal hazard. B) adverse selection. C) attitudinal hazard. D) nondiversifiable risk. Answer: B 39 Which of the following statements concerning social insurance benefits is (are) correct? Social insurance benefits are heavily weighted in favor of upper-income groups because of their higher earnings. Social insurance benefits are financed entirely or in part by mandatory contributions by covered employers and employees, and not by general revenues of the government. A) I only B) II only C) both I and II D) neither I nor II Answer: B 40 Adverse selection occurs A) when an insurance company loses money on its investments. B) when insurance purchasers buy insurance but do not have a loss. C) when catastrophic losses occur as a result of a natural disaster. D) when applicants with a higher-than-average chance of loss seek insurance at standard rates. Answer: D 41 Which of the following statements regarding insurance and hedging is true? A) Both insurance and hedging deal only with pure risks. B) Insurance reduces objective risk while hedging involves only risk transfer and not risk reduction. C) Hedging reduces objective risk while insurance involves only risk reduction and not risk transfer. D) Both insurance and hedging reduce objective risk but do not involve the transfer of risk. Answer: B 42 Which of the following is an example of private insurance? A) unemployment insurance B) Social Security C) life insurance D) federal deposit insurance Answer: C 43 If insurers were to provide indemnification for losses that were deliberately caused, which characteristic of ideally insurable risks would not be met? A) The loss must be accidental and unintentional. B) The loss must be determinable and measurable. C) The loss should not be catastrophic. D) There must be a large number of similar exposure units. Answer: A 44 An insurance company that sells earthquake insurance in an area where earthquakes are possible has subjected itself to the risk of insolvency if a severe earthquake occurs. An insurer can safely sell earthquake insurance in this area if it shifts the risk of catastrophic loss to another insurer. The shifting of insured risk from one insurer to another insurer is called A) underwriting. B) casualty insurance. C) coinsurance. D) reinsurance. Answer: D 45 The premium that insurance companies charge does not cover the cost of expected losses only. The premium must also cover the cost of compensating agents and other costs of doing business. The amount added to the pure premium to cover these costs is called the A) expense loading. B) deductible. C) dividend. D) loss reserve. Answer: A 46 A discount store chain is concerned that cashiers might steal money from cash registers. To provide protection against theft by the cashiers, the discount store chain can purchase a A) fidelity bond. B) liability insurance policy. C) surety bond. D) business income insurance policy. Answer: A 47 BBB Auto Club provides emergency road service and other services to its members. BBB Auto Club charges a higher membership fee to new members than it charges to members who are renewing their membership. When asked to explain this pricing policy, the auto club president noted, "New members often sign-up prior to taking a long road trip, so we have to charge more as first-year members have higher service utilization rates." A similar phenomenon observed in insurance markets is called A) attitudinal hazard. B) adverse selection. C) risk aversion. D) moral hazard. Answer: B

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Which of the following statements about torts is (are) true? The person who is injured or harmed by a tort is called a plaintiff or claimant. The punishment for committing a tort is damages in the form of money. A) I only B) II only C) both I and II D) neither I nor II Answer: C 2 Which of the following is an intentional tort? A) slander B) negligence C) strict liability D) murder Answer: A 3 A situation in which a person is held legally liable even though fault or negligence cannot be proven is an example of A) general damages. B) comparative negligence. C) an intentional tort. D) strict liability. Answer: D 4 Failure to exercise the degree of care required by law to protect others from harm is called A) premeditated liability. B) vicarious liability. C) punitive damages. D) negligence. Answer: D 5 All of the following are elements of negligence EXCEPT A) the ability to pay damages. B) the failure to perform a legal duty to use reasonable care. C) damage or injury to a claimant. D) proximate cause between the negligent act and the injury or harm that occurs. Answer: A 6 Which of the following statements about the elements of negligence is (are) true? The negligence of the tortfeasor may arise from a failure to act. The damage that results must be in the form of property damage. A) I only B) II only C) both I and II D) neither I nor II Answer: A 7 Damages awarded for losses that can be determined or measured are A) special damages. B) general damages. C) punitive damages. D) comparative damages. Answer: A 8 Which of the following statements about monetary damages awarded by a court is (are) true? The purpose of general damages is to provide benefits for medical expenses or loss of earnings. The purpose of