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1) All of the following statements regarding loss exposures are true, EXCEPT:

a. There would be no need to transfer the costs of losses if there were no exposures to loss.
b. For a loss exposure to exist, there must be the possibility of a loss. c. It is necessary for a loss to
occur for a loss exposure to exist. d. Every home has a fire loss exposure.
2) State insurance departments regulate insurance rates to protect consumers against rates that are all of the
following, EXCEPT:

a. Excessive
b. Inadequate
c. Class specific
d. Unfairly discriminatory
3) What states that as the number of similar but independent units increases, the relative accuracy of
predictions about future outcomes based on these exposures units also increases?

a. The principle of indemnity

b. The principle of reciprocal pricing
c. Loss trending and forecasting
d. The law of large numbers
Whole life insurance

a. Provides coverage for a specified period such as 5 or 10 years.

b. Lapses when the policyholder reaches age 65.
c. Is primarily an investment vehicle.
d. Accrues a cash value.
All of the following are types of private insurers, EXCEPT:

a. Stock insurers
b. Mutual insurers
c. Participating insurance consortiums
d. Reciprocal insurance exchanges
The direct and indirect costs of insurance include which of the following?

a. Premiums paid by insureds

b. Increased lawsuits
c. Operating costs of insurers
d. All of the above

Willie's floral shop was damaged by fire and the business was closed for six months. Willie had property
insurance to cover the fire damage, but which one of the following types of coverage did he need to cover
his loss of net income during the six-month restoration period?

a. Crime insurance
b. Fire and allied line insurance
c. Business income insurance
d. Leasehold insurance
All of the following are ways that state insurance departments regulate and protect consumers, EXCEPT:

a. Insurers must maintain a certain ratio of agents to residents in an area

b. Insurers must be licensed to write insurance policies in a given state
c. Insurers must meet certain tests of financial strength
d. Insurers must comply with laws on marketing, underwriting, and claims practices
Joan Appleton has purchased a new car, and when registering her vehicle, she is told that she must provide
proof of liability insurance. Which one of the following benefits of insurance applies to Joan's situation?

a. Support for credit

b. Satisfaction of legal requirements
c. Efficient use of resources
d. Reduction of social burdens
Term life insurance

a. Provides lifetime protection.

b. Accrues a cash value.
c. Provides maximum protection for the lowest cost.
d. Allows the policyholder to borrow against policy savings.
n insurance, the term that means restoring a party who has had a covered loss to the same financial position
that the party held before the loss occurred is

a. Subrogate.
b. Recoup.
c. Indemnify.
d. Rectify.
All of the following are characteristics of ideally insurable loss exposures, EXCEPT:

a. Losses that are definite and measurable

b. Losses that are accidental
c. Large number of similar exposure units
d. Large concentration of financial capacity
Taking measures to prevent some losses from occurring or to reduce the financial consequences of loses
that do occur is known as

a. Loss control.
b. Exposure analysis.
c. Underwriting.
d. Insurance.
Government insurance programs exist because

a. The government has expertise in handling insurance claims.

b. The government has the necessary financial resources.
c. The government has infrastructure and staff to provide insurance.
d. The government has legal representatives in every state of the union.

What is the process by which insurers decide which potential customers to insure and what coverage to
offer them?

a. Reinsuring
b. Marketing
c. Prospecting
d. Underwriting
Pam operates a home business that requires her clients to come to her house. The possibility of one of
Pam's clients tripping on a step leading to Pam's house and injuring herself is a

a. Property loss exposure.

b. Liability loss exposure.
c. Personnel loss exposure.
d. Human loss exposure.
All of the following are types of property insurance, EXCEPT:

a. Fire and allied lines

b. Crime
c. Business income
d. Directors and officers
A mutual insurance company is owned by

a. Independent investors.
b. Policyholders.
c. State insurance departments.
d. Mutual funds.

Which one of the following is most likely to have the characteristics of an ideally insurable loss exposure?

a. Explosion of an industrial factory steam boiler

b. Sun damage to an exterior paint finish
c. Physical damage to a lunar land rover
d. Termite damage to a home
The possibility of Chuck's house being damaged by fire is

a. A property loss exposure relating to real property.

b. A property loss exposure relating to personal property.
c. A noninsurable loss exposure.
d. A commercial loss exposure.

