Insurance MCQ

Loss exposure surveys or checklists are comprehensive and apply to almost any organization. The survey's major weakness is that they A. Are expensive. B. May omit an important exposure. C. Have to be custom designed for each business. D. Take too long to complete. Answer: B. May omit an important exposure.

The best description of a first-party claim is a claim  A. Made by the liable party against the policyholder. B. Made by the policyholder against the insurer. C. Made by the insurer against the policyholder. D. Made by the policyholder against someone to whom the policyholder may be liable. Answer: B. The best description of a first-party claim is a claim made by the policyholder against the insurer.

The insurer's rights to recover and sell or otherwise dispose of insured property on which the insurer has paid a total loss are called  A. Fiduciary rights. B. Salvage rights. C. Constructive rights. D. Catastrophe rights. Answer: B. Salvage rights allow the insurer to recover and sell or otherwise dispose of insured property on which the insurer has paid a total loss.

Which one of the following is true regarding enterprise-wide risk management (ERM)?  A. ERM is an approach to risk management that focuses primarily on loss exposures associated with pure risk. B. In practice, implementation of ERM occurs at the departmental or business unit level. C. Implementation of ERM is fairly consistent among organizations, regardless of their size, nature, or complexity. D. ERM is an approach to managing all of an organization's key risks and opportunities. Answer: D. ERM is an approach to managing all of an organization's key risks and opportunities.

Juan received a phone call from an angry policyholder. The insured received a bill as a result of a workers compensation premium audit. The individual does not understand why premium has increased when his total payroll is lower than originally projected. Juan advises the insured that he will contact the auditor, review the audit, and call back with an explanation. Which one of the following producer functions is Juan performing? A. Consulting B. Customer service C. Premium collection D. Risk management review Answer: B. Customer service

Gulford Insurance Company (Gulford) is a direct writer of commercial insurance in Pennsylvania. Management is frustrated by the continued lack of success in the more rural western part of the state. They believe that there is a profitable market in this territory, but have trouble continuing to justify the cost of assigning agents to this territory. It is difficult to penetrate the market without a local presence. Which one of the following distribution systems should Gulford consider for this territory? A. Managing general agents B. Surplus lines brokers C. Independent agents D. National brokers Answer: C. Independent agents

For a one-year policy covering losses that take several years to develop, all of the following ratios are likely to be revised for several years following the policy period, EXCEPT: A. Expense ratio B. Combined ratio C. Loss ratio D. Overall operating ratio Answer: A. The loss ratio, combined ratio, and overall operating ratio all would change as the losses develop for several years after the policy period.

A commercial general liability policy typically provides insured status to A. Resident relatives of the named insured. B. Independent contractors working on behalf of the named insured. C. Any organization newly acquired by the named insured for up to a certain number of days. D. Persons filing liability claims against the named insured. Answer: C. A commercial general liability policy typically provides insured status to any organization newly acquired by the named insured for up to a certain number of days.

Authority that the insurance company specifically grants to an agent is called A. Binding authority. B. Express authority. C. Implied authority. D. Apparent authority. Answer: B. Authority that the insurance company specifically grants to an agent is called express authority.

If you were a property owner and wanted the broadest coverage available to protect your building, you would purchase A. Basic form coverage. B. Broader form coverage. C. Broad form coverage. D. Special form coverage. Answer: D. You would purchase special form coverage for the broadest coverage.

Which one of the following allegations in insurance claims handling result from criticisms of claim representatives' actions, sometimes regardless of validity?  A. Use of improper valuation techniques allegations B. Unfair rating practices allegations C. Bad faith allegations D. Contract or policy manipulation allegations Answer: C. While insurers are accused of unfair rating, contract manipulation or of improper valuation, bad faith allegations remain as one of the most troublesome and controversial issues for claim representatives and insurers.

