lOMoARcPSD|1595050

Chapter 6 Insurance Company Operations

1) The function of an actuary is to 7) If an underwriter suspects moral hazard, the

A) adjust claims. underwriter may ask an outside firm to investigate the
B) determine premium rates. applicant and make a detailed report to the insurer. This
C) negotiate reinsurance treaties. report is called a(n)
D) invest insurance company assets. A) inspection report.
B) application.
2) Insurers obtain data which can be used to determine C) M.I.B. report.
rates from D) agent’s report.
A) pricing pools.
B) insurance advisory organizations. 8) One source of life and health insurance underwriting
C) banks. information is an organization that life and health
D) reciprocal exchanges. insurance companies can join. As a member, life and
health insurance companies report health impairments
3) Which of the following statements about underwriting of applicants, and this information is shared with
policy is (are) true? member companies. Although the information is shared,
I. A company must establish an underwriting policy the underwriting decision of the member company is not
consistent with company objectives. disclosed. What is this organization called?
II. Underwriting policy is usually subjective and allows A) Fair Isaac Corporation (FICO)
the underwriter considerable flexibility with respect to B) Medical Information Bureau (MIB)
lines written and forms used. C) National Association of Insurance Commissioners
A) I only (NAIC)
B) II only D) National Association of Mutual Insurance Companies
C) both I and II (NAMIC)
D) neither I nor II
9) Factors that may result in more restrictive
underwriting decisions include which of the following?
4) Which of the following statements about underwriting I. Inadequate rates.
standards is (are) true? II. The unavailability of reinsurance at favorable terms.
I. One purpose of underwriting standards is to reduce A) I only
adverse selection against the insurer. B) II only
II. Equitable rates should be charged so that each group C) both I and II
of policyowners pays its own way in terms of losses and D) neither I nor II
expenses.
A) I only
B) II only 10) All of the following are functions of the marketing
C) both I and II department of an insurance company EXCEPT
D) neither I nor II A) to advertise the insurer’s products.
B) to develop new products.
5) The underwriting process begins with the C) to identify production goals.
A) agent. D) to make final underwriting decisions.
B) desk underwriter.
C) inspection report. 11) Which of the following statements about claim
D) acceptance of the application. settlement is (are) true?
I. The fair payment of claims requires an insurer to adopt
6) Common sources of underwriting information for life a very liberal claims policy.
and health insurance include all of the following EXCEPT II. To prevent lawsuits, an insurer should provide no
A) the application. personal assistance to a claimant other than that which is
B) a physical examination. required by contractual obligations.
C) the Medical Information Bureau. A) I only
D) the applicant’s income tax return. B) II only
C) both I and II
D) neither I nor II
 lOMoARcPSD|1595050
12) All of the following statements about claims
settlement are true EXCEPT
A) Agents may have the authority to settle claims.
B) Independent adjustors may be used in a geographic
area where the volume of business is too low for an
insurer to have its own adjustors.
C) Company adjustors are salaried employees who work
for one insurer.
D) A public adjustor is usually paid a flat fee
regardless of the size of a claim.
13) Which of the following statements about adjustment
bureaus is (are) true?
I. They are frequently used to settle claims when a large
number of losses occur in a given geographic location as
a result of a catastrophic event.
II. Their major advantage is low cost because of the use of
part-time adjustors.
A) I only
B) II only
C) both I and II
D) neither I nor II
14) All of the following statements about the settlement
of a claim are true EXCEPT
A) The insurance policy usually has a provision
specifying how a notice of loss is to be made to the
insurance company.
B) One step in the investigation of a claim is to determine
whether the policy was in force when the loss occurred.
C) The adjustor must file the proof of loss, which is a
sworn statement supporting his or her decision
regarding a claim.
D) A policy provision may determine how disputes over
claim settlements are resolved.
15) All of the following statements about reinsurance are
true EXCEPT
A) A reinsurer may also purchase reinsurance.
B) Reinsurance is an arrangement by which the primary
insurer that initially writes the insurance transfers to
another insurer part or all of the potential losses
associated with such insurance.
C) The insurer transferring business to a reinsurer is
called the ceding insurer.
D) The amount of insurance transferred to a
reinsurer is called the net retention.
16) All of the following are reasons for a primary insurer
to use reinsurance EXCEPT
A) to increase the unearned premium reserve.
B) to increase underwriting capacity.
C) to protect against catastrophic losses.
D) to stabilize profits.
17) The unearned premium reserve of an insurer is
A) an asset representing the investments made with
premium income.
B) a liability representing the unearned portion of
gross premiums on outstanding policies.
C) a liability representing claims that have been filed, but
not yet paid.
D) the portion of the insurer’s net worth belonging to
policyowners.
18) A reinsurance contract that is entered into on a case-
by-case basis after an application for insurance is
received by a primary insurer is called
A) a reinsurance pool.
B) automatic treaty reinsurance.
C) retrocession.
D) facultative reinsurance.
19) Which of the following statements about treaty
reinsurance is true?
A) The reinsurer is required to underwrite each
individual applicant that is reinsured.
B) The reinsurer must accept all business that falls
within the scope of the treaty.
C) The ceding insurer can choose which business falling
within the scope of the treaty it wishes to reinsure.
D) It protects the reinsurer by requiring the ceding
insurer to charge adequate premiums.
20) Which of the following statements about treaty
reinsurance is true?
A) Under a surplus-share treaty, 100 percent of the
ceding insurer’s liability must be transferred to the
reinsurer.
B) Using a quota-share treaty increases the ceding
insurer’s unearned premium reserve.
C) Under an excess-of-loss treaty, the reinsurer pays
losses in full only if they are less than the ceding insurer’s
retention limit.
D) Using a reinsurance pool provides financial
capacity to write large amounts of insurance.
21) Delta Insurance Company has a surplus-share treaty
with Eversafe Reinsurance. Delta has a retention limit of
$200,000, and nine lines of insurance are ceded to
Eversafe. How much will Eversafe pay if a $1,600,000
building insured with Delta suffers an $800,000 loss?
A) $600,000
B) $700,000
C) $720,000
 lOMoARcPSD|1595050

