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EACH CHAPTER CONTAIN 3 SETS OF QUESTIONS

CHAPTER 1

Question 1
One of the costs of insurance is said to be opportunity costs. This means that if capital and labor were not being used in the insurance business,
they could be used elsewhere and making other productive contributions to
A. Society.
B. The insurance industry.
C. The agency system.
D. Government.

Question 2
A small business owner concerned about something happening and not being able to work or earn a living for an extended period of time due to
an accident should purchase
A. Personal liability insurance.
B. Medical insurance.
C. Disability insurance.
D. Universal life insurance.

Question 3
Though premiums are an obvious cost of insurance, many insureds believe they are too high because
A. Benefits are intangible until a loss occurs.
B. Premiums are not a regular cost of living.
C. Insurers only use eighty cents from every premium dollar to pay losses.
D. Insureds do not deliberately cause losses.

Question 4
A policy that combines property, crime, and liability coverages into one policy is referred to as a(n)
A. Commercial package policy (CPP).
B. Commercial umbrella policy.
C. Workers compensation policy.
D. Employee dishonesty policy.

Question 5
Which one of the following statements is correct regarding the benefits provided by insurance?
A. The reduction in losses paid by insurers due to risk control measures benefits individual insureds, but not society as a whole.
B. Insurance helps reduce the financial burden to society by compensating accident victims.
C. The primary role of insurance is to meet mandatory insurance requirements.
D. Insurance reduces the financial consequences of loss exposures, but not the related uncertainty.

Question 6
The process of restoring an individual or organization to a pre-loss financial condition is the process of
A. Subrogation.
B. Premium rebating.
C. Indemnification.
D. Loss mitigation.

Question 7
Coverage for money, securities, and other property from various causes of loss such as burglary, robbery, theft, and employee dishonesty typi-
cally is provided by
A. Professional liability insurance.
B. Ocean marine insurance.
C. Commercial crime insurance.
D. Inland marine insurance.

Question 8
Ideally insurable loss exposures are subject to losses that
A. Occur gradually over long periods of time.

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B. Are immeasurable in terms of frequency or severity.
C. Result from unidentifiable causes.
D. Are definite in time, cause, and location.

Question 9
Employees are told what to do and do what they are told in a
A. Training environment.
B. Counseling environment.
C. Coaching environment.
D. Compliance environment.

Question 10
Which one of the following statements is correct?
A. Contractors must usually provide evidence of liability insurance before a construction contract is granted.
B. Insurers generally do not provide incentives to organizations to implement risk control measures.
C. Insurance policies typically cannot be used to provide evidence of financial resources.
D. One disadvantage of insurance is that it promotes inefficient use of policyholders’ funds.

Question 11
Commercial general liability insurance policies written on an occurrence basis apply to bodily injury and property damage that occurs during the
policy period. This provision supports the principle that insurable loss exposures must ideally be
A. Definite.
B. Fortuitous.
C. Independent.
D. Pure risks.

Question 12
As a single mother on a very tight budget, Ciara is tempted to skimp on her insurance. However, her friend Mehmet tells her not to skimp on
insurance, because it will help manage her cash flows. Which one of the following examples best illustrates Mehmet’s point?
A. Ciara finds it difficult to come up with a $787 auto insurance premium every six months.
B. Ciara needs her car to get to her job, and she needs her job to make car payments and pay for her car insurance.
C. When her car’s transmission goes out a month after the warranty expires, Ciara is faced with a $1,100 repair bill.
D. When her car’s windshield breaks, Ciara has to pay only $100 of the $600 cost of replacing it.

Question 13
Employees may have increased job satisfaction as a result of perceiving coaching as a form of
A. Counseling.
B. Compliance.
C. Recognition.
D. Discipline.

Question 14
Coverage for miscellaneous types of property such as movable property, goods in domestic transit, and property used in transportation and
communication, typically is provided by
A. Auto physical damage insurance.
B. Inland marine insurance.
C. Crime insurance.
D. Business income insurance.

Question 15
Which one of the following is an opportunity cost of insurance?
A. The payment of commissions to agents
B. An insurer's loss on invested premiums
C. An insured's funds that could be invested elsewhere if purchasing insurance were not necessary
D. The cost of claims payments that would not have been necessary if insureds' carelessness had not caused losses

Question 1

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As a single mother on a very tight budget, Ciara is tempted to skimp on her insurance. However, her friend Mehmet tells her not to skimp on
insurance, because it will help manage her cash flows. Which one of the following examples best illustrates Mehmet’s point?
A. Ciara finds it difficult to come up with a $787 auto insurance premium every six months.
B. Ciara needs her car to get to her job, and she needs her job to make car payments and pay for her car insurance.
C. When her car’s transmission goes out a month after the warranty expires, Ciara is faced with a $1,100 repair bill.
D. When her car’s windshield breaks, Ciara has to pay only $100 of the $600 cost of replacing it.

Question 2
Coverage for money, securities, and other property from various causes of loss such as burglary, robbery, theft, and employee dishonesty typi-
cally is provided by
A. Professional liability insurance.
B. Ocean marine insurance.
C. Commercial crime insurance.
D. Inland marine insurance.

Question 3
The two primary types of health insurance coverage are
A. Sickness and Accident.
B. Medical and Disability Income.
C. Accident and Medical.
D. Disability Income and Sickness.

Question 4
Liability coverage for loss exposures arising from a business organization's premises and operations, its products, or its completed work is typi-
cally provided by
A. Professional liability insurance.
B. Commercial general liability insurance.
C. Auto liability insurance.
D. Personal liability insurance.

Question 5
Oscar’s custom-built vehicle looks like a sausage sandwich on wheels. He plans to drive it to special events at schools around the country where
it will serve as a mobile billboard to promote his product. Oscar is surprised to learn that insurers are reluctant to insure his vehicle because it
fails to meet one of the ideal characteristics of an insurable risk. Which characteristic is Oscar’s vehicle least likely to meet?
A. Definite and measurable
B. Independent and not catastrophic
C. Large number of similar exposure units
D. Pure risk

Question 6
Which one of the following is an opportunity cost of insurance?
A. The payment of commissions to agents
B. An insurer's loss on invested premiums
C. An insured's funds that could be invested elsewhere if purchasing insurance were not necessary
D. The cost of claims payments that would not have been necessary if insureds' carelessness had not caused losses

Question 7
One of the costs of insurance is said to be opportunity costs. This means that if capital and labor were not being used in the insurance business,
they could be used elsewhere and making other productive contributions to
A. Society.
B. The insurance industry.
C. The agency system.
D. Government.

Question 8
An effective coach helps employees develop competencies through
A. Rules, procedures, structure, instructions, and compliance.
B. Questioning, understanding, support, direction, and feedback.
C. Counseling, training, promotions, incentives, and compensation.

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D. Multiple tasks, resources, responsibilities, challenges, and processes.

Question 9
Though premiums are an obvious cost of insurance, many insureds believe they are too high because
A. Benefits are intangible until a loss occurs.
B. Premiums are not a regular cost of living.
C. Insurers only use eighty cents from every premium dollar to pay losses.
D. Insureds do not deliberately cause losses.

Question 10
Which one of the following statements is correct with regard to risk and ideally insurable characteristics of loss exposures?
A. An ideally insurable loss exposure should be associated with speculative risk.
B. One purpose of insurance is to enable the insured to profit from a loss.
C. Indemnification is the process of restoring an insured to a pre-loss financial condition.
D. If a loss exposure includes the possibility of gain, it is a more desirable risk to insure.

Question 11
Which one of the following statements is correct regarding the benefits that insurance provides?
A. The premiums collected by insurers must be held in cash to be available to pay claims.
B. Insurance provides a source of investment funds for insurers, but not for insureds.
C. Insurers are prohibited from investing in such things as research or technological advancements.
D. Investment income helps keep insurance premiums at a reasonable level.

Question 12
Which one of the following statements is correct?
A. Insurers are prohibited from investing in social projects.
B. Insurance provides a source of investment funds for insurers but not for policyholders.
C. Insurers cannot invest premium income because it must be available to pay claims.
D. Insurers’ investment income helps keep premiums at a reasonable level.

Question 13
Liability coverage to individuals and families for bodily injury and property damage arising from the insured's personal premises or activities is
typically provided by
A. Personal liability insurance.
B. Auto liability insurance.
C. Professional liability insurance.
D. Commercial general liability insurance.

Question 14
Employees may have increased job satisfaction as a result of perceiving coaching as a form of
A. Counseling.
B. Compliance.
C. Recognition.
D. Discipline.

Question 15
The process of restoring an individual or organization to a pre-loss financial condition is the process of
A. Subrogation.
B. Premium rebating.
C. Indemnification.
D. Loss mitigation.

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Question 1
All of the following are types of property insurance, EXCEPT:
A. Fire and allied lines
B. Crime
C. Business income
D. Directors and officers

Question 2
The process of restoring an individual or organization to a pre-loss financial condition is the process of
A. Subrogation.
B. Premium rebating.
C. Indemnification.
D. Loss mitigation.

Question 3
Which one of the following statements is correct regarding the benefits that insurance provides?
A. The premiums collected by insurers must be held in cash to be available to pay claims.
B. Insurance provides a source of investment funds for insurers, but not for insureds.
C. Insurers are prohibited from investing in such things as research or technological advancements.
D. Investment income helps keep insurance premiums at a reasonable level.

Question 4
Which one of the following is an operating cost of insurers?
A. An insured's funds that could be invested elsewhere if purchasing insurance were not necessary
B. Producers' commissions
C. Increased property losses because people have insurance
D. Increased liability loss payments because people have insurance

Question 5
Employees may have increased job satisfaction as a result of perceiving coaching as a form of
A. Counseling.
B. Compliance.
C. Recognition.
D. Discipline.

Question 6
Which one of the following statements is correct regarding the benefits provided by insurance?
A. The reduction in losses paid by insurers due to risk control measures benefits individual insureds, but not society as a whole.
B. Insurance helps reduce the financial burden to society by compensating accident victims.
C. The primary role of insurance is to meet mandatory insurance requirements.
D. Insurance reduces the financial consequences of loss exposures, but not the related uncertainty.

Question 7
Coverage for money, securities, and other property from various causes of loss such as burglary, robbery, theft, and employee dishonesty typi-
cally is provided by
A. Professional liability insurance.
B. Ocean marine insurance.
C. Commercial crime insurance.
D. Inland marine insurance.

Question 8
Sometimes the existence of insurance encourages losses. The result of this phenomenon is that it

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A. Increases competition in the industry.
B. Reduces agents' commissions.
C. Increases the total cost of insurance.
D. Reduces the term of many policies.

Question 9
A homeowners insurance policy typically includes
A. Only property coverage.
B. Only liability coverage.
C. Both property and liability coverage.
D. Umbrella coverage.

Question 10
Adhering to the characteristics of an ideally insurable loss exposure in selling insurance help assure that
A. The insurer is able to charge a premium that the insured can afford to pay.
B. The losses associated with it typically involve small amounts.
C. The insurer can charge a high premium for the coverage.
D. The insurer is able to predict the amount and timing of each future loss.

Question 11
An effective coach helps employees develop competencies through
A. Rules, procedures, structure, instructions, and compliance.
B. Questioning, understanding, support, direction, and feedback.
C. Counseling, training, promotions, incentives, and compensation.
D. Multiple tasks, resources, responsibilities, challenges, and processes.

Question 12
Insurance customers' loss exposures arise out of their activities, as well as
A. Insureds' property.
B. Insurers' requirements.
C. Insureds' goals.
D. Insurers' coverages.

Question 13
Pravalt Construction Company pays less than its competitors for workers compensation insurance because Pravalt has had substantially fewer
employee injuries than other firms in its class. This illustrates which one of the following benefits of insurance?
A. Meet legal requirements
B. Enable efficient use of resources
C. Promote risk control
D. Reduce social burden

Question 14
Which one of the following is an example of a fortuitous loss?
A. Insureds intentionally set a fire and burn their house down.
B. An insured demolishes a deck that has been allowed to rot.
C. An unknown vandal spray-paints graffiti on the insured’s garage.
D. The value of an insured’s home decreases due to a lack of maintenance.

Question 15
Claim buildup is considered to be among which one of the following costs of insurance?
A. Premiums paid
B. Operating costs
C. Opportunity costs
D. Increased losses

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CHAPTER 2

Question 1
What is solvency?
A. The ability of an insurer to meet its obligations as they become due
B. Transparency of policy language
C. The process of a state taking over the assets and obligations of a failing insurer
D. Destructive competition

Question 2
The capital of a stock insurance company comes primarily from
A. Sale of insurance policies.
B. Return on invested premium reserves.
C. Sale of company stock.
D. Leveraging the difference from when a premium is paid in and when a claim is paid out.

Question 3
Destructive competition in the insurance industry could result in
A. Oversupply of insurance.
B. Excess regulation.
C. Insurance shortages.
D. Inadequate regulation.

Question 4
Some communities in the United States celebrate holidays with firecrackers. Firecracker vendors erect stands in the parking lots of shopping
centers before the holidays. One shopping center owner sponsoring a firecracker vendor's booth found that his insurance did not cover the expo-
sure. He found that none of the insurers licensed to do business in the state sold insurance coverage for the exposures.
How can the shopping center owner obtain appropriate coverage for the exposure from the firecracker vendor's booth?
A. By obtaining coverage through the excess and surplus lines market
B. By pooling the risk with other shopping center owners with similar exposures
C. Through a proportionate sharing arrangement with multiple insurers
D. From alien insurers in countries that also celebrate holidays with firecrackers

Question 5
A reinsurance company
A. Is formed to write all or part of the insurance for a parent company.
B. Provides primary insurance for loss exposures that private insurers are unwilling to provide.
C. Transfers losses to a primary insurer.
D. Assumes loss exposures from a primary insurer.

Question 6
Which one of the following is true regarding the administration of the Insurance Regulatory Information System (IRIS)?
A. If the insurer has financial ratios that are inside predetermined norms, IRIS identifies the company for regulatory attention.
B. If regulators determine that an insurer is insolvent, the state insurance department places it in receivership.
C. If an insurer cannot be rehabilitated, the state's guaranty fund may be available to increase the effects of the insurer insolvency.
D. Under a special provision in state licensing laws, state regulators are empowered to completely take over an insurer at any time.

Question 7
Which one of the following is a key focus of states' insurance regulation?

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A. Insurer licensing.
B. Product branding.
C. Premium taxation.
D. Producer concentration.

Question 8
Gen Company is a start-up corporation specializing in providing genetic material for use in new, experimental and often controversial medical
treatments. Reasons why its liability insurance needs may have to be met in the surplus lines market include which one of the following?
A. Its activities raise moral issues.
B. Gen Company is a mainstream business.
C. Surplus lines insurance company personnel enjoy controversy.
D. Its loss exposures require new forms of coverage.

Question 9
Which one of the following best describes what is determined by the insurer’s staff review of applications from prospective insureds?
A. Whether the characteristics of the customer match the insurer’s eligibility and selection guidelines
B. Whether the account should be written as a personal insurance policy or a commercial insurance policy
C. Whether any loss control recommendations will be made
D. Whether claims will be paid or denied

Question 10
Which one of the following is a federal insurance plan in which the government acts as a partner with a private insurer that sells insurance and
pays the claims, and then reimburses the insurer for the portion of losses that exceeds premiums and investment income?
A. Beach and Windstorm Plan
B. National Flood Insurance Program (NFIP)
C. Terrorism Risk Insurance Program (TRIP)
D. Residual Auto Plan

Question 11
What is the most common reason premium audits are conducted?
A. The amount of actual losses are not known at the start of the policy period.
B. Loss control activities during the policy period may reduce the risk of loss.
C. Claim examiners have discovered unacceptable operations during the policy period.
D. The amount of the loss exposure is unknown at the start of the policy period.

Question 12
Which one of the following correctly describes a reason for government involvement in property-casualty insurance?

A. Selling insurance provides the government with a non-tax source of revenues and profits.

B. Government programs can meet legitimate public demands unmet by private insurers.

C. Competition from government plans keeps private insurer’s premiums competitive.

D. Preventing high-risk individuals or activities from being insured is in the public interest.

Question 13
A company interested in improving cash flow should consider meeting its insurance needs through which one of the following types of insurance
organizations?

A. Captive insurers

B. Stock insurers

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C. Mutual insurers

D. Reciprocal insurance exchanges

Question 14
When deciding to approve or disapprove an insurer's request for a rate, a state insurance commissioner must determine if the rates are ade-
quate. This means that the rates should be

A. Similar to the rates charged by other insurers operating in the state.

B. Similar for insureds with similar loss exposures.

C. Sufficient to pay all claims and the expenses related to those claims.

D. Able to generate a fair return for the insurer but no to excessive or unrealistic profit.

Question 15
Riko's insurance agent was caught embezzling several insureds' premiums, which involves what area of insurance company operations and what
punishment by state regulators?

A. Sales; agent license revoked

B. Underwriting; agent license revoked

C. Claim handling; operating license suspended

D. Claim handling; operating license revoked

Question 16
Generally, how often must a foreign insurer's license be renewed?

A. Every five years

B. Every two years

C. Semi-annually

D. Annually

Question 17
In developing insurance rates, a state mandatory rate law requires the insurer to

A. Use state developed rates.

B. Establish and file rates for all admitted lines of insurance.

C. Use rates developed by the National Association of Insurance Commissioners (NAIC).

D. Maintain rates equal to policyholder surplus.

Question 18
Why are insurance regulators concerned about the effects of large catastrophes?

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A. They could lead to destructive competition.

B. Insurers may become insolvent.

C. Insurance rates will rise.

D. Licensed insurers will be unable to handle demand.

Question 19
Which one of the following statements is true?

A. Mutual insurance companies include some large national insurers.

B. Mutual insurers are usually large national insurers.

C. Mutual insurers are exclusively regional or local insurers.

D. Mutual insurers include few regional insurers.

Question 20
Which one of the following statements is correct regarding government involvement in insurance?

A. Federal and state government are involved in insurance to facilitate compulsory insurance purchases.

B. Most organizations obtain workers' compensation insurance through federal or state insurance programs.

C. Government insurance plans typically incur significant costs in marketing and sales commissions.

D. Legislators find it more straightforward to invite and analyze bids from private insurers than to establish government plans.

Question 21
Insurance Company wrote a commercial liability policy for a manufacturer of off-road motorcycles. The potential costs of the insured's loss expo-
sure exceed Insurance Company's capacity. Insurance Company could consider which type of contractual transferring agreement to meet its
needs?

A. Mutual insurance

B. Reciprocal insurance

C. Reinsurance

D. Interinsurance

Question 22
Which one of the following is generally exempt from state insurance regulations pertaining to policy forms and rates?

A. Surplus line insurers

B. Workers compensation insurers

C. Commercial property insurers

D. Health insurers

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Question 23
The two objectives of insurance policy form regulation are to ensure that policies are clear and readable and to

A. Ensure that the insurers rights are protected.

B. Ensure policies are negotiable between an insurer and insured.

C. Limit policies' length and complexity.

D. Detect and address any policy provisions that are unfair.

Question 24
Prompt and professional loss adjustment services are a responsibility of what part of an insurer's organization?

A. The claims function

B. The loss control function

C. The premium audit function

D. The underwriting function

Question 25
Insurers are required to submit annual financial statements to

A. State insurance departments.

B. The National Association of Insurance Commissioners (NAIC).

C. The Insurance Regulatory Information System (IRIS).

D. The state guaranty fund.

Question 26
Unfair trade practices acts involve which one of the following insurance company operations?

A. Rate filings

B. Coverage form design

C. Underwriting

D. Financial reporting

Question 27
Which one of the following statements concerning government insurance programs is true?

A. Businesses seeking flood insurance under the National Flood Insurance Program (NFIP) must purchase it at local federal government offices.

B. Various state insurance programs provide crop insurance for perils such as drought, disease, excessive rain and hail.

C. Fair Access to Insurance Requirements (FAIR) plans make basic property insurance available to property owners who can’t get it otherwise.

D. The federal government provides workers compensation insurance to employers who cannot get it from private insurers.

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Question 28
Kyle is a professional athlete who has had several successful seasons. He earns $10 million a year, and is hopeful that his salary will double when
he renegotiates his contract next year. His financial adviser recommends that he purchase an umbrella policy with multi-million dollar limits to
provide an excess layer of protection above his primary personal insurance policies. Kyle's insurance broker has approached many of the large,
well-known insurance companies, and they have balked at writing limits as high as those needed by Kyle. The broker is likely to find the cover-
age that Kyle needs in the

A. Standard insurance market.

B. Commercial property and casualty market.

C. Surplus lines insurance market.

D. Admitted property and casualty market.

Question 29
Most states regulate the excess and surplus lines market by

A. Establishing a monitoring board comprised of all insurers licensed to do business in the state.

B. Examining the market conduct practices of the unlicensed insurers.

C. Requiring that licensed surplus lines brokers transact business with the unlicensed insurers.

D. Approving the policy forms and rates used by the unlicensed insurers.

Question 30
An Ohio insurer that is licensed to sell insurance in Michigan is known as what in Michigan?

A. An alien insurer

B. A domestic insurer

C. A captive insurer

D. A foreign insurer

Question 1
For an insurer to be considered solvent, states require it to have financial reserves

A. As a fraction of its ordinary expenses.

B. Equal to its ordinary expenses.

C. Well in excess of its ordinary expenses.

D. Double its ordinary expenses.

Question 2
An Ohio insurer that is licensed to sell insurance in Michigan is known as what in Michigan?

A. An alien insurer

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B. A domestic insurer

C. A captive insurer

D. A foreign insurer

Question 3
How does a flex rating law work?

A. Insurers may adjust rates within a range without prior approval.

B. Insurers may change rates without prior approval, but they are subject to regulatory review.

C. Insurers may adjust rates within a range with prior approval.

D. Insurers may adjust rates at will, but are required to file a rate schedule.

Question 4
Which one of the following statements is true?

A. Insurers must be free to create policies that are in their best interest.

B. Insurance regulators review policies to determine if they benefit consumers.

C. Insurance policies are private contracts, the language of which is largely unregulated.

D. Regulators set coverage standards, but allow insurers to determine policy language.

Question 5
Prompt and professional loss adjustment services are a responsibility of what part of an insurer's organization?

A. The claims function

B. The loss control function

C. The premium audit function

D. The underwriting function

Question 6
In developing insurance rates, a state mandatory rate law requires the insurer to

A. Use state developed rates.

B. Establish and file rates for all admitted lines of insurance.

C. Use rates developed by the National Association of Insurance Commissioners (NAIC).

D. Maintain rates equal to policyholder surplus.

Question 7
Insurers are required to submit annual financial statements to

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A. State insurance departments.

B. The National Association of Insurance Commissioners (NAIC).

C. The Insurance Regulatory Information System (IRIS).

D. The state guaranty fund.

Question 8
What is the most common reason premium audits are conducted?

A. The amount of actual losses are not known at the start of the policy period.

B. Loss control activities during the policy period may reduce the risk of loss.

C. Claim examiners have discovered unacceptable operations during the policy period.

D. The amount of the loss exposure is unknown at the start of the policy period.

Question 9
Which one of the following is a key focus of states' insurance regulation?

A. Insurer licensing.

B. Product branding.

C. Premium taxation.

D. Producer concentration.

Question 10
The state of Maryland operates a residual auto plan (the Maryland Auto Insurance Fund—MAIF) that provides coverage for drivers who are
unable to obtain coverage from private insurers. Which one of the following is the best rationale for the MAIF program?

A. Auto insurance for high-risk drivers is profitable, and the program enables the state to share in the profits.

B. Auto insurance is compulsory, and the program makes it possible for all drivers to have reasonably priced insurance.

C. Private insurers face limited competition, and the state increases competitive pressures by operating this type of plan.

D. Private insurers overcharge for auto insurance, and the state provides a low-cost alternative.

Question 11
Why are insurance regulators concerned about the effects of large catastrophes?

A. They could lead to destructive competition.

B. Insurers may become insolvent.

C. Insurance rates will rise.

D. Licensed insurers will be unable to handle demand.

Question 12
What is solvency?

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A. The ability of an insurer to meet its obligations as they become due

B. Transparency of policy language

C. The process of a state taking over the assets and obligations of a failing insurer

D. Destructive competition

Question 13
Which one of the following statements is correct regarding government insurance programs?

A. Government insurers cannot function as primary insurers for duties such as collecting premiums, providing coverage, or paying claims.

B. Government programs can operate as reinsurers, reinsuring 100 percent of the risk or that part in excess of the private insurer's retention.

C. Government partnerships with private insurers usually develop in especially desirable lines of business.

D. Government insurance programs cannot operate in direct competition with private insurers.

Question 14
Generally, how often must a foreign insurer's license be renewed?

A. Every five years

B. Every two years

C. Semi-annually

D. Annually

Question 15
Market conduct regulation focuses on insurers' treatment of applicants for insurance, insureds, and others who present claims for coverage.
Market conduct regulation affects which one of the following areas of operation?

A. Financial requirements

B. Sales

C. Field examinations

D. Annual statements

Question 16
Most states regulate the excess and surplus lines market by

A. Establishing a monitoring board comprised of all insurers licensed to do business in the state.

B. Examining the market conduct practices of the unlicensed insurers.

C. Requiring that licensed surplus lines brokers transact business with the unlicensed insurers.

D. Approving the policy forms and rates used by the unlicensed insurers.

Question 17
An insurer that was formed for the purpose of earning a profit for its stockholders is a

A. Stock insurer.

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B. Reciprocal insurance exchange.

C. Mutual insurer.

D. Captive insurer.

Question 18
Which one of the following describes the characteristics of a mutual insurance company?

A. A corporation owned by stockholders that earns profits for the stockholders.

B. An unincorporated association that provides reciprocal coverage to subscribers.

C. A corporation owned by policyholders that provides insurance to its policyholders.

D. An unincorporated association that earns profits for its individual investors.

Question 19
Risk control is intended to prevent or reduce losses. When practicing sound risk control, an organization

A. Will not be required to expend economic resources to insure those loss exposures.

B. Is likely to use insurance to treat those loss exposures.

C. Will often be able to eliminate losses from those loss exposures.

D. Is likely to see the same economic benefit as compared to insurance.

Question 20
Which one of the following insurance customers might be compelled to meet its liability insurance needs through the excess and surplus lines
market?

A. Hobby shop in a proprietor-owned building

B. Major airline requiring multi-billion dollar limits

C. Plumbing outfit with one full-time and two part-time employees

D. Landscaping company with two full-time and five seasonal workers

Question 21
All of the following belong to classes of business likely to obtain liability coverage in the excess and surplus lines market, EXCEPT:

A. Security services

B. Sports facilities

C. Dry cleaners

D. Amusement parks

Question 22
When deciding to approve or disapprove an insurer's request for a rate, a state insurance commissioner must determine if the rates are ade-
quate. This means that the rates should be

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A. Similar to the rates charged by other insurers operating in the state.

B. Similar for insureds with similar loss exposures.

C. Sufficient to pay all claims and the expenses related to those claims.

D. Able to generate a fair return for the insurer but no to excessive or unrealistic profit.

Question 23
Which one of the following statements is correct regarding government involvement in insurance?

A. Federal and state government are involved in insurance to facilitate compulsory insurance purchases.

B. Most organizations obtain workers' compensation insurance through federal or state insurance programs.

C. Government insurance plans typically incur significant costs in marketing and sales commissions.

D. Legislators find it more straightforward to invite and analyze bids from private insurers than to establish government plans.

Question 24
Some insurance rating laws allow rates to be put into use immediately but require insurers to files the rates with the state within a specific peri-
od of time. These types of laws are known as

A. File-and-use laws.

B. Use-and-file laws.

C. Prior-approval laws.

D. Flex rating laws.

Question 25
A stock insurer is distinguished from a mutual insurer by the fact that

A. Owners are not necessarily insureds.

B. It seeks to generate a profit.

C. It is governed by a board of directors.

D. Owners have voting rights.

Question 26
Bonnie operates a small produce store that sells a lot of grapes and bananas. The store has a long history of slip-and-fall claims against it. Bon-
nie may look to the E&S market for liability coverage because

A. Of the store's poor loss experience..

B. She needs high limits of coverage.

C. Her exposure is unique.

D. She needs unusually broad coverage.

Question 27
Unfair trade practices acts involve which one of the following insurance company operations?

A. Rate filings

17
B. Coverage form design

C. Underwriting

D. Financial reporting

Question 28
Which one of the following is a federal insurance plan in which the government acts as a partner with a private insurer that sells insurance and
pays the claims, and then reimburses the insurer for the portion of losses that exceeds premiums and investment income?

A. Beach and Windstorm Plan

B. National Flood Insurance Program (NFIP)

C. Terrorism Risk Insurance Program (TRIP)

D. Residual Auto Plan

Question 29
The capital of a stock insurance company comes primarily from
A. Sale of insurance policies.

B. Return on invested premium reserves.

C. Sale of company stock.

D. Leveraging the difference from when a premium is paid in and when a claim is paid out.

Question 30
Insurance Company wrote a commercial liability policy for a manufacturer of off-road motorcycles. The potential costs of the insured's loss expo-
sure exceed Insurance Company's capacity. Insurance Company could consider which type of contractual transferring agreement to meet its
needs?

A. Mutual insurance

B. Reciprocal insurance

C. Reinsurance

D. Interinsurance

Question 1
Which one of the following is true regarding the administration of the Insurance Regulatory Information System (IRIS)?
A. If the insurer has financial ratios that are inside predetermined norms, IRIS identifies the company for regulatory attention.

B. If regulators determine that an insurer is insolvent, the state insurance department places it in receivership.

C. If an insurer cannot be rehabilitated, the state's guaranty fund may be available to increase the effects of the insurer insolvency.

D. Under a special provision in state licensing laws, state regulators are empowered to completely take over an insurer at any time.

Question 2
Which one of the following statements is true?

A. Insurers must be free to create policies that are in their best interest.

B. Insurance regulators review policies to determine if they benefit consumers.

18
C. Insurance policies are private contracts, the language of which is largely unregulated.

D. Regulators set coverage standards, but allow insurers to determine policy language.

Question 3
What term refers to the ability of an insurer to meet its obligations as they become due?

A. Capacity

B. Reserves

C. Capital

D. Solvency

Question 4
Unfair trade practices acts involve which one of the following insurance company operations?