All of the following are types of insurance provided by the federal government EXCEPT:

a. Flood insurance
b. Crop insurance
c. Tenants insurance
d. Social Security
An insurance company pays for covered losses and, in effect, distributes the costs of losses among all

a. Insurers in a state.
b. Insureds.
c. Members of society.
d. Claimants.
John has worked for Alloto, Inc. for 25 years and is considering retiring within the next two years. John's
retirement is an example of

a. A personnel loss exposure for Alloto, Inc.

b. A human loss exposure for Alloto, Inc.
c. A liability loss exposure for Alloto, Inc.
d. A loss transfer loss exposure for Alloto, Inc.
Some federal government insurance programs provide coverage for loss exposures that private insurers
have avoided largely because of the potential for catastrophic losses. An example of such a program is

a. Workers compensation insurance funds

b. Unemployment insurance programs
c. Automobile insurance plans
d. The National Flood Insurance Program
Why would insurance regulators have a goal of assuring that the premiums charged by insurers are

a. To maintain insurer solvency

b. To eliminate the potential of a monopoly
c. To protect consumers from high insurance rates
d. To promote equity among insurers
A reinsurance company

a. Is formed to write all or part of the insurance for a parent company.

b. Provides insurance for loss exposures that private insurers are unwilling to provide.
c. Transfers losses to a primary insurer.
d. Accepts loss exposures from a primary insurer.
Workers compensation insurance is offered through a residual market plan in some states, which means

a. It is a state insurance plan that competes with private insurers to provide the insurance.
b. It is a state fund that provides a system to pay the claims of insolvent insurers.
c. It is a program that makes insurance available to those who cannot obtain coverage because
private insurers will not voluntarily provide it.
d. It is an insurance plan that is the only source of workers compensation insurance allowed in
the state.
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.
A ratemaking concept in which rates are based on calculated loss experience and insureds with similar
characteristics are placed in the same rating class is called

a. Unfair discrimination.
b. Premium differential.
c. Actuarial equity.
d. Social equity.
All states require insurance agents to be licensed to transact insurance business in the state. Further, agents
must meet continuing education requirements to maintain their licenses. All of these requirements have
what purpose?

a. To control the number of agents that transact business in a state to reduce the chance of over-
aggressive competition.
b. To ensure that these insurance company representatives have a prescribed minimum level of
insurance knowledge.
c. To improve the image and public perception of the insurance profession.
d. To maintain a level of vigilance in protecting insurance companies against fraudulent behavior by
the public.
How does a stock insurance insurer differ from a reciprocal insurance exchange?

a. Stockholders own a stock company.

Subscribers own a reciprocal insurance exchange .
b. A stock company provides insurance to its policyholder-owners. A reciprocal insurance provides
insurance to investors.
c. Each is owned by stockholders; however, the reciprocal insurance exchange provides coverage to
d. Each is formed to provide profit to investors; however, the stock insurer is managed through a
board of directors.
The Social Security program can be simply described as

a. A federal program that provides retirement, survivorship, disability, and medical benefits to
eligible individuals.
b. A federal welfare benefits program that provides a minimum level of housing, food, and income to
eligible individuals and families.
c. A state unemployment insurance program that provides income for a limited period of time to
workers who become unemployed.
d. A state program that provides a base level of income for retirement based on the level of income
and duration of employment.
The type of insurance rating law that requires rate approval by the state insurance department before the
rates can be used is

a. Flex rating law.

b. Open competition law.
c. File-and-use law.
d. Prior-approval law.
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. Licensing the excess and surplus lines brokers that transact business with the unlicensed
d. Approving the policy forms and rates used by the unlicensed insurers.

Which one of the following provides a step-by-step explanation of how insurance rates are developed?

a. An actuary
1. Analyzes the loss trends for each rating classification
2. Recommends rate increases for each classification
3. Provides recommendations through rating bureaus
b. An actuary
1. Predicts future losses based on factors such as weather patterns and litigation trends
2. Determines required rate increases by classification
c. The insurer
1. Analyzes past loss increases
2. Determines the profit margin required
3. Distributes the loss increases and required profit among all insureds
d. The insurer
1. Develops each insurer's share of predicted losses
2. Adds an amount sufficient to cover predicted expenses and a margin for error, profit, and

One of the methods used by regulators to ensure insurance company solvency is through the Insurance
Regulatory Information System (IRIS), which is

a. The licensing system required for insurance companies that transact business in a state.
b. The licensing process for alien insurers that are incorporated in another country.
c. A periodic examination conducted by a team of state examiners, working at the insurer's home
office to review activities including claims, underwriting, marketing, and accounting procedures.
d. A system that gathers data from insurers financial statements and develops financial ratios to
determine an insurers' overall financial condition.

The National Association of Insurance Commissioners (NAIC) created a uniform financial statement for
property and liability insurance companies. The purpose of the uniform statement is to

a. Ensure that state insurance departments not mistake these companies for life insurers.
b. Provide accounting expertise for those state insurance departments that do not have staff actuaries.
c. Simplify the state insurance department's task of comparing the financial reports of many different
d. Capture the essential criteria required for rate regulation
In a northeastern state, Stable Insurance, an old and established insurance company that writes homeowners
insurance in the northeast experienced three unprofitable years in a row. Large winter storms resulted in
damage to homes that Stable insured. The losses for the last three years have drained the company's
financial resources.

At the end of the third year of the losses, Stable declared bankruptcy when it became insolvent. Stable was
unable to pay for the claims that resulted from the last storm.