D) $800,000 A) underwriter.
B) actuary.
C) loss control engineer.
D) claims adjustor.

22) Huge Insurance Company is a property insurer that is

interested in protecting itself against cumulative losses 27) Mark has been an underwriter for 20 years. An
that exceed $200 million during the year. This protection application he recently reviewed looked odd to him. The
can best be obtained using building value in the application seemed far too high, and
A) a quota-share reinsurance treaty. Mark suspected the applicant might be planning to
B) a surplus-share reinsurance treaty. destroy the property after it is insured. Mark contacted
C) an excess-of-loss reinsurance treaty. an outside firm and hired someone to investigate the
D) a reinsurance pool. applicant and to prepare a report about the applicant.
This report is called a(n)
23) All of the following statements about life insurance A) agent’s report.
company investments are true EXCEPT B) binder.
A) Funds for these investments are derived primarily C) physical inspection.
from premium income, investment earnings, and D) inspection report.
maturing investments that must be reinvested.
B) Income from these investments reduces the cost of 28) Antonio is a claims adjustor for LMN Insurance
insurance. Company. After the insurer is notified that there has been
C) A primary objective in making these investments is a loss, Antonio meets with the insured. The first step in
safety of principal. the claims process that Antonio should follow is to
D) The majority of these investments are short-term A) determine the amount of the loss.
investments. B) attempt to deny the claim regardless of whether he
believes the claim is covered.
24) Which of the following statements about the C) verify that a covered loss has occurred.
investments of property and liability insurers is (are) D) delay paying the claim if the claim is covered.
true?
I. Income from investments is important in offsetting any 29) Beverly lives in a sparsely populated area in northern
unfavorable underwriting experience. Idaho. Some insurance companies marketing coverage in
II. Because premium income is continually being northern Idaho cannot afford to have full-time adjustors
received, the investment objective of liquidity is of little there. Several insurers hire Beverly to adjust claims for
importance. their insureds. Beverly charges the insurers a fee for each
A) I only claim that she settles. Beverly is a(n)
B) II only A) public adjustor.
C) both I and II B) adjustment bureau.
D) neither I nor II C) independent adjustor.
D) company adjustor.
25) Functions of an insurance company’s legal
department include which of the following? 30) New Liability Insurance Company began operations
I. Lobbying for legislation favorable to the insurance last year and has been very successful. The company’s
industry. ability to grow is being restricted by an accounting rule
II. Drafting policy provisions. that requires insurers to realize acquisition expenses
A) I only immediately, while not realizing premiums received as
B) II only income until some time has passed. Reinsurance is often
C) both I and II used in such cases for which of the following purposes?
D) neither I nor II A) to stabilize profitability
B) to reduce the unearned premium reserve
26) Jan is employed by an insurance company. She C) to provide protection against catastrophic losses
reviews applications to determine whether her company D) to withdraw from a line of business or territory
should insure the applicant. If insurable, Jan assigns the
applicant to a rating category based on the applicant’s
degree of risk. Jan is a(n)
 lOMoARcPSD|1595050