A. Rate filings

B. Coverage form design

C. Underwriting

D. Financial reporting

Question 5
Following the terrorist attacks on the United States, insurers became reluctant to provide property insurance on target properties until the fed-
eral Terrorism Risk Insurance Program (TRIP) was introduced. Which one of the following social purposes did this government insurance pro-
gram serve?

A. Incentive to purchase insurance

B. Pooling of loss exposures

C. Prevent economic disruption

D. Reduced risk to society

Question 6
How does a stock insurer differ from a reciprocal insurance exchange?

A. Stockholders own a stock insurer. Subscribers own a reciprocal insurance exchange.

B. A stock insurer provides insurance to its policyholder-owners. A reciprocal insurance exchange provides insurance to investors.

C. Both are owned by stockholders. However, the reciprocal insurance exchange provides coverage to investors.

D. Both are formed to provide profit to investors. However, the stock insurer is managed through a board of directors.

Question 7
Owners of reciprocal insurance exchanges are also known as

A. Policyholders.

B. Subscribers.

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C. Correspondents.

D. Names.

Question 8
Bonnie operates a small produce store that sells a lot of grapes and bananas. The store has a long history of slip-and-fall claims against it. Bon-
nie may look to the E&S market for liability coverage because

A. Of the store's poor loss experience..

B. She needs high limits of coverage.

C. Her exposure is unique.

D. She needs unusually broad coverage.

Question 9
The state of Maryland operates a residual auto plan (the Maryland Auto Insurance Fund—MAIF) that provides coverage for drivers who are
unable to obtain coverage from private insurers. Which one of the following is the best rationale for the MAIF program?

A. Auto insurance for high-risk drivers is profitable, and the program enables the state to share in the profits.

B. Auto insurance is compulsory, and the program makes it possible for all drivers to have reasonably priced insurance.

C. Private insurers face limited competition, and the state increases competitive pressures by operating this type of plan.

D. Private insurers overcharge for auto insurance, and the state provides a low-cost alternative.

Question 10
Small United States unincorporated insurance associations, domiciled mainly in Texas, are known as

A. American reciprocals.

B. American mutuals.

C. American captives.

D. American Lloyds.

Question 11
Which one of the following statements is correct regarding government involvement in insurance?

A. Federal and state government are involved in insurance to facilitate compulsory insurance purchases.

B. Most organizations obtain workers' compensation insurance through federal or state insurance programs.

C. Government insurance plans typically incur significant costs in marketing and sales commissions.

D. Legislators find it more straightforward to invite and analyze bids from private insurers than to establish government plans.

Question 12
Which one of the following is true about the functions within an insurance organization?

A. Each function contributes or detracts from the overall effectiveness of the insurer.

B. Insurers use common terminology to identify these functions.

C. These well defined functions operate with a high degree of independence.

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D. The essential functions are always performed by insurer personnel.

Question 13
Which one of the following is a federal insurance plan in which the government acts as a partner with a private insurer that sells insurance and
pays the claims, and then reimburses the insurer for the portion of losses that exceeds premiums and investment income?

A. Beach and Windstorm Plan

B. National Flood Insurance Program (NFIP)

C. Terrorism Risk Insurance Program (TRIP)

D. Residual Auto Plan

Question 14
Some insurance rating laws allow rates to be put into use immediately but require insurers to files the rates with the state within a specific peri-
od of time. These types of laws are known as

A. File-and-use laws.

B. Use-and-file laws.

C. Prior-approval laws.

D. Flex rating laws.

Question 15
In developing insurance rates, a state mandatory rate law requires the insurer to

A. Use state developed rates.

B. Establish and file rates for all admitted lines of insurance.

C. Use rates developed by the National Association of Insurance Commissioners (NAIC).

D. Maintain rates equal to policyholder surplus.

Question 16
Prompt and professional loss adjustment services are a responsibility of what part of an insurer's organization?

A. The claims function

B. The loss control function

C. The premium audit function

D. The underwriting function

Question 17
All of the following belong to classes of business likely to obtain liability coverage in the excess and surplus lines market, EXCEPT:

A. Security services

B. Sports facilities

C. Dry cleaners

D. Amusement parks

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Question 18
Generally, how often must a foreign insurer's license be renewed?

A. Every five years

B. Every two years

C. Semi-annually

D. Annually

Question 19
Destructive competition in the insurance industry could result in

A. Oversupply of insurance.

B. Excess regulation.

C. Insurance shortages.

D. Inadequate regulation.

Question 20
What is solvency?

A. The ability of an insurer to meet its obligations as they become due

B. Transparency of policy language

C. The process of a state taking over the assets and obligations of a failing insurer

D. Destructive competition

Question 21
The premium charged for an insurance policy should be

A. Commensurate with the exposure.

B. Equal to the exposure.

C. Concurrent with the exposure.

D. Equivalent to the exposure.

Question 22
The two objectives of insurance policy form regulation are to ensure that policies are clear and readable and to

A. Ensure that the insurers rights are protected.

B. Ensure policies are negotiable between an insurer and insured.

C. Limit policies' length and complexity.

22
D. Detect and address any policy provisions that are unfair.

Question 23
All of the following are types of private insurers, EXCEPT:

A. Stock insurers

B. Mutual insurers

C. State workers compensation funds

D. Reciprocal insurance exchanges

Question 24
Gen Company is a start-up corporation specializing in providing genetic material for use in new, experimental and often controversial medical
treatments. Reasons why its liability insurance needs may have to be met in the surplus lines market include which one of the following?

A. Its activities raise moral issues.

B. Gen Company is a mainstream business.

C. Surplus lines insurance company personnel enjoy controversy.

D. Its loss exposures require new forms of coverage.

Question 25
Which one of the following statements is true?

A. Mutual insurance companies include some large national insurers.

B. Mutual insurers are usually large national insurers.

C. Mutual insurers are exclusively regional or local insurers.

D. Mutual insurers include few regional insurers.

Question 26
Market conduct regulation focuses on insurers' treatment of applicants for insurance, insureds, and others who present claims for coverage.
Market conduct regulation affects which one of the following areas of operation?

A. Financial requirements

B. Sales

C. Field examinations

D. Annual statements

Question 27
Kyle is a professional athlete who has had several successful seasons. He earns $10 million a year, and is hopeful that his salary will double when
he renegotiates his contract next year. His financial adviser recommends that he purchase an umbrella policy with multi-million dollar limits to
provide an excess layer of protection above his primary personal insurance policies. Kyle's insurance broker has approached many of the large,
well-known insurance companies, and they have balked at writing limits as high as those needed by Kyle. The broker is likely to find the cover-
age that Kyle needs in the

A. Standard insurance market.

23
B. Commercial property and casualty market.

C. Surplus lines insurance market.

D. Admitted property and casualty market.

Question 28
The capital of a stock insurance company comes primarily from

A. Sale of insurance policies.

B. Return on invested premium reserves.

C. Sale of company stock.

D. Leveraging the difference from when a premium is paid in and when a claim is paid out.

Question 29
Riko's insurance agent was caught embezzling several insureds' premiums, which involves what area of insurance company operations and what
punishment by state regulators?
A. Sales; agent license revoked

B. Underwriting; agent license revoked

C. Claim handling; operating license suspended

D. Claim handling; operating license revoked

Question 30
When deciding to approve or disapprove an insurer's request for a rate, a state insurance commissioner must determine if the rates are ade-
quate. This means that the rates should be

A. Similar to the rates charged by other insurers operating in the state.

B. Similar for insureds with similar loss exposures.

C. Sufficient to pay all claims and the expenses related to those claims.

D. Able to generate a fair return for the insurer but no to excessive or unrealistic profit.

24
CHAPTER 3

Question 1
All of the following are shown on the balance sheet of an insurer, EXCEPT:

A. Admitted assets

B. Unearned premium reserve

C. Premium taxes, licenses, and fees

D. Loss reserves

Question 2
Insurers carefully evaluate the interaction between premiums and loss ratio and how changes in each affect profit. Which one of the following
statements concerning the relationship between premium and loss ratio is true?

A. If premiums increase by a greater percentage than incurred losses increase, the loss ratio will decrease.

B. If incurred losses increase at a faster rate than premiums, the loss ratio will improve.

C. If premiums decrease at a faster rate than losses increase, the loss ratio will decrease.

D. If losses decrease at a faster rate than premiums decrease, the loss ratio will increase.

Question 3
Which one of the following is shown on an insurer's income statement?

A. Acquisition expenses

B. Cash and short-term investments

C. Loss reserves

D. Loss expense reserves

Question 4
Underwriting income (or loss) is calculated by subtracting losses and expenses from

A. Paid premium.

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B. Written premium.

C. Earned premium.

D. Unearned premium.

Question 5
Which one of the following is the best measure of the amount of insurance provided for a given period?

A. Earned premium

B. Paid premium

C. Written premium

D. Unearned premium

Question 6
Which one of the following is considered to be an acquisition expense for an insurance company?

A. Dividends

B. Sales commissions

C. Losses

D. Guarantee fund expenses

Question 7
Unity Insurance Company (UIC) has an operating ratio of 0.98, a combined ratio of 1.02, and a loss ratio of 0.77. Considering these ratios, which
one of the following statements is true for UIC?

A. UIC's investment income is offsetting losses and expenses from its underwriting operation, allowing an operating profit.

B. UIC is collecting enough premium to allow a profit from its underwriting operations.

C. UIC is collecting enough premium exclusive of investment income to allow an operating profit.

D. UIC's favorable financial basis expense ratio is offsetting losses, allowing an underwriting profit.

Question 8
Which one of the following best explains why underwriting expenses are divided by written premiums rather than earned premiums in order to
calculate an insurer's expense ratio?

A. Loss adjustment expenses are incurred evenly throughout the policy period.

B. The expense ratio does not take into account an insurer's investment income.

C. Many underwriting expenses are incurred at the beginning of the policy period.

D. Insurance coverage is provided evenly throughout the policy period.

Question 9
The financial report for Hometown Insurer contains the following information:

Earned premiums
$4,000,000

Written premiums

26
$5,000,000

Net investment income


$1,000,000

Incurred losses
$3,000,000

Incurred underwriting expense


$2,000,000

What is Hometown Insurer's investment income ratio?

A. 10%

B. 20%

C. 25%

D. 50%

Question 10
A policy provides coverage starting on April 1 with an annual premium of $800. How much premium is earned as of June 30?

A. $100

B. $200

C. $600

D. $800

Question 11
Rachel is considering investing in the stock of an insurance company. Which one of the following is likely to provide the best indication of the
insurer's financial position at this point in time?
A. Income statement

B. Cash flow report

C. Balance sheet

D. Sales report

Question 12
ABC Insurance Company's combined ratio is 102. Its operating ratio is 98. These ratios indicate that

A. ABC's underwriting performance is offsetting the lack of investment earnings.

B. ABC's earned premium is greater than the sum of losses and expenses from its underwriting operations.

C. ABC's return on investments is offsetting the unprofitable underwriting performance.

D. ABC is not generating a profit from its core operations.

Question 13
The financial report for Apex Insurance contains the following information (all figures in '000s):

•Admitted assets $500,000


•Nonadmitted assets $400,000

27
•Liabilities $300,000
What is the amount of Apex Insurance's policyholders' surplus?

A. $100,000

B. $200,000

C. $400,000

D. $600,000

Question 14
Which one of the following is an admitted asset?

A. Premium balances due in more than ninety days

B. Furniture

C. Supplies

D. Real estate

Question 15
The two major sources of an insurer's investment funds are policyholders' surplus and
A. Reserves for loss expenses.

B. Acquisition expenses.

C. Premiums received but not yet used to pay claims.

D. Reserves for unearned premiums.

Question 16
Loss reserves are often the largest liability on an insurer's balance sheet. Loss reserves include

A. All loss amounts paid for the year.

B. Claim expenses paid for the year.

C. Unpaid loss amounts for claims not yet settled.

D. All loss amounts paid for the year, excluding expenses not yet settled.

Question 17
Which one of the following is the correct formula for calculating an insurer's combined ratio?

A. Investment income ratio + overall operating ratio

B. Investment income ratio + premium income ratio

C. Loss ratio + expense ratio

D. Loss ratio + underwriting ratio

Question 18
The financial report for Hometown Insurer contains the following information:

•Earned premiums $4,000,000


•Written premiums $5,000,000
•Net investment income $1,000,000

28
•Incurred Losses $3,000,000
•Incurred underwriting expense $2,000,000
What is Hometown Insurer's expense ratio?

A. 20%

B. 40%

C. 50%

D. 75%

Question 19
An insurer's net underwriting gain or loss provides a better measure of the insurer's marketing, underwriting, and claims skills than its overall
gain or loss from operations. This is true because the overall gain or loss from operations includes investment gains or losses that
A. Vary over time.
B. Are inversely related to how well the insurer conducts its marketing, underwriting, and claims activities.
C. Are not directly related to how well the insurer conducts its marketing, underwriting, and claims activities.
D. Are generally not subject to income tax.

Question 20
Which one of the following types of financial statements shows the financial position of an insurance company at any particular point in time?

A. Income statement

B. Balance sheet

C. Sales report

D. Cash flow report

Question 21
If an insurer's admitted assets stayed the same but its liabilities decreased significantly, its policyholders' surplus would

A. Either stay the same or decrease.

B. Increase.

C. Decrease.

D. Either stay the same or increase.

Question 22
An analyst in the financial department for an insurer has calculated the loss ratio to be 1.03. This result indicates that the insurer is

A. Collecting approximately $1.03 in premium for every $1.00 it pays in claim-related expenses.

B. Collecting approximately $1.03 in premium for every $1.00 it pays in claim-related and underwriting expenses.

C. Paying out approximately $1.03 in claim-related and underwriting expenses for every $1.00 it collects in premium.

D. Paying out approximately $1.03 in claim-related expenses for every $1.00 it collects in premium.

Question 23
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.

29
C. More complete picture of an insurer's profitability.

D. More conservative picture of an insurer's profitability.

Question 24
Atwell Insurance Company has the following expenses:

Dividends
$ 50,000
Claim staff salaries $ 90,000
Agents' commissions $ 180,000
Advertising costs $ 30,000
Rent and utilities $ 40,000

What is the amount of Atwell Insurance Company's acquisition expenses?


A. $210,000

B. $260,000

C. $310,000

D. $410,000

Question 25
Which one of the following categories of loss expenses can an insurer use to compare its revenue and expenses?

A. Loss reserves at end of period

B. Change in loss reserves

C. Loss reserves at beginning of period

D. Incurred losses

Question 26
The salaries of investment professionals who are employed by an insurance company are categorized as

A. General expenses.

B. Investment expenses.

C. Acquisition expenses.

D. Other underwriting expenses.

Question 27
On January 1, 2005, the XYZ Insurance Company issued a policy with a one-year policy period. The premium for this policy was $1,200. What was
the unearned premium for this policy as of May 1, 2005?
A. $ 400
B. $ 600
C. $ 800
D. $1,200

Question 28
On November 1, Peafowl Insurance Company issued a one-year business auto policy to Tri-State Painting Company with a premium of $24,000.
What was the written premium for this policy as of December 31?

A. $ 4,000

B. $ 6,000

30
C. $20,000

D. $24,000

Question 29
Which one of the following is the correct formula for an insurer's overall operating ratio?

A. Loss ratio + Expense ratio

B. Combined ratio - Dividend ratio

C. Loss ratio + Dividend ratio

D. Combined ratio - Investment income ratio

Question 30
A decrease in incurred losses will generally cause a decrease in all of the following, EXCEPT:

A. Combined ratio

B. Expense ratio

C. Overall ratio

D. Loss ratio

Question 1
An analyst in the financial department for an insurer has calculated the loss ratio to be 1.03. This result indicates that the insurer is

A. Collecting approximately $1.03 in premium for every $1.00 it pays in claim-related expenses.

B. Collecting approximately $1.03 in premium for every $1.00 it pays in claim-related and underwriting expenses.

C. Paying out approximately $1.03 in claim-related and underwriting expenses for every $1.00 it collects in premium.

D. Paying out approximately $1.03 in claim-related expenses for every $1.00 it collects in premium.

Question 2
A financial analyst determines that the combined ratio for the DEF Insurance Company was 112 percent for the prior year. Which one of the
following statements best describes how the analyst can interpret this information for the year?

A. The insurer’s net profit had to be negative.

B. The insurer had a loss ratio that was over 100 percent.

C. The insurer had an underwriting loss.

D. The insurer’s expense ratio exceeded its loss ratio.

Question 3
Expenses associated with an insurer's underwriting activity include all of the following, EXCEPT:

A. Investment expenses

B. Payment for losses

31
C. Loss adjustment expenses

D. Premium taxes, licenses, and fees

Question 4
The financial report for Hometown Insurer contains the following information:

Earned premiums
$4,000,000

Written premiums $5,000,000

Net investment income


$1,000,000

Incurred losses
$3,000,000

Incurred underwriting expenses


$2,000,000

What is Hometown Insurer's loss ratio?

A. 20%

B. 30%

C. 50%

D. 75%

Question 5
A policy provides coverage starting on April 1 with an annual premium of $800. How much premium is earned as of June 30?

A. $100

B. $200

C. $600

D. $800

Question 6
Atwell Insurance Company has the following expenses:

Dividends
$ 50,000
Claim staff salaries $ 90,000
Agents' commissions $ 180,000
Advertising costs $ 30,000
Rent and utilities $ 40,000

What is the amount of Atwell Insurance Company's acquisition expenses?


A. $210,000

B. $260,000

C. $310,000

D. $410,000

32
Question 7
Which one of the following is considered to be an acquisition expense for an insurance company?

A. Losses

B. Guarantee fund expenses

C. Dividends

D. Advertising expenses

Question 8
Insurers carefully evaluate the interaction between premiums and loss ratio and how changes in each affect profit. Which one of the following
statements concerning the relationship between premium and loss ratio is true?

A. If premiums increase by a greater percentage than incurred losses increase, the loss ratio will decrease.

B. If incurred losses increase at a faster rate than premiums, the loss ratio will improve.

C. If premiums decrease at a faster rate than losses increase, the loss ratio will decrease.

D. If losses decrease at a faster rate than premiums decrease, the loss ratio will increase.

Question 9
Which one of the following best explains why underwriting expenses are divided by written premiums rather than earned premiums in order to
calculate an insurer's expense ratio?

A. Loss adjustment expenses are incurred evenly throughout the policy period.

B. The expense ratio does not take into account an insurer's investment income.

C. Many underwriting expenses are incurred at the beginning of the policy period.

D. Insurance coverage is provided evenly throughout the policy period.

Question 10
The balance sheet shows an insurer's financial position

A. At a particular point in time.

B. For a particular period of time.

C. Based upon revenues versus expenses.

D. Based upon assets minus expenses.

Question 11
The financial report for Hometown Insurer contains the following information:

Earned premiums
$4,000,000

Written premiums
$5,000,000

33
Net investment income
$1,000,000

Incurred losses
$3,000,000

Incurred underwriting expense


$2,000,000

What is Hometown Insurer's investment income ratio?

A. 10%

B. 20%

C. 25%

D. 50%

Question 12
The investment income ratio indicates the

A. Cost of running an insurer's investment department.

B. Percentage of written premium represented by net investment income.

C. Degree of success achieved by the insurer in controlling losses.

D. Degree of success achieved by the insurer in its investment activities.

Question 13
Which one of the following is the best measure of the amount of insurance provided for a given period?

A. Earned premium

B. Paid premium

C. Written premium

D. Unearned premium

Question 14
All of the following appear on an insurer's balance sheet, EXCEPT:

A. Assets

B. Liabilities

C. Net income

D. Policyholders' surplus

Question 15
An insurer's financial statement shows a loss reserve and an unearned premium reserve. These reserves are part of the insurer's

A. Policyholders' surplus.

34
B. Nonadmitted assets.

C. Admitted assets.

D. Total liabilities.

Question 16
All of the following are true with regard to policyholders' surplus, EXCEPT:

A. It measures the difference between what an insurer owns and what it owes.

B. It provides a financial cushion for the insurer if losses turn out to be higher than expected.

C. It equals nonadmitted assets.

D. It provides resources for expansion.

Question 17
On January 1, 2005, the XYZ Insurance Company issued a policy with a one-year policy period. The premium for this policy was $1,200. What was
the unearned premium for this policy as of May 1, 2005?

A. $ 400

B. $ 600

C. $ 800

D. $1,200

Question 18
An insurer's income statement shows amounts for all of the following, EXCEPT:

A. Earned premiums

B. Policyholders' surplus

C. Incurred losses

D. Underwriting expenses

Question 19
The formula for determining an insurer's net underwriting gain or loss is

A. Earned premiums - (losses + underwriting expenses).

B. Written premiums - (losses + underwriting expenses).

C. Earned premiums ÷ (losses + underwriting expenses).

D. Written premiums ÷ (losses + underwriting expenses).

Question 20
An insurer's loss reserve is a(n)

A. Asset designated for paying claims for losses that have already occurred.

B. Liability designated for paying claims for losses that have already occurred.

35
C. Asset designated for paying claims for losses that might happen in the future.

D. Liability designated for paying claims for losses that might happen in the future.

Question 21
Which one of the following is the correct formula for net investment income?

A. Investment income + change in investment expenses

B. Investment income - investment expenses

C. Change in investment expenses - investment income

D. Investment expenses + investment income

Question 22
Which one of the following measures the amount an insurer would owe its policyholders in premium refunds if it were to immediately cease
operations?

A. Policyholders' surplus

B. Nonadmitted assets

C. "All other" liabilities

D. Unearned premium reserve

Question 23
ABC Insurance Company's combined ratio is 102. Its operating ratio is 98. These ratios indicate that

A. ABC's underwriting performance is offsetting the lack of investment earnings.

B. ABC's earned premium is greater than the sum of losses and expenses from its underwriting operations.

C. ABC's return on investments is offsetting the unprofitable underwriting performance.

D. ABC is not generating a profit from its core operations.

Question 24
Which one of the following is the correct formula for calculating an insurer's combined ratio?

A. Investment income ratio + overall operating ratio

B. Investment income ratio + premium income ratio

C. Loss ratio + expense ratio

D. Loss ratio + underwriting ratio

Question 25
Unity Insurance Company (UIC) has an operating ratio of 0.98, a combined ratio of 1.02, and a loss ratio of 0.77. Considering these ratios, which
one of the following statements is true for UIC?

A. UIC's investment income is offsetting losses and expenses from its underwriting operation, allowing an operating profit.

36
B. UIC is collecting enough premium to allow a profit from its underwriting operations.

C. UIC is collecting enough premium exclusive of investment income to allow an operating profit.

D. UIC's favorable financial basis expense ratio is offsetting losses, allowing an underwriting profit.

Question 26
Which one of the following is considered to be an acquisition expense for an insurance company?

A. Dividends

B. Sales commissions

C. Losses

D. Guarantee fund expenses

Question 27
The financial report for Hometown Insurer contains the following information:

•Earned premiums $4,000,000


•Written premiums $5,000,000
•Net investment income $1,000,000
•Incurred Losses $3,000,000
•Incurred underwriting expense $2,000,000
What is Hometown Insurer's expense ratio?

A. 20%

B. 40%

C. 50%

D. 75%

Question 28
The financial report for LMN Insurance contains the following information:

Earned premiums $ 8,000,000


Written premiums
$ 10,000,000
Incurred losses $ 6,000,000
Incurred underwriting expenses $ 4,000,000

What is LMN Insurance's expense ratio?

A. 40%

B. 50%

C. 60%

D. 100%

Question 29
The salaries of investment professionals who are employed by an insurance company are categorized as

A. General expenses.

37
B. Investment expenses.

C. Acquisition expenses.

D. Other underwriting expenses.

Question 30
Most of the income an insurer receives is either from underwriting or

A. Nonadmitted assets.

B. Losses.

C. Policyholders' surplus.

D. Investments.

Question 1
All of the following are shown on an insurer's income statement, EXCEPT:

A. Net underwriting gain (loss)

B. Net investment income

C. Unearned premium reserve

D. Net income

Question 2
An insurer's income statement shows its revenues, expenses, and net income

A. At a particular point in time.

B. Over a particular period of time.

C. Focusing primarily on revenues.

D. Based upon assets minus expenses.

Question 3
Earned premium for XYZ Insurance (XYZ) for the year was $500 million and incurred losses were $400 million. Incurred underwriting expenses
were $60 million. XYZ had a net investment gain of $40 million for the year. Which one of the following is XYZ's overall gain or loss from opera-
tions?

A. $80 million gain

B. $80 million loss

C. $200 million gain

D. $200 million loss

Question 4
All of the following are true with regard to the unearned premium reserve, EXCEPT:

38
A. It equals the admitted portion of unearned premium minus the nonadmitted portion of unearned premium.

B. It represents premiums prepaid by insureds for services that the insurer has not yet rendered.

C. It represents the total premium refunds the insurer would owe its policyholders if it were to immediately cancel all policies.

D. It is the total of an insurer's unearned premiums on all policies at a particular time.

Question 5
Earned premiums are the portion of written premiums that

A. Apply to the part of the policy period that has already occurred.

B. Are available to generate investment income.

C. Are billed at the beginning of the policy period.

D. Apply to the part of the policy period that follows a loss.

Question 6
On November 1, Peafowl Insurance Company issued a one-year business auto policy to Tri-State Painting Company with a premium of $24,000.
What was the written premium for this policy as of December 31?

A. $ 4,000

B. $ 6,000

C. $20,000

D. $24,000

Question 7
An analyst in the financial department for an insurer has calculated the loss ratio to be 1.03. This result indicates that the insurer is

A. Collecting approximately $1.03 in premium for every $1.00 it pays in claim-related expenses.

B. Collecting approximately $1.03 in premium for every $1.00 it pays in claim-related and underwriting expenses.

C. Paying out approximately $1.03 in claim-related and underwriting expenses for every $1.00 it collects in premium.

D. Paying out approximately $1.03 in claim-related expenses for every $1.00 it collects in premium.

Question 8
A decrease in incurred losses will generally cause a decrease in all of the following, EXCEPT:

A. Combined ratio

B. Expense ratio

C. Overall ratio

D. Loss ratio

Question 9
Most of the income an insurer receives is either from underwriting or

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A. Nonadmitted assets.

B. Losses.

C. Policyholders' surplus.

D. Investments.

Question 10
An insurer's loss expense reserve is

A. An asset designated to pay the cost of settling the claims included in the loss reserve.

B. An asset designated to pay claims for losses that have occurred.

C. A liability designated to pay the cost of settling the claims included in the loss reserve.

D. A liability designated to pay claims for losses that have occurred.

Question 11
An insurer's net underwriting gain or loss provides a better measure of the insurer's marketing, underwriting, and claims skills than its overall
gain or loss from operations. This is true because the overall gain or loss from operations includes investment gains or losses that

A. Vary over time.

B. Are inversely related to how well the insurer conducts its marketing, underwriting, and claims activities.

C. Are not directly related to how well the insurer conducts its marketing, underwriting, and claims activities.

D. Are generally not subject to income tax.

Question 12
The financial report for Hometown Insurer contains the following information:

•Earned premiums $4,000,000


•Written premiums $5,000,000
•Net investment income $1,000,000
•Incurred Losses $3,000,000
•Incurred underwriting expense $2,000,000
What is Hometown Insurer's expense ratio?

A. 20%

B. 40%

C. 50%

D. 75%

Question 13
Which one of the following is true with regard to nonadmitted assets?

A. Regulators allow them to be shown on insurers' financial statements.

B. They can be readily converted to cash at or near their market value.

C. They help prevent an insurer from overstating its true financial condition.

D. Regulators assume that they are readily available for paying claims.

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Question 14
Which one of the following is the correct formula for calculating an insurer's combined ratio?

A. Investment income ratio + overall operating ratio

B. Investment income ratio + premium income ratio

C. Loss ratio + expense ratio

D. Loss ratio + underwriting ratio

Question 15
Unity Insurance Company (UIC) has an operating ratio of 0.98, a combined ratio of 1.02, and a loss ratio of 0.77. Considering these ratios, which
one of the following statements is true for UIC?

A. UIC's investment income is offsetting losses and expenses from its underwriting operation, allowing an operating profit.

B. UIC is collecting enough premium to allow a profit from its underwriting operations.

C. UIC is collecting enough premium exclusive of investment income to allow an operating profit.

D. UIC's favorable financial basis expense ratio is offsetting losses, allowing an underwriting profit.

Question 16
A financial analyst determines that the combined ratio for the DEF Insurance Company was 112 percent for the prior year. Which one of the
following statements best describes how the analyst can interpret this information for the year?

A. The insurer’s net profit had to be negative.

B. The insurer had a loss ratio that was over 100 percent.

C. The insurer had an underwriting loss.

D. The insurer’s expense ratio exceeded its loss ratio.

Question 17
The largest expense category for most insurers is payment for

A. Additions to loss reserves.

B. Acquisition expenses.

C. Losses arising from claims.

D. Loss adjustment expenses.

Question 18
A combined ratio of 1.05 indicates that an insurer is

41
A. Profitable overall.

B. Not profitable on an underwriting basis.

C. Not profitable overall.

D. Profitable on an underwriting basis.

Question 19
An insurer's income statement shows amounts for all of the following, EXCEPT:

A. Earned premiums

B. Policyholders' surplus

C. Incurred losses

D. Underwriting expenses

Question 20
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 fol-
lowing the policy period, EXCEPT:
A. Expense ratio
B. Combined ratio
C. Loss ratio
D. Overall operating ratio

Question 21
The financial report for Hometown Insurer contains the following information:

Earned premiums $4,000,000


Written premiums $5,000,000
Net investment income $1,000,000
Incurred losses $3,000,000
Incurred underwriting expenses $2,000,000

What was the Hometown Insurer's combined ratio?

A. 75%

B. 95%

C. 105%

D. 115%

Question 22
ABC Insurance Company's combined ratio is 102. Its operating ratio is 98. These ratios indicate that

A. ABC's underwriting performance is offsetting the lack of investment earnings.

B. ABC's earned premium is greater than the sum of losses and expenses from its underwriting operations.

C. ABC's return on investments is offsetting the unprofitable underwriting performance.

D. ABC is not generating a profit from its core operations.

Question 23

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Insurers carefully evaluate the interaction between premiums and loss ratio and how changes in each affect profit. Which one of the following
statements concerning the relationship between premium and loss ratio is true?