Ted Van Wrinkle is a policyholder with Stable who filed a claim as a result of the last storm. Ted's house
was damaged when the weight of snow and ice collapsed a portion of his roof. How will Ted be paid for
his loss?

a. Ted must join as a creditor in Stable's bankruptcy and receive a portion of his loss.
b. The guaranty fund in Ted's state will pay for Ted's losses.
c. Ted will not be paid because there is no system to cover insolvency caused by underwriting losses.
d. The state government will provide compensation to Ted through the state's FAIR plan.
An automobile insurance policyholder has complained that her insurance premium is higher than her
neighbor's premium. Both the policyholder and her neighbor have insurance with the same company, and
they have identical vehicles.

The policyholder feels that she is the subject of unfair discrimination. As the policyholder's agent, you
know the policyholder has been responsible for several small auto accidents. The policyholder has
mentioned that her neighbor has had no accidents or violation in the last three years.

You must explain to the policyholder the objective of rate regulation ensuring that rates are not unfairly
discriminatory, as it applies in her case. Which one of the following is an accurate explanation?

a. Insureds with similar characteristics are usually placed in the same class and charged the same rate
unless social equity required modification in that rate structure. This has probably occurred in your
b. Insureds with similar characteristics are placed in the same class and charged the same rate.
However, your accidents have probably placed you in a different classification. Your premium is
based on the loss experience for policyholders in your classification.
c. Your neighbor has probably received a credit based on the length of time he has had his
policy with the company. This is not unfairly discriminatory because it is available to all policyholders
over time.
d. Your neighbor has been placed in a preferred category of policyholders, which gives him
rights and privileges that you do not have. Your neighbor has been given a rate reduction based on
excess profits that have been returned to policyholders.
Some communities in the United States celebrate holidays with firecrackers. Firecracker vendors erect
stands in the parking lot of shopping centers before the holidays.

One shopping center owner sponsoring a firecracker vendor's booth found that his insurance did not cover
the exposure. 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.
The National Association of Insurance Commissioners (NAIC) has identified a problem that affects all
states. Unscrupulous auto body shops are:

Hiring thieves to steal cars, cross state lines, and deliver the stolen vehicles to the shops
Insuring the vehicles and later claiming they are stolen
Changing the vehicle identification number (serial number)
Reselling the vehicles

The NAIC would like to address these issues uniformly across the United States by introducing tough laws
to punish the body shops for claim fraud, but the NAIC members recognize that there are significant
differences from one state to the next.

How can the NAIC address the problem?

a. Develop a Model Bill for the proposed solution and distribute it to the states for possible
b. Require each state insurance commissioner to draft a proposed solution to the problem
tailored to his or her state.
c. Draft a federal bill and lobby for legislative action to address the problem uniformly.
d. Circulate a petition among all state legislators to join in a countrywide campaign to pass
tough laws in each state.
Which one of the following types of financial statements shows the financial position of an insurance
company at any particular time?

a. Income statement
b. Balance sheet
c. Sales report
d. Cash flow report
Which one of the following is part of written premiums?

a. Investment income
b. Policyholders surplus
c. Unearned premiums
d. Underwriting expenses
An insurer's financial statement shows a loss reserve and an unearned premium reserve. These reserves are
each part of the insurer's

a. Policyholders' surplus.
b. Unadmitted assets.
c. Admitted assets.
d. Total liabilities.
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
All of the following parties are likely to monitor an insurer's financial performance, EXCEPT:

a. Regulators
b. Agents
c. Claimants
d. Shareholders
Amounts designated by insurers to pay claims for losses that have already occurred are called

a. Acquisition expenses.
b. Loss adjustment expenses.
c. Loss reserves.
d. Unearned premium reserves.
An insurer's income statement shows amounts for all of the following for a particular period, EXCEPT:

a. Earned premiums
b. Policyholders surplus
c. Incurred losses
d. Underwriting expenses
Brown Insurance Company has the following expenses:

Licenses, taxes, and fees $70,000

Claim staff salaries $100,000
Agents' commissions $200,000
Advertising costs $50,000
Rent and utilities $60,000

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

a. $250,000
b. $300,000
c. $350,000
d. $450,000
The financial report for Apex Insurers contains the following information:

Admitted assets $500,000

Unadmitted assets $400,000
Liabilities $300,000

What is the amount of Apex Insurers' policyholders surplus?

a. $100,000
b. $200,000
c. $400,000
d. $600,000
Old Faithful Insurer has written premiums of $1,400,000 and policyholders' surplus of $400,000. What
does the capacity ratio indicate about Old Faithful Insurer?

a. Financial weakness
b. Financial strength
c. Operating strength
d. Operating weakness Answer :A
World Insurance Company has the following assets:

Cash $ 50,000
Stocks $400,000
Bonds $200,000
Real Estate $500,000
Furniture and office equipment $70,000
Premium balance due in less than 90 days $20,000
Premium overdue more than 90 days $10,000

What is the amount of World's total admitted assets?

a. $450,000
b. $650,000
c. $1,170,000
d. $1,250,000
INS Insurer's earned premiums are $1,800,000 for the year. Its losses and expenses are $1,730,000. What
type of financial performance did INS Insurer experience for the year?