punitive damages is to punish the tortfeasor so that others are deterred from committing the same wrongful act. A) I only B) II only C) both I and II D) neither I nor II Answer: B 9 Heather sued Robert for injuries suffered in an automobile accident. Based on the facts presented, the jury concluded that Heather was 40 percent at fault in the accident and Robert was 60 percent at fault. Under the common law doctrine of contributory negligence, the jury should award Heather A) nothing. B) 40 percent of her actual damages. C) 60 percent of her actual damages. D) 100 percent of her actual damages. Answer: A 10 Which of the following statements about comparative negligence laws is (are) true? Under the pure rule, any negligence by the plaintiff automatically bars recovery for damages. Under the 50 percent rule, parties who are equally at fault are each allowed to recover damages. A) I only B) II only C) both I and II D) neither I nor II Answer: B 11 Nancy was injured when she drove her car through a stop sign and was struck by Philip's car. Philip saw Nancy and could have stopped. However, he failed to do so since he had the right-of-way. Nancy can recover damages from Philip under which of the following legal doctrines? A) vicarious liability B) the last clear chance rule C) contributory negligence D) the assumption of risk doctrine Answer: B 12 A common situation involving strict liability includes which of the following? A) operating a motor vehicle B) blasting operations C) manufacturing a product D) mining operations Answer: B 13 Which of the following may give rise to imputed negligence? A) employer-employee relationships B) injury to a trespasser C) sole proprietorships D) attractive nuisance situations Answer: A 14 All of the following requirements must be met to satisfy the doctrine of res ipsa loquitur EXCEPT A) The injured party has not contributed to the accident in any way. B) The injured party must prove negligence on the part of the defendant. C) The event is one that normally does not occur in the absence of negligence. D) The defendant has exclusive control over the instrumentality causing the accident. Answer: B 15 Under certain conditions, the wrongful acts of one person can be attributed to another person. This practice is called A) imputed negligence. B) mediation. C) comparative negligence. D) strict liability. Answer: A 16 Which of the following statements about the legal obligations of a property owner is (are) true? A property owner must inspect the premises for the benefit of an invitee and correct any unsafe conditions. A property owner has the right to set a trap designed to injure a trespasser. A) I only B) II only C) both I and II D) neither I nor II Answer: A 17 Under common law, which of the following persons is most likely to be classified as an invitee? A) a mail carrier B) a social guest C) a door-to-door salesperson D) a solicitor for a charitable organization Answer: A 18 Which of the following are legal obligations of a property owner with respect to an invitee? The property owner must warn an invitee of any unsafe conditions. The property owner must inspect the premises and eliminate any dangerous conditions revealed by the inspection. A) I only B) II only C) both I and II D) neither I nor II Answer: C 19 What is the intent of the family purpose doctrine? A) to impose liability on children for the care of elderly parents B) to impose liability on the owner of an automobile for the negligence of immediate family members operating the automobile C) to impose liability on a parent for any negligence caused by a child D) to impose strict liability on the owner of a wild animal for any injuries caused by the animal Answer: B 20 Which of the following statements about the immunity of governmental entities is (are) true? Governmental entities are more likely to be immune from liability when performing proprietary functions than when performing governmental functions. Many courts have eliminated the immunity of government entities. A) I only B) II only C) both I and II D) neither I nor II Answer: B 21 The doctrine of respondeat superior applies to a(n) A) parent's liability for a negligent child. B) pet owner's liability for the pet. C) employer's liability for a negligent employee. D) manufacturer's liability for a faulty product. Answer: C 22 Situations under which parents can be held liable for the actions of a child include which of the following? The child uses a parent's gun to injure someone. The child is acting as an agent of the parent. A) I only B) II only C) both I and II D) neither I nor II Answer: C 23 Under one doctrine, a person who understands the danger inherent in an activity cannot recover damages in the event of injury from the activity. This doctrine is called the A) contributory negligence doctrine. B) assumption of risk doctrine. C) comparative negligence doctrine. D) fellow servant doctrine. Answer: B 24 One tort reform permits manufacturers to assert that as long as the product conformed to the prevailing technology and production methods at the time it was produced, it cannot be considered a defective product today. This defense is called the A) collateral source rule. B) state of the art defense. C) strict liability defense. D) privity of contract