A. If premiums increase by a greater percentage than incurred losses increase, the loss ratio will decrease.

B. If incurred losses increase at a faster rate than premiums, the loss ratio will improve.

C. If premiums decrease at a faster rate than losses increase, the loss ratio will decrease.

D. If losses decrease at a faster rate than premiums decrease, the loss ratio will increase.

Question 24
The balance sheet for ABC Insurance (ABC), dated June 30, shows total admitted assets of $50 million. ABC's loss and loss adjustment expense
reserve is $30 million, its unearned premium reserve is $10 million, and its "all other" liabilities are $5 million. ABC's policyholders' surplus as of
June 30 was

A. $0 million.

B. $5 million.

C. $45 million.

D. $50 million.

Question 25
Which one of the following is considered to be an acquisition expense for an insurance company?

A. Losses

B. Guarantee fund expenses

C. Dividends

D. Advertising expenses

Question 26
Underwriting income (or loss) is calculated by subtracting losses and expenses from

A. Paid premium.

B. Written premium.

C. Earned premium.

D. Unearned premium.

Question 27
All of the following are true with regard to policyholders' surplus, EXCEPT:

A. It measures the difference between what an insurer owns and what it owes.

B. It provides a financial cushion for the insurer if losses turn out to be higher than expected.

C. It equals nonadmitted assets.

D. It provides resources for expansion.

Question 28

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Which one of the following is considered to be an acquisition expense for an insurance company?

A. Dividends

B. Sales commissions

C. Losses

D. Guarantee fund expenses

Question 29
A policy provides coverage starting on April 1 with an annual premium of $800. How much premium is earned as of June 30?

A. $100

B. $200

C. $600

D. $800

Question 30
Which one of the following categories of loss expenses can an insurer use to compare its revenue and expenses?

A. Loss reserves at end of period

B. Change in loss reserves

C. Loss reserves at beginning of period

D. Incurred losses

CHAPTER 4

Question 1
When an insurance company appoints an insurance agent to serve as its representative, what specifies the scope of authority given to the agent
in this relationship?

A. Implied authority

B. Binding authority

C. A unilateral contract

D. An agency contract

Question 2
In terms of their legal relationships, which one of the following statements accurately describes insurance agents and insurance brokers?

A. An insurance agent represents the customer while a broker represents the insurer.

B. An insurance agent represents the insurer while a broker represents the customer.

C. Both insurance agents and insurance brokers represent the customer.

D. Both insurance agents and insurance brokers represent the insurer.

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Question 3
When an insurer appoints an agent to act its behalf, the agent's scope of authority is spelled out in the

A. Broker of record letter.

B. Insurance contract.

C. Agency contract.

D. Letter of intent.

Question 4
Insurers using direct response marketing

A. Use personal contact rather than the Internet for sales.

B. Use a select group of agents.

C. Often advertise heavily, which can be costly.

D. Do not target market.

Question 5
After investing significant resources to develop a Web-based system, a personal lines insurer has decided to expand its territory by assuming the
role of a direct writer and using the Internet as a distribution channel. What is the insurer's greatest concern with the existing book which used
independent agents as the distribution system?

A. The quality of the existing book compared to the new book

B. The agents own the expiriations for the existing book

C. Clear communication with existing customers

D. The service needs of the existing book

Question 6
When selecting a distribution channel, which one of the following is an important consideration with regard to customers' needs and character-
istics?

A. The target market

B. The compatibility of the channel with established channels

C. The expertise of current staff

D. The ease of accessibility within the channel

Question 7
Which one of the following statements is correct with respect to insurance distribution system?

A. Insurers specializing in large commercial accounts should select a direct response distribution system.

B. Multiple distribution systems cannot be used simultaneously because they do not generally complement each other.
C. The expertise of current staff and producers must be sufficient to manage the selected system.

D. All insurance distribution systems are equally effective in accomplishing both sales and service activities.

45
Question 8
All of the following are true about the insurance agency relationship, EXCEPT:

A. The agency agreement is a written agreement between the insurer and an agent.

B. The agency agreement gives the agent the right to represent the insurer and sell insurance on the insurer’s behalf.

C. The principal is the party the agent authorizes to bind coverage.

D. The agent is the party authorized by the principal to act on the principal’s behalf.

Question 9
A bank recently began selling insurance and advertises a discounted auto loan rate to any new- or used-car buyer who also purchases auto
insurance through the bank. This discount is an example of

A. Binding.

B. Contingent commissions.

C. Mixed marketing.

D. Rebating.

Question 10
Which one of the following is the primary duty that a principal legally owes to an agent?

A. Paying the agent for services performed

B. Loyalty to the agent

C. Reasonable care in action on behalf of the agent

D. Accounting of the agent’s money

Question 11
An independent business owner or firm that sells insurance by representing customers rather than insurers is

A. An insurance broker.

B. A managing general agency.

C. An exclusive agent.

D. A direct writer.

Question 12
Which one of the following statements is correct with respect to selecting a distribution channel?

A. Customers are prepared to spend a reasonable amount of time and effort interacting with a distribution channel if that channel saves them
money.

B. The types of insurance products and services to be delivered by the insurer must fit the marketing channel selected.

C. The majority of customers prefer to speak with a producer or service representative rather than access their account information online.

D. The primary consideration is what approach will allow the insurer to operate efficiently.

Question 13

46
Which one of the following is true concerning the direct response distribution channel to market insurance?

A. It relies heavily on advertising.

B. It relies heavily on producer interaction.

C. Commision costs are generally increased.

D. There is less contact between the insurer and the customer with its use.

Question 14
The laws of agency impose all of the following specific duties on all agents, EXCEPT:

A. Knowledge

B. Accounting

C. Loyalty

D. Relaying information

Question 15
At the end of the year, some agencies that have carefully selected profitable business throughout the year may earn a(n)

A. Contingent commission.

B. Sales commission.

C. Indirect commission.

D. Annual commission.

Question 16
If a third party sues the agent in connection with activities performed on behalf of the principal, the principal must

A. Reimburse the agent for any liability incurred, whether or not the agent was at fault.

B. Reimburse the agent for any liability incurred, if the agent was not at fault.

C. Bring a countersuit against the third party.

D. Provide legal defense for the agent.

Question 17
Rhonda is a personal lines insurance producer. Under the terms of her agency contracts, the insurers forward policies promptly to Rhonda’s
customers and send a premium invoice with the policy. Insureds are instructed to remit premium payments to their insurer. The insurers calcu-
late Rhonda’s commissions and forward those commission payments to her monthly. Rhonda is operating under which one of the following
payment procedures?

A. Item basis

B. Statement basis

C. Account current basis

D. Direct bill basis

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Question 18
Which one of the following statements is true concerning the use of the Internet to market insurance products?

A. Consumers assume that insurance purchased over the Internet will be less expensive than the same product purchased from a producer.

B. Consumers who use the Internet for insurance focus chiefly on service rather than price.

C. Consumers' ability to access competitor information is reduced when insurers market products over the Internet.

D. Insurers' costs for underwriting and claim processing services are increased by having an Internet presence.

Question 19
The licensing process for claim representatives involves a background check as well as

A. An undergraduate degree.

B. Ethics requirements.

C. Interning with an experienced adjuster.

D. Customer service training.

Question 20
Which one of the following statements is correct?

A. Many producers offer consulting services for which they are paid on a fee basis.

B. Producers are restricted to only providing services to their current insureds.

C. It is illegal for producers to reduce their consulting fees in recognition of commissions received.

D. When consulting services are provided, insurance premiums, commissions, and fees are billed together.

Question 21
All of the following are considered misrepresentation or false advertising for insurance agents or other insurance personnel, EXCEPT:

A. Paying a portion of the premium or giving a commission to a policyholder

B. Misrepresenting the advantages of an insurance policy

C. Making a false statement about dividends paid on an insurance policy

D. Using an insurance policy title that misrepresents the true nature of the policy

Question 22
A producer will generally review a company's loss run report while performing which one of the following functions?

A. Claims handling

B. Sales

C. Risk management review

D. Customer service

Question 23

48
Which one of the following classifications of insurance personnel must be licensed in each state in which they do business?

A. Underwriters of property and casualty insurance

B. Consultants who give insurance advice or counsel about policies

C. Claim adjusters who represent insurers

D. Producers of insurance products

Question 24
Which one of the following statements is correct?

A. All insurance producers perform the same functions, which are specified in state insurance regulations.

B. Cold calling, or cold canvas, is generally not used by insurance producers because it is an ineffective method of prospecting.

C. Insurance producers are prohibited from accepting referrals from strategic partners, such as banks or real estate brokers.

D. In the exclusive agent and direct writer marketing systems, insurers might assist producers with prospecting.

Question 25
When a firm is selecting a distribution channel, which one of the following is an important consideration with regard to its operations?

A. How quickly can inquiries and transactions be processed in the channel?

B. Are customers willing to pay a premium for personalized products and services through the channel?

C. What are customers' expectations regarding accessibility to the channel?

D. Does the selected channel capitalize on its core capabilities?

Question 26
Given the complexity of commercial insurance, which one of the following is best suited for its distribution?

A. Internet

B. Direct response

C. Group marketing

D. Independent agencies

Question 27
A producer is usually paid a fee for performing which one of the following functions?

A. Premium collection

B. Prospecting

C. Policy issuance

D. Consulting

Question 28
Donna is an insurance producer. She makes an appointment with a potential policyholder to review the prospect's loss exposures. She asks the
prospect to complete a questionnaire to assist her in this effort. Donna is conducting a

49
A. Customer service analysis.

B. Sales closing call.

C. Cold canvas review.

D. Risk management review.

Question 29
A business manufactures a product that is harmful to the public if used improperly. More than three licensed insurance companies have refused
to provide commercial general liability coverage for the business. The producer should contact which one of the following to attempt to arrange
coverage?

A. A direct writer

B. An independent agent

C. A managing general agent

D. A surplus lines broker

Question 30
To function legally as an insurance agent, a producer must

A. Be a college graduate.

B. Be licensed by the state.

C. Work for an insurance company.

D. Have a valid drivers' license.

Question 1
Which one of the following statements is correct with respect to insurance distribution system?

A. Insurers specializing in large commercial accounts should select a direct response distribution system.

B. Multiple distribution systems cannot be used simultaneously because they do not generally complement each other.

C. The expertise of current staff and producers must be sufficient to manage the selected system.

D. All insurance distribution systems are equally effective in accomplishing both sales and service activities.

Question 2
Once a state agent's license has been issued, the agent must seek to be appointed by one or more
A. Insurers.

B. Brokers.

C. Trade associations.

D. Insurance departments.

Question 3
When a firm is selecting a distribution channel, which one of the following is an important consideration with regard to its operations?

50
A. How quickly can inquiries and transactions be processed in the channel?

B. Are customers willing to pay a premium for personalized products and services through the channel?

C. What are customers' expectations regarding accessibility to the channel?

D. Does the selected channel capitalize on its core capabilities?

Question 4
Which one of the following statements is true concerning the use of the Internet to market insurance products?

A. Consumers assume that insurance purchased over the Internet will be less expensive than the same product purchased from a producer.

B. Consumers who use the Internet for insurance focus chiefly on service rather than price.

C. Consumers' ability to access competitor information is reduced when insurers market products over the Internet.

D. Insurers' costs for underwriting and claim processing services are increased by having an Internet presence.

Question 5
After investing significant resources to develop a Web-based system, a personal lines insurer has decided to expand its territory by assuming the
role of a direct writer and using the Internet as a distribution channel. What is the insurer's greatest concern with the existing book which used
independent agents as the distribution system?

A. The quality of the existing book compared to the new book

B. The agents own the expiriations for the existing book

C. Clear communication with existing customers

D. The service needs of the existing book

Question 6
Which one of the following would be a critical strength required for a personal lines insurer planning to expand geographically through Web-
based distribution?
A. Financial resources

B. Producer force

C. Coverage expertise

D. Service capabilities

Question 7
Producers are prohibited from paying a portion of the premiums for a policy or giving any commission to a policyholder. Actions of this type are
called

A. Tie-in sales.

B. Contingent commissions.

C. Misrepresentation of dividends.

D. Rebating.

Question 8
Many insurers marketing through the independent agency system use

51
A. Word-of-mouth advertising.

B. Direct mail advertising listing every agent with a photo of each.

C. Local advertising focusing on specific agencies.

D. National advertising programs intended to enhance the company image.

Question 9
Which one of the following distribution channels is also an efficient way to handle claim reporting and billing inquiries?

A. Call centers

B. Financial institutions

C. Direct response

D. Affinity marketing

Question 10
Erin has recently graduated from college and relocated to Chicago. She has purchased a car and rented an apartment, and now needs to pur-
chase insurance. Erin is looking for minimum coverages and the lowest price available. Which one of the following is likely the best distribution
system to meet Erin's needs?

A. Financial institution

B. Regional broker

C. Independent agent

D. Direct writer Internet search

Question 11
Which one of the following types of agent is usually paid the same commission rate for new business and renewals?

A. Exclusive agent

B. Direct writer sales agent

C. Managing agent

D. Independent agent

Question 12
All of the following are true about the insurance distribution system, EXCEPT:

A. Managing general agencies appoint and supervise independent agents for insurers that operate in the system.

B. Insurance brokers are independent business owners or firms that place insurance by representing the customers, not insurers.

C. An agency expiration list is the record of policies that have lapsed or been canceled due to overdue premiums.

D. The direct response system advertises to encourage potential customers to contact the insurer to purchase insurance.

Question 13
Which one of the following methods of prospecting is more likely to be used by an experienced producer than a new insurance producer?

A. Interactive Web sites

B. Direct mail

52
C. Cold canvass

D. Referrals from present clients

Question 14
When an independent agency is bought or sold, the agency's most valuable asset is its

A. Expiration lists.

B. Building and personal property.

C. Accounts receivables.

D. Written premiums.

Question 15
Which one of the following methods of premium collection is generally used for personal insurance policies and small commercial accounts?

A. Direct bill

B. Account current basis bill

C. Agency bill

D. Item basis bill

Question 16
Among other things, a binder provides

A. Applicable coverages and limits.

B. Operations of the insured.

C. Policy conditions and exclusions.

D. Insured’s financial profile.

Question 17
In the legal relationship known as agency, which one of the following is the principal?

A. Third party

B. Agent

C. Insured

D. Insurer

Question 18
A producer is usually paid a fee for performing which one of the following functions?

A. Premium collection

B. Prospecting

C. Policy issuance

53
D. Consulting

Question 19
The authority that the principal specifically grants the agent is called

A. Implied authority.

B. Express authority.

C. Apparent authority.

D. Conditional authority

Question 20
Which one of the following premium collection methods is used in the majority of personal insurance sales?

A. Item basis

B. Statement basis

C. Account current basis

D. Direct bill process

Question 21
Which one of the following statements is true regarding the agency contract?

A. The agent is the principal in the agency contract relationship.

B. An agency contract is also known as an agency endowment.

C. Insurance agency contracts usually have a fixed expiration date, at which time the parties negotiate the renewal.

D. The agency contract states the scope of the agency's authority to conduct business for the insurer.

Question 22
The functions that insurance producers perform vary widely from one marketing system to another. Which one of the following functions do all
producers perform?

A. Prospecting

B. Premium collection

C. Risk management review

D. Consulting

Question 23
For an independent agency or an exclusive agency, the percentage of the premium that goes to the agency or to the producer for new policies
sold or existing policies renewed is the

A. Contingent commission.

54
B. Profit sharing.

C. Salary.

D. Sales commission.

Question 24
Principals often authorize another party to act on their behalf. This relationship is called

A. Broker.

B. Fiduciary.

C. Agency.

D. Attorney in fact.

Question 25
The laws of agency impose all of the following specific duties on all agents, EXCEPT:

A. Apparent authority

B. Accounting

C. Loyalty

D. Relaying information

Question 26
A risk retention group can write insurance only for its members, and it may write

A. Only personal liability insurance.

B. Only commercial liability insurance.

C. Any line of business approved by the state department of insurance.

D. Only workers compensation insurance.

Question 27
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?

Question 28
Which one of the following statements is correct?

A. Insurance agents are not subject to licensing requirements in most states.

55
B. Licensing requirements for insurance brokers are standardized among all the states.

C. Some states require insurance consultants, who give advice or opinions about polices, to be licensed.

D. Public adjusters, who represent insureds for a fee, are not subject to licensing requirements.

Question 29
The principal method of determining a prospect's insurance needs is through

A. Reviewing the prospect's current insurance policies.

B. Determining how much the prospect is willing to pay for insurance coverage.

C. Completing a risk management review for the prospect.

D. Asking the prospect what coverage they would like to purchase.

Question 30
Offering a cash payment or something of value to an applicant as an inducement to buy or maintain insurance is called

A. Rebating.

B. Misrepresentation.

C. Tie-in.

D. Twisting.

Question 1
All of the following are considered misrepresentation or false advertising for insurance agents or other insurance personnel, EXCEPT:

A. Paying a portion of the premium or giving a commission to a policyholder

B. Misrepresenting the advantages of an insurance policy

C. Making a false statement about dividends paid on an insurance policy

D. Using an insurance policy title that misrepresents the true nature of the policy

Question 2
Which one of the following premium collection methods is used in the majority of personal insurance sales?

A. Item basis

B. Statement basis

C. Account current basis

D. Direct bill process

Question 3
Rhonda is a personal lines insurance producer. Under the terms of her agency contracts, the insurers forward policies promptly to Rhonda’s
customers and send a premium invoice with the policy. Insureds are instructed to remit premium payments to their insurer. The insurers calcu-
late Rhonda’s commissions and forward those commission payments to her monthly. Rhonda is operating under which one of the following
payment procedures?

56
A. Item basis

B. Statement basis

C. Account current basis

D. Direct bill basis

Question 4
Given the complexity of commercial insurance, which one of the following is best suited for its distribution?

A. Internet

B. Direct response

C. Group marketing

D. Independent agencies

Question 5
In an insurance agency relationship, the agent's fundamental responsibility is to act for the benefit of the

A. Insured.

B. Insurer.

C. Broker.

D. Policyholder.

Question 6
When an independent agency is bought or sold, the agency's most valuable asset is its

A. Expiration lists.

B. Building and personal property.

C. Accounts receivables.

D. Written premiums.

Question 7
Which one of the following statements is correct with respect to selecting a distribution channel?

A. Customers are prepared to spend a reasonable amount of time and effort interacting with a distribution channel if that channel saves them
money.

B. The types of insurance products and services to be delivered by the insurer must fit the marketing channel selected.

C. The majority of customers prefer to speak with a producer or service representative rather than access their account information online.

D. The primary consideration is what approach will allow the insurer to operate efficiently.

Question 8
When a firm is selecting a distribution channel, which one of the following is an important consideration with regard to its operations?

A. How quickly can inquiries and transactions be processed in the channel?

B. Are customers willing to pay a premium for personalized products and services through the channel?

57
C. What are customers' expectations regarding accessibility to the channel?

D. Does the selected channel capitalize on its core capabilities?

Question 9
A producer will generally review a company's loss run report while performing which one of the following functions?

A. Claims handling

B. Sales

C. Risk management review

D. Customer service

Question 10
The Wellborn agency represents only Coastal Insurance. Wellborn is an independent contractor but its contract with Coastal specifies that all
insurance it sells will be placed with Coastal. Wellborn is operating under which one of the following marketing systems?

A. The independent agency system

B. The direct writer system

C. The exclusive agency system

D. The managing general agency system

Question 11
It is an unfair trade practice for a lender to require that a borrower purchase insurance from the lender or from any insurance producer recom-
mended by the lender. This unfair trade practice is called

A. Misrepresentation.

B. Twisting.

C. Tie-in sale.

D. Rebating.

Question 12
An independent business owner or firm that sells insurance by representing customers rather than insurers is

A. An insurance broker.

B. A managing general agency.

C. An exclusive agent.

D. A direct writer.

Question 13
The licensing process for claim representatives involves a background check as well as

A. An undergraduate degree.

B. Ethics requirements.

58
C. Interning with an experienced adjuster.

D. Customer service training.

Question 14
Which one of the following statements is true regarding the agency contract?

A. The agent is the principal in the agency contract relationship.

B. An agency contract is also known as an agency endowment.

C. Insurance agency contracts usually have a fixed expiration date, at which time the parties negotiate the renewal.

D. The agency contract states the scope of the agency's authority to conduct business for the insurer.

Question 15
Martin Insurance Company targets manufacturers of specialty products. Its insureds place a high value on producer expertise, responsiveness,
and confidentiality. Martin wants to expand into similar markets. Which one of the following insurance marketing distribution systems is most
appropriate for Martin Insurance Company?

A. Independent agent network

B. Direct writer

C. Financial institution

D. Surplus lines broker

Question 16
When an insurance company appoints an insurance agent to serve as its representative, what specifies the scope of authority given to the agent
in this relationship?

A. Implied authority

B. Binding authority

C. A unilateral contract

D. An agency contract

Question 17
Many insurers marketing through the independent agency system use

A. Word-of-mouth advertising.

B. Direct mail advertising listing every agent with a photo of each.

C. Local advertising focusing on specific agencies.

D. National advertising programs intended to enhance the company image.

Question 18
After investing significant resources to develop a Web-based system, a personal lines insurer has decided to expand its territory by assuming the
role of a direct writer and using the Internet as a distribution channel. What is the insurer's greatest concern with the existing book which used
independent agents as the distribution system?

A. The quality of the existing book compared to the new book

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B. The agents own the expiriations for the existing book

C. Clear communication with existing customers

D. The service needs of the existing book

Question 19
Which one of the following is the primary duty that a principal legally owes to an agent?

A. Paying the agent for services performed

B. Loyalty to the agent

C. Reasonable care in action on behalf of the agent

D. Accounting of the agent’s money

Question 20
An important question for an insurer to ask when examining customers' needs and characteristics to select a distribution channel is

A. Who is the target market?

B. Is the expertise of the current staff adequate?

C. Does cost outweigh the benefit?

D. How quickly can inquiries and transactions be processed?

Question 21
A producer is usually paid a fee for performing which one of the following functions?

A. Premium collection

B. Prospecting

C. Policy issuance

D. Consulting

Question 22
A risk retention group can write insurance only for its members, and it may write

A. Only personal liability insurance.

B. Only commercial liability insurance.

C. Any line of business approved by the state department of insurance.

D. Only workers compensation insurance.

Question 23
Among other things, a binder provides

A. Applicable coverages and limits.

B. Operations of the insured.

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C. Policy conditions and exclusions.

D. Insured’s financial profile.

Question 24
Insurance Company is updating its marketing plan for the coming year. The management team is proposing a combination of the distribution
systems and channels. A consideration unique to combining distribution systems and channels is

A. Which system will be the most cost effective to implement that the insurer has used successfully in the past.

B. How the insurer will market to all channels so that potential customers will know what is available to them.

C. If customers will receive a consistent message about products and services no matter which system they choose.

D. If the insurer will offer a discount in premium to customers who purchase insurance over the Internet.

Question 25
Bill is an insurance producer for ABC Insurance Company (ABC). He represents only ABC when marketing insurance products. ABC compensates
Bill primarily through salary, and he has no ownership rights to policy expirations. Bill is a producer in the

A. Independent agency marketing system.

B. Exclusive agency marketing system.

C. Captive agency marketing system.

D. Direct writer marketing system.

Question 26
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

Question 27
Donna is an insurance producer. She makes an appointment with a potential policyholder to review the prospect's loss exposures. She asks the
prospect to complete a questionnaire to assist her in this effort. Donna is conducting a

A. Customer service analysis.

B. Sales closing call.

C. Cold canvas review.

D. Risk management review.

Question 28
Because the agent represents the insurer, the law presumes that

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A. Agents are employees of the insurer.

B. Knowledge acquired by the insurer is knowledge acquired by the agent.

C. Knowledge acquired by the agent is knowledge acquired by the insurer.

D. All communications between the agent and the insurer will be in writing.

Question 29
A nonadmitted insurer is typically a

A. Reinsurer.

B. Surplus lines insurer.

C. Reciprocal insurer.

D. Captive insurer.

Question 30
An independent agent received his monthly commissions for the new policies he sold. Even though he wrote 20 new policies that month, his
commission was low. Which one of the following explains why this could occur?

A. Commissions are not fully earned at the time of a sale; other written policies might have been canceled with the unearned portion of the
commission deducted from the insurance company's current payment.

B. The agent failed to provide the level of service required by the insurance company. The insurance commission was reduced as an incentive for
better performance.

C. The agent did not meet the premium volume and profitability levels that were specified in his contract; therefore, his commission was re-
duced.

D. The agent is a salaried employee of the insurance company and receives only contingent commissions.

CHAPTER 5

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Question 1
Which one of the following is a condition that increases the likelihood that a person will intentionally cause or exaggerate a loss?

A. Physical hazard

B. Moral hazard

C. Morale hazard

D. Legal hazard

Question 2
Underwriting management develops underwriting guidelines, which

A. Specify the insurer's attitude toward applicants exhibiting certain characteristics.

B. Vary from one underwriter to another.

C. Set firm standards that rarely, if ever, are modified.

D. Ensure that unprofitable business will be offset by profitable business.

Question 3
Victor, sales manager for Hallbinger's Insurance Company wants the company to grow in written premium. He wants his agents to write more
auto and homeowner business. In order to do so, the company must have adequate capacity. Which one of the following impacts Victor's agents
and the company the most concerning surplus and capacity?

A. Claims must pay only covered losses and have low expenses.

B. Research and development must create policies which are marketable.

C. Underwriting practices must generate policy premiums that exceed losses and expenses.

D. Sales must write profitable business not loss producing business.

Question 4
To achieve profitability, the underwriting function serves which one of the following additional purposes?

A. Enforcing underwriting goals

B. Adding to policyholder surplus

C. Guarding against adverse selection

D. Transferring the risks of individuals and businesses

Question 5
Which one of the following will draft a manuscript policy or endorsement that is worded to address the specific needs of the insured?

A. Underwriting supervisor

B. Staff underwriter

C. Underwriting specialist

D. Line underwriter

Question 6
While developing goals for its book of business, an insurer's staff decides to increase its market share of workers compensation insurance in the
construction industry. This type of underwriting activity is known as

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A. Reviewing and revising rating plans.

B. Developing underwriting guides.

C. Formulating underwriting policy.

D. Providing assistance to policyholders.

Question 7
Unfair discrimination is prohibited under state insurance laws as an unfair trade practice. However, an insurer's ability to discriminate fairly is
essential so

A. Insurers can select the specific people in a given area to be offered coverage.

B. Insureds are charged a premium commensurate with their loss exposures.

C. Insureds can be guaranteed the coverages they want at the price they request.

D. Insurers can refuse to provide coverage based on an applicant's age and marital status.

Question 8
Which one of the following is true regarding the delegation of underwriting authority by underwriting management?

A. Highly centralized insurers restrict underwriting authority to both the home and field offices.

B. Front-line underwriters operate primarily from the home office.

C. Most insurers' underwriting decisions are either highly centralized or highly decentralized.

D. The extent of underwriting authority granted to an agent generally depends on premium volume and loss experience.

Question 9
Which one of the following describes the effect underwriting standards can have on premium?

A. If more causes of loss are covered, premiums will increase.

B. Insurers can lower premiums for better-than-average risks.

C. The more services provided, the more premiums will increase.

D. Reduced cash flow drives up premium interest charges.

Question 10
An underwriter receives a renewal application for a property quote from his producer. The applicant has had a series of small losses in the recent
past. The underwriter is debating whether to reject the submission or quote it with a property deductible of $5,000. During which one of the
following steps in the underwriting process is the underwriter involved?

A. Evaluating the submission

B. Implementing the underwriting decision

C. Monitoring underwriting decisions

D. Developing underwriting alternatives

Question 11
Underwriting management monitors underwriting results

A. By issuing periodic bulletins to field offices.

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B. Through a process called an underwriting audit.

C. To determine if coverage changes will increase sales.

D. To allow the insured to adjust goals if results are not as expected.

Question 12
The state advisory organization has developed a new homeowners form, which increases the personal property limits for guns, silverware, jew-
elry, and boats. Jancy Insurance Company is considering modifying this form for its own use. Which one of the following of Jancy's staff would be
involved in this research and development of this new form?

A. Merve, the claims manager

B. Antonia, the accounting manager

C. Clara, the underwriting manager

D. Emma, the staff underwriter

Question 13
A situation that occurs because people with the greatest probability of loss are the ones likely to purchase insurance is known as

A. Underwriting selection.

B. Applicant "pre-qualification."

C. Loss exposure evaluation.

D. Adverse selection.

Question 14
One of the responsibilities of underwriting management is to arrange reinsurance. One type of reinsurance is arranged to automatically reinsure
a portion of all eligible risks of the primary insurer. This arrangement is called

A. Treaty reinsurance.

B. Temporary reinsurance.

C. Facultative reinsurance.

D. Underwriting reinsurance.

Question 15
Which one of the following is the term used to refer to a situation that occurs because people with the greatest probability of loss are the ones
most likely to purchase insurance?

A. Spread of risk

B. Adverse selection

C. Probable maximum loss

D. Risk inconsistency

Question 16
A rating plan available to commercial insurance applicants that awards debits and credits to a submission based on specific categories is known
as a(n)

A. Experience rating plan.

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B. Financial rating plan.

C. Retrospective rating plan.

D. Schedule rating plan.

Question 17
An insurance company needs to hire an employee with knowledge of insurance policy forms and the ability to relate policy provisions to the loss
exposures of individual policyholders. The person will also prepare premium quotes and process cancellations. This company is currently in need
of a

A. Line underwriter.

B. Staff underwriter.

C. Producer.

D. Premium auditor.

Question 18
Underwriting guidelines reflect the levels of

A. Written premium by type of insurance.

B. Underwriting authority.

C. Loss exposure.

D. Responsibility by job title.

Question 19
According to state insurance laws, unfair discrimination occurs when insurers deny coverage based solely on certain factors. Those factors in-
clude all of the following, EXCEPT:

A. The applicant's geographic location

B. The applicant's ability to pay the premium

C. The applicant's gender

D. The applicant's race

Question 20
The law of large numbers states that as the number of similar but independent exposure units increases,

A. The relative accuracy of predictions about future outcomes decreases.

B. Divergence from the norm will be in direct proportion to the increase in size of the sample.

C. The relative accuracy of predictions about future outcomes increases.

D. Divergence from the norm will be in inverse proportion to the increase in size of the sample.

Question 21
Which one of the following tasks is the responsibility of a staff underwriter as opposed to a line underwriter?