a. A net operating gain of $70,000

b. A net underwriting gain of $70,000
c. A net operating loss of $1,730,000
d. A net operating gain of $1,800,000
Mid-State Painting Company owns vans, trucks, and cars that carry workers,
supplies, and equipment to worksites. On November 1, Mammoth Insurance
Company issued a business auto policy with a one-year period to Mid-State
Painting Company. The premium for the policy is $24,000.
What was the written premium for Mid-State Painting Company's business auto policy as of December 31?

a. $4,000
b. $6,000
c. $20,000
d. $24,000
What was the unearned premium for Mid-State Painting Company's business auto policy as of December
a. $4,000
b. $6,000
c. $20,000
d. $24,000
The financial report for Hometown Insurer contains the following information:

Earned premiums $4,000,000

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

a. 20%
b. 30%
c. 50%
d. 75% Answer : D
What is Hometown Insurer's expense ratio?

a. 20%
b. 40%
c. 50%
d. 75%
What is Hometown Insurer's combined ratio?

a. 75%
b. 95%
c. 105%
d. 115%
What is Hometown Insurer's investment income ratio?

a. 10%
b. 20%
c. 25%
d. 50%
What is Hometown Insurer's overall operating ratio?

a. 75%
b. 90%
c. 105%
d. 115%
In what specific type of marketing system do insurance companies advertise directly by mail, radio,
television, Internet, or with the communications of an association, a credit card company, or a bank?

a. A direct writing system

b. A direct approach system
c. A direct brokerage system
d. A direct response system
Advertising by independent agencies promotes

a. Brand recognition of the companies represented.

b. The agency rather than the insurers it represents.
c. Symbols used to increase recognition of the insurers represented.
d. Attention to the prices of the policies offered.
An independent agent received his monthly commissions for the new policies he has sold. Even though he
wrote twenty 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 policies written by the agent might
have been cancelled with the unearned portion of the commission returned to the insurance
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 reduced.
d. The agent is a salaried employee of the insurance company and receives only contingent
commissions. Answer : A
The laws of agency impose all of the following specific duties on all agents, EXCEPT:

a. Prudence
b. Accounting
c. Loyalty
d. Relaying information
Claire is a producer who is self-employed and represents a group of related insurers called the United
Insurance Group. She has no right of ownership of the expiration list of insureds. In what distribution
system does she operate?

a. Exclusive agency
b. Independent agency
c. Direct writing
d. Direct response
Peter is a salaried producer who is an employee of ABC Insurance Company. In what distribution system
does he operate?

a. Exclusive agency
b. Independent agency
c. Direct writing
d. Direct response
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 principle to act on the principal's behalf
The authority that the principal specifically grants the agent is called

a. Implied authority.
b. Express authority.
c. Apparent authority.
d. Conditional authority.
An independent business owner or firm that sells insurance by representing customers rather than insurance
companies is which one of the following?

a. An independent adjuster
b. An underwriter
c. An insurance broker
d. An insurance carrier
To obtain a state agent's license, a person must meet several requirements that include which one of the

a. Spend a specified amount of time as a customer service representative.

b. Obtain an agency contract offered by an insurance company.
c. Acquire a bond identifying the state as the principal.
d. Pass an examination and meet other qualifications of the state insurance department.
The president of an insurance company that markets through independent agents is concerned that agents in
one geographic area are not motivated to seek profitable business. Other agents in this geographic area
have a better reputation for producing profitable business.

Within the insurance company, whose job is it to fix this problem?

a. The production underwriter's

b. The staff underwriter's
c. The producer's
d. The marketing representative's
Producers are not allowed to pay a portion of the premiums for a policy or give any commission to a
policyholder. Actions of this type are called

a. Tie-in sales
b. Contingent commissions
c. Misrepresentation of dividends
d. Rebating
Which one of the following is the principal's primary duty to the agent?

a. To pay the agent for services performed

b. To act as the agent's legal representative
c. To educate and train the agent
d. To act on behalf of the agent in court proceedings
Insurers using direct response marketing attract new customers through all of the following methods,

a. Recognition of local agents

b. Extensive advertisement
c. Established customer bases
d. Word-of-mouth advertising
The managers of an independent agency are hoping to earn contingent commissions from several insurers
at the end of the year. What should the agency managers attempt to do to earn contingent commissions?

a. Reduce the number of homeowners policies written for houses in urban areas compared to
the homeowners policies written for houses in rural areas.
b. Reduce the number of employees required to acquire and service the policies in the agency.
c. Increase the premium volume and profitability level of the agency's business with those
d. Increase the level of customer service provided to policyholders and claimants.
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. d.
The agency contract states the scope of the agency's authority to conduct business for the
Authority that the insurance company specifically grants to an agent is called

a. Binding authority
b. Express authority
c. Implied authority
d. Apparent authority