who suffer a loss to submit a sworn statement to

substantiate that a loss occurred and to describe the
conditions under which the loss occurred. This sworn
statement is called a
A) binder.
B) proof of loss.
C) inspection report.
31) Liability Insurance Company (LIC) was approached D) notice of loss.
by a regional airline to see if LIC would write the airline’s 36) All of the following are methods that a property and
liability coverage. LIC agreed to write the coverage and liability insurance company can use to protect against
entered into an agreement with a reinsurer. Under the catastrophic losses EXCEPT
agreement, LIC retains 25 percent of the premium and A) sale of catastrophe bonds.
pays 25 percent of the losses, and the reinsurer receives B) purchase of common stock.
75 percent of the premium and pays 75 percent of the C) purchase of excess-of-loss reinsurance.
losses. This reinsurance arrangement is best described as D) quota share reinsurance with a low retention
A) excess-of-loss reinsurance. percentage.
B) surplus-share reinsurance.
C) quota-share reinsurance. 37) Which of the following statements is (are) true with
D) pool reinsurance. respect to catastrophe bonds?
I. The bonds are issued by the U.S. Government.
32) Ross studied engineering in college. After graduation, II. The bonds have relatively high interest (coupon) rates.
he went to work for an insurance company. Ross visits A) I only
properties insured by his company. He conducts B) II only
inspections and makes recommendations about alarm C) both I and II
systems, sprinkler systems, and building construction. In D) neither I nor II
what functional area does Ross work?
A) underwriting 38) Pac-Coast Insurance (PCI) concentrates its
B) loss control underwriting activities in California. The company is
C) information systems concerned that if a catastrophic earthquake occurs, it
D) claims adjusting might threaten the solvency of the company. To address
this risk, PCI issued some debt securities. If a
33) Amy heads the legal staff of a large property and catastrophic earthquake occurs, PCI does not have to
liability insurance company. Amy’s staff is likely involved repay the borrowed funds or pay interest. The securities
in all of the following activities EXCEPT PCI issued are called
A) reviewing policy wording before policies are adopted A) catastrophe futures contracts.
and marketed. B) interest rate swaps.
B) recouping subrogation recoveries from third parties C) catastrophe bonds.
who injured individuals insured by Amy’s company. D) contingent options contracts.
C) providing legal advice about marketing, taxation, and
insurance law. 39) The process of transferring risk to the capital
D) reviewing applications to determine if the markets through the use of financial instruments such as
company should insure the risk. bonds, futures contracts, and options is knows as
A) consolidation of risk.
34) Sue double-majored in mathematics and statistics in B) avoidance of risk.
college. She also enrolled in a number of finance courses. C) securitization of risk.
After graduation, she was hired by Econodeath Insurance D) compartmentalization of risk.
Company. Her job is to calculate premium rates for life
insurance coverages. Sue is a(n) 40) Which of the following statements is (are) true about
A) actuary. life insurance company investments?
B) underwriter. I. The majority of life insurance company general account
C) claims adjustor. assets are invested in bonds.
D) producer. II. The majority of life insurance company separate
account assets are invested in stocks.
35) Easy Pay Insurance Company may require insureds A) I only
 lOMoARcPSD|1595050

B) II only
C) both I and II 46) When a fraternal insurer began operations, it asked
D) neither I nor II each member, regardless of age, to pay $20 per month to
the fraternal's group life insurance plan. In exchange,
each member received the same amount of life insurance.
Soon younger members of the group began to drop out
when they realized their premiums were subsidizing a
group with a higher chance of loss. Which important
underwriting principle was violated in this case?
41) One method through which reinsurance is provided A) An underwriting profit should be attained.
is through an organization of insurers that underwrites B) Moral hazard should be avoided.
insurance on a joint basis. Through the organization, C) Insureds should be selected according to underwriting
financial capacity is available for large commercial risks. standards.
This reinsurance arrangement is a(n) D) There should be equity among policyholders.
A) quota-share treaty.
B) surplus-share treaty. 47) ABC Insurance Company entered into a reinsurance
C) excess-of-loss treaty. agreement with XYZ Reinsurance. Under the contract,
D) reinsurance pool. XYZ Re has no liability unless ABC's loss ratio exceeds 75
percent for the year. XYZ Re agreed to pay all losses in
42) Most insurance companies require their marketing excess of the 75 percent loss ratio. ABC
representatives to submit an evaluation of the Insurance Company is using reinsurance to
prospective insured. This important source of A) stabilize profits.
underwriting information is called the B) reduce the unearned premium reserve.
A) application. C) provide large risk capacity.
B) agent’s report. D) retire from a line or territory.
C) inspection report.
D) physical inspection. 48) Granite Insurance Company entered into a treaty
reinsurance agreement with Rock Solid Reinsurance
43) Catastrophe bonds are made available to institutional (RSR). Granite's retention limit is $400,000 and RSR
investors in the capital markets through an entity that is agreed to provide reinsurance for up to $2.0 million. If
specially created for that purpose.This is entity is called a Granite writes an $800,000 policy, RSR is responsible for
A) risk retention group. 50 percent of the losses. If Granite insures a $1.6 million
B) fraternal insurance company. risk, RSR is responsible for 25 percent of any losses.
C) captive insurance company. What type of reinsurance arrangement did Granite enter
D) special purpose reinsurance vehicle. into with RSR?
A) facultative reinsurance
44) Which of the following statements is true regarding B) surplus share reinsurance
the information systems functional area of an insurance C) quota share reinsurance
company? D) excess of loss reinsurance
I. Computers and information systems are able to
perform some tasks that previously were performed 49) State insurance regulators require LMN Life
directly by employees. Insurance Company to maintain a separate account. The
II. Information systems can speed the processing of assets in the separate account would support the
policies by insurers. liabilities for which of the following products?
A) I only A) term life insurance
B) II only B) whole life insurance
C) both I and II C) fixed annuity
D) neither I nor II D) variable life insurance

45) The price per unit of insurance is called the 50) Gwen is in charge of accounting at Integrity
A) premium. Insurance Company. Integrity is a publicly- traded
B) loss adjustment expense. insurer. In describing her job, Gwen said, "There aren't
C) rate too many businesses where you are required to keep two
D) loss reserve.
 lOMoARcPSD|1595050