T. Roy Insurance Company is selecting a distribution system and channel for its products. Which one of the following best describes the type of consideration that T. Roy should give to its operations? A. What are customer's expectations regarding accessibility? B. Will customers be willing to pay a premium for services? C. Can customers navigate easily within the channel? D. Does it have the necessary financial resources? Answer: D. Does it have the necessary financial resources?

Compared to its net underwriting gain or loss, an insurer's overall gain or loss from operations gives a A. Distorted picture of an insurer's profitability. B. Less complete picture of an insurer's profitability. C. More complete picture of an insurer's profitability. D. More conservative picture of an insurer's profitability. Answer: C. An insurer's overall gain or loss from operations provides a more complete picture because it includes net investment gains (or losses), which help offset any underwriting losses.

Actual cash value (ACV) is  A. Replacement cost minus depreciation. B. Agreed value minus depreciation. C. Replacement cost plus depreciation. D. Replacement cost minus agreed value. Answer: A. ACV is replacement cost minus depreciation.

Which one of the following losses would be covered under a typical broad form property policy but not under a basic form policy? A. A large limb from a decaying tree falls onto a building causing damage to the building. B. A sinkhole collapse damages a building. C. Maintenance workers accidentally bang a ladder against a sprinkler head, which discharges, causing water damage to a building. D. The sudden malfunction of the oil-burning furnace discharges grimy, sooty smoke throughout a building, damaging its interior. Answer: A. A broad form policy would cover damage caused by a falling tree limb.

Retention is often used in combination with insurance as a way of treating loss exposures. One of the major downsides of individuals using retention alone is  A. The unavailability of insurer loss control services. B. The potential for financial ruin. C. The record keeping associated with retained losses. D. Availability of insurer loss settlement services. Answer: B. One of the major downsides of individuals using retention alone is the potential for financial ruin.

Sally is a recent college graduate who lives in the suburbs and drives to work daily in the city. She recognizes that owning a car creates both property damage and liability exposures for her and at the same time she has the burden of student loans. For someone in Sally's circumstances the most practical risk management technique for dealing with her auto-related loss exposures is A. Retention. B. Avoidance. C. Loss control. D. Risk tarnsfer. Answer: D. For someone in Sally's situation, risk transfer is the most practical technique.

One of the benefits to a business of retaining a loss exposure instead of insuring it is A. A reduction in expenses. B. A greater peace of mind. C. Access to the insurer's loss control services. D. Increase in expenses. Answer: A. Retaining losses rather than insuring them creates a reduction in expenses.

Agencies, such as the Federal Trade Commission, state public utility commissions, and local zoning boards, derive their authority from A. Criminal law. B. Constitutional law. C. Common law. D. Statutory law. Answer: D. Agencies, such as the Federal Trade Commission, state public utility commissions, and local zoning boards, derive their authority from statutory law.

All of the following are correct with respect to fair evaluation of a claim, EXCEPT: A. A fair approach to evaluating liability claims is to evaluate them as if no coverage limit existed. B. Claim representatives are prohibited from discussing the evaluation of a claim with anyone not directly connected with that claim. C. Legislation often specifies a time limit within which evaluations of coverage and damages must be completed. D. Information about settlements or trial results from similar cases can help claim representatives knowledgably evaluate a claim. Answer: B. Claim representatives are prohibited from discussing the evaluation of a claim with anyone not directly connected with that claim.

An individual that has 40 quarters of coverage, for Social Security purposes, is considered to be A) fully insured B) currently insured C) PIA insured D) partially insured Answer: A) fully insured

Which statement is NOT true regarding Social Security benefits? A) Benefit eligibility is based upon fully insured status B) Benefits are designed to replace the entire amount of the worker's earnings C) Disability is expected to continue for 12 months or result in death D) Worker must be totally and permanently disabled for at least 5 months and unable to work again to be eligible for benefits Answer: B) Benefits are designed to replace the entire amount of the worker's earnings

An insured's status under Social Security can be described as A) partially insured B) actively insured C) fully insured D) completely insured Answer: C) fully insured