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A. Assist producers and insureds in determining appropriate coverage

B. Review and revise rating plans

C. Verify that policies are issued with appropriate forms

D. Prepare premium quotations

Question 22
Sports, Inc. is looking to obtain a commercial property policy on its building for $400,000. If their insurer decides to charge them a rate of $0.50
per $100 of building insurance, what premium must Sports, Inc. pay?

A. $1,000

B. $2,000

C. $4,000

D. $8,000

Question 23
All of the following are principal sources of underwriting information, EXCEPT:

A. Underwriting authority reports

B. Producers

C. Financial rating services

D. Applications

Question 24
Why do states require that insurers notify the insured before a policy is to be canceled or nonrenewed?

A. To provide the state an opportunity to investigate the reason for the cancellation or nonrenewal

B. To give the policyholder an opportunity to replace the coverage

C. To eliminate the possibility of an insurer canceling all policies covering a category of business or in a geographic area

D. To reduce the opportunity for an insurer to redline

Question 25
Class rating relies on

A. All insureds being charged the same rate.

B. A highly refined classification.

C. Insureds with similar characteristics.

D. Similar frequency and severity of loss.

Question 26
Which one of the following is the fundamental measure of loss exposure used in insurance rating?

A. Premium

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B. Rate

C. Exposure unit

D. Risk

Question 27
In individual rating,

A. Underwriters are often forced to make an arbitrary judgment.

B. Individual insureds are assigned to a specific class.

C. The law of large numbers allows accurate premium determination.

D. Points are added or subtracted to arrive at a rate.

Question 28
If a manufacturer has $1 million in annual sales, its liability insurance is priced per 1,000 of sales, and the per-unit rate is $0.50, what is the
manufacturer's liability insurance premium?

A. $500

B. $1,000

C. $5,000

D. $10,000

Question 29
If an insurance applicant charges that an insurer has rejected the application due to prohibited unfair discrimination, what is a likely valid de-
fense to the charge?

A. The risk did not meet objective underwriting criteria.

B. The risk is located in a distressed area of a city.

C. The applicant could not demonstrate stability through marriage records or other community ties.

D. Unfair trade practices laws do not prohibit denying coverage for all discrimination, only in cases of racial discrimination.

Question 30
For the law of large numbers to function properly, exposure units must be

A. Equal.

B. Independent.

C. Random.

D. Accurate.

Question 1
An underwriter is working with a risk control representative on a new opportunity. Given the complexity of the exposures, a physical survey is
conducted by the risk control representative, and a formal report is prepared. The report reveals that the insured owns several unattended

68
properties, and that they were unlocked when the risk control representative conducted the survey. This failure to properly secure an unattend-
ed building would be an indicator to the underwriter of which one of the following types of hazard?

A. Moral

B. Morale

C. Legal

D. Physical

Question 2
Staff underwriters share research of the market responsibilities with actuarial and marketing departments. Research includes an ongoing evalu-
ation of which one of the following?
A. Revision to coverage forms

B. Average loss ratio for a book of business

C. Optimal product mix in the book of business

D. The hit ratios by underwriter

Question 3
A rating plan available to commercial insurance applicants that awards debits and credits to a submission based on specific categories is known
as a(n)

A. Experience rating plan.

B. Financial rating plan.

C. Retrospective rating plan.

D. Schedule rating plan.

Question 4
How do states prohibit unfair discrimination by insurers?

A. By reviewing each policy cancellation or nonrenewal and the justification for the insurer's action

B. By requiring reunderwriting of policyholder complaints

C. By prohibiting rejection of applications due to certain characteristics without justification

D. By examining insurers' mission statements and objectives

Question 5
Which one of the following is the fundamental measure of loss exposure used in insurance rating?

A. Premium

B. Rate

C. Exposure unit

D. Risk

Question 6
Tania receives an application for homeowner's insurance for a home valued at $500,000 from Patrick, the producer for Keithly Insurance Com-
pany. Since Tania's underwriting authority is $350,000 on property risks, she must refer it to Lachlan, her underwriting supervisor. Which one of
the following additional functions for underwriting profitability does this case illustrate?

69
A. Guarding against adverse selection

B. Adequacy of trained staff

C. Prevention of errors and omissions

D. Enforcing underwriting guidelines

Question 7
Judgment rates are used

A. Because no two risks are identical.

B. Because wide variations in actual losses occur from one insured to the next.

C. Because the underwriter has experience with comparable exposures.

D. Because there is no established premium-determination system.

Question 8
The state advisory organization has developed a new homeowners form, which increases the personal property limits for guns, silverware, jew-
elry, and boats. Jancy Insurance Company is considering modifying this form for its own use. Which one of the following of Jancy's staff would be
involved in this research and development of this new form?

A. Merve, the claims manager

B. Antonia, the accounting manager

C. Clara, the underwriting manager

D. Emma, the staff underwriter

Question 9
An insurance company must have adequate policyholders' surplus if it wishes to

A. Avoid adverse selection.

B. Increase its written premium volume.

C. Produce profitable business.

D. Generate premiums that exceed losses.

Question 10
Underwriters can best minimize the effects of adverse selection by

A. Rejecting applicants who have had any prior losses.

B. Choosing to insure only those risks with a high probability of loss.

C. Accepting all applicants that are submitted by the producer.

D. Carefully selecting the applicants whose loss exposures they are willing to insure.

Question 11

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If a manufacturer has $1 million in annual sales, its liability insurance is priced per 1,000 of sales, and the per-unit rate is $0.50, what is the
manufacturer's liability insurance premium?

A. $500

B. $1,000

C. $5,000

D. $10,000

Question 12
To achieve profitability, the underwriting function serves which one of the following additional purposes?

A. Enforcing underwriting goals

B. Adding to policyholder surplus

C. Guarding against adverse selection

D. Transferring the risks of individuals and businesses

Question 13
During which one of the following steps in the underwriting process would an underwriter request a risk control visit to a prospective policy-
holder's location?

A. Monitoring the loss exposures

B. Evaluating the submission

C. Determining underwriting alternatives

D. Implementing the underwriting decision

Question 14
Underwriting management develops underwriting guidelines, which

A. Specify the insurer's attitude toward applicants exhibiting certain characteristics.

B. Vary from one underwriter to another.

C. Set firm standards that rarely, if ever, are modified.

D. Ensure that unprofitable business will be offset by profitable business.

Question 15
The focus of line underwriter is

A. Managing the risk selection process.

B. Conducting education and training.

C. Evaluating new submissions and renewal underwriting.

D. Securing and maintaining treaty reinsurance.

Question 16

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Sports, Inc. is looking to obtain a commercial property policy on its building for $400,000. If their insurer decides to charge them a rate of $0.50
per $100 of building insurance, what premium must Sports, Inc. pay?

A. $1,000

B. $2,000

C. $4,000

D. $8,000

Question 17
Underwriting management arranges treaty reinsurance to reinsure

A. Individual accounts.

B. A group or group of insureds.

C. All insurance of the primary insurer.

D. Insureds that do not meet underwriting guidelines.

Question 18
How does the law of large numbers assist insurers?

A. Allows reliable estimates of future loss amounts

B. Assures a profit, given sufficient number of policies

C. Prevents catastrophic losses from any single event

D. Predicts who will likely suffer losses

Question 19
Rating systems rely on

A. Grouping insureds with similar loss characteristics.

B. Investment earnings supplementing premiums.

C. Assigning all insureds to classes.

D. Statistical analysis of past losses.

Question 20
Produce, such as apples or grapes, may be priced by the unit or by the pound. In insurance, these measures are similar to

A. Exposure units.

B. Rates.

C. Premiums.

D. Construction cost index.

Question 21

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The Bakery, an applicant for commercial property insurance, has experienced a series of property losses over the past three years. In order to
find this applicant viable, the underwriter agrees to increase the property deductible. This type of underwriting modification is known as

A. Requiring loss control measures.

B. Using schedule rating modifications.

C. Amending policy terms and conditions.

D. Using facultative reinsurance.

Question 22
While evaluating an application, an underwriter thinks that the class of business is not one that the company wishes to write, but would need to
physically inspect to be certain. The underwriter also realizes that the business is located in an undesirable section of the city. Based on the
location alone, the underwriter decides not to issue the policy. According to many state insurance laws, this would be an example of

A. Diversification.

B. Unfair discrimination.

C. Fair discrimination.

D. Regulated discrimination.

Question 23
Which one of the following tasks is the responsibility of a staff underwriter as opposed to a line underwriter?

A. Assist producers and insureds in determining appropriate coverage

B. Review and revise rating plans

C. Verify that policies are issued with appropriate forms

D. Prepare premium quotations

Question 24 B
Julio, a producer for Argot's Insurance Company (Argot) submits an application for a fifty year old residence to Mathilde, the underwriter. Julio
wants to know why the homeowner rate is higher for his fifty year old residence. Mathilde explains that the homeowner rate for the fifty year
old residence is not the same for a five year old residence. Which one of the following underwriting profitability functions of Argot is Mathilde's
explanation supporting?

A. Guarding against adverse selection

B. Ensuring adequate policyholder's surplus

C. Enforcing policy guidelines

D. Protecting the homeowner rate

Question 25
For an insurer to succeed in the long run,

A. Its investment income must exceed claims and expenses.

B. Its premium income must be adequate to pay claims.

C. Its investment income must be adequate to generate profit for investors.

D. Its premium and investment income must be adequate to pay claims and expenses.

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Question 26
Why do states require that insurers notify the insured before a policy is to be canceled or nonrenewed?

A. To provide the state an opportunity to investigate the reason for the cancellation or nonrenewal

B. To give the policyholder an opportunity to replace the coverage

C. To eliminate the possibility of an insurer canceling all policies covering a category of business or in a geographic area

D. To reduce the opportunity for an insurer to redline

Question 27
Which one of the following will draft a manuscript policy or endorsement that is worded to address the specific needs of the insured?

A. Underwriting supervisor

B. Staff underwriter

C. Underwriting specialist

D. Line underwriter

Question 28
How do underwriting guidelines help an insurer achieve its goals?

A. By establishing the criteria required for treaty reinsurance to apply

B. By creating a channel for communication for the insurer's vision, mission, and objectives

C. By providing rules that guide underwriters toward consistent decisions

D. By maintaining a consistently applied set of behavioral measurements against which an individual's performance will be measured

Question 29
One of the responsibilities of underwriting management is to arrange reinsurance. One type of reinsurance is arranged to automatically reinsure
a portion of all eligible risks of the primary insurer. This arrangement is called

A. Treaty reinsurance.

B. Temporary reinsurance.

C. Facultative reinsurance.

D. Underwriting reinsurance.

Question 30
In most states, how many days' notice must an insured be given of an insurer's intent to cancel or nonrenew coverage?

A. No more than 10 days

B. At least 30 days

C. Not fewer than 45 days

D. At least 60 days

Question 1
The principal purpose of underwriting is to

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A. Only insure those applicants with minimal or no loss exposure.

B. Educate producers regarding the insurer’s underwriting guidelines.

C. Develop and maintain a profitable portfolio for the insurer.

D. Decline to insure those applicants with a risk of incurring a severe loss.

Question 2
An insurance company needs to hire an employee with knowledge of insurance policy forms and the ability to relate policy provisions to the loss
exposures of individual policyholders. The person will also prepare premium quotes and process cancellations. This company is currently in need
of a

A. Line underwriter.

B. Staff underwriter.

C. Producer.

D. Premium auditor.

Question 3
While evaluating an application, an underwriter thinks that the class of business is not one that the company wishes to write, but would need to
physically inspect to be certain. The underwriter also realizes that the business is located in an undesirable section of the city. Based on the
location alone, the underwriter decides not to issue the policy. According to many state insurance laws, this would be an example of

A. Diversification.

B. Unfair discrimination.

C. Fair discrimination.

D. Regulated discrimination.

Question 4
All of the following are underwriting activities typically performed by staff underwriters, EXCEPT:

A. Research the market

B. Formulate underwriting policy

C. Conduct underwriting audits

D. Support producers and insureds

Question 5
Bob is shopping for auto insurance. Insurance Comany A's rating system determines that Bob should be charge $800 per auto. If Bob is looking to
insure four autos, what premium will he be charged by Insurance Company A?

A. $200

B. $800

C. $2,400

D. $3,200

Question 6

75
A type of individual rate that is used to develop a premium for a unique exposure for which there is no established rate is known as

A. A retrospective rate.

B. A judgment rate.

C. An experience rate.

D. A schedule rate.

Question 7
While developing goals for its book of business, an insurer's staff decides to increase its market share of workers compensation insurance in the
construction industry. This type of underwriting activity is known as

A. Reviewing and revising rating plans.

B. Developing underwriting guides.

C. Formulating underwriting policy.

D. Providing assistance to policyholders.

Question 8
Underwriting management monitors underwriting results

A. By issuing periodic bulletins to field offices.

B. Through a process called an underwriting audit.

C. To determine if coverage changes will increase sales.

D. To allow the insured to adjust goals if results are not as expected.

Question 9
Which one of the following is true regarding the delegation of underwriting authority by underwriting management?

A. Highly centralized insurers restrict underwriting authority to both the home and field offices.

B. Front-line underwriters operate primarily from the home office.

C. Most insurers' underwriting decisions are either highly centralized or highly decentralized.

D. The extent of underwriting authority granted to an agent generally depends on premium volume and loss experience.

Question 10
For an insurer to succeed in the long run,

A. Its investment income must exceed claims and expenses.

B. Its premium income must be adequate to pay claims.

C. Its investment income must be adequate to generate profit for investors.

D. Its premium and investment income must be adequate to pay claims and expenses.

Question 11
An underwriter is working with a risk control representative on a new opportunity. Given the complexity of the exposures, a physical survey is
conducted by the risk control representative, and a formal report is prepared. The report reveals that the insured owns several unattended
properties, and that they were unlocked when the risk control representative conducted the survey. This failure to properly secure an unattend-
ed building would be an indicator to the underwriter of which one of the following types of hazard?

76
A. Moral

B. Morale

C. Legal

D. Physical

Question 12
Why do states require that insurers notify the insured before a policy is to be canceled or nonrenewed?

A. To provide the state an opportunity to investigate the reason for the cancellation or nonrenewal

B. To give the policyholder an opportunity to replace the coverage

C. To eliminate the possibility of an insurer canceling all policies covering a category of business or in a geographic area

D. To reduce the opportunity for an insurer to redline

Question 13
Produce, such as apples or grapes, may be priced by the unit or by the pound. In insurance, these measures are similar to

A. Exposure units.

B. Rates.

C. Premiums.

D. Construction cost index.

Question 14
Rating agencies such as Dun & Bradstreet (D&B) provide

A. Data on credit ratings of businesses.

B. Information about business operations' safety records.

C. Data on motor vehicle reports.

D. Aggregate loss experience data.

Question 15
According to state insurance laws, unfair discrimination occurs when insurers deny coverage based solely on certain factors. Those factors in-
clude all of the following, EXCEPT:

A. The applicant's geographic location

B. The applicant's ability to pay the premium

C. The applicant's gender

D. The applicant's race

Question 16
If a manufacturer has $1 million in annual sales, its liability insurance is priced per 1,000 of sales, and the per-unit rate is $0.50, what is the
manufacturer's liability insurance premium?

A. $500

B. $1,000

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C. $5,000

D. $10,000

Question 17
Maja's, a professional liability underwriter, primary responsibilities involve formulating underwriting policy and revising underwriting guides for
various lines of professional liability insurance that will be used by personnel in the company’s field offices. Maja is functioning as a

A. Chartered underwriter.

B. Field underwriter.

C. Line underwriter.

D. Staff underwriter.

Question 18
Which one of the following statements regarding underwriter responsibilities is correct?

A. Line underwriters often serve on industry committees that study standard policy forms and recommend changes.

B. Staff underwriters offer valuable technical assistance to the insured's risk manager and the producer who is directly responsible for determin-
ing what coverage best meets the insured's needs.

C. Line underwriters are generally responsible for completing underwriting audits of the branch or region in which they work.

D. Staff underwriters typically share responsibility for researching fundamental insurance issues with the actuarial and marketing departments.

Question 19
Sofie and the members of her homeowner's association have homeowner's policies on their coastal dwellings. They have heard that there will be
eleven named hurricane storms predicted for their coastal area this year. Sofie and the homeowner association members plan to increase their
homeowner's property coverage limits to handle their concern about the possible hurricane damage. Their action is known as

A. Property limits assessment.

B. Adverse selection.

C. Prevention of errors and omission claims.

D. Prevention of inadequate property limits.

Question 20
Which one of the following statements is correct with regard to the submission evaluation step in the underwriting process?

A. While producers for direct writing and exclusive agency insurers perform field underwriting to screen applicants, independent agents and
brokers generally do not.

B. When an insurance application form is completed properly, an underwriter normally does not need any additional information.

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C. An applicant’s financial status as indicated by a financial rating service is an incidental piece of underwriting information for evaluating po-
tential loss exposures.

D. Government records that provide underwriting information include motor vehicle reports, criminal records, and civil court records.

Question 21
The overarching purpose of underwriting is

A. To develop and maintain a profitable book of business.

B. Make and sustain a profit.

C. Achieve the underwriting goals of the company.

D. Add to policyholder surplus.

Question 22
Underwriting management develops underwriting guidelines, which

A. Specify the insurer's attitude toward applicants exhibiting certain characteristics.

B. Vary from one underwriter to another.

C. Set firm standards that rarely, if ever, are modified.

D. Ensure that unprofitable business will be offset by profitable business.

Question 23
If a line of insurance is class rated, with all insureds possessing similar characteristics and paying the same rate, what determines the difference
in premiums insureds pay?

A. Considerations for profits and expenses

B. Number of exposure units

C. Credits and debits for changes in exposures

D. Data from insurance advisory organizations

Question 24
Which one of the following is the fundamental measure of loss exposure used in insurance rating?

A. Premium

B. Rate

C. Exposure unit

D. Risk

Question 25
One of the roles of underwriting management is arranging reinsurance. Which one of the following statements explains how treaty reinsurance
helps an insurer meet its obligations?

A. The reinsurer automatically assumes a portion of all of the primary insurer's insurance that is eligible under the treaty.

B. The reinsurer delegates underwriting authority to the primary insurer, helping the primary insurer achieve consistent results.

C. The reinsurer monitors the results of the primary insurer's underwriting guidelines to ensure compliance.

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D. The reinsurer assumes a portion of the losses from all policies that have been specifically listed and insured under the treaty.

Question 26
An applicant for commercial property insurance is found unacceptable by an underwriter due to the nature of its operations and the construction
of the building it occupies. If the applicant installs an automatic fire-extinguishing sprinkler system, the underwriter will approve the application.
This type of underwriting modification is known as

A. Amending the policy terms and conditions.

B. Using facultative reinsurance.

C. Requiring risk control measures.

D. Changing insurance rates, rating plans, or policy limits.

Question 27
For underwriting to achieve its purpose,
A. Underwriters must select applicants with legal hazards.
B. Insurers must minimize the effects of adverse selection on the book of business.
C. Underwriters must randomly select applicants to insure.
D. Insurers must follow the steps in the underwriting process in strict sequence.

Question 28
In most states, how many days' notice must an insured be given of an insurer's intent to cancel or nonrenew coverage?

A. No more than 10 days

B. At least 30 days

C. Not fewer than 45 days

D. At least 60 days

Question 29
Underwriting guidelines reflect the levels of

A. Written premium by type of insurance.

B. Underwriting authority.

C. Loss exposure.

D. Responsibility by job title.

Question 30
The law of large numbers states that as the number of similar but independent exposure units increases,

A. The relative accuracy of predictions about future outcomes decreases.

B. Divergence from the norm will be in direct proportion to the increase in size of the sample.

C. The relative accuracy of predictions about future outcomes increases.

D. Divergence from the norm will be in inverse proportion to the increase in size of the sample.

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CHAPTER 6

Question 1
The value of an insurance contract in the event of a claim

A. Is purely financial.

B. Is purely remedial.

C. Includes the opportunity to profit.

D. Includes peace of mind.

Question 2
An employee of an insurance company who performs some or all of the insurer's claim-handling activities is called

A. An inside claim representative.

B. A staff claim representative.

C. A public adjuster.

D. A field claim adjuster.

Question 3
Marvin suffered a fire loss at his residence. The claim representative valued several antiques at a very low price. Marvin refuses to settle his
claim with his insurer. Which one of the following is Marvin’s recourse?

A. Marvin’s only recourse is to sue the insurer for coverage and damages to the property.

B. Marvin may follow the appraisal provision in the policy to settle the dispute over the value of the damaged property.

C. Marvin may obtain a quote from a certified antique dealer to determine the value the insurer must pay.

D. Marvin may choose to arbitrate the value of the antiques before a judge.

Question 4
Which one of the following is a common alternative dispute resolution (ADR) technique.

A. Motion for summary judgment

B. Pleadings

C. Arbitration

D. Interrogatories

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Question 5
If a claim is complex or if settlement negotiations are not progressing with the insurer, the insured may hire

A. An independent adjuster.

B. A public adjuster.

C. A senior claim representative.

D. A public defender.

Question 6
Jorgen is a claim supervisor who is devising a new response plan for his employer so that it can handle catastrophe claims more effectively. All of
the following are factors he should consider, EXCEPT:

A. Retaining independent adjuster firms

B. Requesting that personnel staff temporary claim offices without pay.

C. Increasing the role of producers through increased settlement authority

D. Giving the policyholder the benefit of any doubt as to the valuation of property

Question 7
One way for claim managers to help maintain an insurer's underwriting profit is to

A. Retain high-priced experts whenever possible.

B. Achieve the lowest settlements possible.

C. Establish appropriate spending policies.

D. Grant claim staff complete autonomy as to spending decisions.

Question 8
A goal of the claim function is to support the profit goal of the

A. Insured.

B. Claimant.

C. Insurer.

D. Policyholder.

Question 9
In a constructive total loss, the property cannot be repaired

A. For less than salvage value minus actual cash value.

B. For less than actual cash value minus anticipated salvage value.

C. For less than subrogation value minus salvage value.

D. For less than salvage value minus agreed value.

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Question 10
An insurance contract is designed to be all of the following in the event of a claim, EXCEPT:

A. A financial mechanism that can benefit policyholders and other claimants

B. A means to provide a profit to the insured

C. A means to afford peace of mind to the insured

D. A way to restore a claimant to pre-loss condition

Question 11
The foundation and primary focus of good faith is

A. Training.

B. Prompt and courteous service.

C. Thorough, timely, and unbiased investigations.

D. Efficiency.

Question 12
People who handle claims fall into a number of categories. Those who handle claims, keep claim records, and perform statistical analysis on
behalf of self-insureds are called

A. Claim managers.

B. Independent adjusters.

C. Staff claim representatives.

D. Third-party administrators.

Question 13
Insurers handling catastrophe claims should be prepared for

A. Claimants who are not eager to assert their rights.

B. Mortgagees that are eager to abbreviate their procedures.

C. News media eager to promote aggressive behavior.

D. Claimants who are aggressive in their pursuit of settlement.

Question 14
One of the greatest challenges for an insurer dealing with a catastrophe is staffing. All of the following are likely responses to this challenge,
EXCEPT:

A. Identifying and training staff from non-claim areas to assist.

B. Establishing relationships with independent adjusters to help manage overflow.

C. Purchasing catastrophe reinsurance.

D. Bringing in catastrophe teams of claim representatives from other regions.

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Question 15
A liability adjuster must be concerned with specific, out-of-pocket expenses when evaluating the damages being claimed. The technical term for
such expenses is

A. Special damages.

B. Punitive damages.

C. General damages.

D. Measurable damages.

Question 16
An important aspect of acknowledging a claimant's bodily injury liability claim, upon first contact, is to try to obtain information on the

A. Claimant's medical history.

B. Nature and extent of the injury.

C. Claimant's accident history.

D. Claimant's sources of additional income.

Question 17
Damages for pain and suffering are a form of

A. Out-of-pocket damages.

B. Punitive damages.

C. Special damages.

D. General damages.

Question 18
Bill's three-year-old stereo was completely destroyed in a covered loss. Its expected useful life was ten years. Its replacement cost is $600. Its
actual cash value (ACV) is

A. $ 60.

B. $180.

C. $420.

D. $600.

Question 19
People who handle claims may be staff claim representatives, independent adjusters, employees of third-party administrators, or

A. Private claims representatives.

B. Self-insurer claim representatives.

C. Producers who sell policies to insureds.

D. Special claims representatives.

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Question 20
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.

Question 21
The most typical third-party bad-faith claim alleges

A. Breach of contract.

B. Bad-faith claims made against the first-party policyholder relating to coverage issues.

C. Failure of a claim representative to divulge details of a loss investigation that would lead to an increased claim payment to the insured.

D. An improper failure to settle a third party's liability claim within policy limits followed by a verdict that exceeds the policy limits.

Question 22
Loss reserves are funds held by an insurer to pay claims for losses that have occurred but have not yet been settled. Such funds assigned to an
individual claim create a

A. Damage reserve.

B. Suit reserve.

C. Claim reserve.

D. Case reserve.

Question 23
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.

Question 24
In the claim evaluation process, specific, out-of-pocket expenses are called

A. Compensatory damages.

B. General damages.

C. Special damages.

D. Negotiated damages.

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Question 25
In order to expedite claim handling during a catastrophe, an insurer will consider all of the following modifications to procedures, EXCEPT:

A. Temporarily increasing claim handling authority for producers

B. Making advance payments to policyholders

C. Using abbreviated claim handling procedures

D. Suspending the use of independent adjusting firms

Question 26
Which one of the following statements is true regarding laws prohibiting unfair claims practices?

A. The laws apply only to actions by the insurer and not by individual claim representatives.

B. The federal government has enacted an unfair claims practices law to which all states must adhere, unless their law is more stringent.

C. Each state that has such a law will usually list insurer or claim representative practices that are prohibited.

D. The laws specifically list acceptable actions or processes that insurers may take.

Question 27
All of the following correctly describe reasons for the use of independent adjusters, EXCEPT:

A. Insurers may use independent adjusters when special skills and expertise are needed, for example to investigate aircraft accidents.

B. In the case of a catastrophic loss such as a hurricane, an insurer may not have sufficient staff to manage the large number of claims, and may
use independent adjusters.

C. In some areas it is not economically feasible to set up claim offices, and insurers may contract with independent adjusters to handle claims in
these remote areas.

D. The insured may retain an independent adjuster if settlement negotiations with the insurer are not progressing satisfactorily.

Question 28
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.

Question 29
If a claim representative's investigation determines that no coverage applies for a liability claim, the insurer will

A. Pay for the defense but not the settlement of the claim.

B. Settle the claim and then seek reimbursement from the insured.

C. Deny the claim.

D. Try to quickly settle the claim.

Question 30

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Claim representatives should understand the subjective interpretation of negligence and gross misconduct. The difference between negligence
and gross misconduct is determined by

A. The actual intentions of the claim representative.

B. The court's or jury's interpretation of the facts.

C. Federal law.

D. The claim representative's exercised standard of care.

Question 1
Property insurers are subject to the possibility of many claims occurring from a single event and straining their resources. This type of event is
called

A. An accident.

B. An occurrence.

C. A catastrophe.

D. A simulation.

Question 2
People who handle claims may be staff claim representatives, independent adjusters, employees of third-party administrators, or

A. Private claims representatives.

B. Self-insurer claim representatives.

C. Producers who sell policies to insureds.

D. Special claims representatives.

Question 3
The adequacy of the case reserve for a complicated claim should be evaluated

A. As new information is obtained.

B. At year's end.

C. On a weekly basis.

D. When the claimant submits a settlement offer.

Question 4
A person or entity that would suffer a financial loss if property were damaged has

A. A contractual interest.

B. A discretionary interest.

C. A renewable interest.

D. An insurable interest.

Question 5
Insurers handling catastrophe claims should be prepared for

A. Claimants who are not eager to assert their rights.

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B. Mortgagees that are eager to abbreviate their procedures.

C. News media eager to promote aggressive behavior.

D. Claimants who are aggressive in their pursuit of settlement.

Question 6
A liability loss has the following damages:

Medical expenses:
$ 10,000
Damages for disfigurement:
$ 50,000

Damages for pain and suffering:


$ 100,000

What is the amount of special damages?


A. $ 10,000
B. $ 50,000
C. $100,000
D. $160,000

Question 7
Which one of the following is a negotiation process in which a neutral outside party helps participants examine the issues and develop a mutual-
ly agreeable settlement?

A. Appraisal

B. Arbitration

C. Mediation

D. Mini-trial

Question 8
An insurance contract is designed to be all of the following in the event of a claim, EXCEPT:

A. A financial mechanism that can benefit policyholders and other claimants

B. A means to provide a profit to the insured

C. A means to afford peace of mind to the insured

D. A way to restore a claimant to pre-loss condition

Question 9
Most insurers give some producers the authority to pay claims up to a certain amount. In this role, producers function much like an

A. Outside claim representative.

B. Independent adjuster.

C. Insurance appraiser.

D. Inside claim representative.

Question 10
Which one of the following is an example of general damages?

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A. Hospital expenses

B. Lost wages

C. Prescription costs

D. Compensation for disfigurement

Question 11
An insurance company employee who investigates the scene of a loss; meets with insureds, claimants, lawyers, and others; and inspects damage
is most accurately called

A. A third-party administrator.

B. A field claim representative.

C. An independent adjuster.

D. An adjusting agent.

Question 12
Work on a new claim begins for the claim representative upon receipt of the notice of loss. The representative obtains initial information and
verifies coverage. Next, the representative should

A. Set a loss reserve.

B. Make an offer to settle the claim.

C. Retain causation experts.

D. Assign the claim to defense counsel.

Question 13
Because insurers control how claims are resolved, courts reason that insurers should be responsible for the outcome of their claim handling if
they have acted in bad faith. Therefore, courts hold insurers to a higher standard of conduct to

A. Encourage insurers to be equitable in all insurance transactions.

B. Encourage insurers to keep rates accurate, fair, and reasonable.

C. Discourage insurers from abusing their position of power.

D. Discourage insurers from deceiving the public in marketing and advertising practices.

Question 14
All of the following explain when the use of independent adjusters might be advantageous, EXCEPT:

A. Insurers may use independent adjusters for specific types of losses, for example, aircraft accidents, in which specialized expertise is required to
settle the claim.
B. In the case of a catastrophic loss such as a hurricane, an insurer may not have sufficient staff to manage the claim volume and may temporari-
ly depend upon independent adjusters to handle the excess.
C. In some areas it is not economically feasible to set up remote claim offices and in these areas insurers may depend on independent adjusters
to handle their insureds' losses.
D. The insured may retain an independent adjuster after becoming dissatisfied with the pace of negotiations with the insurer.