sets of book." Gwen's comment most likely refers to her

company 6) Reasons why a peril may be considered uninsurable
A) preparing accounting statements using statutory and therefore excluded from insurance contracts include
and GAAP accounting. which of the following?
B) preparing one set of records for the insurer's I. The losses from the occurrence of the peril may be due
managers and another set for the policyholders. to a predictable decline in value.
C) preparing one set of books using dishonest values and II. The losses from the occurrence of the peril may be
another set using current market values. incalculable and catastrophic.
D) preparing one set of accounting statements A) I only
considering investment income and another set of B) II only
accounting statements not considering investment C) both I and II
income. D) neither I nor II
Chapter 10 Analysis of Insurance Contracts
7) The policy provision requiring the filing of proof of
1) The portion of a property and liability insurance loss with the insurer is an example of a(n)
contract that contains information about the property or A) declaration.
activity to be insured is called the B) condition.
A) declarations. C) insuring agreement.
B) insuring agreement. D) miscellaneous provision.
C) exclusions.
D) conditions. 8) Which of the following statements about the definition
of the insured is (are) true?
2) What information is contained in the insuring I. In some cases, a person who is not specifically named
agreement of an insurance policy? may be classified as an insured.
A) a description of the property or life to be insured II. Under no circumstances can more than one person be
B) a summary of the major promises of the insurer named as an insured.
C) a summary of the obligations of the insured A) I only
D) a list of the property, losses, and perils that are not B) II only
covered C) both I and II
D) neither I nor II
3) Which of the following statements about "open-perils"
coverage is (are) true? 9) All of the following statements about endorsements
I. All losses are covered except those losses specifically and riders are true EXCEPT
excluded. A) They are usually written.
II. The burden of proof is on the insured to prove that a B) They can be used to add or delete policy provisions.
loss is covered. C) They normally take precedence over other conflicting
A) I only policy provisions.
B) II only D) They are primarily used to circumvent legislation
C) both I and II requiring specific policy provisions.
D) neither I nor II
10) Deductibles are not used in which of the following
4) The exclusion of flood in a homeowners policy is an type of insurance?
example of an A) life insurance
A) excluded activity. B) health insurance
B) excluded condition. C) property insurance
C) excluded property. D) disability income insurance
D) excluded peril.
11) One of the purposes that deductible are used in
5) Exclusions are used in insurance policies for all of the insurance policies is to
following reasons EXCEPT A) eliminate coverage for small claims.
A) to reduce moral hazard. B) place restrictions or limits on the insurer's promise to
B) to waive policy conditions. perform.
C) to eliminate coverage for uninsurable perils. C) provide broader coverage by increasing the number of
D) to eliminate coverage not needed by typical insureds. perils covered.
 lOMoARcPSD|1595050

D) exclude perils that are not insurable.

17) The primary purpose of coinsurance in property
12) The deductible used for automobile collision losses is insurance is to
an example of a(n) A) reduce moral hazard.
A) calendar year deductible. B) achieve equity in rating.
B) elimination period. C) minimize problems in settling claims.
C) straight deductible. D) eliminate small losses.
D) aggregate deductible.