rule. Answer: B 25 Traditionally, federal state, and local governments could not be sued. This immunity had eroded over time. Today, government units may be liable for injuries arising out of money-making activities. Such activities are called A) municipal operations. B) proprietary functions. C) commercial ventures. D) pecuniary interest. Answer: B 26 All of the following are proposed solutions to the medical malpractice problem EXCEPT A) shortening the statute of limitations for filing lawsuits. B) eliminating arbitration panels to resolve disputes. C) placing limitations on contingent fees charged by attorneys. D) placing limitations on damage awards. Answer: B 27 A homeowner was repairing the deck on the back of his home. He left power tools on the deck when he quit working for the day. A neighbor's child saw the power tools. He came on to the deck, and started to play with a power saw. He cut off two of his fingers. A property owner may be held liable for creating a condition that entices children to enter the property where they are injured under the doctrine of A) sovereign immunity. B) attractive nuisance. C) family purpose. D) respondeat superior. Answer: B 28 Arguments in favor of reforming the civil justice system include which of the following? There is often a long delay in settling lawsuits. Compensation awards have decreased significantly over the past two decades. A) I only B) II only C) both I and II D) neither I nor II Answer: A 29 All of the following are examples of tort reform proposals EXCEPT A) modifying the collateral source rule. B) eliminating caps on noneconomic damages. C) regulation of attorney fees. D) imposing penalties to deter frivolous lawsuits. Answer: B 30 A defendant who is only slightly liable may be required to pay the full amount of damages under which of the following? A) the joint and several liability rule B) the collateral source rule C) arbitration D) res ipsa loquitor Answer: A 31 Alternative techniques for resolving legal disputes without litigation include which of the following? Arbitration Mediation A) I only B) II only C) both I and II D) neither I nor II Answer: C 32 All of the following are categories of torts EXCEPT A) intentional torts. B) breach of contract. C) strict liability. D) negligence. Answer: B 33 James was injured in an auto accident caused by another motorist's negligence. To reimburse him for his hospital bills and lost earnings, items which can be specifically itemized, James will receive A) punitive damages. B) special damages. C) imputed damages. D) general damages. Answer: B 34 James was injured in an auto accident caused by another motorist's negligence. He received severe facial lacerations and injured his back in the accident. In payment for his pain, suffering, and disfigurement, losses which cannot be specifically itemized, James will receive A) punitive damages. B) special damages. C) imputed damages. D) general damages. Answer: D 35 Michelle had major abdominal surgery. Months after the surgery, she still did not feel well. When she was operated on again, the surgeon discovered two sponges that were not removed at the conclusion of the first operation. Michelle should be able to collect damages without having to prove negligence under the doctrine of A) joint and several liability. B) res ipsa loquitor. C) contributory negligence. D) uberrimae fidei. Answer: B 36 Francis opened a store. She knows that customers who come to the store may be injured on the premises and hold her responsible for their injuries. Under common law, business customers in the store Francis opened are considered A) aliens. B) licensees. C) trespassers. D) invitees. Answer: D 37 Malcolm was involved in an auto accident. He was judged to be 20 percent at fault in the accident, and the other party was judged to be 80 percent at fault. Malcolm's actual damages were $40,000. Under a pure comparative negligence rule, how much will Malcolm receive for his injuries? A) $8,000 B) $24,000 C) $32,000 D) $40,000 Answer: C 38 Louise was in a hurry and tried to cross the street in the middle of the block rather than at a street corner. A car struck her. Even though Louise placed herself in danger, she may still be able to collect for her injuries if the driver had an opportunity to avoid hitting her but failed to do so. This rule is called the A) last clear chance rule. B) collateral sources rule. C) alternative dispute resolution rule. D) joint and several liability rule. Answer: A 39 Bruce believes a local manufacturer is responsible for contaminating some land he owns. He filed suit against the company. Rather than have the case go to court, the manufacturing company's legal team suggested mediation or arbitration to settle the case. Methods that are employed to resolve legal disputes without litigation, such as mediation, are called A) collateral source rules. B) alternative dispute resolution techniques. C) joint and several liability techniques. D) comparative negligence rules. Answer: B 40 Jan was injured in a work-related auto accident. She sued the other driver, and the case went to court. While questioning Jan, the defendant's lawyer asked if her injuries and lost earnings were covered under workers compensation. Jan's lawyer objected to the