Principles of Risk Management and Insurance: Principles of Risk Management and Insurance - Chapter 9 Flashcards

Fundamental purposes of the principle of indemnity include which of the following?

1. To reduce physical hazards
2. To prevent the insured from profiting from insurance
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II

Which of the following is a fundamental purpose of the principle of indemnity?

1. A) to reduce moral hazard
2. B) to minimize physical hazards
3. C) to settle property insurance losses on a replacement cost basis
4. D) to require deductibles in all property insurance policies

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?

1. A) $600
2. B) $900
3. C) $1200
4. D) $1800

The loss settlement under which of the following supports the principle of indemnity?

1. A) life insurance
2. B) valued policies
3. C) replacement cost property insurance
4. D) actual cash value property insurance

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?

1. A) the circumstantial evidence rule
2. B) the broad evidence rule
3. C) the property indemnity rule
4. D) the objective value rule

A total loss under a valued policy is settled on the basis of the

1. A) market value of the loss.
2. B) actual cash value of the loss.
3. C) replacement value of the loss.
4. D) amount of insurance covering the loss.

Which of the following statements describes how losses will be settled if a property insurance policy is written on a replacement cost basis?

1. A) Losses are settled without the applicable deductible.
2. B) Losses are settled without a deduction for depreciation.
3. C) The insurer must replace the damaged or destroyed property in lieu of a cash settlement.
4. D) The policy is converted to a valued policy.

Which of the following statements about the principle of insurable interest is (are) true?

1. It makes it difficult to measure the amount of an insured's loss.
2. It reduces moral hazard.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II

All of the following will support an insurable interest for purposes of purchasing property and liability insurance EXCEPT

1. A) former ownership of property.
2. B) potential legal liability.
3. C) secured creditors.
4. D) contractual right.

Which of the following statements about an insurable interest in life insurance is (are) true?

1. It is required of any person named as beneficiary.
2. It may result from a pecuniary (financial) interest.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II

When must an insurable interest legally exist in life insurance?

1. A) only at the time of the insured's death
2. B) only at the inception of the policy
3. C) only at the time the beneficiary is paid
4. D) both at the time of the insured's death and at the inception of the policy

When must an insurable interest legally exist in property insurance for an insured to receive payment for a loss from the insurer?

1. A) only at the time of the loss
2. B) only at the inception of the policy
3. C) only at the time the loss settlement takes place
4. D) both at the time of the loss and at the inception of the policy

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

1. A) warranty.
2. B) insurable interest.
3. C) utmost good faith.
4. D) subrogation.

Which of the following statements about subrogation is true?

1. A) Subrogation eliminates adverse selection.
2. B) Subrogation helps to hold down the cost of insurance.
3. C) Subrogation results in violation of the principle of indemnity.
4. D) Subrogation permits a party who caused a loss to avoid responsibility for the loss.

Which of the following statements about subrogation is true?

1. A) It is used primarily for losses paid under life insurance policies.
2. B) It allows the insurer to sue its own insured who is negligent.
3. 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.
4. D) The insurer is required to exercise its subrogation rights.

The principle of utmost good faith is supported by all of the following legal doctrines EXCEPT

1. A) representations.
2. B) warranty.
3. C) subrogation.
4. D) concealment.

What is the legal significance of a material concealment by an insurance applicant?

1. A) The contract is automatically voided from its inception.
2. B) The contract is voidable at the insurer's option.
3. C) Loss payments are reduced by the degree of the concealment.
4. D) The insurer is immediately entitled to a higher premium.

What is the legal significance of a material misrepresentation in an insurance application?

1. A) The contract is automatically voided from its inception.
2. B) The contract is voidable at the insurer's option.
3. C) Loss payments are reduced by the degree of the misrepresentation.
4. D) The insurer is immediately entitled to a higher premium.

A false material statement made by an applicant for insurance is an example of

1. A) concealment.
2. B) breach of warranty.
3. C) lack of offer and acceptance.
4. D) misrepresentation.

Which of the following statements about a warranty in an insurance contract is (are) true?

1. It is part of the insurance contract.
2. Statements made by an insurance applicant are considered warranties rather than representations.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II

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

1. A) representation.
2. B) binder.
3. C) rider.
4. D) warranty.

Which of the following statements about offer and acceptance for insurance contracts is true?

1. A) In property and liability insurance, agents typically do not have the authority to bind coverage.
2. B) In life insurance, the agent can usually accept an offer by immediately binding coverage.
3. C) In property insurance, the offer and acceptance are usually in writing but may be oral.
4. D) In life insurance, completing the application and paying the first premium constitute acceptance of the offer from the insurer.

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?

1. A) on Monday, when she completed the application and paid the first premium
2. B) on Wednesday, two days after completing the application and paying the first premium
3. C) on Thursday when she passed the medical exam
4. D) on Saturday, two days after passing the medical exam

Which of the following statements about consideration in an insurance contract is (are) true?

1. The insured's total consideration is submission of a completed application.
2. The insurer's consideration is the promise to do those things specified in the policy.
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II

A contract in which the values exchanged are not equal because chance is involved is called a(n)

1. A) contract of adhesion.
2. B) unilateral contract.
3. C) conditional contract.
4. D) aleatory contract.

Why are insurance contracts said to be contracts of adhesion?

1. A) The values exchanged by the parties to the contract are not equal.
2. B) One party writes the contract, and the other party must accept the entire contract as written.
3. C) Only one party makes a legally enforceable promise.
4. D) Conditions are placed on the insurer's promise to perform.

Why does the insured get the benefit of the doubt if an insurance policy contains any ambiguities or uncertainties?