13) Which of the following statements about a calendar-

year deductible is (are) true? 18) Which of the following statements about problems
I. It requires the insured to pay a specified amount of arising from the use of a coinsurance clause is (are) true?
each claim regardless of when the claim occurs during I. The amount of insurance should be periodically
the year and regardless of any previous claims during the evaluated to avoid a coinsurance penalty because of
year. inflation.
II. It is used only in policies which cover direct property II. An agreed value coverage option is one method used
losses. to solve the problem of values that fluctuate throughout
A) I only the policy term.
B) II only A) I only
C) both I and II B) II only
D) neither I nor II C) both I and II
D) neither I nor II
14) A provision in a disability income insurance policy
that requires a person to be disabled for 60 days before 19) Connie has a major medical policy with a $200
receiving benefits is an example of a(n) deductible. She is required to pay 25 percent of covered
A) calendar year deductible. expenses in excess of the deductible. The insurer will pay
B) grace period. 75 percent of expenses in excess of the deductible. If
C) elimination period. Connie has eligible medical expenses of $10,000, how
D) probationary period. much will be paid by her insurer?
A) $7,300
15) At what point in time must an insured meet the B) $7,350
coinsurance requirement in a property insurance policy C) $7,500
in order to avoid having to pay a portion of the loss? D) $9,800
A) only at the time of loss
B) only at the time when the policy is issued 20) Purposes of the coinsurance clause in health
C) only at the time of policy application insurance contracts include which of the following?
D) both at the time when the policy is issued and at the I. To reduce premiums.
time of loss II. To exclude coverage for certain medical procedures.
A) I only
16) David owns a commercial building with a B) II only
replacement cost of $4 million. The building is insured on C) both I and II
a replacement cost basis for $2.4 million under a fire D) neither I nor II
insurance policy that has an 80 percent coinsurance
clause. How much will David collect if the building 21) The purpose of other-insurance provisions is to
sustains a covered fire loss with a replacement cost of A) eliminate the need for deductibles.
$80,000? B) penalize those insureds who carry inadequate
A) $50,000 amounts of insurance.
B) $60,000 C) specify who will pay losses if the insurer is bankrupt.
C) $66,667 D) preserve the principle of indemnity.
D) $80,000
 lOMoARcPSD|1595050
22) Lisa has three fire insurance policies on her office
building. The policy from company A is for $400,000, and
the policies from companies B and C are for $100,000
each. If Lisa has a $360,000 loss, how much of the loss
will be covered by each policy if the loss is settled on a
pro rata basis by the insurers?
A) each policy: $120,000
B) policy A: $160,000; policies B and C: $100,000 each
C) policy A: $240,000; policies B and C: $60,000 each
D) policy A: $360,000; policies B and C: nothing
23) Kevin has three liability policies which provide for
contribution by equal shares if other insurance applies to
a loss. How much will each policy pay for a $3,000,000
liability judgment if policy A provides $500,000 of
coverage, policy B provides $1,000,000 of coverage, and
policy C provides $3,000,000 of coverage?
A) Each policy will pay $500,000, and Kevin must pay the
remaining $1,500,000.
B) Policy A will pay $500,000, policies B and C will each
pay $1,000,000, and Kevin must pay the remaining
$500,000.
C) Policy A will pay nothing, policy B will pay $1,000,000,
and policy C will pay $2,000,000.
D) Policy A will pay $500,000, policy B will pay
$1,000,000, and policy C will pay $1,500,000.
24) Helen and John both own automobiles on which they
carry liability insurance. If Helen is negligent and has an
accident while driving John's car with his permission,
how will each insurer respond to any liability judgment
against Helen?
A) The insurers will pay the judgment on a pro rata basis.
B) John's insurer will pay on an excess basis if Helen's
insurance is insufficient to cover the judgment.
C) Helen's insurance will pay on an excess basis if
John's insurance is insufficient to cover the judgment.
D) The policies will pay the judgment on the basis of
contribution by equal shares.
25) Kate is covered under her employer's group health
plan. She is also covered as a dependent under her
husband's group health plan. Under the usual
coordination-of-benefits provision, how will each
company respond to a claim filed by Kate?
A) Kate's plan is primary, and her husband's plan is
excess.
B) Her husband's plan is primary, and Kate's plan is
excess.
C) The plan of the person with the birthday earliest in the
year pays first, and the other plan is excess.
D) Each plan will pay 50 percent of the claim.
26) Eric's property was damaged in an accident. He
phoned his agent to see if the loss was covered under his
property insurance policy. The agent said, "As long as the
cause of loss is not specifically excluded in the policy, the
loss is covered." Based on the agent's answer, what type
of insuring agreement appears in the policy?
A) unconditional coverage
B) named-perils coverage
C) extended-perils coverage
D) "open-perils" coverage
27) Janet hit a wall causing a large dent in the fender of
her car. She was busy at work and delayed reporting the
damage to her insurer for 9 months. The insurer denied
the claim, stating, "Although such a loss is usually
covered, you are required under the terms of the contract
to provide prompt notification in case of loss." The
prompt notification requirement is an example of a(n)
A) declaration.
B) definition.
C) insuring agreement.
D) condition.
28) Mark reviewed his homeowners policy. He learned
that his personal property was insured on an actual cash
value basis. He would like replacement cost coverage on
his personal property. He contacted his agent who said,
"I'll simply add an amendment to your contract that
changes the basis of recovery to replacement cost." The
written provision the agent was referring to is called
a(n)
A) endorsement.
B) coinsurance clause.
C) binder.
D) deductible.
29) Under the terms of Jenny's auto insurance policy, she
must pay the first $500 of any physical damage loss to
her vehicle before her insurer will pay anything. What
type of deductible is included in Jenny's auto insurance
policy?
A) calendar-year deductible
B) waiting period
C) straight deductible
30) Shauna hurt her back and was unable to work. She
filed a claim under her disability income insurance policy.
Under terms of the policy, 60 days must pass between the
date of the injury and when the insurer begins to replace
lost earnings. This 60-day period is called a(n)
 lOMoARcPSD|1595050
A) grace period.
B) enrollment period.
C) probationary period.
D) elimination (waiting) period.
31) ABC Company insured its building on a replacement
cost basis for $700,000 under a property insurance
policy that included an 80 percent coinsurance clause.
The building had a replacement cost of $1 million when it
sustained a $40,000 loss. How much will ABC Company
receive from its insurer, assuming no deductible applies?
A) $33,333
B) $35,000
C) $36,000
D) $40,000
32) XYZ Company insured its building on a replacement
cost basis for $450,000 under a property insurance
policy that included an 80 percent coinsurance clause.
The building had a replacement cost of $500,000 when it
sustained a $50,000 loss. How much will XYZ Company
receive from its insurer, assuming no deductible applies?
A) $42,500
B) $45,000
C) $50,000
D) $56,250
33) Laura's major medical insurance policy includes a
$500 deductible. Laura is required to pay 20 percent of
covered expenses in excess of the deductible, and her
insurer will pay 80 percent of covered expenses in excess
of the deductible. Laura was hospitalized and her covered
medical expenses were $10,500. How much of the
$10,500 will be paid by the insurer?
A) $7,500
B) $7,900
C) $8,000
D) $10,000
34) James purchased liability insurance with a $100,000
limit from Insurer A. When Insurer A denied a claim that
James thought should be covered, he bought a second
liability insurance policy with a $150,000 limit from
Insurer B. Before he cancelled the policy with Insurer A, a
$60,000 loss occurred. If this loss is settled on a pro rata
basis, how much must each insurer pay?
A) Insurer A will pay $10,000 and Insurer B will pay
$50,000.
B) Insurer A will pay $20,000 and Insurer B will pay
$40,000.
C) Insurer A will pay $24,000 and Insurer B will pay
$36,000.
D) Insurer A will pay $40,000 and Insurer B will pay
$20,000.
35) Jane purchased a $50,000 liability insurance policy
from Insurer A. Fearing that she did not have enough
liability insurance, she purchased an additional $100,000
of liability coverage from Insurer B. As a result of a
negligent act, Jane was ordered to pay $75,000 in
damages. Assuming the coverage from Insurer A is
primary and the coverage from Insurer B is excess, how
will this claim be settled?
A) Insurer A will pay $50,000 and Insurer B will pay
$25,000.
B) Insurer A will pay $37,500 and Insurer B will pay
$37,500.
C) Insurer A will pay $25,000 and Insurer B will pay
$50,000.
D) Insurer A will pay nothing and Insurer B will pay
$75,000.
36) The purpose of a coordination-of-benefits provision
in group health insurance plans is to
A) determine which plan pays first if more than one
plan covers a loss.
B) determine which health care provider an insured may
use for his or her care.
C) determine if the calendar-year deductible has been
satisfied by the insured.
D) determine if the employee is eligible for coverage
under the group health plan.
37) As an alternative to coinsurance, rate discounts can
be given as the amount of insurance to value increases.
This alternative is called
A) graded rates.
B) agreed value coverage.
C) retrospective rating.
D) manual rating.
38) Mark owns a building that he insured for $90,000.
The replacement cost of the building is $100,000. Mark's
property insurance policy has an 80 percent coinsurance
clause and no deductible. If Mark's building is destroyed
by a covered peril, how much will Mark receive from his
insurer?
A) $80,000
B) $90,000
C) $101,250
D) $112,500
39) A special coverage policy is a policy that
A) has no exclusions.
B) provides open-perils coverage.
C) provides replacement cost coverage.
D) has coverage for multiple lines of insurance.
 lOMoARcPSD|1595050