question. The judge ruled the question was improper and instructed the jury to disregard the question. Based on the judge's reaction to the question, which of the following rules is in force where this trial took place? A) the joint and several liability rule B) the last clear chance rule C) the comparative negligence rule D) the collateral source rule Answer: D 41 Trisha was injured when the delivery truck for a local furniture store struck her. The delivery driver claimed the brakes of the delivery truck failed, causing the accident. Trisha filed suit, and in her lawsuit named the delivery driver, the furniture store, the service station responsible for vehicle maintenance, and the manufacturer of the vehicle. Even though the manufacturer of the vehicle may be only 1 percent responsible for the accident, it may be required to pay a large percentage of the damages under the A) collateral source rule. B) assumption of risk rule. C) joint and several liability rule. D) last clear chance rule. Answer: C 42 Compensatory damages include A) general damages and special damages. B) special damages and punitive damages. C) punitive damages and general damages. D) general damages, special damages, and punitive damages. Answer: A 43 A person who enters or remains on the property with the occupant's expressed or implied permission is called (a)n A) trespasser. B) resident agent. C) invitee. D) licensee. Answer: C 44 In the context of medical malpractice, what is a "never event"? A) A medical condition that despite the best screening and technology cannot be detected. B) A pandemic that quickly spreads and infects many people. C) A medical error that should never occur. D) An event for which doctors and medical facilities cannot be held legally responsible. Answer: C 45 Steve was involved in an auto accident. Both drivers were partially at fault for the accident. Steve's actual damages were $50,000. He was judged to be 60 percent at fault. If Steve's state has a pure comparative negligence law, how much will Steve collect? A) $0 B) $20,000 C) $30,000 D) $50,000 Answer: B 46 Steve was involved in an auto accident. Both drivers were partially at fault for the accident. Steve's actual damages were $50,000. He was judged to be 60 percent at fault. If Steve's state has a 51 percent rule for comparative negligence, how much will Steve collect? A) $0 B) $20,000 C) $30,000 D) $50,000 Answer: A 47 A legal wrong for which the law allows a remedy in the form of money damages is a A) crime. B) breach. C) misdemeanor. D) tort. Answer: D 48 One requirement for proving that an act was negligent is the existence of an unbroken chain of events between the act and the injury or harm that occurred. This unbroken chain of events is called A) condition precedent. B) cause and effect. C) proximate cause. D) condition subsequent. Answer: C 49 Under a dram shop law, a business may be held liable for damages resulting from A) the sale of alcohol. B) the creation of an unsafe work place. C) the sale of prescription drugs. D) the creation of a hostile work environment. Answer: A 50 One tort reform proposal is capping noneconomic damages. Noneconomic damages include A) payment for time missed from work. B) payment for the cost of a hospital stay. C) payment for pain and suffering. D) payment for the cost of care provided by a physical therapist. Answer: C 51 Under state workers compensation programs, employers may not use common law defenses to defend against claims of workers who are injured on the job. In such cases, proof of a worker's injury is proof of responsibility of the employer. Because of this characteristic, workers compensation is an example of A) personal injury. B) strict (absolute) liability. C) comparative negligence. D) tort liability. Answer: B 52 Steve was involved in an auto accident. Both drivers were partially at fault for the accident. Steve's actual damages were $50,000. He was judged to be 20 percent at fault. If Steve's state has a contributory negligence law, how much will Steve collect? A) $0 B) $10,000 C) $25,000 D) $40,000 Answer: A 53 Someone who is asked to come on to the property to benefit the property owner, such as customers at a store or a garbage collector, is classified as a(n) A) trespasser. B) resident agent. C) invitee. D) licensee. Answer: C 54 Liability may arise because of a method of collecting oil or natural gas. Under this collection method, a high-pressure flow of fluid is injected underground. This collection method is called A) clear cutting. B) flow mining. C) hydraulic fracturing. D) slurry mining. Answer: C 55 Unmanned aircraft systems are gaining in popularity. These systems are creating new liability exposures. Unmanned aircraft systems are also known as A) rockets. B) hovercraft. C) ultralights. D) drones. Answer: D 56 Individuals renting out rooms in their home for overnight stays, individuals jointly owing a car with other owners, and individuals who give rides to people who call or text them are creating "new" liability exposures for insurers. The social change that creates these new liability exposures is called A) the millennial generation. B) the baby boom factor C) the greying of America. D) the sharing economy. Answer: D

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