Question 15

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Bill's three-year-old stereo was completely destroyed in a covered loss. Its expected useful life was ten years. Its replacement cost is $600. Its
actual cash value (ACV) is

A. $ 60.

B. $180.

C. $420.

D. $600.

Question 16
In the claim evaluation process, specific, out-of-pocket expenses are called

A. Compensatory damages.

B. General damages.

C. Special damages.

D. Negotiated damages.

Question 17
Marvin suffered a fire loss at his residence. The claim representative valued several antiques at a very low price. Marvin refuses to settle his
claim with his insurer. Which one of the following is Marvin’s recourse?

A. Marvin’s only recourse is to sue the insurer for coverage and damages to the property.

B. Marvin may follow the appraisal provision in the policy to settle the dispute over the value of the damaged property.

C. Marvin may obtain a quote from a certified antique dealer to determine the value the insurer must pay.

D. Marvin may choose to arbitrate the value of the antiques before a judge.

Question 18
All of the following correctly describe reasons for the use of independent adjusters, EXCEPT:

A. Insurers may use independent adjusters when special skills and expertise are needed, for example to investigate aircraft accidents.
B. In the case of a catastrophic loss such as a hurricane, an insurer may not have sufficient staff to manage the large number of claims, and may
use independent adjusters.
C. In some areas it is not economically feasible to set up claim offices, and insurers may contract with independent adjusters to handle claims in
these remote areas.
D. The insured may retain an independent adjuster if settlement negotiations with the insurer are not progressing satisfactorily.

Question 19
One of the greatest challenges for an insurer dealing with a catastrophe is staffing. All of the following are likely responses to this challenge,
EXCEPT:

A. Identifying and training staff from non-claim areas to assist.

B. Establishing relationships with independent adjusters to help manage overflow.

C. Purchasing catastrophe reinsurance.

D. Bringing in catastrophe teams of claim representatives from other regions.

Question 20
The best description of a third-party claim is a claim

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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 against the policyholder by someone to whom the policyholder may be liable.

Question 21
If an insured’s house burns to the ground due to faulty wiring, the most difficult part of the claim handling process will probably be

A. Determining the cause of loss.

B. Verifying coverage.

C. Determining the amount of damages.

D. Determining insurable interest.

Question 22
Which one of the following statements about claim evaluation is correct?

A. Prompt evaluation helps to ensure compliance with time limits specified by unfair claims settlement practices acts.

B. The limit of liability should be considered when determining the value of a liability claim.

C. The claim representative's opinion of the value of a claim is the most important evaluation factor.

D. Evaluation of a liability claim should be made after the claimant makes his or her first settlement demand.

Question 23
Jorgen is a claim supervisor who is devising a new response plan for his employer so that it can handle catastrophe claims more effectively. All of
the following are factors he should consider, EXCEPT:

A. Retaining independent adjuster firms

B. Requesting that personnel staff temporary claim offices without pay.

C. Increasing the role of producers through increased settlement authority

D. Giving the policyholder the benefit of any doubt as to the valuation of property

Question 24
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.

Question 25
One way for claim managers to help maintain an insurer's underwriting profit is to

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A. Retain high-priced experts whenever possible.

B. Achieve the lowest settlements possible.

C. Establish appropriate spending policies.

D. Grant claim staff complete autonomy as to spending decisions.

Question 26
A goal of the claim function is to support the profit goal of the

A. Insured.

B. Claimant.

C. Insurer.

D. Policyholder.

Question 27
Lou is a claim manager at a small property-casualty insurance company. Lou takes pride in the fact that because of his leadership, his company
has gained a public reputation for resisting legitimate claims. Ultimately, this reputation

A. Satisfies the mandate of regulators.

B. Makes the company's policies more marketable.

C. Supports his company's profit goals.

D. Undermines the effectiveness of his company's advertising.

Question 28
Adjuster Toni is evaluating damages in a bodily injury liability claim where she has determined that the insured is completely at fault for the
accident. The claimant suffered a sprain and strain injury to his neck. His special damages total $1,500. He was out of work for a week, was
disabled and prevented from performing some regular activities for a month, and attended physical therapy for six weeks. In assessing general
damages, Toni should

A. Multiply the amount of special damages of $1,500 by three as a rule of thumb, and pay $4,500.

B. Use past cases which are similar as a guide.

C. Consider what she would want to be paid if she were in claimant's shoes.

D. Multiply $1,500, the amount of special damages, by six, the number of weeks of physical therapy, and pay $9,000.

Question 29
Which one of the following would have an insurable interest in real property?

A. Bank that has provided a personal credit card to the owner of the property

B. Former owner of the property

C. Mortgagee that has provided a mortgage loan on the property

D. Someone expressing interest in purchasing the property

Question 30

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Claim management involves many duties crucial to good-faith claim handling such as consistent supervision, thorough training, and

A. Expense management.

B. Organizational skills.

C. Customer service soft skills.

D. Manageable caseloads.

Question 1
A goal of the claim function is to support the profit goal of the

A. Insured.

B. Claimant.

C. Insurer.

D. Policyholder.

Question 2
A liability loss has the following damages:

Medical expenses:
$ 10,000
Damages for disfigurement:
$ 50,000

Damages for pain and suffering:


$ 100,000

What is the amount of special damages?

A. $ 10,000

B. $ 50,000

C. $100,000

D. $160,000

Question 3
Despite the unique challenges and variations from case to case, the last step in the claim handling process is usually

A. Determining cause of loss.

B. Determining the amount of damages.

C. Verifying coverages.

D. Negotiating and settling.

Question 4
People who handle claims may be staff claim representatives, independent adjusters, employees of third-party administrators, or

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A. Private claims representatives.

B. Self-insurer claim representatives.

C. Producers who sell policies to insureds.

D. Special claims representatives.

Question 5
Worthley Insurance Company uses claim audits to ensure compliance with best practices. These audits evaluate both quantitative and qualita-
tive factors. Which one of the following factors that Worthley evaluates is a qualitative factor?

A. Timeliness of reserving

B. Accurate evaluation of insured’s liability

C. Average claim settlement value by claim type

D. Accuracy of data entry

Question 6
Compensatory damages represent

A. Out-of-pocket expenses.

B. Non-economic loss.

C. Actual harm suffered.

D. Damages to deter others from committing wrongful acts.

Question 7
One way for claim managers to help maintain an insurer's underwriting profit is to

A. Retain high-priced experts whenever possible.

B. Achieve the lowest settlements possible.

C. Establish appropriate spending policies.

D. Grant claim staff complete autonomy as to spending decisions.

Question 8
If an insured’s house burns to the ground due to faulty wiring, the most difficult part of the claim handling process will probably be

A. Determining the cause of loss.

B. Verifying coverage.

C. Determining the amount of damages.

D. Determining insurable interest.

Question 9
Adjuster Toni is evaluating damages in a bodily injury liability claim where she has determined that the insured is completely at fault for the
accident. The claimant suffered a sprain and strain injury to his neck. His special damages total $1,500. He was out of work for a week, was

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disabled and prevented from performing some regular activities for a month, and attended physical therapy for six weeks. In assessing general
damages, Toni should

A. Multiply the amount of special damages of $1,500 by three as a rule of thumb, and pay $4,500.

B. Use past cases which are similar as a guide.

C. Consider what she would want to be paid if she were in claimant's shoes.

D. Multiply $1,500, the amount of special damages, by six, the number of weeks of physical therapy, and pay $9,000.

Question 10
Lou is a claim manager at a small property-casualty insurance company. Lou takes pride in the fact that because of his leadership, his company
has gained a public reputation for resisting legitimate claims. Ultimately, this reputation

A. Satisfies the mandate of regulators.

B. Makes the company's policies more marketable.

C. Supports his company's profit goals.

D. Undermines the effectiveness of his company's advertising.

Question 11
In the claim evaluation process, specific, out-of-pocket expenses are called

A. Compensatory damages.

B. General damages.

C. Special damages.

D. Negotiated damages.

Question 12
One of the greatest challenges for an insurer dealing with a catastrophe is staffing. All of the following are likely responses to this challenge,
EXCEPT:

A. Identifying and training staff from non-claim areas to assist.

B. Establishing relationships with independent adjusters to help manage overflow.

C. Purchasing catastrophe reinsurance.

D. Bringing in catastrophe teams of claim representatives from other regions.

Question 13
An insurance contract is designed to be all of the following in the event of a claim, EXCEPT:

A. A financial mechanism that can benefit policyholders and other claimants

B. A means to provide a profit to the insured

C. A means to afford peace of mind to the insured

D. A way to restore a claimant to pre-loss condition

Question 14

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The insured's washing machine was damaged by a covered loss. At the time of the loss, the actual cash value (ACV) of the machine was $300.
Repairs would cost $250. The scrap metal dealer would pay $100 for what remains of it. Which one of the following calculations correctly deter-
mines whether or not the washing machine was a constructive total loss?

A. $300 ACV - $100 salvage value = $200. This loss was a constructive total loss.

B. $300 ACV - $100 salvage value = $200. This loss was not a constructive total loss.

C. $300 ACV - $250 repairs = $50. This loss was a constructive total loss.

D. $300 ACV - $250 repairs = $50. This loss was not a constructive total loss.

Question 15
Fair evaluation of claims is an element of good-faith claim handling. All of the following are true regarding 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. Unfair claims settlement practices acts often specify 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.

Question 16
Defending liability claims through litigation can be a very long and expensive process. Mediation and arbitration are two common forums for
settling claims outside the traditional court system. What is the difference between arbitration and mediation?

A. Someone other than the insurer and the claimant decides the case in arbitration.

B. The arbitrator’s decision is always binding.

C. Only one insured and one insurer can be involved in arbitration.

D. Solutions are proposed in arbitration to help the parties settle.

Question 17
An important aspect of acknowledging a claimant's bodily injury liability claim, upon first contact, is to try to obtain information on the

A. Claimant's medical history.

B. Nature and extent of the injury.

C. Claimant's accident history.

D. Claimant's sources of additional income.

Question 18
Jorgen is a claim supervisor who is devising a new response plan for his employer so that it can handle catastrophe claims more effectively. All of
the following are factors he should consider, EXCEPT:

A. Retaining independent adjuster firms

B. Requesting that personnel staff temporary claim offices without pay.

C. Increasing the role of producers through increased settlement authority

D. Giving the policyholder the benefit of any doubt as to the valuation of property

Question 19
Incurred losses (including loss adjustment expenses) divided by earned premium is the formula for

A. Combined ratio.

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B. Loss ratio.

C. Expense ratio.

D. Underwriting profit ratio.

Question 20
Which one of the following allegations in insurance claims handling result from criticisms of claim representatives' actions, sometimes regard-
less of validity?

A. Use of improper valuation techniques allegations

B. Unfair rating practices allegations

C. Bad faith allegations

D. Contract or policy manipulation allegations

Question 21
Because insurers control how claims are resolved, courts reason that insurers should be responsible for the outcome of their claim handling if
they have acted in bad faith. Therefore, courts hold insurers to a higher standard of conduct to

A. Encourage insurers to be equitable in all insurance transactions.

B. Encourage insurers to keep rates accurate, fair, and reasonable.

C. Discourage insurers from abusing their position of power.

D. Discourage insurers from deceiving the public in marketing and advertising practices.

Question 22
Jerry is an experienced claim adjuster who handles claims for Jackson Insurance Company during hurricane season when Jackson’s staff adjust-
ers need assistance. Jerry is

A. A public adjuster.

B. A third-party adjuster.

C. An independent adjuster.

D. A hurricane adjuster.

Question 23
Insurers handling catastrophe claims should be prepared for

A. Claimants who are not eager to assert their rights.

B. Mortgagees that are eager to abbreviate their procedures.

C. News media eager to promote aggressive behavior.

D. Claimants who are aggressive in their pursuit of settlement.

Question 24
One aspect of good-faith claim handling is the fair evaluation of the claim. A fair approach to evaluating liability claims is for the claim repre-
sentative to evaluate them

A. As if no coverage limit existed.

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B. From the claimant's perspective.

C. As they relate to similar claims with similar coverage and limits.

D. By forming a claim committee for the purpose of achieving greater impartiality.

Question 25
A reservation of rights letter

A. Lists all of the rights that an insurer has under an insurance policy.

B. Advises the insurer that the insured has made a claim, but retains the right to withdraw the claim later.

C. Lists all of the rights that an insured has under an insurance policy.

D. Advises the insured that the insurer is investigating the claim but retains the right to deny coverage later.

Question 26
Most insurers give some producers the authority to pay claims up to a certain amount. In this role, producers function much like an

A. Outside claim representative.

B. Independent adjuster.

C. Insurance appraiser.

D. Inside claim representative.

Question 27
All of the following are factors in determining the replacement cost of real property, EXCEPT:

A. Actual cash value of the property

B. Construction cost per square foot

C. Square footage of the property

D. Type and quality of the construction

Question 28
Property insurers are subject to the possibility of many claims occurring from a single event and straining their resources. This type of event is
called

A. An accident.

B. An occurrence.

C. A catastrophe.

D. A simulation.

Question 29
Mira raised chickens in a coop that she constructed in her backyard. Due to her careless smoking, the coop was destroyed by fire. She submitted
a claim to her homeowners insurer, which assigned an adjuster. This is the adjuster's first claim involving a building detached from a dwelling.
Assuming the adjuster has established Mira's insurable interest in the property, which one of the following should the adjuster be asking next?

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A. Was the chicken coop constructed within the standards of the local building code?

B. How old is the chicken coop?

C. How many chickens died in the fire?

D. Is the damaged property covered by the policy?

Question 30
The best description of a third-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 against the policyholder by someone to whom the policyholder may be liable.

CHAPTER 7

Question 1
When implementing the selected risk management techniques, the risk management program must include

A. A communications plan.

B. A mission statement.

C. A loss analysis.

D. An analysis of expected results.

Question 2
Which one of the following best describes how effective risk management benefits insurers?

A. Stimulating economic growth

B. Causing fewer disruption in the social environment

C. Increased ability to accurately predict future losses

D. Encourages insurers to create innovative products and offer competitive prices

Question 3
Jeff recently started a consulting business. One of his concerns is that he will be sued for giving erroneous advice to a client. Which one of the
following would most likely be the best risk management technique for Jeff’s use in this situation?

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A. Retention

B. Avoidance

C. Insurance

D. Duplication

Question 4
Traditionally, the risk management professional's role has been associated with loss exposures related to

A. Business risk.

B. Operational risk.

C. Pure risk.

D. Speculative risk.

Question 5 C
Properly estimating loss severity is essential in treating a loss exposure because the potential severity is a major consideration in determining
whether to

A. Use risk control or risk financing.

B. Use loss avoidance or loss prevention.

C. Insure or retain a particular loss exposure.

D. Physically inspect or rely on a loss exposure survey.

Question 6
Which one of the following identifies a benefit that a business can receive by applying sound risk management?

A. It will meet state and federal safety regulations.

B. It will have a better opportunity to achieve business goals.

C. It will not have to worry about losses.

D. It will be able to attract and retain talented employees and managers.

Question 7
It is easier to gauge the potential severity of property losses than of liability losses because property loss exposures

A. Are confined to the building and contents.

B. Can be determined as an average according to the type of business.

C. Have a calculable frequency.

D. Typically have a finite value.

Question 8
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.

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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.

Question 9
Which one of the following best describes how effective risk management benefits society?

A. Creating a positive effect on an insurer’s underwriting results

B. Providing more thoughtful consumers of insurance

C. Causing fewer disruptions in the economic and social environment

D. Increasing the types of charitable and governmental agencies available to the general public

Question 10
In order to monitor and modify the risk management program, the risk manager must periodically

A. Identify and analyze new and existing loss exposures.

B. Purchase insurance.

C. Rewrite the risk management mission statement.

D. Change insurers.

Question 11
Katie and Kevin have a small stream in their back yard. Last year was exceptionally rainy and they were concerned about flood exposures to
their home. They recently had a contractor regrade the back yard, building a large berm, which provides a raised barrier to divert the flow of
water away from the house. In this situation, Katie and Kevin are using which one of the following risk management techniques?

A. Separation

B. Avoidance

C. Loss prevention

D. Loss reduction

Question 12
Grocers' Warehouse is a newly created business that will open next month. It will include a retail operation as well as 500,000 square feet of
warehouse space with loading docks. Which one of the following methods of identifying loss exposures would be least applicable in this situa-
tion?

A. Physical inspection

B. Loss exposure survey

C. Loss histories

D. Interviews with management

Question 13
A physical inspection can help to identify loss exposures that are not identified through other means because it

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A. Is based on direct information from others.

B. Is required in any sound physical fitness program.

C. Provides the opportunity to see things firsthand.

D. Requires the use of a thorough checklist.

Question 14
Analyzing the potential frequency and severity of a loss exposure enables the risk manager to

A. Retain loss exposures.

B. Avoid loss exposures.

C. Prioritize loss exposures.

D. Transfer loss exposures.

Question 15
A business installs a sprinkler system to reduce the amount of fire damage from potential fires. This is an example of

A. Avoidance.

B. Separation.

C. Loss prevention.

D. Loss reduction.

Question 16 A
Businesses, individuals, and families that practice sound risk management can benefit society in all of the following ways, EXCEPT:

A. Increasing interest in leisure activities

B. Reducing the overall number of losses

C. Controlling medical expenses through reduced injuries

D. Stimulating economic growth

Question 17
Sho Ching is risk manager for Market Sales Company. Market Sales owns a large fleet of autos used by the sales employees. The fleet is insured
with $1,000 physical damage deductibles. Sho Ching is concerned about an increasing frequency of auto accidents in recent years. Which one of
the following is the best risk management option for addressing the increased frequency of accidents from the fleet of autos?

A. Decrease the deductible to $500

B. Increase the deductible to $2,000

C. Implement loss reduction programs

D. Implement loss prevention programs

Question 18
Risk management activities under the enterprise-wide risk management approach occur at the

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A. Business unit level.

B. Corporate level.

C. Departmental level.

D. Regional level.

Question 19
Helen, the risk manager of a supermarket, has decided that the store needs a sprinkler system. She needs to check on the local water supply and
building permits and decide what is necessary to comply with local ordinances as well as decide how much the supermarket can afford to spend
on the system. Helen is making these decisions as part of

A. Examining the feasibility of the risk management technique.

B. Implementing the selected risk management technique.

C. Analyzing loss exposures.

D. Selecting the appropriate risk management technique.

Question 20
A taxi firm maintains a few spare vehicles to keep all drivers on the road even if one vehicle needs repair. Which one of the following identifies
the risk management technique being used in this example?

A. Diversification

B. Avoidance

C. Duplication

D. Separation

Question 21
Which one of the following is the goal of enterprise-wide risk management (ERM)?

A. Coordinate loss reduction efforts

B. Reduce risk management costs

C. Decentralize control of business decisions

D. Maximize the organization’s value

Question 22
A business installs bars on windows and door deadbolts to prevent burglaries. This is an example of

A. Avoidance.

B. Separation.

C. Loss prevention.

D. Loss reduction.

Question 23
Randy and Ida are concerned that a buried heating oil tank in their yard might be leaking, but they have decided that replacing that tank must
wait until they have the funds in a year or two. Randy and Ida have discovered that pollution resulting from a leak would not be covered by their
homeowners insurance policy. They fear the oil might seep into the water table and contaminate their neighbors' well water. Illness and dam-
age that might result could be very expensive. Randy and Ida can purchase an endorsement that will provide coverage for this pollution expo-
sure. The endorsement would cost $50 per year. Is this an effective risk management selection for Randy and Ida until they can replace the tank?

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A. Yes, they should do this indefinitely and not replace the tank.

B. Yes, they are exchanging a large exposure for a little premium.

C. No, they are spending a lot of money for little protection.

D. No, each neighbor will have insurance to cover any damage to their wells.

Question 24
John Young is a risk manager of a medium-size business with both auto and real property exposures. John is looking for ways to save money on
insurance premiums. John should consider
A. Retaining the auto liability loss exposures.
B. Retaining some or all of the auto physical damage exposures.
C. Canceling the insurance and implementing noninsurance transfer techniques.
D. Retaining the property loss exposures.

Question 25
When implementing selected risk management techniques, a risk manager must

A. Base decisions on financial criteria.

B. Base decisions on informal guidelines.

C. Analyze the benefits of the risk management program.

D. Determine how to allocate the costs of the program.

Question 26
Frank and Jan recently married and purchased their first home together. What is an effective way for Frank and Jan to begin identifying the
liability loss exposures associated with their new home?

A. Hire a professional risk manager

B. Determine the value of the home and contents

C. Purchase a homeowners insurance policy

D. Inspect the home for loss exposures

Question 27
When selecting the appropriate risk management techniques, financial management decisions are typically made with the objective of

A. Decreasing the worry factor.

B. Increasing the cost of risk.

C. Increasing profits.

D. Decreasing expenses.

Question 28
Estimating how large the losses may be and how often they may occur is required under which one of the steps of the risk management process?

A. Identifying loss exposures

B. Analyzing loss exposures

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C. Examining the feasibility of risk management techniques

D. Monitoring results

Question 29
Which one of the following describes a benefit to businesses of making insurance part of an overall risk management program instead of relying
solely on insurance?

A. Improved access to affordable insurance

B. Stimulating economic growth

C. Reducing the number of persons dependent on society for support

D. Increased use of exposure avoidance

Question 30
Retention of losses is

A. More expensive than insurance in the long run.

B. Less expensive than insurance in the long run.

C. More effective than insurance in handling loss frequency problems.

D. Very similar to noninsurance transfer.

Question 1
Traditionally, the risk management professional's role has been associated with loss exposures related to

A. Business risk.

B. Operational risk.

C. Pure risk.

D. Speculative risk.

Question 2
Outdoor Designs Company (ODC) makes cedar patio furniture. ODC's lumber supplier, L&L Wood Products, is the largest and most competitive
supplier of lumber in the area. ODC's risk manager is concerned that a disruption in the supply of lumber from L&L due to a large fire loss would
adversely affect its production. Which one of the following would best minimize the adverse effect to ODC of a large loss experienced by L&L?

A. Separation

B. Duplication

C. Loss prevention

D. Avoidance

Question 3
Waking up on a cold February morning, Amy discovers the roads are icy and snow covered. Concerned about driving to work and possibly having
an accident, she decides to take the day off. Amy’s decision is an example of which one of the following risk management techniques?

A. Loss prevention

B. Loss reduction

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C. Avoidance

D. Separation

Question 4
Which one of the following is the goal of enterprise-wide risk management (ERM)?

A. Coordinate loss reduction efforts

B. Reduce risk management costs

C. Decentralize control of business decisions

D. Maximize the organization’s value

Question 5
Risk management activities under the enterprise-wide risk management approach occur at the

A. Business unit level.

B. Corporate level.

C. Departmental level.

D. Regional level.

Question 6
Dudley drives to work in the city each day and until recently, parked on a street near his office. Dudley began parking in a lot that has an at-
tendant to reduce the chance of his vehicle being damaged while it is parked. Which one of the following risk management techniques is Dudley
applying?

A. Avoidance

B. Loss prevention

C. Noninsurance transfer

D. Retention

Question 7
Some businesses require key executives to fly on different flights. This is an example of which one of the following risk control techniques?

A. Avoidance

B. Loss prevention

C. Separation

D. Duplication

Question 8
Analyzing the potential frequency and severity of a loss exposure enables the risk manager to

A. Retain loss exposures.

B. Avoid loss exposures.

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C. Prioritize loss exposures.

D. Transfer loss exposures.

Question 9
Alan Peachtree owns a hobby shop, which he runs from a detached garage on his property. Alan has set aside funds to pay for possible property
losses rather than purchasing insurance. Which one of the following risk management techniques is Alan using?

A. Avoidance

B. Non-Insurance transfer

C. Retention

D. Loss control

Question 10
Which one of the following is true regarding loss histories?

A. Changing environments have little effect on the quality of loss histories.

B. Changes in an organizations operations have little effect on the quality of loss histories.

C. Loss histories are not commonly used to identify loss exposures.

D. The quality of loss histories depends on whether they are organized and consistent.

Question 11
Businesses, individuals, and families that practice sound risk management can benefit society in all of the following ways, EXCEPT:

A. Increasing interest in leisure activities

B. Reducing the overall number of losses

C. Controlling medical expenses through reduced injuries

D. Stimulating economic growth

Question 12
In implementing risk management techniques, the risk manager usually

A. Is responsible for communicating guidelines but is otherwise not involved in implementing techniques.

B. Relies on consultants outside the organization to implement the techniques.

C. Has complete authority to make decisions and implement the techniques.

D. Depends on others to implement the techniques based on the risk manager’s advice.

Question 13
Which one of the following best describes how effective risk management benefits insurers?

A. Stimulating economic growth

B. Causing fewer disruption in the social environment

C. Increased ability to accurately predict future losses

D. Encourages insurers to create innovative products and offer competitive prices

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Question 14
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.

Question 15
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.

Question 16
There have been several recent burglaries in Sally’s neighborhood. Which one of the following best describes a risk management technique and
a corresponding example of that technique that Sally should consider due to the recent increase in burglaries?

A. Separation, such as installing a new alarm system

B. Loss reduction, such as keeping doors and windows locked

C. Loss prevention, such as keeping doors and windows locked

D. Loss prevention, such as installing a safe in her home

Question 17
Which one of the following statements describes the monitoring and revising step in the risk management process?

A. Check to make sure the decisions made are still valid, and make changes as needed.

B. Create a new workflow and identify new bottlenecks that have occurred.

C. Make sure insurance is not being used as a substitute for loss control.

D. Identify noninsurance transfers through hold-harmless agreements.

Question 18
Barton Industries keeps copies of key documents stored at a second location. The risk control technique Barton Industries is using is

A. Duplication.

B. Separation.

C. Loss prevention.

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D. Avoidance.

Question 19
Individuals and families benefit from effective risk management in which one of the following ways?

A. Increasing their personal cash flows by retaining rather than insuring their property exposures

B. Continuing activities following an accident or other loss, and thus reducing inconvenience.

C. Stimulating economic growth because fewer losses mean that more funds are available for other uses

D. Creating a positive effect on an insurer’s underwriting results

Question 20
Helen, the risk manager of a supermarket, has decided that the store needs a sprinkler system. She needs to check on the local water supply and
building permits and decide what is necessary to comply with local ordinances as well as decide how much the supermarket can afford to spend
on the system. Helen is making these decisions as part of

A. Examining the feasibility of the risk management technique.

B. Implementing the selected risk management technique.

C. Analyzing loss exposures.

D. Selecting the appropriate risk management technique.

Question 21
Which one of the following is true regarding loss exposure surveys?

A. Households and organizations are likely to face all of the loss exposures detailed in surveys.

B. Loss exposures for unique operations are usually identified on surveys.

C. Surveys usually group questions on similar exposures together.

D. Risk managers can depend solely on a comprehensive survey to identify loss exposures.

Question 22
In order to monitor and modify the risk management program, the risk manager must periodically

A. Identify and analyze new and existing loss exposures.

B. Purchase insurance.

C. Rewrite the risk management mission statement.

D. Change insurers.

Question 23
Malvern Imports has several retail stores in a three-state area. They receive and store imports in a large central warehouse. The risk manager is
considering ways to lower the severity exposure due to a fire loss to the warehouse. Which one of the following would most effectively decrease
the severity exposure of fire loss to the warehouse?

A. Separation

B. Duplication

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C. Loss prevention

D. Avoidance

Question 24
Financial statement analysis, loss history analysis, and flowcharts are used in

A. Identifying loss exposures.

B. Analyzing loss exposures.

C. Selecting risk management techniques.

D. Implementing risk management techniques.

Question 25
An accurate measure of loss frequency is important because

A. Loss frequency is a major consideration in determining whether a flowchart is required.

B. Loss frequency is a major consideration in determining whether a physical inspection is necessary.

C. If loss frequency has been increasing, loss reduction methods will likely need to be implemented.

D. The proper treatment of the loss exposure often depends on how frequently the loss is expected to occur.

Question 26
Randy and Ida are concerned that a buried heating oil tank in their yard might be leaking, but they have decided that replacing that tank must
wait until they have the funds in a year or two. Randy and Ida have discovered that pollution resulting from a leak would not be covered by their
homeowners insurance policy. They fear the oil might seep into the water table and contaminate their neighbors' well water. Illness and dam-
age that might result could be very expensive. Randy and Ida can purchase an endorsement that will provide coverage for this pollution expo-
sure. The endorsement would cost $50 per year. Is this an effective risk management selection for Randy and Ida until they can replace the tank?
A. Yes, they should do this indefinitely and not replace the tank.

B. Yes, they are exchanging a large exposure for a little premium.

C. No, they are spending a lot of money for little protection.

D. No, each neighbor will have insurance to cover any damage to their wells.

Question 27
Sound risk management benefits society in each of the following ways, EXCEPT:

A. Causing fewer disruptions in the economic and social environment

B. Increasing opportunity costs

C. Reducing the number of people dependent on society for support

D. Stimulating economic growth

Question 28
Exposures with the potential of low frequency but high severity should generally be

A. Retained because they are fairly predictable.

B. Retained because this would encourage loss control.

C. Insured because they are highly unpredictable.

D. Written with a large deductible to reduce premium costs.

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Question 29
John Young is a risk manager of a medium-size business with both auto and real property exposures. John is looking for ways to save money on
insurance premiums. John should consider

A. Retaining the auto liability loss exposures.

B. Retaining some or all of the auto physical damage exposures.

C. Canceling the insurance and implementing noninsurance transfer techniques.

D. Retaining the property loss exposures.

Question 30
Which one of the following describes a benefit to businesses of making insurance part of an overall risk management program instead of relying
solely on insurance?