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
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
b. Profit sharing
c. Salary
d. Sales commission
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 the potential customers to contact the
insurer to purchase insurance
Which one of the following individuals represents the insurance purchaser?

a. An agent
b. A solicitor
c. A customer service agent
d. A broker
Insurance companies attempt to motivate producers to sell the types of business the companies want to
acquire. Which one of the following would motivate producers to sell the desired type of business?

a. Reduce commissions if sales goals are not achieved.

b. Hold sales contests to encourage the type of sales activity.
c. Provide additional staff to help with the processing.
d. Offer subscriptions to educational services for the producers.
The laws of agency impose all of the following specific duties on agents, EXCEPT:

a. Profitability
b. Obedience
c. Loyalty
d. Accounting
RipTide Insurance Company has formed an alliance with Local Bank and U-Betcha Used Car Sales. When
U-Betcha sells a car, the sales person directs the customer to Local Bank for the loan and RipTide for
insurance. If the customer transacts business with all three organizations, the customer will receive reduced
auto rates.

Would this be considered to be an unfair trade practice by RipTide?

a. Yes, it is an unfair trade practice to tie the purchase of insurance to some other sale or
financial arrangement.
b. Yes, offering a preferred rate to a customer as described is considered to be rebating.
c. No, businesses interact in this way as a regular practice.
d. No, this is not deceptive or unfair to the applicants or insureds.
An insurance agent wrote insurance policies for a number of military service veterans who were satisfied
with the coverage they received and the price they paid for the coverage. Subsequently, the agent ran an ad
in a local newspaper stating that the insurance policies offered by his agency are "Veteran Approved

Why would this be considered misrepresentation or false advertising?

a. The statement misrepresents the benefits, conditions, or terms of the insurance policies.
b. The statement uses a name or title for the insurance policies that misrepresents the true
nature of the policies.
c. The statement indicates that sales are ties to other benefits.
d. The statement makes an illegal reference to a government entity in an insurance sale.
Love, Stack, and Jones Insurance sells insurance coverage for small businesses. This office of insurance
producers represents only one insurer, and the producers work on commission with bonuses. Love, Stack,
and Jones Insurance does not own the expiration list for the policies it sells and services.

What type of marketing (or distribution) system does Love, Stack, and Jones represent?

a. Independent agency system

b. Exclusive agency system
c. Direct writing system
d. Direct response system
All of the following are sources of information underwriters use as they gather information for
underwriting, EXCEPT:

a. Producers
b. Government records
c. Inspection reports
d. Educational records
How do underwriting guidelines help an insurer achieve its objectives?

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 a uniform set of 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
Insurers screen applicants to determine which ones they desire to insure. If insurers do not properly select

a. Their profits will be excessive in comparison to the premiums collected.

b. Some insureds might be allowed to purchase insurance at prices that do not adequately
reflect their loss exposures.
c. They will have an excessive number of new policies, and their expenses related to writing
the new policies will be excessive.
d. The entire group of policyholders written will be substandard.

Why would an underwriter modify the rate charged for the coverage provided when evaluating an
application for insurance?

a. Because treaty reinsurance in unavailable for the exposures indicated

b. To address the moral hazards the underwriter identified during investigation
c. To better match the rate to the characteristics of the risk
d. Because the applicant is not acceptable for coverage
How does an expert system assist underwriters in the underwriting process?

a. It automatically assembles the necessary information to underwrite an application.

b. It helps ensure that no necessary information is overlooked.
c. It provides management reports to ensure underwriters' compliance with guidelines.
d. It monitors the results of the decisions made and suggests changes in underwriting guidelines

One of the roles of underwriting management is arranging reinsurance. Explain how treaty reinsurance
helps an insurer meet its objectives.

a. The reinsurer automatically assumes a portion of all of the primary insurer's losses that are
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 assure
d. The reinsurer assumes a portion of the losses from all policies that have been specifically
listed and insured under the treaty.

The amount of business an insurer is able to write based on a comparison of the insurer's written premium
to the size of its policyholders' surplus is

a. Capacity
b. Adverse selection
c. Risk selection
d. Combined ratio
The amount of business an insurer is able to write based on a comparison of the insurer's written premium
to the size of its policyholders' surplus is

a. Capacity
b. Adverse selection
c. Risk selection
d. Combined ratio Answer :D
How do states prohibit unfair discrimination by insurers?

a. By reviewing each policy cancellation or no renewal and the justification for the insurer's action
b. By maintaining a channel for policyholder complaints
c. By identifying it as an unfair trade practice in state insurance laws
d. By examining insurers' mission statements and objectives
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
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 red line
Which one of the following statements is true regarding types of rates used by insurers?

a. Class rates apply to all insureds in the same rating category. b. Merit rating plans are also called
manual rating plans.
c. Class rates are not based on loss statistics.
d. Class rates reflect loss characteristics of a particular insured.