According to Social Security, an individual with 6 credits of coverage during the previous 13-quarter period is considered to be:  A) partially insured B) currently insured C) fully insured D) not insured Answer: B) currently insured

What is considered to be the definition of disability, according to Social Security?  A) Unable to engage in the worker's chosen career field B) Unable to engage in any substantial gainful activity C) Unable to perform duties in the worker's occupation D) Unable to perform occupational duties in similar career fields Answer: B) Unable to engage in any substantial gainful activity

The "blackout period" affects whose benefits? A) Employer B) Disabled worker C) Surviving spouse D) Surviving children Answer: C) Surviving spouse

What determines the Social Security normal retirement age?  A) Year in which worker was born B) Worker's average lifetime income C) Number of dependents D) Number of quarters employed Answer: A) Year in which worker was born

At what age is a surviving spouse without dependents eligible for Social Security survivor benefits?  A) 50 B) 60 C) 62 D) 65 Answer: C) 62

How long is a person expected to be disabled in order to receive Social Security disability benefits?  A) 4 months B) 6 months C) 12 months D) 18 months Answer: 12 months

Who is NOT eligible for Social Security survivor benefits?  A) A widow at any age who is caring for children younger than 16 B) A widow at full retirement age C) Full-time students under the age of 19 D) A deceased worker's dependent parents of any age Answer: D) A deceased worker's dependent parents of any age

Which Social Security status does a worker with 6 quarters of coverage during the last 13-quarter period have?  A) Partially insured B) Fully insured C) Currently insured D) Not insured Answer: C) -Currently insured

How long must an individual be unable to engage in any gainful activity due to physical or mental disability in order to qualify for Social Security Total Disability? A) 3 months B) 6 months C) 12 months D) 18 months Answer: C) 12 months

Who is eligible for retirement benefits under Social Security? A) Fully insured workers B) Currently insured workers C) Partially insured workers D) All disabled workers Answer: A) Fully insured workers

The reason for social insurance is to A) provide more products for agents to sell B) create dependents of government C) grow the U.S. economy D) protect certain vulnerable segments of the population Answer: D) protect certain vulnerable segments of the population

Which type of worker has Social Security benefits available to them?  A) Fully insured B) Currently insured C) Partially insured D) Presently insured Answer: A) Fully insured

How does one qualify as a fully-insured individual under Social Security disability coverage? A) Individual has been credited with the appropriate number of quarters of coverage B) Individual is currently covered under Medicaid C) Individual is expected to be disabled for 5 months D) Individual is currently employed Answer: A) Individual has been credited with the appropriate number of quarters of coverage

The period in which there are no Social Security benefits for the surviving spouse is called the A) blackout period B) elimination period C) ineligible period D) dependency period Answer: A) blackout period

All of the following statements correctly describe the purpose of Social Security EXCEPT A) It provides a source of income for a meaningful standard of living during retirement B) It provides basic protection against financial problems accompanying death, disability, and retirement C) It augments a sound personal insurance plan D) It provides retirement and survivor benefits to a worker and the worker's family Answer: A) It provides a source of income for a meaningful standard of living during retirement

A worker is entitled to Social Security disability benefits if all of the following are true, EXCEPT for: A) worker is under age 65 B) worker is insured for disability benefits C) disability is expected to continue for 12 months or result in death D) worker cannot perform his or her current job, but is actively seeking other employment Answer: D) worker cannot perform his or her current job, but is actively seeking other employment

In order to be considered "currently insured" under Social Security, an individual must be credited with:  A) 12 quarters of coverage during the last 26-quarter period B) 6 quarters of coverage during the last 13-quarter period C) 15 total quarters of coverage D) 30 total quarters of coverage Answer: B

Hank bought a farm. There was an old barn on the land. One day Hank decided to take a look at the barn. It was windy, and Hank could see the roof swaying in the wind. Hank ran out of the barn fearing the roof might collapse. While driving home, Hank stopped to see his insurance agent. 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) concealment

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) pecuniary interest.