40) The section of the insurance policy that includes 45) An insurance policy provision that specifies how a
provisions that qualify or limit the insurer's promise to property loss will be settled if more than one property
perform is the insurance policy covers the loss is the
A) definitions. A) insuring agreement provision.
B) insuring agreement. B) loss settlement provision.
C) exclusions. C) other insurance provision.
D) conditions. D) coinsurance provision.

41) An elimination (waiting) period is an example of a(n)

A) exclusion.
B) deductible.
C) other-insurance provision.
D) coinsurance provision.

42) Roger owns some farmland that he rents to a tenant.

The tenant lives in an old farmhouse on the property and
raises crops on the land. Roger is concerned about
possible legal liability if the tenant injures someone.
Roger requires the tenant to have liability insurance and
to add himself to the liability coverage through an
endorsement. Under the tenant's liability insurance,
Roger is a(n)
A) additional insured.
B) first-named insured.
C) second-named insured.
D) other insured.

43) Maria's property was damaged by an earthquake.

Maria is unsure whether earthquake is covered by her
property insurance. Which two sections of the property
insurance policy should Maria review to determine
whether earthquake damage to her property is covered?
A) exclusions and declarations
B) insuring agreement and exclusions
C) definitions and insuring agreement
D) conditions and declarations

44) In determining insurance limits and deductibles, an

important concept is that insurance should be used to
pay big losses rather than small losses. The objective is to
insure big losses that could cause financial ruin and to
exclude small losses that can be budgeted out of current
income. This concept is called the
A) law of large numbers.
B) efficient loss-cost concept.
C) large-loss principle.
D) retention-transfer tradeoff.
 lOMoARcPSD|1595050

Chapter 19 The Liability Risk 7) Damages awarded for losses that can be determined or
measured are
1) Which of the following statements about torts is (are) A) special damages.
true? B) general damages.
I. The person who is injured or harmed by a tort is called C) punitive damages.
a plaintiff or claimant. D) comparative damages.
II. The punishment for committing a tort is damages in
the form of money. 8) Which of the following statements about monetary
A) I only damages awarded by a court is (are) true?
B) II only I. The purpose of general damages is to provide benefits
C) both I and II for medical expenses or loss of earnings.
D) neither I nor II II. The purpose of punitive damages is to punish the
tortfeasor so that others are deterred from committing
2) Which of the following is an intentional tort? the same wrongful act.
A) slander A) I only
B) negligence B) II only
C) strict liability C) both I and II
D) murder D) neither I nor II

3) A situation in which a person is held legally liable even 9) Heather sued Robert for injuries suffered in an
though fault or negligence cannot be proven is an automobile accident. Based upon the facts presented, the
example of jury concluded that Heather was 40 percent at fault in
A) general damages. the accident and Robert was 60 percent at fault. Under
B) comparative negligence. the common law doctrine of contributory negligence, the
C) an intentional tort. jury should award Heather
D) strict liability. A) nothing.
B) 40 percent of her actual damages.
4) Failure to exercise the degree of care required by law C) 60 percent of her actual damages.
to protect others from harm is called D) 100 percent of her actual damages.
A) premeditated liability.
B) vicarious liability. 10) Which of the following statements about comparative
C) punitive damages. negligence laws is (are) true?
D) negligence. I. Under the pure rule, any negligence by the plaintiff
automatically bars recovery for damages.
5) All of the following are elements of negligence EXCEPT II. Under the 50 percent rule, parties who are equally at
A) the ability to pay damages. fault are each allowed to recover damages.
B) the failure to perform a legal duty to use reasonable A) I only
care. B) II only
C) damages or injuries to a claimant. C) both I and II
D) proximate cause between the negligent act and the D) neither I nor II
injury or harm that occurs.
11) Nancy was injured when she drove her car through a
6) Which of the following statements about the elements stop sign and was struck by Philip's car.
of negligence is (are) true? Philip saw Nancy and could have stopped. However, he
I. The negligence of the tortfeasor may arise from a failed to do so since he had the right-of-way. Nancy can
failure to act. recover damages from Philip under which of the
II. The damage that results must be in the form of following legal doctrines?
property damage. A) vicarious liability
A) I only B) the last clear chance rule
B) II only C) contributory negligence
C) both I and II D) the assumption of risk doctrine
D) neither I nor II
 lOMoARcPSD|1595050