A. Improved access to affordable insurance

B. Stimulating economic growth

C. Reducing the number of persons dependent on society for support

D. Increased use of exposure avoidance

Question 1
Outdoor Designs Company (ODC) makes cedar patio furniture. ODC's lumber supplier, L&L Wood Products, is the largest and most competitive
supplier of lumber in the area. ODC's risk manager is concerned that a disruption in the supply of lumber from L&L due to a large fire loss would
adversely affect its production. Which one of the following would best minimize the adverse effect to ODC of a large loss experienced by L&L?

A. Separation

B. Duplication

C. Loss prevention

D. Avoidance

Question 2
A business installs bars on windows and door deadbolts to prevent burglaries. This is an example of

A. Avoidance.

B. Separation.

C. Loss prevention.

D. Loss reduction.

Question 3
Risk management activities under the enterprise-wide risk management approach occur at the

A. Business unit level.

B. Corporate level.

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C. Departmental level.

D. Regional level.

Question 4
In the selection of appropriate risk management techniques, financial management decisions are often made with the objective of

A. Decreasing the worry factor.

B. Decreasing expenses.

C. Increasing the cost of risk.

D. Increasing operating efficiency.

Question 5
Which one of the following best describes how effective risk management benefits society?

A. Creating a positive effect on an insurer’s underwriting results

B. Providing more thoughtful consumers of insurance

C. Causing fewer disruptions in the economic and social environment

D. Increasing the types of charitable and governmental agencies available to the general public

Question 6
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.

Question 7
Malvern Imports has several retail stores in a three-state area. They receive and store imports in a large central warehouse. The risk manager is
considering ways to lower the severity exposure due to a fire loss to the warehouse. Which one of the following would most effectively decrease
the severity exposure of fire loss to the warehouse?

A. Separation

B. Duplication

C. Loss prevention

D. Avoidance

Question 8
Properly estimating loss severity is essential in treating a loss exposure because the potential severity is a major consideration in determining
whether to

A. Use risk control or risk financing.

B. Use loss avoidance or loss prevention.

C. Insure or retain a particular loss exposure.

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D. Physically inspect or rely on a loss exposure survey.

Question 9
It is easier to gauge the potential severity of property losses than of liability losses because property loss exposures

A. Are confined to the building and contents.

B. Can be determined as an average according to the type of business.

C. Have a calculable frequency.

D. Typically have a finite value.

Question 10
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.

Question 11
Chuck and Sally discovered they have flaking lead paint on the walls and trim inside their recently purchased house. They researched lead paint
hazards and abatement techniques on the Internet and discovered the best action they can take is to remove loose paint chips and dust, replace
the windows, and seal the walls with a paint designed for that purpose. Which one of the following risk management techniques does this activ-
ity involve?

A. Avoidance

B. Loss control

C. Retention

D. Noninsurance transfer

Question 12
What will individuals gain as a benefit of applying sound risk management to automobile loss exposures?

A. No future increases in insurance premiums

B. A loss free future

C. Economic growth

D. Greater peace of mind

Question 13
Alan Peachtree owns a hobby shop, which he runs from a detached garage on his property. Alan has set aside funds to pay for possible property
losses rather than purchasing insurance. Which one of the following risk management techniques is Alan using?

A. Avoidance

B. Non-Insurance transfer

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C. Retention

D. Loss control

Question 14
Individuals and families benefit from effective risk management in which one of the following ways?

A. Increasing their personal cash flows by retaining rather than insuring their property exposures

B. Continuing activities following an accident or other loss, and thus reducing inconvenience.

C. Stimulating economic growth because fewer losses mean that more funds are available for other uses

D. Creating a positive effect on an insurer’s underwriting results

Question 15
The first step in the risk management process is to

A. Implement the selected technique.

B. Select the appropriate technique.

C. Identify loss exposures.

D. Analyze loss exposures.

Question 16
In managing loss exposures using the risk management process, the key to identifying loss exposures is

A. Understanding how the household or organization operates.

B. An organizational process flowchart.

C. A financial analysis of customers and suppliers.

D. Understanding the loss frequency and loss severity.

Question 17
The last step in the risk management process, monitoring results and revising the risk management program,

A. Is complete once expected results are achieved.

B. Does not include complex decisions as do the previous steps of the risk management process.

C. Is not a necessary step for households but is an important step for organizations since their needs often change over time.

D. Is a return to the first step and begins the risk management process once again.

Question 18
Sound risk management benefits society in each of the following ways, EXCEPT:

A. Causing fewer disruptions in the economic and social environment

B. Increasing opportunity costs

C. Reducing the number of people dependent on society for support

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D. Stimulating economic growth

Question 19
The last step in the risk management process is to

A. Implement the selected technique.

B. Select the appropriate technique.

C. Identify loss exposures.

D. Monitor results.

Question 20
Which one of the following identifies the two broad categories of risk management techniques?

A. Risk control and risk financing

B. Loss prevention and loss reduction

C. Separation and duplication

D. Insurance and noninsurance

Question 21
Katie and Kevin have a small stream in their back yard. Last year was exceptionally rainy and they were concerned about flood exposures to
their home. They recently had a contractor regrade the back yard, building a large berm, which provides a raised barrier to divert the flow of
water away from the house. In this situation, Katie and Kevin are using which one of the following risk management techniques?

A. Separation

B. Avoidance

C. Loss prevention

D. Loss reduction

Question 22
Frank and Jan recently married and purchased their first home together. What is an effective way for Frank and Jan to begin identifying the
liability loss exposures associated with their new home?

A. Hire a professional risk manager

B. Determine the value of the home and contents

C. Purchase a homeowners insurance policy

D. Inspect the home for loss exposures

Question 23
Which one of the following is the goal of enterprise-wide risk management (ERM)?

A. Coordinate loss reduction efforts

B. Reduce risk management costs

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C. Decentralize control of business decisions

D. Maximize the organization’s value

Question 24
Which one of the following best describes how effective risk management benefits insurers?

A. Stimulating economic growth

B. Causing fewer disruption in the social environment

C. Increased ability to accurately predict future losses

D. Encourages insurers to create innovative products and offer competitive prices

Question 25
Traditionally, the risk management professional's role has been associated with loss exposures related to

A. Business risk.

B. Operational risk.

C. Pure risk.

D. Speculative risk.

Question 26
A document listing potential loss exposures that a household or an organization may face is a

A. Flowchart.

B. Loss exposure survey or checklist.

C. Loss exposure analysis.

D. Method of monitoring loss exposures.

Question 27
In implementing risk management techniques, the risk manager usually

A. Is responsible for communicating guidelines but is otherwise not involved in implementing techniques.

B. Relies on consultants outside the organization to implement the techniques.

C. Has complete authority to make decisions and implement the techniques.

D. Depends on others to implement the techniques based on the risk manager’s advice.

Question 28
Jeff recently started a consulting business. One of his concerns is that he will be sued for giving erroneous advice to a client. Which one of the
following would most likely be the best risk management technique for Jeff’s use in this situation?

A. Retention

B. Avoidance

C. Insurance

D. Duplication

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Question 29
When implementing selected risk management techniques, a risk manager must

A. Base decisions on financial criteria.

B. Base decisions on informal guidelines.

C. Analyze the benefits of the risk management program.

D. Determine how to allocate the costs of the program.

Question 30
Risk management departments of large organizations generally rely on a manual to inform others of how to identify new exposures, what risk
management techniques are currently in place, how to report insurance claims, and other important information. This communication of risk
management information is part of which one of the following steps in the risk management process?

A. Analyzing loss exposures

B. Monitoring results

C. Examining the feasibility of techniques

D. Implementing the selected risk management techniques

CHAPTER 8

Question 1
The loss of or damage to property can have adverse financial consequences including reduced property value. Which one of the following state-
ments is correct with respect to a reduction in value?

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A. A valuable painting that is repaired after being damaged is likely to have declined in value.

B. For insurance purposes, the dollar amount of a reduction in value is the same regardless of the valuation measure used.

C. If a cell phone is lost or stolen, its decline in value is measured as its replacement cost minus its salvage value.

D. When property is lost or destroyed, the limit of insurance is deemed to be the amount of the reduction in value.

Question 2
To analyze the possible financial consequences of an income loss to his business, Joe estimates his normal revenue and expenses and compares
them to his estimated revenue and expenses should a loss occur.

Normal Operations
Post-Loss

Revenue
$120,000
$0

Expenses
$70,000
$40,000

Net Income
$50,000
($40,000)

Based on Joe's estimates, which one of the following represents his projected net income loss?

A. $ 40,000

B. $ 50,000

C. $ 90,000

D. $120,000

Question 3
Buildings, investments, patents, and human resources are all examples of

A. Causes of loss, or perils.

B. Financial consequences of loss.

C. Assets exposed to loss.

D. Tangible and intangible hazards.

Question 4
When property is used to secure a loan, which of the following is exposed to loss?

A. The secured lender only

B. The property owner and the secured lender

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C. The property owner only

D. Neither the property owner nor the secured lender

Question 5
Wrongful acts that society deems harmful to the public welfare are addressed by

A. Criminal law.

B. Common law.

C. Contract law.

D. Constitutional law.

Question 6
A licensed electrician completes the job of rewiring a house and returns to his shop. With regard to this job, the electrician has a

A. Completed operations loss exposure.

B. Premises liability loss exposure.

C. Business operations loss exposure.

D. Professional liability loss exposure.

Question 7
With regard to negligence, the plaintiff can make no recovery unless he or she

A. Has a witness.

B. Suffers injury or damage.

C. Has a contract.

D. Breaks the chain of events.

Question 8
For insurance purposes, money and securities are separate from other types of contents because

A. They are not susceptible to the same perils as other property.

B. The insurance industry considers them uninsurable.

C. They are highly susceptible to loss by theft.

D. The burden of proof for a loss is on the insurer.

Question 9
Kid Smart manufacturing makes a line of childrens toys. The possibility that a child may be injured because of a defect in a Kid Smart toy is what
type of liability loss exposure for this toy manufacturer?

A. Business operations

B. Completed operations

C. Products

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D. Professional activities

Question 10
While involuntary employee separations may expose an organization to additional liability loss exposures, such as wrongful termination accusa-
tions, they generally are not considered a personnel loss exposure because

A. The organization may not have a risk management person measuring personnel exposures.

B. The organization has determined that it is better off without that employee.

C. The reasons for involuntary employee separations are too numerous and too varied to be measure with high accuracy.

D. Employees leave organizations for non-business related reasons and therefore, are not considered a personnel loss.

Question 11
In insurance terminology, trucks, trailers, buses, fire engines, and ambulances designed for road use are examples of which one of the following
categories of motor vehicles?

A. Autos

B. Mobile equipment

C. Heavy vehicles

D. Recreational vehicles

Question 12
When property is lost or damaged, the value of the property is decreased. In addition to direct damage to the property, there could be indirect
losses to the business. This latter type of loss is known as

A. Net income losses.

B. Deferred income.

C. Historical income.

D. Residual income losses.

Question 13
Josephine Redmond who is the sole proprietor of Dream Quilts, Inc., operates out of three branch offices with 17 employees. What happens to
Josephine’s business if she dies or retires?

A. The business is divided among the employees.

B. The business ceases to exist.

C. The business is divided among the remaining partners.

D. The disposition of the business must be resolved in a court of law.

Question 14
A completed operations liability loss exposure differs from a products liability loss exposure in that the completed operations liability loss expo-
sure

A. Is based solely on strict liability rather than negligence or strict liability.

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B. Arises out of the entity’s completed work, including defective parts or materials furnished with the work.

C. Is based solely on negligence and breach of warranty rather than strict liability.

D. Arises out of the entity's defective product, whether or not it has been installed as part of the finished work.

Question 15 B
Other than for money, for what primary reasons or types of reasons would an internationally based American organization’s employees be
kidnapped or held for ransom?

A. Cultural reasons

B. Political reasons

C. Microeconomic reasons

D. Psychological reasons

Question 16
When a newspaper's printing press is damaged, the company may spend extra money to have the newspaper printed on another company's
press. The additional cost of printing the newspaper is an example of which one of the following?

A. Reduction in value

B. Lost income

C. Extra expense

D. Altered condition

Question 17
Personnel loss exposures can be comprised of all of the following categories of key personnel, EXCEPT:

A. Individual employees

B. Owners, officers, and managers

C. Groups of employees

D. Shareholders

Question 18
When a business suffers loss of income following a liability suit that causes customers to lose confidence in the business' products, what type of
loss has the business suffered?

A. Damage to reputation

B. Punitive damage

C. Special damage

D. Confidence loss

Question 19
SEB Holdings has grown into a multi-billion dollar financial services firm. For 38 years, Big Hal has been its CEO and has ruled the company with
an iron first. Big Hal is 78 years old, and financial analysts are concerned about his health and longevity and how closely these factors relate to
the company’s success. Which one of the following might help assuage the analysts’ concerns?

A. A letter attesting to Big Hal's good health

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B. Key man life coverage on Big Hal

C. A corporate succession plan

D. Key man retirement plan

Question 20
County Janitorial Service has contracted with local bars and taverns to clean their restrooms on a daily basis. County’s greatest liability exposure
is probably

A. Liquor liability.

B. Professional liability.

C. Advertising liability.

D. Completed operations.

Question 21
Damages awarded to pay surgeon's fees following an auto accident, are referred to as

A. Punitive damages.

B. General damages.

C. Special damages.

D. Surgical damages.

Question 22
Telephone Company installs fiber-optic cable using a trenching machine that digs a trench, buries the cable, fills in the trench, and reseeds, all in
one pass. The trenching machine can install cable in a fifty-home neighborhood in one day. Soon after the trenching machine passes by, a mem-
ber of the community steps on the trenched area, sinks in, and breaks his leg. This is an example of a liability loss exposure arising out of

A. Premises.

B. Products.

C. Completed operations.

D. Mobile equipment.

Question 23
Lars was running an errand for his employer when he ran a red light and crashed into the side of another vehicle. Under which one of the follow-
ing tort liability concepts could Lars' employer be held liable?

A. Expanded liability concepts

B. Concert of action

C. Vicarious liability

D. Alternative liability

Question 24
No-fault auto laws are an example of

A. Tort law.

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B. Contract law.

C. Criminal law.

D. Statutory law.

Question 25
The term "net income losses" is usually associated with

A. Loss of goodwill.

B. Liability losses.

C. Property losses.

D. Missed opportunities.

Question 26
The difference between an organization’s total revenues and its total expenses is

A. Operating profit.

B. Net sales.

C. Net income.

D. Gross profit.

Question 27
An auto dealer's showroom is destroyed by fire, and the dealer has to temporarily rent an adjacent building to use as a showroom. This is an
example of

A. A reduction in value.

B. Lost income.

C. An extra expense.

D. An altered condition.

Question 28
ABC Company manufactures hot beverage containers and distributes them to various retail outlets. A customer who purchased one of these
containers at a retail store is burned by hot coffee after the lid on a container falls off. Which one of the following principles of law would be the
basis for a suit brought by the injured party?

A. Implied warranty

B. Express warranty

C. Misrepresentation

D. Assumption of risk

Question 29
The cause of loss that occurs more frequently than death, causing personnel losses, is

A. Retirement.

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B. Disability.

C. Kidnap.

D. War/terrorism.

Question 30
Property insurance policies not only protect the property owner but also generally protect a secured lender’s interest in the financed property by

A. Issuing a mortgagee interest-only policy.

B. Sending the lender a letter of intent.

C. Issuing a separate policy.

D. Naming the lender on the owner’s policy.

Question 1
Other than some type of merger, layoff, or organizational change, which one of the following is an example of a situation where an entire group
of employees might leave an organization?

A. When the economy is in a long term period of inflation

B. When employees follow a manager to a new organization

C. When statutes make it more attractive to pursue other career opportunities

D. When an organization offers excessive compensation

Question 2
A company turnover rate well above company and industry averages could be a sign of

A. Employee slacking.

B. Financial problems that need to be addressed.

C. Claims-consciousness.

D. Personnel problems that need to be addressed.

Question 3
The possibility that a retailer might be sued because it used a customer's photo in a sales brochure without the customer's permission is what
kind of liability exposure for the retailer?

A. Products

B. Business operations

C. Professional activities

D. Advertising

Question 4
Jennifer was injured in an auto accident and claimed that her medical expenses were $10,000, the physical therapy costs were $5,000, and her
lost wages were $3,000. Additionally, she claimed $10,000 for pain and suffering. If a court awards Jennifer only special damages and denies any
general damages, she will receive

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A. $10,000.

B. $13,000.

C. $18,000.

D. $25,000.

Question 5
The possibility that a plumbing contractor might start a fire at a customer's house while soldering a pipe is what type of liability loss exposure
for the plumber?

A. Business operations

B. Completed operations

C. Products

D. Professional activities

Question 6
When John was driving his car, he was inattentive and was unable to stop in time to avoid hitting a car stopped at a traffic light. The collision
damaged the stopped car. What is the basis for John's liability?

A. Negligence

B. Absolute liability

C. Statutory liability

D. No-fault statutes

Question 7
Josephine Redmond who is the sole proprietor of Dream Quilts, Inc., operates out of three branch offices with 17 employees. What happens to
Josephine’s business if she dies or retires?

A. The business is divided among the employees.

B. The business ceases to exist.

C. The business is divided among the remaining partners.

D. The disposition of the business must be resolved in a court of law.

Question 8
Renata owns a valuable antique sculpture by a famous artist. One day she accidentally dropped the sculpture and a piece of it broke off. Renata
took the sculpture to an art restorer, who reattached the broken piece and repaired the surface. From a distance, the statue looks the same as it
did before Renata dropped it, but a close inspection reveals the repair. Which one of the following best describes the financial consequences of
the accident?
A. There are no financial consequences because the piece looks the same as it did before the accident.
B. The only financial consequence of the accident is the money Renata paid the art restorer for the repair.
C. The financial consequences include the cost of the repair and the reduction in value resulting from the repaired damage.
D. Renata has incurred a total loss because original artwork is impossible to replace.

Question 9
Benny lost track of where his property ended and ran over a neighbor's sapling with his lawn mower. The neighbor John sued Benny for $700
stating it was an exotic tree that could not easily be replaced. John also claimed that because of the loss, he was undergoing emotional stress for
which he claimed $5,000. Additionally, John asserted that the noise of Benny's mower had caused him to lose hearing in his right ear and he was

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also suing Benny for $5,000 for loss of hearing. The court awarded no general damages but did award special damages related to John's lawsuit.
The amount John will receive as a special damages award is

A. $ 700.

B. $ 5,000.

C. $ 5,700.

D. $10,000.

.ID: 5849922

Question 10
When property is lost or damaged, the value of the property is decreased. In addition to direct damage to the property, there could be indirect
losses to the business. This latter type of loss is known as

A. Net income losses.

B. Deferred income.

C. Historical income.

D. Residual income losses.

Question 11
The term "net income losses" is usually associated with

A. Loss of goodwill.
B. Liability losses.
C. Property losses.
D. Missed opportunities.

Question 12
Kid Smart manufacturing makes a line of childrens toys. The possibility that a child may be injured because of a defect in a Kid Smart toy is what
type of liability loss exposure for this toy manufacturer?

A. Business operations

B. Completed operations

C. Products

D. Professional activities

Question 13
Because attorneys, physicians, architects, and engineers are considered to be experts in their fields and are expected to perform accordingly,
what liability exposure do they face if a client is injured when such an expert fails to exercise the appropriate standard of care?

A. Completed operations

B. Professional liability

C. Business operations

D. Products

Question 14
A net income loss exposure is a condition that presents the possibility of loss caused by a reduction in net income. In a given time period, net
income equals revenue minus

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A. Costs of goods sold.

B. Accounts payable and income taxes.

C. Expenses and income taxes.

D. Continuing expenses and outstanding liabilities.

Question 15
When property is used to secure a loan, which of the following is exposed to loss?

A. The secured lender only

B. The property owner and the secured lender

C. The property owner only

D. Neither the property owner nor the secured lender

Question 16
The cause of loss that occurs more frequently than death, causing personnel losses, is

A. Retirement.

B. Disability.

C. Kidnap.

D. War/terrorism.

Question 17
Contract law is a branch of

A. Common law.

B. Civil law.

C. Criminal law.

D. Constitutional law.

Question 18
Which one of the following best defines a hazard?

A. The actual means by which property is damaged or destroyed

B. Anything that shifts the burden of proof to the insurer

C. Anything that increases the frequency or the severity of a loss

D. An uninterrupted chain of events

Question 19
Property insurance policies not only protect the property owner but also generally protect a secured lender’s interest in the financed property by

A. Issuing a mortgagee interest-only policy.

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B. Sending the lender a letter of intent.

C. Issuing a separate policy.

D. Naming the lender on the owner’s policy.

Question 20
The death of a shareholder in a close corporation is often a significant event for the corporation for which one of the following reasons?

A. Ownership in a close corporation is typically concentrated in just the few major shareholders, most of whom are also managers.

B. The death or disability of one of the shareholders generally results in payment of dividends to the remaining shareholders.

C. Key shareholders are paid high salaries and are difficult to replace.

D. Shareholders in a close corporation also serve on the board of directors resulting in a disparity of shareholder votes.

Question 21
Another term for cause of loss is

A. Negative outcome.

B. Exposure.

C. Peril.

D. Hazard.

Question 22
The difference between an organization’s total revenues and its total expenses is

A. Operating profit.

B. Net sales.

C. Net income.

D. Gross profit.

Question 23
Telephone Company installs fiber-optic cable using a trenching machine that digs a trench, buries the cable, fills in the trench, and reseeds, all in
one pass. The trenching machine can install cable in a fifty-home neighborhood in one day. Soon after the trenching machine passes by, a mem-
ber of the community steps on the trenched area, sinks in, and breaks his leg. This is an example of a liability loss exposure arising out of

A. Premises.

B. Products.

C. Completed operations.

D. Mobile equipment.

Question 24
Which one of the following elements is necessary for a plaintiff to prevail in an assault case?

A. There is a fear that there may be physical contact immediately or sometime in the future.

B. A threat is made regardless of whether the individual making the threat can actually act on it.

C. A threat is made with the intent of creating fear or apprehension.

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D. The damages resulting from an assault are significant and measurable in nature.

Question 25
Extra expenses are a common financial consequence of property losses. Which one of the following is an example of an extra expense?

A. A fence worth $7,000 was damaged by a car, and the fence owner has to pay $2,000 to have the damage repaired.

B. When a grocery store in a mall burns, other nearby stores have to close and lose revenue until the grocery store is repaired.

C. Even though fire has made a building untenantable, the landlord must continue making mortgage and tax payments.

D. When a family’s house is damaged, the family must pay rent to live in a hotel temporarily.

Question 26
ABC Company manufactures hot beverage containers and distributes them to various retail outlets. A customer who purchased one of these
containers at a retail store is burned by hot coffee after the lid on a container falls off. Which one of the following principles of law would be the
basis for a suit brought by the injured party?

A. Implied warranty

B. Express warranty

C. Misrepresentation

D. Assumption of risk

Question 27
All for-profit organizations are exposed to net income losses. Net income is defined as

A. Total assets minus total liabilities.

B. Total revenue minus total expenses.

C. Total profit minus total expenses.

D. Total income minus indirect losses.

Question 28
County Janitorial Service has contracted with local bars and taverns to clean their restrooms on a daily basis. County’s greatest liability exposure
is probably

A. Liquor liability.

B. Professional liability.

C. Advertising liability.

D. Completed operations.

Question 29
Which one of the following is a financial consequence of personnel losses to an organization?

A. Losses to an organization’s value caused by negative publicity

B. Expenses of paying replacement employees more than departing employees

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C. Cost allocations relating to departing employees’ benefit plans

D. Costs of hiring new management personnel to manage a younger workforce

Question 30
Perils are an important aspect of property insurance. Which one of the following statements is correct with respect to perils?

A. In order to be covered by an insurance policy, a peril must be defined and described in that policy.

B. A peril is anything that increases the frequency or the severity of a loss.

C. A peril is the actual means by which property is damaged or destroyed such as fire, lightning, windstorm, hail, or theft.

D. Property insurance policies can cover specific perils and cannot exclude other perils.

Question 1
The body of principles and rules established over time by courts on a case-by-case basis is known as

A. Statutory law.

B. Informal law.

C. Common law.

D. State law.

Question 2
Ships and their cargoes represent a special category of property insurance. Which one of the following statements is correct with respect to this
category?

A. Because of the high risk of loss, ships and their cargoes are generally considered to be uninsurable.

B. If a ship cannot reach its intended destination, the cargo cannot be sold in a different port.

C. Ships and their cargoes are exposed only to the perils of windstorm and sinking.

D. Even more than other property, ocean cargoes fluctuate in value according to their location.

Question 3
When property is used to secure a loan, which of the following is exposed to loss?

A. The secured lender only

B. The property owner and the secured lender

C. The property owner only

D. Neither the property owner nor the secured lender

Question 4
John was involved in a serious accident that included injuries to the other party, and charged with driving while intoxicated. The actions that are
likely to be brought against John are

A. Statutory and common.

B. Civil and common.

C. Constitutional and criminal.

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D. Civil and criminal.

Question 5
A neighbor has sued Andy for property damage that is potentially covered under Andy's homeowners liability coverage. Even if this lawsuit is
found to be groundless, Andy's insurer will still probably be obligated to pay

A. Special damages.

B. General damages.

C. Defense costs.

D. Compensatory damages.

Question 6
Recruiting, interviewing, and training a new employee who replaces a worker who has just resigned are examples of which one of the following
types of financial consequences flowing from personnel losses?

A. Replacement costs

B. Depreciation costs

C. Loss of value

D. Compensation costs

Question 7
Products liability loss exposures arise out of injuries or damage that result from an organization’s

A. Defective product.

B. Operations away from premises.

C. Types of bailments.

D. Manufacturing operations.

Question 8
All for-profit organizations are exposed to net income losses. Net income is defined as

A. Total assets minus total liabilities.

B. Total revenue minus total expenses.

C. Total profit minus total expenses.

D. Total income minus indirect losses.

Question 9
Colson makes knives and swords as a hobby selling his products on a non-advertised basis. He does not package his products but does provide a
warranty against defects. If a parent whose child is injured by one of Colson's ever-sharp knives sues Colson under strict liability, which one of
the following statements may be true?

A. Colson would be strictly liable only if the knife was unreasonably dangerous in normal use.

B. Colson would be liable because of failure to warn that the knife was sharp and dangerous.

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C. Knives are generally known to be dangerous instrumentalities and Colson could not be held liable.

D. Colson is not liable for harm to a third party.

Question 10
The difference between an organization’s total revenues and its total expenses is

A. Operating profit.

B. Net sales.

C. Net income.

D. Gross profit.

Question 11
Which one of the following is an element of a loss exposure?

A. The verification of risk

B. A cause of loss

C. The probability of a loss

D. The occurrence of a loss

Question 12
An auto dealer's showroom is destroyed by fire, and the dealer has to temporarily rent an adjacent building to use as a showroom. This is an
example of

A. A reduction in value.

B. Lost income.

C. An extra expense.

D. An altered condition.

Question 13
Because attorneys, physicians, architects, and engineers are considered to be experts in their fields and are expected to perform accordingly,
what liability exposure do they face if a client is injured when such an expert fails to exercise the appropriate standard of care?

A. Completed operations

B. Professional liability

C. Business operations

D. Products

Question 14
Extra expenses are a common financial consequence of property losses. Which one of the following is an example of an extra expense?
A. A fence worth $7,000 was damaged by a car, and the fence owner has to pay $2,000 to have the damage repaired.

B. When a grocery store in a mall burns, other nearby stores have to close and lose revenue until the grocery store is repaired.

C. Even though fire has made a building untenantable, the landlord must continue making mortgage and tax payments.

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D. When a family’s house is damaged, the family must pay rent to live in a hotel temporarily.

Question 15
Anyone who owns or occupies property has a

A. Products liability loss exposure.

B. Professional liability loss exposure.

C. Premises liability loss exposure.

D. Pollution liability loss exposure.

Question 16
The possibility that a retailer might be sued because it used a customer's photo in a sales brochure without the customer's permission is what
kind of liability exposure for the retailer?

A. Products

B. Business operations

C. Professional activities

D. Advertising

Question 17
Jim's Computer Repair will often take customers' computers into the shop for repairs and service. While Jim has a customer's computer in his
possession, he is in the role of

A. A bailee.

B. A bailor.

C. A secured lender.

D. An agent.

Question 18
Which one of the following is a financial consequence of personnel losses to an organization?

A. Losses to an organization’s value caused by negative publicity

B. Expenses of paying replacement employees more than departing employees

C. Cost allocations relating to departing employees’ benefit plans

D. Costs of hiring new management personnel to manage a younger workforce

Question 19
Buildings, investments, patents, and human resources are all examples of

A. Causes of loss, or perils.

B. Financial consequences of loss.

C. Assets exposed to loss.

D. Tangible and intangible hazards.

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Question 20
Personnel loss exposures can be comprised of all of the following categories of key personnel, EXCEPT:

A. Individual employees

B. Owners, officers, and managers

C. Groups of employees

D. Shareholders

Question 21
The term "net income losses" is usually associated with

A. Loss of goodwill.

B. Liability losses.

C. Property losses.

D. Missed opportunities.

Question 22
Other than some type of merger, layoff, or organizational change, which one of the following is an example of a situation where an entire group
of employees might leave an organization?

A. When the economy is in a long term period of inflation

B. When employees follow a manager to a new organization

C. When statutes make it more attractive to pursue other career opportunities

D. When an organization offers excessive compensation

Question 23
Brenda drove too rapidly through a work zone and ran over a worker's foot. Because she was afraid she would have to pay for the worker's
injury, she did not stop to assist the worker. The liability imposed on Brenda for leaving the scene rather than providing assistance comes from

A. Public duty.

B. Criminal law.

C. Contractual law.

D. Negligence liability.

Question 24
The death of a shareholder in a close corporation is often a significant event for the corporation for which one of the following reasons?

A. Ownership in a close corporation is typically concentrated in just the few major shareholders, most of whom are also managers.

B. The death or disability of one of the shareholders generally results in payment of dividends to the remaining shareholders.