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) competent parties

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) the policy would have been issued on different terms if the insurer knew the true facts.

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) implied authority.

If a third party is led to reasonably believe that an agent is acting with 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) apparent authority.

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) express authority.

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) The insurer reserves the right to subrogate against its own insureds.

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) being a secured creditor.

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) the principle of reasonable expectations .

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) valued policy laws.

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) reconstruction cost method. Answer: C) fair market value method.

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) unilateral contracts

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) legal purpose

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) contracts of adhesion.

Dave is an agent for Easy Pay Insurance. Easy Pay insures only the highest-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) A principal is responsible for the acts of its agents who are acting within the scope of their authority.

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) warranty.

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) misrepresentation

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) the principle of subrogation

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) Insurance contracts are personal contracts.

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) $900

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 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) estoppel

The voluntary relinquishment of a legal right is called A) subrogation. B) adhesion. C) estoppel. D) waiver. Answer: D) waiver.

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) The principal is responsible for the acts of agents only if the acts are criminal.

What is the practical effect of an insurance contract being a contract of adhesion? A) The insurer can refuse to pay claims unless the insured has 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) The policy is interpreted in the insured's favor if the policy contains any ambiguities or uncertainties.

What is the practical effect of an insurance policy being a conditional contract? A) The insurer can refuse to a pay claim unless the insured has 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) The insurer can refuse to a pay claim unless the insured has complied with all policy provisions.

Which of the following types of insurance policies can usually be assigned without the insurer's consent? I. Life insurance II. Property insurance A) I only B) II only C) both I and II D) neither I nor II Answer: A) I only

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) because insurance contracts are conditional

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) because insurance contracts are contracts of adhesion

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) One party writes the contract, and the other party must accept the entire contract as written.

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) aleatory contract.

Which of the following statements about consideration in an insurance contract is (are) true? I. The insured's total consideration is submission of a completed application. II. 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) II only

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) on Thursday when she passed the medical exam

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, the offer is merely the promise to pay the first premium. Answer: C) In property insurance, the offer and acceptance are usually in writing but may be oral.

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) warranty.

Which of the following statements about a warranty in an insurance contract is (are) true? I. It is part of the insurance contract. II. 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) I only

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) misrepresentation.

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) The contract is voidable at the insurer's option.

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) The contract is voidable at the insurer's option.

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) subrogation.

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) The insured's right to collect benefits may be forfeited if the insured interferes with the insurer's subrogation rights after a loss occurs.

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) Subrogation helps to hold down the cost of insurance.

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) subrogation.

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 process takes place D) both at the time of the loss and at the inception of the policy Answer: A) only at the time of the loss

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) only at the inception of the policy

Which of the following statements about an insurable interest in life insurance is (are) true? I. It is required of any person named as beneficiary. II. 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) II only

All of the following will support an insurable interest for purposes of purchasing property and liability insurance EXCEPT A) close family relationship. B) potential legal liability. C) secured creditors. D) a contract right. Answer: A) close family relationship.

Which of the following statements about the principle of insurable interest is (are) true? I. It makes it difficult to measure the amount of an insured's loss. II. It reduces moral hazard. A) I only B) II only C) both I and II D) neither I nor II Answer: B) II only

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) Losses are settled without a deduction for depreciation.

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) amount of insurance covering the loss.

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) the broad evidence rule

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) actual cash value property insurance

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) $900

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) to reduce moral hazard

Fundamental purposes of the principle of indemnity include which of the following? I. To reduce physical hazards II. 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) II only

An insurer having a large number of similar exposure units is considered important because A) the insurer can decrease its reserves B) the greater the number insured, the more accurately the insurer can predict losses and set appropriate premiums C) its financial rating will improve D) the greater the number insured, the more premiums it collects Answer: B) the greater the number insured, the more accurately the insurer can predict losses and set appropriate premiums

People with higher loss exposure have the tendency to purchase insurance more often than those at average risk. This is called A) risk retention B) preexisting conditions C) law of large numbers D) adverse selection Answer: D) adverse selection