12) A common situation involving strict liability includes D) neither I nor II

which of the following? 21) The doctrine of respondent superior applies to a(n)
A) operating a motor vehicle A) parent's liability for a negligent child.
B) blasting operations B) pet owner's liability for the pet.
C) manufacturing a product C) employer's liability for a negligent employee.
D) mining operations D) manufacturer's liability for a faulty product.

13) Which of the following may give rise to imputed 22) Situations under which parents can be held liable for
negligence? the actions of a child include which of the following?
A) employer-employee relationships I. The child uses a parent's gun to injure someone.
B) injury to a trespasser II. The child is acting as an agent of the parent.
C) sole proprietorships A) I only
D) attractive nuisance situations B) II only
C) both I and II
14) All of the following requirements must be met to D) neither I nor II
satisfy the doctrine of res ipsa loquitur EXCEPT Answer: C
A) The injured party has not contributed to the accident Question Status: Previous Edition
in any way.
B) The injured party must prove negligence on the 23) Under one doctrine, a person who understands the
part of the defendant. danger inherent in an activity cannot recover damages in
C) The event is one that normally does not occur in the the event of injury from the activity. This doctrine is
absence of negligence. called the
D) The defendant has exclusive control over the A) contributory negligence doctrine.
instrumentality causing the accident. B) assumption of risk doctrine.
C) comparative negligence doctrine.
15) Under certain conditions, the wrongful acts of one D) fellow servant doctrine.
person can be attributed to another person. This practice
is called 24) One tort reform permits manufacturers to assert that
A) imputed negligence. as long as the product conformed to the prevailing
B) mediation. technology and production methods at the time it was
C) comparative negligence. produced, it cannot be considered a defective product
D) strict liability. today. This defense is called the
A) collateral source rule.
19) What is the intent of the family purpose doctrine? B) state of the art defense.
A) to impose liability on children for the care of elderly C) strict liability defense.
parents D) privity of contract rule.
B) to impose liability on the owner of an automobile
for the negligence of immediate family members 25) Shareholders and employees harmed by the
operating the automobile negligent acts and deceptive statements of company
C) to impose liability on a parent for any negligence leaders may file lawsuits against the company leaders.
caused by a child Company leaders are covered for such claims under
D) to impose strict liability on the owner of a wild animal which type of insurance?
for any injuries caused by the animal A) employment practices liability insurance
B) employee benefit liability insurance
20) Which of the following statements about the C) directors and officers liability insurance
immunity of governmental entities is (are) true? D) general liability insurance
I. Governmental entities are more likely to be immune
from liability when performing proprietary functions 26) All of the following are proposed solutions to the
than when performing governmental functions. medical malpractice problem EXCEPT
II. Many courts have eliminated the immunity of A) shortening the statute of limitations for filing lawsuits.
government entities. B) eliminating arbitration panels to resolve disputes.
A) I only C) placing limitations on contingent fees charged by
B) II only attorneys.
C) both I and II D) placing limitations on damage awards.
 lOMoARcPSD|1595050

27) The Sarbanes-Oxley Act requires which of the

following? 33) James was injured in an auto accident caused by
I. Accounting firms auditing a company's books must another motorist's negligence. To reimburse him for his
provide other major services to the firm besides auditing hospital bills and lost earnings, items which can be
services. specifically itemized, James will receive
II. The company's Chief Executive Officer (CEO) must A) punitive damages.
swear to the accuracy of quarterly and annual financial B) special damages.
reports. C) imputed damages.
A) I only D) general damages.
B) II only
C) both I and II 34) James was injured in an auto accident caused by
D) neither I nor II another motorist's negligence. He received severe facial
lacerations and injured his back in the accident. In
28) Arguments in favor of reforming the civil justice payment for his pain, suffering, and disfigurement, losses
system include which of the following? which cannot be specifically itemized, James will receive
I. There is often a long delay in settling lawsuits. A) punitive damages.
II. Compensation awards have decreased significantly B) special damages.
over the past two decades. C) imputed damages.
A) I only D) general damages.
B) II only
C) both I and II 35) Michelle had major abdominal surgery. Months after
D) neither I nor II the surgery, she still did not feel well. When she was
operated on again, the surgeon discovered two sponges
29) All of the following are examples of tort reform that were not removed at the conclusion of the first
proposals EXCEPT operation. Michelle should be able to collect damages
A) modifying the collateral source rule. without having to prove negligence under the doctrine of
B) eliminating caps on noneconomic damages. A) joint and several liability.
C) regulation of attorney fees. B) res ipsa loquitor.
D) imposing penalties to deter frivolous lawsuits. C) contributory negligence.
D) uberrimae fidei.
30) A defendant who is only slightly liable may be
required to pay the full amount of damages under which 36) Francis opened a store. She knows that customers
of the following? who come to the store may be injured on the premises
A) the joint and several liability rule and hold her responsible for their injuries. Under
B) the collateral source rule common law, business customers in the store Francis
C) arbitration opened are considered
D) res ipsa loquitor A) aliens.
B) licensees.
31) Alternative techniques for resolving legal disputes C) trespassers.
without litigation include which of the following? D) invitees.
I. Arbitration
II. Mediation 37) Malcolm was involved in an auto accident. He was
A) I only judged to be 20 percent at fault in the accident, and the
B) II only other party was judged to be 80 percent at fault.
C) both I and II Malcolm's actual damages were $40,000. Under a pure
D) neither I nor II comparative negligence rule, how much will Malcolm
receive for his injuries?
32) All of the following are categories of torts EXCEPT A) $8,000
A) intentional torts. B) $24,000
B) breach of contract. C) $32,000
C) strict liability. D) $40,000
D) negligence.
 lOMoARcPSD|1595050