C. Key shareholders are paid high salaries and are difficult to replace.

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D. Shareholders in a close corporation also serve on the board of directors resulting in a disparity of shareholder votes.

Question 25
A contractual provision that obligates one party to assume the financial consequences of legal liability for another party is

A. A statute.

B. A hold-harmless agreement.

C. An example of strict liability.

D. A warranty.

Question 26
Which one of the following elements is necessary for a plaintiff to prevail in an assault case?

A. There is a fear that there may be physical contact immediately or sometime in the future.

B. A threat is made regardless of whether the individual making the threat can actually act on it.

C. A threat is made with the intent of creating fear or apprehension.

D. The damages resulting from an assault are significant and measurable in nature.

Question 27
For insurance purposes, money and securities are separate from other types of contents because

A. They are not susceptible to the same perils as other property.

B. The insurance industry considers them uninsurable.

C. They are highly susceptible to loss by theft.

D. The burden of proof for a loss is on the insurer.

Question 28
Which one of the following potential financial consequences of liability loss exposures is often difficult to quantify?

A. Special damages

B. Defense costs

C. Costs of investigation

D. Damage to reputation

Question 29
Other than for money, for what primary reasons or types of reasons would an internationally based American organization’s employees be
kidnapped or held for ransom?

A. Cultural reasons

B. Political reasons

C. Microeconomic reasons

D. Psychological reasons

Question 30

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When a newspaper's printing press is damaged, the company may spend extra money to have the newspaper printed on another company's
press. The additional cost of printing the newspaper is an example of which one of the following?

A. Reduction in value

B. Lost income

C. Extra expense

D. Altered condition

CHAPTER 9

Question 1
An insurer will make a loss payment if an insured loss occurs and if the insured performs certain duties. This illustrates that an insurance policy is
a
A. Contract of adhesion.

B. Contract of indemnity.

C. Conditional contract.

D. Personal contract.

Question 2
Bea’s Restaurant suffered a serious fire due to a lightning strike, and the structure had to be torn down. The damage to the building is an exam-
ple of

A. An indirect loss.

B. A direct loss.

C. A time element loss.

D. A consequential loss.

Question 3
Which one of the following types of policies provides the broadest coverage for personal property in terms of the covered locations?

A. Homeowners

B. Transportation

C. Floater

D. Commercial property

Question 4
Basheer sold his car to Carl. For an additional sum, he also transferred his auto policy to Carl, to go with the car. Is Carl now entitled to the bene-
fits promised by Basheer's policy?

A. Yes, because the assignment was a proper transaction.

B. No, because Basheer's policy is not transferable.

C. It depends on whether or not Carl suffers a subsequent loss.

D. It depends on the intent of the parties.

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Question 5
Rachel is an insurance broker. She has received a sales referral from another broker concerning an airport management company, Airport Ltd.
The company plans to operate a large, national airport in a major city and has requested a quote for airport liability coverage. Rachel will prob-
ably recommend the use of which one of the following types of policy forms?

A. Miscellaneous

B. Manuscript

C. Preprinted

D. Self-contained

Question 6
A broad statement of an insurer's promises to the insured may be found in a policy's

A. Declarations.

B. Insuring agreements.

C. Conditions.

D. Endorsements.

Question 7
Which one of the following statements about policy sections is true?

A. An insuring agreement establishes procedures for implementing the policy.

B. Exclusions define terms to clarify ambiguity.

C. A condition clarifies an insurer's promise or an insured's duty.

D. Declarations state what an insurer will not cover.

Question 8
Which one of the following statements is true regarding insurance policies?

A. Because of their special nature, insurance policies must meet several requirements in addition to those required for other valid contracts.

B. Because the insurer's promise to pay claims spans several years, insurance policies have a separate set of requirements than those for any
other valid contract.

C. Insurance policies are approved in advance and therefore are presumed to meet all of the requirements of a valid contract.

D. Insurance policies must meet the same requirements as any other valid contract.

Question 9
All commercial package policies begin with two components, namely, common policy conditions and common

A. Coverages.

B. Manuscripts.

C. Modules.

D. Declarations.

Question 10

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The validity of a contract depends on all of the following essential elements, EXCEPT:

A. Adhesion

B. Legal purpose

C. Consideration

D. Agreement

Question 11
Because insurance contracts impose an obligation of complete honesty on the parties, an insurance contract is called a

A. Contract of indemnity.

B. Contract of adhesion.

C. Conditional contract.

D. Contract of utmost good faith.

Question 12
In creation of a contract of insurance, what is the consideration that is provided by the insurer?

A. The prompt payment of claims

B. The insurer's promise to pay claims for covered losses

C. The insurer's delivering the insurance policy to the insured

D. The acceptance of the application

Question 13
An insuring agreement may state the insurer's promise to do all of the following in the event of a covered loss, EXCEPT:

A. Indemnify the insured

B. Defend against the claim

C. Surcharge the insured

D. Pay the claim

Question 14
Standard forms

A. May result in different insurers issuing identical policies.

B. Prevent insurers from offering significantly different coverage.

C. Are commonly used in professional liability insurance.

D. Allow insurers to modify terms and conditions to accommodate differences in applicants' needs.

Question 15
Broad pollution coverage is not typically included in liability policies primarily as an attempt to

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A. Eliminate duplicate coverage.

B. Avoid covering uninsurable losses.

C. Keep premiums reasonable.

D. Avoid insuring losses that could be prevented.

Question 16
Which one of the following types of insurers is the most likely to include its bylaws as part of its policies?

A. No-fault insurers

B. Auto insurers

C. Workers compensation insurers

D. Mutual insurers

Question 17
When Amy applied for insurance, her agent asked her if she had received more than three traffic tickets in the last five years. Amy had received
four, but remembered only three. Thus, she told the agent she had received only three. Amy's statement is an example of

A. Misrepresentation.

B. Concealment.

C. Intent to deceive.

D. Intent to withhold information.

Question 18
In commercial insurance, the person who is responsible for paying premiums and who also has the right to receive any return premiums is the

A. Named insured.

B. Additional insured.

C. First named insured.

D. Other insured.

Question 19
Which one of the following can be covered by a floater?

A. Jewelry

B. Swimming pools

C. Carports

D. Antenna towers

Question 20
Documents that can become part of an insurance policy include all of the following, EXCEPT:

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A. Summary of available coverage options

B. Relevant statutory terms and provisions

C. Completed application

D. Insurer's bylaws

Question 21
If duress, coercion, fraud, or mistake is involved in the creation of a contract, then the contract is

A. Nontransferable.

B. Under consideration.

C. Binding.

D. Unenforceable.

Question 22
What purpose do insurance-to-value provisions serve in property insurance policies?

A. They discourage insurance fraud by ensuring that the property is worth the value requested in the policy limits.

B. They encourage insureds to purchase an amount of insurance that is equal to, or close to, the value of the covered property.

C. They establish the maximum amount the insurance company will pay for any loss.

D. They establish the options available to the insurance company in settling the loss.

Question 23
If an insurer mistakenly writes an insurance policy in a state in which it is not licensed, the insured might later successfully argue on what
grounds that the contract is not valid?

A. No legal purpose

B. The lack of competent parties

C. The lack of consideration

D. No agreement

Question 24
The definitions section of the policy

A. Helps clarify real or perceived ambiguity.

B. Contains a definitive statement of coverage.

C. Consists of dictionary meanings of words.

D. Describes the services provided by the insurer.

Question 25
All of the following explain the importance of a policy limit, EXCEPT:

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A. It tells the insurer the maximum amount it may have to pay for a covered loss.

B. It helps the insured determine whether the amount of insurance is adequate.

C. It tells the insurer whether to value an item at replacement cost or actual cash value.

D. It helps the insurer keep track of its overall obligations in any one geographical area.

Question 26
Because the insurance company usually determines policy wording and the insured has little choice but to "take it or leave it," an insurance
contract is a

A. Contract of adhesion.

B. Contract of indemnity.

C. Nontransferable contract.

D. Bilateral contract.

Question 27
Most homeowners policies provide coverage for relatives of the named insured who

A. Reside in the same household.

B. Are less than 18 years old.

C. Are the legal responsibility of the named insured or spouse.

D. Are related by blood to the named insured.

Question 28
Bob has purchased an auto insurance policy with $300,000 of single limit liability coverage. This policy has replaced his previous auto policy,
which had split limits for bodily injury and property damage. Bob was at fault in an auto accident, which resulted in a $250,000 bodily injury
settlement and payment of $75,000 for property damage. How much will Bob's new policy pay in damages for this loss?

A. $ 75,000

B. $250,000

C. $300,000

D. $325,000

Question 29
All of the following are typical examples of conditions in an insurance policy pertaining to the insured's obligations, EXCEPT:

A. Documenting losses

B. Reporting losses in a timely manner

C. Paying premiums

D. Defending itself from lawsuits

Question 30
Which one of the following correctly describes a property insurance policy covering property of others?

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A. Commercial property policies generally extend coverage to the dwellings and personal property of company owners, officers, and partners.

B. Homeowners policies provide coverage for the personal property of others, such as guests or employees, while the property is in the insured’s
home.

C. Floaters typically extend coverage to include the personal property of others while it is in the care, custody, or control of the insured.

D. The personal auto policy extends physical damage coverage to any automobile leased by the insured but not listed on the policy.

Question 1
A commercial package policy is an example of a
A. Manuscript policy.
B. Modular policy.
C. Standard self-contained policy.
D. Nonstandard self-contained policy.

Question 2
Commercial property insurance policies usually refer to the contents of buildings as business personal property. Which one of the following best
describes the coverage typically provided for business personal property?

A. Commercial policies cover all business personal property on a worldwide basis.

B. Business personal property includes furniture, machinery, equipment, and stock that are not part of the building.

C. Commercial policies cover only those items of business personal property specifically listed on the declarations page.

D. Business personal property also includes owned vehicles while parked within 100 feet of the described premises.

Question 3
Most property policies providing coverage on buildings and personal property at fixed locations exclude coverage for

A. Riot and civil commotion.

B. Vandalism.

C. Explosion.

D. Earthquake and flood.

Question 4
In creation of a contract of insurance, what is the consideration that is provided by the insurer?

A. The prompt payment of claims

B. The insurer's promise to pay claims for covered losses

C. The insurer's delivering the insurance policy to the insured

D. The acceptance of the application

Question 5
A policy exclusion can serve all of the following purposes, EXCEPT:

A. State the coverages exclusively provided by the policy.

B. Eliminate coverage for uninsurable loss exposures.

C. Help manage morale hazards.

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D. Eliminate coverages requiring special treatments.

Question 6
The policy section that usually contains the policyholder’s name and mailing address, policy limits, and premium amount is the

A. Declarations.

B. Definitions.

C. Conditions.

D. Miscellaneous provisions.

Question 7
All commercial package policies begin with two components, namely, common policy conditions and common

A. Coverages.

B. Manuscripts.

C. Modules.

D. Declarations.

Question 8
Which one of the following statements is true regarding insurance policies?

A. Because of their special nature, insurance policies must meet several requirements in addition to those required for other valid contracts.

B. Because the insurer's promise to pay claims spans several years, insurance policies have a separate set of requirements than those for any
other valid contract.

C. Insurance policies are approved in advance and therefore are presumed to meet all of the requirements of a valid contract.

D. Insurance policies must meet the same requirements as any other valid contract.

Question 9
The validity of a contract depends on all of the following essential elements, EXCEPT:

A. Adhesion

B. Legal purpose

C. Consideration

D. Agreement

Question 10
Insurance policies are written in such a way that the parties have to perform only under certain conditions, because an insurance contract is a

A. Contract of indemnity.

B. Contract of adhesion.

C. Conditional contract.

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D. Contract of utmost good faith.

Question 11
The aggregate limit in a liability policy is the maximum amount an insurer will pay for all covered losses during the

A. Calendar year.

B. Policy period.

C. Retroactive period.

D. Fiscal year.

Question 12
Under a liability policy, the maximum amount an insurer will pay for both bodily injury and property damage arising from a single occurrence is
known as the

A. Aggregate limit.

B. Split limit.

C. Occurrence limit.

D. Defined limit.

Question 13
An insurance policy is considered a contract of adhesion when it is drafted by the

A. Insured.

B. Third party.

C. Insurer.

D. Insurance commissioner.

Question 14
Joe owns a building covered by a property insurance policy. Joe intentionally sets fire to and destroys this building. He then files a claim with his
insurance company. Which one of the following statements best describes why Joe would be precluded from recovering under his policy for this
loss?

A. Joe acted under emotional duress

B. Joe acted irrationally

C. Payment of the claim would be a violation of public policy

D. Payment of the claim would violate the principle of indemnity

Question 15
Iron Works, Inc., is insured under a commercial liability policy listing several names on the declarations page. The declarations lists Bart Danner,
Paul Binder, and Iron Works, Inc., in that order. A policy provision would generally identify which of the following as the insured(s) with whom
the insurer has primary contact?

A. Bart Danner

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B. Paul Binder

C. Iron Works, Inc.

D. All of the above

Question 16
All of the following are typical examples of conditions in an insurance policy pertaining to the insured's obligations, EXCEPT:

A. Documenting losses

B. Reporting losses in a timely manner

C. Paying premiums

D. Defending itself from lawsuits

Question 17
Which one of the following statements about policy parts is true?

A. An insuring agreement establishes procedures for implementing the policy.

B. Exclusions define terms to clarify ambiguity.

C. A condition clarifies an insurer's promise or an insured's duty.

D. Declarations state what an insurer will not cover.

Question 18
When Amy applied for insurance, her agent asked her if she had received more than three traffic tickets in the last five years. Amy had received
four, but remembered only three. Thus, she told the agent she had received only three. Amy's statement is an example of

A. Misrepresentation.

B. Concealment.

C. Intent to deceive.

D. Intent to withhold information.

Question 19
Wear and tear, rust, marring, and scratching are examples of maintenance perils that are usually excluded by property insurance policies be-
cause

A. There might not be enough claim adjusters in the event of a loss.

B. It is against public policy to cover these types of perils.

C. Losses arising from these perils are certain to occur.

D. It is illegal to cover these types of perils.

Question 20
War is generally excluded from property insurance policies because

A. War losses can be prevented through careful planning.

B. The federal government covers war losses.

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C. Most families and businesses do not face a war exposure.

D. War affects many people at the same time with widespread losses.

Question 21
Claims-made coverage typically is used to insure businesses that face certain types of liability exposures, such as

A. Bailee liability.

B. Medical malpractice.

C. Homeowners personal liability.

D. Garagekeepers liability.

Question 22
Standard forms

A. May result in different insurers issuing identical policies.

B. Prevent insurers from offering significantly different coverage.

C. Are commonly used in professional liability insurance.

D. Allow insurers to modify terms and conditions to accommodate differences in applicants' needs.

Question 23
A liability policy has an aggregate limit of $1 million, an each occurrence limit of $500,000, and an each person limit of $100,000. A court or-
dered the insured under this policy to pay $50,000 in damages to each of three claimants as the result of a single accident. What is the total
amount payable under this policy to all three claimants?

A. $50,000

B. $100,000

C. $150,000

D. $500,000

Question 24
Which one of the following is an example of material misrepresentation by Albert, a businessman applying for property insurance on a building
he owns?

A. Albert does not tell the insurance agent he is about to file for bankruptcy.

B. Albert does not tell the insurance agent his building has a defective heating system that could explode at any time.

C. Albert tells the insurance agent he has owned the building for seventeen years, but he has actually owned it for eighteen years.

D. Albert tells the insurance agent the building is used to store steel, but it is actually used to store steel drums containing flammable liquids.

Question 25
Ching is a commercial claim representative who has been assigned a large fire loss. Ching suspects that the insured may not have been com-
pletely honest in describing the property before the policy was issued such that coverage for the claim may be denied. In which document might
Ching find the representations of the insured regarding the property's description?

A. Declarations

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B. Application

C. Endorsements

D. Manuscript

Question 26
The definitions section of the policy

A. Helps clarify real or perceived ambiguity.

B. Contains a definitive statement of coverage.

C. Consists of dictionary meanings of words.

D. Describes the services provided by the insurer.

Question 27
For a contract to be enforceable, something of value must be exchanged. The thing of value exchanged is called

A. Mutual assent.

B. Consideration.

C. Indemnity.

D. Adhesion.

Question 28
An insurer has decided to take an extremely narrow interpretation of a property insurance policy provision to limit the number of loss payments
it will need to make. It realizes that its interpretation is probably wrong, but it knows that individual insured's loss amounts will be small, such
that most insureds will not take the trouble to file lawsuits against it. The insurer may be violating the principle that an insurance policy is

A. A contract of adhesion.

B. A contract of utmost good faith.

C. A conditional contract.

D. A contract of indemnity.

Question 29
A property insurance policy specifies what property is covered and where it is covered.Which one of the following is correct with regard to the
property or location covered for a specific type of insurance policy?

A. Personal auto policies typically cover collision damage to a described auto on a worldwide basis.

B. Homeowners policies typically cover personal property on a worldwide basis, with some limitations.

C. The building coverage of a commercial property policy usually excludes permanently installed fixtures and equipment.

D. The building coverage of a commercial property policy usually excludes fire extinguishing equipment.

Question 30
Self-contained policies

A. Address complete coverage needs.

B. Require more than one form to address coverage needs.

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C. Address unique coverage needs.

D. Do not address all of an insured's coverage needs.

Question 1
In terms of the elements of a contract, an insurance application is

A. An offer.

B. An acceptance.

C. A consideration.

D. An agreement.

Question 2
Law Firm asked Insurance Company to provide both a commercial liability policy and a professional liability policy to meet its coverage needs.
Insurance Company believes that there could be some types of losses that would be covered under both policies, a situation it wishes to avoid.
What type of policy provisions could Insurance Company use to address this problem?

A. Coverage sections

B. Exclusions

C. Additions

D. Extensions

Question 3
Documents that can become part of an insurance policy include all of the following, EXCEPT:

A. Summary of available coverage options

B. Relevant statutory terms and provisions

C. Completed application

D. Insurer's bylaws

Question 4
Many property insurance policies contain a provision that reduces the amount of recovery for loss if the property is underinsured. This provision
is known as

A. Reinsurance.

B. Coinsurance.

C. The deductible.

D. The other insurance clause.

Question 5
In commercial insurance policies, several different individuals and businesses may be listed as named insureds.Which one of the following is the
term used to refer to the party that is responsible for paying premiums and that has the right to receive any return premiums and cancel the
policy?

A. The named insured

B. The contact person

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C. The first named insured

D. The authorized agent

Question 6
Which one of the following statements about policy parts is true?

A. An insuring agreement establishes procedures for implementing the policy.

B. Exclusions define terms to clarify ambiguity.

C. A condition clarifies an insurer's promise or an insured's duty.

D. Declarations state what an insurer will not cover.

Question 7
Which one of the following is an example of material misrepresentation by Albert, a businessman applying for property insurance on a building
he owns?

A. Albert does not tell the insurance agent he is about to file for bankruptcy.

B. Albert does not tell the insurance agent his building has a defective heating system that could explode at any time.

C. Albert tells the insurance agent he has owned the building for seventeen years, but he has actually owned it for eighteen years.

D. Albert tells the insurance agent the building is used to store steel, but it is actually used to store steel drums containing flammable liquids.

Question 8
Because insurance contracts impose an obligation of complete honesty on the parties, an insurance contract is called a

A. Contract of indemnity.

B. Contract of adhesion.

C. Conditional contract.

D. Contract of utmost good faith.

Question 9
Ching is a commercial claim representative who has been assigned a large fire loss. Ching suspects that the insured may not have been com-
pletely honest in describing the property before the policy was issued such that coverage for the claim may be denied. In which document might
Ching find the representations of the insured regarding the property's description?

A. Declarations

B. Application

C. Endorsements

D. Manuscript

Question 10
Commercial property insurance policies usually refer to the contents of buildings as business personal property. Which one of the following best
describes the coverage typically provided for business personal property?

A. Commercial policies cover all business personal property on a worldwide basis.

B. Business personal property includes furniture, machinery, equipment, and stock that are not part of the building.

C. Commercial policies cover only those items of business personal property specifically listed on the declarations page.

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D. Business personal property also includes owned vehicles while parked within 100 feet of the described premises.

Question 11
Which one of the following statements is true regarding insurance policies?

A. Because of their special nature, insurance policies must meet several requirements in addition to those required for other valid contracts.

B. Because the insurer's promise to pay claims spans several years, insurance policies have a separate set of requirements than those for any
other valid contract.

C. Insurance policies are approved in advance and therefore are presumed to meet all of the requirements of a valid contract.

D. Insurance policies must meet the same requirements as any other valid contract.

Question 12
A broad statement of an insurer's promises to the insured may be found in a policy's
A. Declarations.
B. Insuring agreements.
C. Conditions.
D. Endorsements.

Question 13
The homeowners policy excludes coverage for aircraft in an attempt to

A. Avoid covering uninsurable losses.

B. Eliminate coverage that most insureds do not need.

C. Eliminate duplicate coverage.

D. To avoid insuring losses that could be prevented.

Question 14
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.

Question 15
Rachel is an insurance broker. She has received a sales referral from another broker concerning an airport management company, Airport Ltd.
The company plans to operate a large, national airport in a major city and has requested a quote for airport liability coverage. Rachel will prob-
ably recommend the use of which one of the following types of policy forms?

A. Miscellaneous

B. Manuscript

C. Preprinted

D. Self-contained

Question 16
Most insurance policies exclude loss caused by war in order to

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A. Eliminate duplicate coverage.

B. Avoid covering uninsurable losses.

C. Keep premiums reasonable.

D. Avoid insuring losses that could be prevented.

Question 17
If Katie purchases auto insurance from an out-of-state insurer without a license to sell insurance in Katie’s state, the policy may be an invalid
contract because

A. The contract does not have a legal purpose.

B. Utmost good faith was not practiced by the parties.

C. The principle of indemnity has been violated.

D. The insurer was not legally competent to make the agreement.

Question 18
An insurer will make a loss payment if an insured loss occurs and if the insured performs certain duties. This illustrates that an insurance policy is
a
A. Contract of adhesion.

B. Contract of indemnity.

C. Conditional contract.

D. Personal contract.

Question 19
Under a liability policy, the maximum an insurer will pay for injury to any one person is known as the

A. Per individual limit.

B. Single limit.

C. Each occurrence limit.

D. Each person limit.

Question 20
When Amy applied for insurance, her agent asked her if she had received more than three traffic tickets in the last five years. Amy had received
four, but remembered only three. Thus, she told the agent she had received only three. Amy's statement is an example of

A. Misrepresentation.

B. Concealment.

C. Intent to deceive.

D. Intent to withhold information.

Question 21

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While driving to work, John loses control of his automobile, which jumps a curb and strikes a tree. Which one of the following coverages must
John have purchased in order for the damage to his vehicle to be covered?

A. Comprehensive

B. Specified causes of loss

C. Collision

D. Vehicle damage

Question 22
All of the following are typical examples of conditions in an insurance policy pertaining to the insured's obligations, EXCEPT:

A. Documenting losses

B. Reporting losses in a timely manner

C. Paying premiums

D. Defending itself from lawsuits

Question 23
The definitions section of the policy

A. Helps clarify real or perceived ambiguity.

B. Contains a definitive statement of coverage.

C. Consists of dictionary meanings of words.

D. Describes the services provided by the insurer.

Question 24
The validity of a contract depends on all of the following essential elements, EXCEPT:

A. Adhesion

B. Legal purpose

C. Consideration

D. Agreement

Question 25
All commercial package policies begin with two components, namely, common policy conditions and common

A. Coverages.

B. Manuscripts.

C. Modules.

D. Declarations.

Question 26
In creation of a contract of insurance, what is the consideration that is provided by the insurer?

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A. The prompt payment of claims

B. The insurer's promise to pay claims for covered losses

C. The insurer's delivering the insurance policy to the insured

D. The acceptance of the application

Question 27
Angela is having a dispute with her insurance company regarding a claim and the definition of an insured loss. The definition is subject to two
reasonable interpretations, one that favors Angela and one that favors the insurer. A court of law is likely to find in favor of

A. Angela, because an insurance contract is a contract of adhesion.

B. The insurer, because an insurance contract is a contract of adhesion.

C. Neither party, because each side has failed to meet the burden of proof.

D. Both parties, because the definition is subject to two interpretations.

Question 28
Depending on the policy terms and conditions, property insurance can protect other parties in addition to the named insured. Which one of the
following statements best describes the coverage for property of others provided under a homeowners policy?

A. Homeowners policies can cover property of others who reside in the named insured's household – relatives of any age, and other persons
under the age of twenty-one.
B. The spouse receives the same coverage as the named insured, even if the spouse is not named on the declarations and is not residing in the
same household.
C. The personal property of tenants of the named insured is automatically covered under a homeowners policy while in the part of the residence
that the tenant usually occupies.
D. A homeowners policy can provide worldwide coverage for property belonging to the named insured's guests, residence employees, and oth-
ers.

Question 29
Standard forms

A. May result in different insurers issuing identical policies.

B. Prevent insurers from offering significantly different coverage.

C. Are commonly used in professional liability insurance.

D. Allow insurers to modify terms and conditions to accommodate differences in applicants' needs.

Question 30
A portion of a covered loss that is subtracted from the amount the insurer would otherwise be obligated to pay is the

A. Amount of the loan still outstanding.

B. Pro-rata premium.

C. Reinsurance.

D. Deductible.

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CHAPTER 10

Question 1
The insured's young son hits a baseball through a neighbor's living room window. The damage caused by the child would be covered under
which one of the following coverages of the insured's homeowners policy?

A. Dwelling coverage

B. Other structures coverage

C. Loss of use coverage

D. Personal liability coverage

Question 2
To be eligible for coverage as an other structure under a homeowners policy, the other structure must be

A. Separated from the house by a clear space or fence.

B. Attached to the house.

C. Rented to others and not used by the insured.

D. Used as a garage, but not used as a utility shed.

Question 3
Loss exposures covered under an unendorsed dwelling policy include which one of the following consequences?

A. Wind damage to an insured's roof

B. Flood damage to an insured's dwelling

C. Injury by a tenant on the insured's rental property

D. Fire damage to an insured's automobile

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Question 4
Damage from flood is covered under most

A. Policies that cover property at a fixed location.

B. Homeowners policies.

C. Auto policies.

D. Dwelling policies.

Question 5
Which one of the following best describes what is insured under dwelling coverage, as provided by a homeowners policy?

A. Dwelling only.

B. Dwelling and any structures attached to the house only.

C. Dwelling, any structures attached to the house and liability exposures.

D. Dwelling, structures attached to the house, liability exposures and loss of use.

Question 6
Liability coverage under a personal auto policy (PAP) applies to vehicles shown in the declarations and also applies to insureds

A. If they rent a car while on vacation.

B. If they drive employer owned vehicles on a regular basis.

C. If they drive a forklift at their place of employment.

D. If they drive a neighbor's lawn tractor.

Question 7
Which one of the following coverages of a homeowners policy provides coverage for bodily injury and property damage for which the insured is
legally liable?

A. Dwelling coverage

B. Personal property coverage

C. Personal liability coverage

D. Loss of use coverage

Question 8
A self-insured retention (SIR) is

A. Applied to a dwelling policy as a policy deductible.

B. Applied to a personal inland marine policy as a policy deductible.

C. An amount that is deducted from claims that are payable under an umbrella liability policy and that are covered in excess of a primary policy.

D. An amount that is deducted from claims that are payable under an umbrella liability policy and that are not covered at all by any primary
policy.

Question 9

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The dwelling program is often used to insure

A. A two-family rental dwelling owned by an insured who lives elsewhere in a primary home.

B. An apartment complex owned by an insured who lives elsewhere in a primary home.

C. A upscale single-family home in which the owner resides.

D. A residence for limits in excess of its homeowners policy.

Question 10
Which one of the following best describes applicable coverage under a personal auto policy (PAP) if an insured incurs serious bodily injury caused
by a hit-and-run driver?

A. Uninsured motorists coverage

B. Bodily injury liability coverage

C. Medical payments coverage

D. Physical damage coverage

Question 11
All homeowners policy forms

A. Provide coverages on a named perils basis.

B. Provide coverages on an open perils basis.

C. Follow a similar general pattern of construction but may vary in terms of coverage specifics.

D. Include the same coverage specifics but vary in terms of the general construction of the policy.

Question 12
Flood insurance provides

A. Building and contents coverage.

B. Bodily injury liability coverage.

C. Property damage liability coverage.

D. Umbrella liability coverage.

Question 13
While driving home from work on a dark and rainy evening, a driver loses control of his vehicle and strikes a pedestrian, causing severe injuries.
The driver has purchased all primary coverages under a personal auto policy. Which one of the following coverages applies to this accident?

A. Liability coverage

B. Medical payments coverage

C. Uninsured motorists coverage

D. Physical damage coverage

Question 14

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Which one of the following best describes applicable coverage under a personal auto policy (PAP) if an insured incurs serious bodily injuries
caused by a driver whose insurer is insolvent?

A. Uninsured motorists coverage

B. Bodily injury liability coverage

C. Medical payments coverage

D. Physical damage coverage

Question 15
A delivery person trips and falls over the insured's uneven sidewalk. The delivery person sues the insured for his medical bills. This claim falls
under which one of the following coverages of the insured's homeowners policy?

A. Other structures coverage

B. Dwelling coverage

C. Personal property coverage

D. Personal liability coverage

Question 16
Which one of the following is true about collision coverage under the personal auto policy (PAP)?

A. It is only provided if other than collision coverage is not provided.

B. It is subject to the property damage liability limit of the policy.

C. It is typically available only when other than collision coverage also is provided.

D. It is a mandatory coverage when other than collision coverage also is provided.

Question 17
Other than collision loss exposures under a personal auto policy (PAP) include all of the following, EXCEPT:

A. Auto theft

B. Collision with a building

C. Fire damage

D. Contact with a deer

Question 18
Under a homeowners policy, loss of use coverage provides coverage to an insured for

A. Bodily injury for which the insured is legally liable.

B. Periods during which the insured residence is uninhabitable by a covered loss.

C. Property damage for which the insured is legally liable.

D. Goodwill medical payments due to minor injuries incurred on the insured's premises.

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Question 19
The personal auto policy (PAP) contains two sets of physical damage coverage, which are

A. Bodily injury coverage and property damage coverage.

B. Property damage coverage and collision coverage.

C. Uninsured motorists coverage and underinsured motorists coverage.

D. Other than collision coverage and collision coverage.

Question 20
Personal property coverage as provided on a homeowners policy typically protects against damage to all of the following, EXCEPT:

A. Clothing

B. Furniture

C. Utility shed

D. Appliances

Question 1
Damage from flood is covered under most

A. Policies that cover property at a fixed location.

B. Homeowners policies.

C. Auto policies.

D. Dwelling policies.

Question 2
Which one of the following best describes what is insured under dwelling coverage, as provided by a homeowners policy?