An individual who removes the risk of losing money in the stock market by never purchasing stocks is said to be engaging in  A) Risk reduction B) Risk transference C) Risk avoidance D) Risk retention Answer: C) Risk avoidance

Which of the following is NOT considered a definition of risk?  A) The potential for loss B) The cause of a loss C) Exposure to danger D) Uncertainty Answer: B) The cause of a loss

Which type of risk is gambling?  A) Pure risk B) Risk transfer C) Risk pooling D) Speculative risk Answer: D) Speculative risk

Which of the following describes the increase in the probability of a loss due to an insured's dishonest tendencies?  A) Morale hazard B) Physical hazard C) Moral hazard D) Speculative hazard Answer: C) Moral hazard

Which of the following would NOT be accomplished with the purchase of an insurance policy?  A) Greater peace of mind B) Risk is eliminated C) Payment made for covered losses D) Uncertainty is reduced Answer: B) Risk is eliminated

A hazard can be best described as A) the potential for loss B) the tendency for poorer than average risks to seek out insurance C) a condition that may increase the likelihood of a loss occurring D) a risk that has the potential for both loss and gain Answer: C) a condition that may increase the likelihood of a loss occurirng

The cause of a loss is referred to as a(n)  A) hazard B) adversity C) peril D) risk Answer: C) peril

Which of the following refers to a condition that may increase the chance of a loss?  A) Adverse selection B) Hazard C) Risk D) Peril Answer: B) Hazard

Restoring an insured to the same condition as before a loss is known as A) Law of large numbers B) Fiduciary retention C) Adverse selection D) Principle of indemnity Answer: D) Principle of indemnity

An example of risk sharing would be A) Adding more security to a high-risk building B) Choosing not to invest in the stock market C) Doctors pooling their money to cover malpractice exposures D) Buying an insurance policy to cover potential liabilities Answer: C) Doctors pooling their money to cover malpractice exposures

A situation in which there is ONLY a chance of loss or no loss is a A) pure risk B) particular risk C) speculative risk D) fundamental risk Answer: A) pure risk

All of the following circumstances must be met for loss retention to be an effective risk management technique, EXCEPT A) Loss cannot be catastrophic B) Probability of loss is unknown C) Highly predictable losses D) Loss must be measurable Answer: B) Probability of loss is unknown

Which of the following is NOT an element of an insurable risk? A) Loss must be due to chance B) Loss frequency must be predictable C) Loss must be measurable D) Loss must be catastrophic Answer: D) Loss must be catastrophic

Moral hazard is described as the A) increased chance of loss because of an insured's recklessness B) increased ability to predict loss because a higher exposure to loss C) increased risk of adverse selection D) increased chance of a loss because of an insured's dishonest tendencies Answer: D) increased chance of a loss because of an insured's dishonest tendencies

All of the following are examples of pure risk EXCEPT A) Losing money at a casino B) Injured while playing football C) Falling at a casino and breaking a hip D) Jewelry stolen during a home robbery Answer: A) Losing money at a casino

Insurance companies determine risk exposure by which of the following? A) Insurable interest B) Insurance exchanges C) Law of large numbers and risk poolings D) Population table data Answer: C) Law of large numbers and risk poolings

Which of the following best describes the statement "The more times an event is repeated, the more predictable the outcome becomes"?  A) Law of large numbers B) Adverse selection C) Average variance D) Speculative retention Answer: A) Law of large numbers

What is known as the immediate specific event causing loss and giving rise to risk? A) Peril B) Hazard C) Loss factor D) Liability Answer: A) Peril

Which of these statements correctly describes risk?  A) Pure risk is the only insurable risk B) Speculative risk is the only insurable risk C) An example of pure risk would be a legal wager D) Pure and speculative risks are both insurable Answer: A) Pure risk is the only insurable risk

How do insurers predict the increase of individual risks? A) Law of large numbers B) U.S. Census C) Average mortality incidents D) Experience of morbidity Answer: A) Law of large numbers