Some insurers now use expert systems in the underwriting process. The primary purpose of these expert
systems is to

a. Reduce claim expenses and loss adjustment expenses. b. Replace underwriting decision-
making and enhance accuracy. c. Emulate the underwriting decision-making process as it would be
performed by expert underwriters.
d. Modernize insurance company information systems.
As insurers select insureds they attempt to avoid adverse selection. Adverse selection occurs when

a. Applicants purchase insurance with the intent of submitting fraudulent claims.

b. An insurer does not select a cross-section of applicants that range from low to high
probability of loss.
c. Competitors select the better applications, leaving the remainder to the insurer.
d. People with the greatest probability of loss are the ones most likely to purchase insurance.

Which one of the following underwriting options requires the greatest amount of underwriting creativity on
the part of the underwriter?

a. Accepting the application with modifications

b. Accepting the application without modifications c. processing the application without using an
expert or knowledge- based system
d. Rejecting the application

The Maxfield Mutual Insurance Company writes only homeowners insurance for homes that range in value
from $100,000 to $200,000 in one state in the central plains of the United States. Maxfield has written
insurance profitably for 75 years. This long period of profitability has developed a considerable available
capacity for Maxfield Mutual.
However, in the last five years Maxfield's executive staff has become increasingly concerned about the
increasing number of tornado losses Maxfield's policyholders have experienced. Losses paid during these
years have been higher than any other period in Maxfield's history. In addition, competitors have
aggressively marketed in the state and Maxfield has lost policyholders to the competitors for lower
Maxfield is considering expanding its policy writings to other types of insurance and different geographic
areas. How could this activity help Maxfield protect its available capacity?

a. By meeting regulatory requirements to provide coverage to a wide range of

policyholders, the insurer will be less likely to engage in unfair discrimination.
b. By reducing the chances that the company's overall results will be affected by a large number
of losses from one loss event.
c. The insurer will reduce its reinsurance premiums by reducing its exposure to any one
catastrophic event.
d. Diversification will allow the insurer to create a more visible image in the market, attracting
more potential applicants from which it can select.
Which one of the following is an example of how Maxfield can optimize its available resources in order to
protect its available capacity?

a. Maxfield chooses not to solicit applications for watercraft insurance.

b. Maxfield expands its policy writing in three new types of business.
c. Maxfield's underwriters take classes to expand their understanding of claim adjustment.
d. Maxfield's management staff takes classes to learn how to provide reasonable
accommodations for physically challenged employees.
Maxfield Mutual's executive staff is considering lowering its standards in the selection of policyholders. In
this way, Maxfield can maintain the same rate level, but add more policyholders that have slightly higher
exposures to loss. What is the likely result of this decision?

a. Maxfield might be accused of unfair discrimination.

b. Maxfield must reduce the amount of reinsurance it purchases.
c. Maxfield must spread its risks at the same time to be profitable.
d. Maxfield's premiums will not be commensurate with the exposures.
Which of the following types of insurance rates would be appropriate for the type of insurance and loss
exposures that Maxfield Mutual writes?

a. Merit rates
b. Individual rates
c. Class rates
d. Judgement rates

GhostWriter Publishing Company publishes romance novels. They purchase manuscripts from freelance
novelists, edit that material, print the texts, and bind the books.

GhostWriter owns the building where its employees perform all of its publication operations. GhostWriter
uses book-binding glue that is flammable and toxic, so employees try to take care in opening windows
when they are in the binding step of the operation. GhostWriter has been unwilling to install a sprinkler
system or appropriate ventilation system due to the associated costs. So far, opening the windows has been
effective, and none of the employees has become ill from the fumes.

GhostWriter's employees dump any unused book-binding glue in a 50-gallon drum behind the building.
The Environmental Protection Agency determined that the drum has been leaking for years, and the toxins
in the glue have run into the ground. They have ordered GhostWriter to perform a clean-up. GhostWriter
submitted a claim to its insurer for the expenses associated with the clean-up. Recent court decisions have
eroded the original exclusions in the insurer's policy language that would eliminate pollution losses. The
insurer will be required to pay for the pollution loss.

In the last year, profits have been down for GhostWriter. One evening, the fire department responded to a
fire reported at GhostWriter's building. They were able to extinguish the three small fires that started
simultaneously in the building. GhostWriter's owners said they had received anonymous threats that
someone would "burn them down." GhostWriter's owners were suspected of involvement, but nothing
could be proven.
Which one of the following represents a physical hazard in the GhostWriter Publishing case?

a. The suspicious fire

b. The ownership of the building
c. The book-binding glue
d. The 50-gallon drum
Which one of the following represents a morale hazard in the GhostWriter Publishing case?

a. Failure to install sprinklers and ventilation

b. Use of the glue
c. The suspicious fire
d. The lack of profits

Which one of the following represents a legal hazard in the GhostWriter Publishing case?

a. The treatment of the employees

b. The toxic pollution
c. The inability to provide GhostWriter's involvement in the fire
d. The court interpretation of the policy language
n insurer might send a reservation of rights letter to the insured following a claim that involves which of the

a. An occurrence that might have happened outside the policy period b. An intentional action of
the insured
c. More than one insurer and there is a question of which insurer pays first
d. All of the above
What is the largest and most important liability of property and liability insurers?