1. A) because insurance contracts are aleatory
2. B) because insurance contracts are unilateral
3. C) because insurance contracts are conditional
4. D) because insurance contracts are contracts of adhesion

Why can an insurer refuse to pay a claim if an insured fails to abide by the policy provisions?

1. A) because insurance contracts are aleatory
2. B) because insurance contracts are unilateral
3. C) because insurance contracts are conditional
4. D) because insurance contracts are contracts of adhesion

Which of the following types of insurance policies can usually be assigned without the insurer's consent?

1. Life insurance
2. Property insurance
3. A) I only
4. B) II only
5. C) both I and II
6. D) neither I nor II

What is the practical effect of an insurance policy being a conditional contract?

1. A) The insurer can refuse to a pay claim if the insured has not complied with all policy provisions.
2. B) The insured can assign the policy only with the insurer's consent.
3. C) The insurer can sue the insured for failure to pay any premiums.
4. D) The insured gets the benefit of the doubt if a policy contains any ambiguities or uncertainties.

What is the practical effect of an insurance contract being a contract of adhesion?

1. A) The insurer can refuse to pay claims if the insured has not complied with all policy provisions.
2. B) The insured can assign the policy only with the insurer's consent.
3. C) The insurer can sue the insured for failure to pay any premiums.
4. D) The policy is interpreted in the insured's favor if the policy contains any ambiguities or uncertainties.

All of the following statements about the rules governing agency relationships are true EXCEPT

1. A) An agent must be authorized to act on behalf of a principal.
2. B) An agency agreement may grant certain powers to the agent as well as denying the agent other powers.
3. C) The principal is responsible for the acts of agents only if the acts are criminal.
4. D) Knowledge of the agent is presumed to be knowledge of the principal with respect to matters within the scope of the agency relationship.

The voluntary relinquishment of a legal right is called

1. A) subrogation.
2. B) adhesion.
3. C) estoppel.
4. D) waiver.

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?

1. A) adhesion
2. B) waiver
3. C) estoppel
4. D) subrogation

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?

1. A) $900
2. B) $950
3. C) $1,000
4. D) $1,200

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?

1. A) Insurance contracts are unilateral contracts.
2. B) Insurance contacts are contracts of adhesion.
3. C) Insurance contracts are aleatory contracts.
4. D) Insurance contracts are personal contracts.

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?

1. A) the principle of utmost good faith
2. B) the principle of insurable interest
3. C) the principle of subrogation
4. D) the principle of reasonable expectations

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?

1. A) warranty
2. B) misrepresentation
3. C) waiver
4. D) concealment

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

1. A) binder.
2. B) warranty.
3. C) waiver.
4. D) deductible.

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?

1. A) There is no presumption of an agency relationship.
2. B) Agents should be compensated based on the quality of the business they generate.
3. C) A principal is responsible for the acts of its agents who are acting within the scope of their authority.
4. D) An agent must have authority to represent the principal.

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

1. A) personal contracts.
2. B) unilateral contracts.
3. C) aleatory contracts.
4. D) contracts of adhesion.

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?

1. A) consideration
2. B) offer and acceptance
3. C) legal purpose
4. D) competent parties

Which distinct legal characteristic of insurance contracts states that only the insurer's promise to perform is legally enforceable?

1. A) contracts of adhesion
2. B) unilateral contracts
3. C) aleatory contracts
4. D) personal contracts

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

1. A) intrinsic value method.
2. B) valued policy method.
3. C) fair market value method.
4. D) forensic cost method.

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

1. A) agreed amount laws.
2. B) replacement cost laws.
3. C) homestead laws.
4. D) valued policy laws.

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

1. A) the principle of utmost good faith.
2. B) the principle of reasonable expectations.
3. C) the principle of subrogation.
4. D) the principle of indemnity.

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

1. A) potential responsibility for legal liability.
2. B) being a secured creditor.
3. C) expectation of ownership.
4. D) having a contractual right.

All of the following statements about subrogation are true EXCEPT

1. A) The general rule allows the insurer to recover up to the amount paid to its insured under the policy.
2. B) Subrogation does not apply in life insurance.
3. C) Interfering with the insurer's subrogation rights can jeopardize indemnification of the insured.
4. D) The insurer reserves the right to subrogate against its own insureds.

Powers specifically conferred on an agent to act on behalf of a principal are

1. A) incidental authority.
2. B) apparent authority.
3. C) implied authority.
4. D) express authority.

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

1. A) implied authority.
2. B) apparent authority.
3. C) incidental authority.
4. D) express authority.

The authority of an agent to perform all incidental acts necessary to fulfill the purposes of the agency agreement is called

1. A) implied authority.
2. B) declared authority.
3. C) apparent authority.
4. D) express authority.

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

1. A) it was in writing on the application.
2. B) it was given with the intent to deceive.
3. C) the policy would have been issued on different terms if the insurer knew the true facts.
4. D) the policy would have been issued for a lower face value if the insurer knew the true facts.

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?

1. A) exchange of consideration
2. B) offer and acceptance
3. C) legal purpose
4. D) competent parties

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)

1. A) ownership interest.
2. B) close family relationship.
3. C) pecuniary interest.
4. D) economic family relationship.

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?

1. A) estoppel
2. B) concealment
3. C) warranty
4. D) misrepresentation

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

1. A) unilateral contracts.
2. B) contracts of adhesion.
3. C) personal contracts.
4. D) aleatory contracts.

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

1. A) the principal is never responsible for the acts of its agents.
2. B) there is no presumption of an agency relationship.
3. C) limitations can be placed on the powers of agents.
4. D) knowledge of the agent is assumed to be knowledge of the principal.