Which of the following is considered to be an event or condition that increases the probability of an insured's loss? A) Risk B) Hazard C) Indemnity D) Peril Answer: B) Hazard

Which of the following is a situation where there is a possibility of either a loss or a gain?  A) Hazard B) Pure risk C) Speculative risk D) Peril Answer: C) Speculative risk

Which of the following is NOT considered to be a definition of the term "loss"?  A) Probability that an event will occur B) An insurable event that takes place which results in a payment made by the insurance company C) Unintentional decrease in the value of an asset due to a peril D) The amount an insurance company must pay because of an insurable event Answer: A) Probability that an event will occur

Which of the following is any situation that presents the possibility of a loss? A) Adverse selection B) Risk pooling C) Loss exposure D) Insured loss Answer: C) Loss exposure

Insurance represents the process of risk A) selection B) avoidance C) transference D) assumption Answer: C) transference

Which of the following is considered to be any situation that has the potential for loss?  A) Law of large numbers B) Adverse Selection C) Loss exposure D) Risk transfer Answer: C) Loss exposure

An insurer's claim settlement practices are regulated by the  A) Securities and Exchange Commission (SEC) B) National Association of Claims Adjusters (NACA) C) National Association of Insurance Commissioners (NAIC) D) State insurance departments Answer: D) State insurance departments

A plan in which an employer pays insurance benefits from a fund derived from the employer's current revenues is called A) A self-derived plan B) A multiple-employer plan C) A blanket plan D) A self-funded plan Answer: D) A self-funded plan

Which of the following is a type of insurance where an insurer transfers loss exposures from policies written for its insureds?  A) Treaty insurance B) Reinsurance C) Mutual insurance D) Captive insurance Answer: B) Reinsurance

Karen is a producer who has obtained personal information about a client without having a legitimate reason to do so. Under the McCarran-Ferguson Act, what is the minimum penalty for this? A) $0 B) $5,000 C) $10,000 D) $15,000 Answer: C) $10,000

AAA Insurance Company has transferred a portion of its loss exposure to BBB Insurance Company. In this reinsurance transaction, what is AAA Insurance Company called? A) Captive insurer B) Tertiary insurer C) Primary insurer D) Secondary insurer Answer: C) Primary insurer

A life insurance company has transferred some of its risk to another insurer. The insurer assuming the risk is called the A) mutual insurer B) reinsurer C) reciprocal insurer D) participating insurer Answer: B) reinsurer

A nonparticipating policy will  A) provide a return of premium B) provide tax advantages C) not pay dividends D) give policyowners special privileges Answer: C) not pay dividends

An insurer enters into a contract with a third party to insure itself against losses from insurance policies it issues. What is this agreement called? A) Reinsurance B) Reserves C) Mutual D) Multi-line Answer: A) Reinsurance

Which of the following is NOT considered advertising? A) A rating from a rating service company, such as A.M. Best B) An illustration C) A sales presentation D) Direct mailing from an agency Answer: A) A rating from a rating service company, such as A.M. Best

An insurer owned by its policyholders is called a A) stock insurer B) reinsurer C) mutual insurer D) multi-line insurer Answer: C) mutual insurer

What is considered to be the primary reason for buying life insurance? A) Provide death benefits B) Provide money for retirement C) Provide living benefits D) Provide money for college Answer: A) Provide death benefits

Which of the following is NOT a benefit of insurance?  A) Losses due to fraud are eliminated B) Reduces the uncertainty of loss exposures C) Makes a loss whole again D) Source of investment funds Answer: A) Losses due to fraud are eliminated

John owns an insurance policy that gives him the right to share in the insurer's surplus. What kind of policy is this?  A) Nonparticipating B) Participating C) Contributory D) Surplus Answer: B) Participating

A nonparticipating company is sometimes called a(n) A) alien insurer B) mutual insurer C) reinsurer D) stock insurer Answer: D) stock insurer