a. Acquisition costs
b. Administration costs
c. Loss reserves
d. Unearned premium reserves
What is the purpose of Unfair Claim Practices laws?

a. To justify legal claim practices

b. To determine the value of the loss
c. To punish insurers
d. To specify illegal claim practices
Granting draft authority to agents will generally increase

a. Claim settlement expenses.

b. Time to settle claims.
c. Cost of insurance.
d. Customer satisfaction.
Subrogation is the insurer's right to

a. Recover its claim payment from the party responsible

b. Drop a claim in exchange for an agreed amount of money
c. Estimate the value of the damaged property
d. Transfer coverage to a third party
What is an example of general damages?

a. Hospital expenses
b. Lost wages
c. Prescriptions
d. Disfigurement
What is the major purpose of claim handling?

a. To determine whether coverage exists

b. To obtain adequate information
c. To satisfy the insurance company's obligation under the policy
d. To respond promptly to claimant requests
All of the following describes an independent adjuster, EXCEPT:

a. Self-employed
b. Contracted by an insurer
c. Employee of an insurer
d. Employee of an adjusting firm
Generally, an inside claim representative

a. Meets with parties involved with the loss

b. Handles claims by phone or mail from the insurer's office
c. Visits the scene of the loss to investigate damages
d. Offers claim settlement service for a fee to insurers
Mary's car collides with two other cars, and several people are injured. The accident occurs near her
insurer's branch office location. What type claim representative will Mary's insurer generally use to handle
this claim?

a. Independent adjuster
b. Public adjuster
c. Inside claim representative
d. Outside claim representative
A 50,000 square foot building of standard construction is totally destroyed by fire. The construction cost
for medium quality in that location is $70 per square foot. What is the best estimate of the building's
replacement cost?

a. $2,000,000
b. $3,500,000
c. $4,000,000
d. $5,500,000
ABC Company pays for all its property losses up to $3 million and insures losses over $3 million. What is
this plan called?

a. Coinsurance
b. Reinsurance
c. Self-insurance
d. Umbrella insurance
Sue's homeowner's policy covers her camera against theft. While on vacation, Sue's camera is stolen. In
which step in the claim settlement process would the claim representative determine the camera's
replacement cost?

a. Valuation
b. Settlement
c. Negotiation
d. Investigation
John has an unendorsed homeowner's policy. John's two-year-old bicycle is stolen. The bicycle's purchase
price was $800, and depreciation is estimated at $450. What is the bicycle's actual cash value?

a. $225
b. $350
c. $450
d. $800
XYZ Company has established a self-insurance plan to treat its loss exposures. Other than its internal staff,
what resources would XYZ Company generally use to settle claims?

a. Independent adjusters
b. Public adjusters
c. Third party administrators
d. Outside claim representatives
A collision damages Sue's car. The car's actual cash value is $2,000. Repair costs are estimated at $1,800.
Salvage value is estimated at $500. What is the insurer's loss payment?

a. $1,500
b. $1,800
c. $2,000
d. $2,300
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
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 general damages?

a. $60,000
b. $110,000
c. $150,000
d. $160,000
Jim notifies ABC Insurer of an accident with an ABC insured in a state in which ABC does not do
business. What type of claim staff will ABC Insurer generally use to investigate this claim?

a. Inside claim representative

b. Outside claim representative
c. Independent adjuster
d. Independent agent
The validity of a contract depends on all of the following essential elements, EXCEPT:

a. Adhesion
b. Legal purpose
c. Consideration
d. Agreement
In insurance contracts, what type of consideration is involved on the part of the insurer?

a. The payment of policy premium

b. The insurer's promise to pay claims as specified in the insurance contract
c. The insurer's delivering the insurance policy to the insured d. The insurer's guarantee of payment
for all losses
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
What statement best describes subrogation in an insurance policy?

a. The insurer agrees, in the event of a covered loss, to pay an amount directly related to the
amount of the loss.
b. The insurer takes over the insured's right to collect damages from a third party.
c. The insured adheres to the agreement as written by the insurer.
d. The insured transfers its rights or interest in a policy to a third party.

Insurance policies contain exclusions for which of the following reasons?

a. To eliminate coverage that most insureds do not need b. To avoid covering losses that
exceed limits
c. To provide coverage for exposures that require special handling by the insurer
d. All of the above
In an insurance policy, what is the purpose of the insuring agreement?

a. Establishes procedures for carrying out the terms of the contract

b. Makes a broad promise to provide coverage
c. Explains the specific meanings of terms with respect to the coverages
d. Eliminates coverage for specified exposures
To reinforce the principle of indemnity, what provision is required in insurance policies?

a. Coinsurance
b. Cancellation
c. Proof of loss
d. Other insurance
An insurance policy is a contract of adhesion written by the

a. NAIC.
b. IRIS.
c. Insurer.
d. Actuary.
In some cases, the ultimate loss payment can exceed the policy limit shown in the declarations because the
loss payment can include costs for all of the following, EXCEPT:

a. Defense costs
b. Debris removal
c. Additional perils
d. Additional coverages
The term "exclusion" can accurately apply to any policy provision whose function is to

a. Eliminate coverage for specified loss exposures.

b. Provide coverage’s for unique loss exposures.
c. Reduce overall policy premium.
d. Avoid covering losses that could be prevented.