38) Louise was in a hurry and tried to cross the street in

the middle of the block rather than at a street corner. A 42) Compensatory damages include
car struck her. Even though Louise placed herself in A) general damages and special damages.
danger, she may still be able to collect for her injuries if B) special damages and punitive damages.
the driver had an opportunity to avoid hitting her but C) punitive damages and general damages.
failed to do so. This rule is called the D) general damages, special damages, and punitive
A) last clear chance rule. damages.
B) collateral sources rule.
C) alternative dispute resolution rule. 43) Congress passed the Sarbanes-Oxley Act to address
D) joint and several liability rule. which of the following problems?
A) deficiencies in the tort liability system
39) Bruce believes a local manufacturer is responsible for B) corporate fraud and lax corporate governance
contaminating some land he owns. He filed suit against C) inefficiencies in state regulation of the insurance
the company. Rather than have the case go to court, the industry
manufacturing company's legal team suggested D) inadequate availability of certain insurance coverages
mediation or arbitration to settle the case. Methods that
are employed to resolve legal disputes without litigation, 44) In the context of medical malpractice, what is a
such as mediation, are called "never event"?
A) collateral source rules. A) A medical condition that despite the best screening
B) alternative dispute resolution techniques. and technology cannot be detected.
C) joint and several liability techniques. B) A pandemic that quickly spreads and infects many
D) comparative negligence rules. people.
C) A medical error that should never occur.
40) Jan was injured in a work-related auto accident. She D) An event for which doctors and medical facilities
sued the other driver, and the case went to court. While cannot be held legally responsible.
questioning Jan, the defendant's lawyer asked if her
injuries and lost earnings were covered under workers 45) Steve was involved in an auto accident. Both drivers
compensation. Jan's lawyer objected to the question. The were partially at fault for the accident. Steve's actual
judge ruled the question was improper and instructed damages were $50,000. He was judged to be 60 percent
the jury to disregard the question. Based on the judge's at fault. If Steve's state has a pure comparative negligence
reaction to the question, we can conclude that which of law, how much will Steve collect?
the following rules is in force where this trial took place? A) $0
A) the joint and several liability rule B) $20,000
B) the last clear chance rule C) $30,000
C) the comparative negligence rule D) $50,000
D) the collateral source rule
46) Steve was involved in an auto accident. Both drivers
41) Trisha was injured when the delivery truck for a local were partially at fault for the accident. Steve's actual
furniture store struck her. The delivery driver claimed damages were $50,000. He was judged to be 60 percent
the brakes of the delivery truck failed, causing the at fault. If Steve's state has a 51 percent rule for
accident. Trisha filed suit, and in her lawsuit named the comparative negligence, how much will Steve collect?
delivery driver, the furniture store, the service station A) $0
responsible for vehicle maintenance, and the B) $20,000
manufacturer of the vehicle. Even though the C) $30,000
manufacturer of the vehicle may be only 1 percent D) $50,000
responsible for the accident, it may be required to pay a
large percentage of the damages under the 47) A legal wrong for which the law allows a remedy in
A) collateral source rule. the form of money damages is a
B) assumption of risk rule. A) crime.
C) joint and several liability rule. B) breach.
D) last clear chance rule. C) misdemeanor.
D) tort.
 lOMoARcPSD|1595050

50) One tort reform proposal is capping noneconomic

damages. Noneconomic damages include
48) One requirement for proving that an act was A) payment for time missed from work.
negligent is the existence of an unbroken chain of events B) payment for the cost of a hospital stay.
between the act and the injury or harm that occurred. C) payment for pain and suffering.
This unbroken chain of events is called D) payment for the cost of care provided by a physical
A) condition precedent. therapist.
B) cause and effect.
C) proximate cause.
D) condition subsequent. 51) Under state workers compensation programs,
employers may not use common law defenses to defend
49) Under a dram shop law, a business may be held liable against claims of workers who are injured on the job. In
for damages resulting from such cases, proof of a worker's injury is proof of
A) the sale of alcohol. responsibility of the employer. Because of this
B) the creation of an unsafe work place. characteristic, workers compensation is an example of
C) the sale of prescription drugs. A) personal injury.
D) the creation of a hostile work environment. B) absolute liability.
C) comparative negligence.
D) tort liability.