A. Dwelling only.

B. Dwelling and any structures attached to the house only.

C. Dwelling, any structures attached to the house and liability exposures.

D. Dwelling, structures attached to the house, liability exposures and loss of use.

Question 3
The dwelling program is often used to insure

A. A two-family rental dwelling owned by an insured who lives elsewhere in a primary home.

B. An apartment complex owned by an insured who lives elsewhere in a primary home.

C. A upscale single-family home in which the owner resides.

D. A residence for limits in excess of its homeowners policy.

Question 4
Flood insurance provides

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A. Building and contents coverage.

B. Bodily injury liability coverage.

C. Property damage liability coverage.

D. Umbrella liability coverage.

Question 5
Which one of the following best describes a type of loss covered under a personal umbrella policy?

A. A catastrophic auto accident that exceeds an insured's auto liability limit

B. A catastrophic fire that totally destroys the insured residence

C. Theft of high valued items such as jewelry and silverware from the insured's residence

D. A severe flood that totally destroys the insured's vacation property

Question 6
Which one of the following is true about collision coverage under the personal auto policy (PAP)?

A. It is only provided if other than collision coverage is not provided.

B. It is subject to the property damage liability limit of the policy.

C. It is typically available only when other than collision coverage also is provided.

D. It is a mandatory coverage when other than collision coverage also is provided.

Question 7
Under a homeowners policy, loss of use coverage provides coverage to an insured for

A. Bodily injury for which the insured is legally liable.

B. Periods during which the insured residence is uninhabitable by a covered loss.

C. Property damage for which the insured is legally liable.

D. Goodwill medical payments due to minor injuries incurred on the insured's premises.

Question 8
While driving home from work on a dark and rainy evening, a driver loses control of his vehicle and strikes a pedestrian, causing severe injuries.
The driver has purchased all primary coverages under a personal auto policy. Which one of the following coverages applies to this accident?

A. Liability coverage

B. Medical payments coverage

C. Uninsured motorists coverage

D. Physical damage coverage

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Question 9
A delivery person trips and falls over the insured's uneven sidewalk. The delivery person sues the insured for his medical bills. This claim falls
under which one of the following coverages of the insured's homeowners policy?

A. Other structures coverage

B. Dwelling coverage

C. Personal property coverage

D. Personal liability coverage

Question 10
Liability coverage under a personal auto policy (PAP) applies to vehicles shown in the declarations and also applies to insureds

A. If they rent a car while on vacation.

B. If they drive employer owned vehicles on a regular basis.

C. If they drive a forklift at their place of employment.

D. If they drive a neighbor's lawn tractor.

Question 11
Which one of the following best describes applicable coverage under a personal auto policy (PAP) if an insured incurs serious bodily injury caused
by a hit-and-run driver?

A. Uninsured motorists coverage

B. Bodily injury liability coverage

C. Medical payments coverage

D. Physical damage coverage

Question 12
The personal auto policy (PAP) contains two sets of physical damage coverage, which are

A. Bodily injury coverage and property damage coverage.

B. Property damage coverage and collision coverage.

C. Uninsured motorists coverage and underinsured motorists coverage.

D. Other than collision coverage and collision coverage.

Question 13
Other than collision loss exposures under a personal auto policy (PAP) include all of the following, EXCEPT:

A. Auto theft

B. Collision with a building

C. Fire damage

D. Contact with a deer

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Question 14
Which one of the following coverages of a homeowners policy provides coverage for bodily injury and property damage for which the insured is
legally liable?

A. Dwelling coverage

B. Personal property coverage

C. Personal liability coverage

D. Loss of use coverage

Question 15
All homeowners policy forms

A. Provide coverages on a named perils basis.

B. Provide coverages on an open perils basis.

C. Follow a similar general pattern of construction but may vary in terms of coverage specifics.

D. Include the same coverage specifics but vary in terms of the general construction of the policy.

Question 16
Personal property coverage as provided on a homeowners policy typically protects against damage to all of the following, EXCEPT:

A. Clothing

B. Furniture

C. Utility shed

D. Appliances

Question 17
Which one of the following best describes applicable coverage under a personal auto policy (PAP) if an insured incurs serious bodily injuries
caused by a driver whose insurer is insolvent?

A. Uninsured motorists coverage

B. Bodily injury liability coverage

C. Medical payments coverage

D. Physical damage coverage

Question 18 C
The unendorsed dwelling policy provides coverage for

A. The dwelling, but not other structures.

B. The dwelling and other structures, but not personal property.

C. The dwelling, other structures, and personal property.

D. The dwelling, other structures, personal property and personal liability coverage.

Question 19

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The insured's young son hits a baseball through a neighbor's living room window. The damage caused by the child would be covered under
which one of the following coverages of the insured's homeowners policy?

A. Dwelling coverage

B. Other structures coverage

C. Loss of use coverage

D. Personal liability coverage

Question 20
To be eligible for coverage as an other structure under a homeowners policy, the other structure must be

A. Separated from the house by a clear space or fence.

B. Attached to the house.

C. Rented to others and not used by the insured.

D. Used as a garage, but not used as a utility shed.

Question 1
Personal property coverage as provided on a homeowners policy typically protects against damage to all of the following, EXCEPT:

A. Clothing

B. Furniture

C. Utility shed

D. Appliances

Question 2
Damage from flood is covered under most

A. Policies that cover property at a fixed location.

B. Homeowners policies.

C. Auto policies.

D. Dwelling policies.

Question 3
To be eligible for coverage as an other structure under a homeowners policy, the other structure must be

A. Separated from the house by a clear space or fence.

B. Attached to the house.

C. Rented to others and not used by the insured.

D. Used as a garage, but not used as a utility shed.

Question 4

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The unendorsed dwelling policy provides coverage for

A. The dwelling, but not other structures.

B. The dwelling and other structures, but not personal property.

C. The dwelling, other structures, and personal property.

D. The dwelling, other structures, personal property and personal liability coverage.

Question 5
While driving home from work on a dark and rainy evening, a driver loses control of his vehicle and strikes a pedestrian, causing severe injuries.
The driver has purchased all primary coverages under a personal auto policy. Which one of the following coverages applies to this accident?

A. Liability coverage

B. Medical payments coverage

C. Uninsured motorists coverage

D. Physical damage coverage

Question 6
A delivery person trips and falls over the insured's uneven sidewalk. The delivery person sues the insured for his medical bills. This claim falls
under which one of the following coverages of the insured's homeowners policy?

A. Other structures coverage

B. Dwelling coverage

C. Personal property coverage

D. Personal liability coverage

Question 7
Flood insurance provides

A. Building and contents coverage.

B. Bodily injury liability coverage.

C. Property damage liability coverage.

D. Umbrella liability coverage.

Question 8
Which one of the following coverages of a homeowners policy provides coverage for bodily injury and property damage for which the insured is
legally liable?

A. Dwelling coverage

B. Personal property coverage

C. Personal liability coverage

D. Loss of use coverage

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Question 9
Which one of the following best describes a type of loss covered under a personal umbrella policy?

A. A catastrophic auto accident that exceeds an insured's auto liability limit

B. A catastrophic fire that totally destroys the insured residence

C. Theft of high valued items such as jewelry and silverware from the insured's residence

D. A severe flood that totally destroys the insured's vacation property

Question 10
Which one of the following best describes applicable coverage under a personal auto policy (PAP) if an insured incurs serious bodily injury caused
by a hit-and-run driver?

A. Uninsured motorists coverage

B. Bodily injury liability coverage

C. Medical payments coverage

D. Physical damage coverage

Question 11
Which one of the following is true about collision coverage under the personal auto policy (PAP)?

A. It is only provided if other than collision coverage is not provided.

B. It is subject to the property damage liability limit of the policy.

C. It is typically available only when other than collision coverage also is provided.

D. It is a mandatory coverage when other than collision coverage also is provided.

Question 12
A self-insured retention (SIR) is

A. Applied to a dwelling policy as a policy deductible.

B. Applied to a personal inland marine policy as a policy deductible.

C. An amount that is deducted from claims that are payable under an umbrella liability policy and that are covered in excess of a primary policy.

D. An amount that is deducted from claims that are payable under an umbrella liability policy and that are not covered at all by any primary
policy.

Question 13
Liability coverage under a personal auto policy (PAP) applies to vehicles shown in the declarations and also applies to insureds

A. If they rent a car while on vacation.

B. If they drive employer owned vehicles on a regular basis.

C. If they drive a forklift at their place of employment.

D. If they drive a neighbor's lawn tractor.

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Question 14
Other than collision loss exposures under a personal auto policy (PAP) include all of the following, EXCEPT:

A. Auto theft

B. Collision with a building

C. Fire damage

D. Contact with a deer

Question 15
All homeowners policy forms

A. Provide coverages on a named perils basis.

B. Provide coverages on an open perils basis.

C. Follow a similar general pattern of construction but may vary in terms of coverage specifics.

D. Include the same coverage specifics but vary in terms of the general construction of the policy.

Question 16
The insured's young son hits a baseball through a neighbor's living room window. The damage caused by the child would be covered under
which one of the following coverages of the insured's homeowners policy?

A. Dwelling coverage

B. Other structures coverage

C. Loss of use coverage

D. Personal liability coverage

Question 17
Under a homeowners policy, loss of use coverage provides coverage to an insured for

A. Bodily injury for which the insured is legally liable.

B. Periods during which the insured residence is uninhabitable by a covered loss.

C. Property damage for which the insured is legally liable.

D. Goodwill medical payments due to minor injuries incurred on the insured's premises.

Question 18
Which one of the following best describes what is insured under dwelling coverage, as provided by a homeowners policy?

A. Dwelling only.

B. Dwelling and any structures attached to the house only.

C. Dwelling, any structures attached to the house and liability exposures.

D. Dwelling, structures attached to the house, liability exposures and loss of use.

Question 19

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Which one of the following best describes applicable coverage under a personal auto policy (PAP) if an insured incurs serious bodily injuries
caused by a driver whose insurer is insolvent?

A. Uninsured motorists coverage

B. Bodily injury liability coverage

C. Medical payments coverage

D. Physical damage coverage

Question 20
The personal auto policy (PAP) contains two sets of physical damage coverage, which are

A. Bodily injury coverage and property damage coverage.

B. Property damage coverage and collision coverage.

C. Uninsured motorists coverage and underinsured motorists coverage.

D. Other than collision coverage and collision coverage.

CHAPTER 11

Question 1
For which of the following does the Building and Personal Property Coverage Form (BPP) usually provide very limited coverage?

A. Building

B. Property away from the insured's premises

C. Personal property

D. Personal property of others

Question 2
Umbrella liability insurance is often referred to as "excess" insurance because it

A. Is not needed by most insureds.

B. Applies in excess of the primary policies.

C. Provides unlimited coverage.

D. Often provides broader coverage than the primary policies.

Question 3
ABC Company (ABC) manufactures welding torches and sells them to contractors. One of the torches used by a contractor malfunctions and
causes a fire that destroys a building under construction. Which one of the following would cover ABC against a subsequent products liability
claim for the fire loss?

A. Coverage A—Bodily Injury and Property Damage Liability of ABC's commercial general liability (CGL) policy

B. ABC's employers liability insurance

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C. Coverage B—Personal and Advertising Injury Liability of ABC's commercial general liability (CGL) policy

D. ABC's premises liability insurance

Question 4
Most policies that provide coverage on buildings and personal property at fixed locations exclude coverage for
A. Fire and lightning losses.
B. Earthquake and flood losses.
C. Riot or civil commotion losses.
D. Sinkhole collapse and volcanic action losses.

Question 5
Building and contents insurance policies usually provide either a nominal amount of coverage or no coverage for all of the following, EXCEPT:

A. Merchandise shipped by railcar

B. Property that moves from site-to-site

C. Completed products in inventory

D. Property in the possession of others

Question 6
The main purpose of umbrella liability insurance is to provide

A. Limits of insurance that apply in addition to those of the insured's primary policies.

B. Unlimited medical expense coverage.

C. Adequate limits of insurance for workers compensation benefits.

D. Disability income benefits.

Question 7
Under a Commercial General Liability (CGL) Coverage Form, the purpose of Coverage C–Medical Payments is to provide

A. Unlimited medical expense coverage.

B. A modest amount of medical expense coverage for settling minor injury cases.

C. Medical expense coverage for injury arising from products.

D. Medical expense coverage for injury arising from personal injury.

Question 8
Which one of the following is likely to be covered by inland marine insurance rather than by the Building and Personal Property Coverage Form
(BPP)?

A. Completed additions to covered buildings

B. Permanently installed production machinery

C. Personal property used to service a covered building

D. Personal property situated at the premises of others

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Question 9
Which one of the following is excluded under the Building and Personal Property Coverage Form (BPP)?

A. Completed additions to covered buildings

B. Business personal property located within 100 feet of the premises

C. Property in transit

D. Personal property used to maintain the building

Question 10
The benefits that workers compensation laws require employers to pay include all of the following, EXCEPT:

A. Meal expenses

B. Medical expenses

C. Disability income

D. Rehabilitation benefits

Question 11
Under a Commercial General Liability (CGL) Coverage Form, medical payments coverage pays

A. Only if the insured is not legally liable.

B. Regardless of whether the insured is legally liable.

C. Only if the insured is legally liable.

D. Regardless of whether the insured incurs any medical expenses.

Question 12
Which one of the following causes of loss forms is the lowest-cost version that provides coverage for approximately one dozen named perils?

A. Special form

B. Basic form

C. Intermediate form

D. Broad form

Question 13
Under the Building and Personal Property Coverage Form (BPP), "your business personal property" is covered under all of the following condi-
tions, EXCEPT:

A. In the described building

B. In the open within 100 feet of the premises

C. On the described building

D. Situated at the premises of others on a permanent basis

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Question 14
Virtually all employers purchase workers compensation and employers liability insurance to cover workers compensation benefits and liability

A. To employees for advertising injury.

B. To employees for property damage.

C. For employee injury in which the employee subsequently dies.

D. For employee injury not covered by workers compensation statutes.

Question 15
Extra expense insurance covers additional expenses incurred to

A. Reduce the length of a business interruption.

B. Suspend the insured's operations.

C. Cover "floating property."

D. Cover the "maintenance" perils.

Question 16
An architect makes false statements about one of his competitors, who sues him for slander. Which one of the following would cover the archi-
tect for a loss arising out of this situation?

A. Coverage A – Bodily Injury and Property Damage Liability of the Commercial General Liability (CGL) Coverage Form.

B. Employers liability insurance

C. Operations liability insurance

D. Coverage B – Personal and Advertising Injury Liability of the Commercial General Liability (CGL) Coverage Form

Question 17
Which one of the following is true with regard to auto liability coverage under business auto insurance?

A. It does not cover liability for injury resulting from faulty maintenance of an auto.

B. It covers bodily injury and property damage regardless of whether the insured is legally liable.

C. It can be arranged to cover liability arising from autos the insured does not own, lease, or hire but that are used on the insured's behalf.

D. Commercial general liability (CGL) insurance and business auto insurance overlap and cover the same auto liability losses.

Question 18
Which one of the following can be insured by the Building and Personal Property Coverage Form (BPP)?

A. A bridge

B. Money

C. Securities

D. Merchandise

Question 19

169
Under Coverage A of the Commercial General Liability (CGL) Coverage Form, the insurer agrees to pay those sums that the insured becomes
legally obligated to pay as damages because of property damage or

A. Bodily injury.

B. Personal injury.

C. Advertising injury.

D. Medical injury.

Question 20
Damage to property caused by rust is uninsurable because it is

A. Difficult to value.

B. Certain to occur over time.

C. Usually due to latent defects.

D. Catastrophic in nature.

Question 21
Which one of the following is considered to be a "maintenance peril"?

A. Nuclear reaction

B. Sprinkler leakage

C. Damage by insects

D. Falling objects

Question 22
Coverage A–Bodily Injury and Property Damage Liability of a Commercial General Liability (CGL) Coverage Form insures two general categories
of loss exposures. One is premises and operations liability and the other is

A. Medical payments.

B. Personal injury liability.

C. Products and completed operations liability.

D. Advertising liability.

Question 23
Under the Building and Personal Property Coverage Form (BPP), personal property of others is covered

A. Only if the insured is legally liable for it.

B. While in the insured's care, custody, or control.

C. While in transit.

D. Up to 500 feet from the described premises.

Question 24
Under a Commercial General Liability (CGL) Coverage Form, property damage means physical injury to property and the

170
A. Cost of repairing the property.

B. Related premises liability.

C. Cost of defending claims for property damage.

D. Resulting loss of use.

Question 25
All of the following conditions must exist in order for business income insurance to cover a loss, EXCEPT:

A. There must be a reduction in the insured's net income.

B. There must be a suspension of the insured's operations.

C. There must be a reduction in extra expenses.

D. There must be damage by a covered cause of loss at the insured's location.

Question 1
All of the following conditions must exist in order for business income insurance to cover a loss, EXCEPT:

A. There must be a reduction in the insured's net income.

B. There must be a suspension of the insured's operations.

C. There must be a reduction in extra expenses.

D. There must be damage by a covered cause of loss at the insured's location.

Question 2
Which one of the following is true with regard to auto liability coverage under business auto insurance?

A. It does not cover liability for injury resulting from faulty maintenance of an auto.

B. It covers bodily injury and property damage regardless of whether the insured is legally liable.

C. It can be arranged to cover liability arising from autos the insured does not own, lease, or hire but that are used on the insured's behalf.

D. Commercial general liability (CGL) insurance and business auto insurance overlap and cover the same auto liability losses.

Question 3
Coverage A–Bodily Injury and Property Damage Liability of a Commercial General Liability (CGL) Coverage Form insures two general categories
of loss exposures. One is premises and operations liability and the other is

A. Medical payments.

B. Personal injury liability.

C. Products and completed operations liability.

D. Advertising liability.

Question 4

171
Umbrella liability insurance is often referred to as "excess" insurance because it

A. Is not needed by most insureds.

B. Applies in excess of the primary policies.

C. Provides unlimited coverage.

D. Often provides broader coverage than the primary policies.

Question 5
Which one of the following can be insured by the Building and Personal Property Coverage Form (BPP)?

A. A bridge

B. Money

C. Securities

D. Merchandise

Question 6
Which one of the following is likely to be covered by inland marine insurance rather than by the Building and Personal Property Coverage Form
(BPP)?

A. Completed additions to covered buildings

B. Permanently installed production machinery

C. Personal property used to service a covered building

D. Personal property situated at the premises of others

Question 7
Under the Building and Personal Property Coverage Form (BPP), "your business personal property" is covered under all of the following condi-
tions, EXCEPT:

A. In the described building

B. In the open within 100 feet of the premises

C. On the described building

D. Situated at the premises of others on a permanent basis

Question 8
Which one of the following is considered to be a "maintenance peril"?

A. Nuclear reaction

B. Sprinkler leakage

C. Damage by insects

D. Falling objects

Question 9

172
For which of the following does the Building and Personal Property Coverage Form (BPP) usually provide very limited coverage?

A. Building

B. Property away from the insured's premises

C. Personal property

D. Personal property of others

Question 10
Which one of the following is excluded under the Building and Personal Property Coverage Form (BPP)?

A. Completed additions to covered buildings

B. Business personal property located within 100 feet of the premises

C. Property in transit

D. Personal property used to maintain the building

Question 11
Most policies that provide coverage on buildings and personal property at fixed locations exclude coverage for

A. Fire and lightning losses.

B. Earthquake and flood losses.

C. Riot or civil commotion losses.

D. Sinkhole collapse and volcanic action losses.

Question 12
Extra expense insurance covers additional expenses incurred to

A. Reduce the length of a business interruption.

B. Suspend the insured's operations.

C. Cover "floating property."

D. Cover the "maintenance" perils.

Question 13
The benefits that workers compensation laws require employers to pay include all of the following, EXCEPT:

A. Meal expenses

B. Medical expenses

C. Disability income

D. Rehabilitation benefits

Question 14
Under a Commercial General Liability (CGL) Coverage Form, property damage means physical injury to property and the

173
A. Cost of repairing the property.

B. Related premises liability.

C. Cost of defending claims for property damage.

D. Resulting loss of use.

Question 15
The main purpose of umbrella liability insurance is to provide

A. Limits of insurance that apply in addition to those of the insured's primary policies.

B. Unlimited medical expense coverage.

C. Adequate limits of insurance for workers compensation benefits.

D. Disability income benefits.

Question 16
Which one of the following causes of loss forms is the lowest-cost version that provides coverage for approximately one dozen named perils?

A. Special form

B. Basic form

C. Intermediate form

D. Broad form

Question 17
Under the Building and Personal Property Coverage Form (BPP), personal property of others is covered

A. Only if the insured is legally liable for it.

B. While in the insured's care, custody, or control.

C. While in transit.

D. Up to 500 feet from the described premises.

Question 18
Virtually all employers purchase workers compensation and employers liability insurance to cover workers compensation benefits and liability

A. To employees for advertising injury.

B. To employees for property damage.

C. For employee injury in which the employee subsequently dies.

D. For employee injury not covered by workers compensation statutes.

Question 19
Building and contents insurance policies usually provide either a nominal amount of coverage or no coverage for all of the following, EXCEPT:

A. Merchandise shipped by railcar

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B. Property that moves from site-to-site

C. Completed products in inventory

D. Property in the possession of others

Question 20
Under Coverage A of the Commercial General Liability (CGL) Coverage Form, the insurer agrees to pay those sums that the insured becomes
legally obligated to pay as damages because of property damage or

A. Bodily injury.

B. Personal injury.

C. Advertising injury.

D. Medical injury.

Question 21
ABC Company (ABC) manufactures welding torches and sells them to contractors. One of the torches used by a contractor malfunctions and
causes a fire that destroys a building under construction. Which one of the following would cover ABC against a subsequent products liability
claim for the fire loss?

A. Coverage A—Bodily Injury and Property Damage Liability of ABC's commercial general liability (CGL) policy

B. ABC's employers liability insurance

C. Coverage B—Personal and Advertising Injury Liability of ABC's commercial general liability (CGL) policy

D. ABC's premises liability insurance

Question 22
Under a Commercial General Liability (CGL) Coverage Form, medical payments coverage pays

A. Only if the insured is not legally liable.

B. Regardless of whether the insured is legally liable.

C. Only if the insured is legally liable.

D. Regardless of whether the insured incurs any medical expenses.

Question 23
An architect makes false statements about one of his competitors, who sues him for slander. Which one of the following would cover the archi-
tect for a loss arising out of this situation?

A. Coverage A – Bodily Injury and Property Damage Liability of the Commercial General Liability (CGL) Coverage Form.

B. Employers liability insurance

C. Operations liability insurance

D. Coverage B – Personal and Advertising Injury Liability of the Commercial General Liability (CGL) Coverage Form

Question 24
Damage to property caused by rust is uninsurable because it is

175
A. Difficult to value.

B. Certain to occur over time.

C. Usually due to latent defects.

D. Catastrophic in nature.

Question 25
Under a Commercial General Liability (CGL) Coverage Form, the purpose of Coverage C–Medical Payments is to provide

A. Unlimited medical expense coverage.

B. A modest amount of medical expense coverage for settling minor injury cases.

C. Medical expense coverage for injury arising from products.

D. Medical expense coverage for injury arising from personal injury.

Question 1
Damage to property caused by rust is uninsurable because it is

A. Difficult to value.

B. Certain to occur over time.

C. Usually due to latent defects.

D. Catastrophic in nature.

Question 2
Virtually all employers purchase workers compensation and employers liability insurance to cover workers compensation benefits and liability

A. To employees for advertising injury.

B. To employees for property damage.

C. For employee injury in which the employee subsequently dies.

D. For employee injury not covered by workers compensation statutes.

Question 3
For which of the following does the Building and Personal Property Coverage Form (BPP) usually provide very limited coverage?

A. Building

B. Property away from the insured's premises

C. Personal property

D. Personal property of others

Question 4
Under a Commercial General Liability (CGL) Coverage Form, property damage means physical injury to property and the

176
A. Cost of repairing the property.

B. Related premises liability.

C. Cost of defending claims for property damage.

D. Resulting loss of use.

Question 5
Which one of the following is likely to be covered by inland marine insurance rather than by the Building and Personal Property Coverage Form
(BPP)?

A. Completed additions to covered buildings

B. Permanently installed production machinery

C. Personal property used to service a covered building

D. Personal property situated at the premises of others

Question 6
An architect makes false statements about one of his competitors, who sues him for slander. Which one of the following would cover the archi-
tect for a loss arising out of this situation?

A. Coverage A – Bodily Injury and Property Damage Liability of the Commercial General Liability (CGL) Coverage Form.

B. Employers liability insurance

C. Operations liability insurance

D. Coverage B – Personal and Advertising Injury Liability of the Commercial General Liability (CGL) Coverage Form

Question 7
Under Coverage A of the Commercial General Liability (CGL) Coverage Form, the insurer agrees to pay those sums that the insured becomes
legally obligated to pay as damages because of property damage or

A. Bodily injury.

B. Personal injury.

C. Advertising injury.

D. Medical injury.

Question 8
Coverage A–Bodily Injury and Property Damage Liability of a Commercial General Liability (CGL) Coverage Form insures two general categories
of loss exposures. One is premises and operations liability and the other is

A. Medical payments.

B. Personal injury liability.

C. Products and completed operations liability.

D. Advertising liability.

Question 9
Which one of the following can be insured by the Building and Personal Property Coverage Form (BPP)?

A. A bridge

177
B. Money

C. Securities

D. Merchandise

Question 10
The main purpose of umbrella liability insurance is to provide

A. Limits of insurance that apply in addition to those of the insured's primary policies.

B. Unlimited medical expense coverage.

C. Adequate limits of insurance for workers compensation benefits.

D. Disability income benefits.

Question 11
Under the Building and Personal Property Coverage Form (BPP), "your business personal property" is covered under all of the following condi-
tions, EXCEPT:

A. In the described building

B. In the open within 100 feet of the premises

C. On the described building

D. Situated at the premises of others on a permanent basis

Question 12
ABC Company (ABC) manufactures welding torches and sells them to contractors. One of the torches used by a contractor malfunctions and
causes a fire that destroys a building under construction. Which one of the following would cover ABC against a subsequent products liability
claim for the fire loss?

A. Coverage A—Bodily Injury and Property Damage Liability of ABC's commercial general liability (CGL) policy

B. ABC's employers liability insurance

C. Coverage B—Personal and Advertising Injury Liability of ABC's commercial general liability (CGL) policy

D. ABC's premises liability insurance

Question 13
All of the following conditions must exist in order for business income insurance to cover a loss, EXCEPT:

A. There must be a reduction in the insured's net income.

B. There must be a suspension of the insured's operations.

C. There must be a reduction in extra expenses.

D. There must be damage by a covered cause of loss at the insured's location.

Question 14
Umbrella liability insurance is often referred to as "excess" insurance because it

178
A. Is not needed by most insureds.

B. Applies in excess of the primary policies.

C. Provides unlimited coverage.

D. Often provides broader coverage than the primary policies.

Question 15
Which one of the following causes of loss forms is the lowest-cost version that provides coverage for approximately one dozen named perils?

A. Special form

B. Basic form

C. Intermediate form

D. Broad form

Question 16
Most policies that provide coverage on buildings and personal property at fixed locations exclude coverage for

A. Fire and lightning losses.

B. Earthquake and flood losses.

C. Riot or civil commotion losses.

D. Sinkhole collapse and volcanic action losses.

Question 17
Under a Commercial General Liability (CGL) Coverage Form, medical payments coverage pays

A. Only if the insured is not legally liable.

B. Regardless of whether the insured is legally liable.

C. Only if the insured is legally liable.

D. Regardless of whether the insured incurs any medical expenses.

Question 18
Which one of the following is considered to be a "maintenance peril"?

A. Nuclear reaction

B. Sprinkler leakage

C. Damage by insects

D. Falling objects

Question 19
Building and contents insurance policies usually provide either a nominal amount of coverage or no coverage for all of the following, EXCEPT:

179
A. Merchandise shipped by railcar

B. Property that moves from site-to-site

C. Completed products in inventory

D. Property in the possession of others

Question 20
Under a Commercial General Liability (CGL) Coverage Form, the purpose of Coverage C–Medical Payments is to provide

A. Unlimited medical expense coverage.

B. A modest amount of medical expense coverage for settling minor injury cases.

C. Medical expense coverage for injury arising from products.

D. Medical expense coverage for injury arising from personal injury.

Question 21
Which one of the following is true with regard to auto liability coverage under business auto insurance?

A. It does not cover liability for injury resulting from faulty maintenance of an auto.

B. It covers bodily injury and property damage regardless of whether the insured is legally liable.

C. It can be arranged to cover liability arising from autos the insured does not own, lease, or hire but that are used on the insured's behalf.

D. Commercial general liability (CGL) insurance and business auto insurance overlap and cover the same auto liability losses.

Question 22
The benefits that workers compensation laws require employers to pay include all of the following, EXCEPT:

A. Meal expenses

B. Medical expenses

C. Disability income

D. Rehabilitation benefits

Question 23
Under the Building and Personal Property Coverage Form (BPP), personal property of others is covered

A. Only if the insured is legally liable for it.

B. While in the insured's care, custody, or control.

C. While in transit.

D. Up to 500 feet from the described premises.

Question 24
Which one of the following is excluded under the Building and Personal Property Coverage Form (BPP)?

A. Completed additions to covered buildings

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B. Business personal property located within 100 feet of the premises

C. Property in transit

D. Personal property used to maintain the building

Question 25
Extra expense insurance covers additional expenses incurred to

A. Reduce the length of a business interruption.

B. Suspend the insured's operations.

C. Cover "floating property."

D. Cover the "maintenance" perils.

END

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