When an insured transfers his or her rights in a policy to a third party, this is called

a. Settlement.
b. Liberalization.
c. Assignment.
d. Subrogation.
Other than common policy declarations, a modular Commercial Package Policy (CPP) must contain

a. Common policy exclusions.

b. Common policy conditions.
c. Commercial property conditions.
d. Commercial liability declarations.
With standard forms, the insurer can generally expect all of the following, EXCEPT:

a. Consistent company operations

b. Increased expense for policy issuance
c. Consistent court interpretations
d. Decreased claim settlement disputes
All of the following items are generally located on the declarations page of an insurance policy, EXCEPT:

a. Deductibles
b. Premiums
c. Exclusions
d. Endorsements
What policy condition does the insurer use to recover some of its expenses and to discourage insurance
buyers from canceling their insurance before the end of the policy period?

a. Cancellation provision
b. Liberalization clause
c. Pro rata refund
d. Short rate refund
Mark's car collides with Pat's car. Pat believes that she will "make out great" because both her insurance
and Mark's insurance will pay Pat for her car's damage. If both insurers made this loss payment, what
principle of insurance would this violate?

a. Adhesion
b. Utmost good faith
c. Indemnity
d. Assignment
Brown Company's Policy includes a liberalization clause. Brown's insurer introduces a policy change that
broadens coverage at no additional premium. How will this change apply to Brown's existing policy?

a. The broadened coverage does not apply to Brown Company's policy.

b. The broadened coverage automatically applies to Brown Company's policy.
c. The broadened coverage will apply to Brown Company's policy with an endorsement.
d. The broadened coverage will apply to Brown Company's new policies as they are issued.
Joe owns a building covered by a property insurance policy. Joe intentionally sets fire to this building, and
it is destroyed. Using only this information, what statement best describes why Joe's property insurance
policy is unenforceable for this loss?

a. Joe acted under emotional duress.

b. Joe acted irrationally.
c. Joe acted in violation of public policy.
d. Joe acted under the influence of alcohol.

Green Company has commercial property insurance with ABC Insurer. The policy term is 1/1 to 12/31.
ABC Insurer has notified Green that it will stop the coverage on 6/30. What policy condition does ABC's
notification represent?

a. Changes
b. Cancellation
c. Assignment
d. Subrogation
Beth has auto physical damage coverage with a $500 deductible. A collision causes $1,800 damage to
Beth's car. How much is the loss payment from Beth's insurer?

a. $500
b. $1,300
c. $1,800
d. $2,300
Jim canceled his auto policy 315 days after the inception date. The one-year premium is $1,095. Assuming
that a year is 365 days, what is Jim's pro rata premium refund?

a $50
b. $150
c. $780
d. $945
Bill drives through a stop sign and collides with Jeff's car. The collision caused physical damage to both
cars but no injuries. Bill and Jeff report the accident to their insurers. Each receives a loss payment from his
respective insurer, and they have their cars repaired. What is the next step in the claim settlement process?

a. Bill's insurer will attempt to recover for the loss from Jeff's insurer.
b. Jeff's insurer will attempt to recover for the loss from Bill's insurer.
c. Bill's insurer will bring a lawsuit against Jeff's insurer.
d. Jeff's insurer will bring a lawsuit against Bill's insurer.

Assignment - 8

1.Property insurance policies typically exclude loss from maintenance perils. Such losses are generally
uninsurable because

a. Covering such losses would result in a moral hazard.

b. They are either certain to occur, over time, or are avoidable.
c. Maintenance policies are written only through excess and surplus lines.
d. It is difficult (if not impossible) to identify the date of loss and therefore the policy or
insurer providing coverage.

2.Water damage to a building following a windstorm is often not covered by a property policy unless

a. The windstorm is confirmed by the weather service.

b. The policy is written with named perils.
c. The policy is written with special coverage.
d. Wind caused an opening in the structure through which water entered.

3.A policy limit plays which of the following roles?

a.The policy limit tells the insured the maximum amount of money that can be
recovered from the insurance company after a covered loss

b.The policy limit tells the insurer the maximum amount it may have to pay for a covered loss.
c. The policy limit is related to the insurance premium charged.
d.All of the above

4. The taking of property from a person by someone who has caused or threatened to cause personal harm

a. Burglary.
b. Robbery.
c. Theft.
d. Dishonesty.

5. 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.

6. An insurance-to-value provision in property insurance policies that reduces the amount the insurer will
pay for a covered loss that occurs to property that is underinsured is

a. A coinsurance clause.
b. A deductible.
c. A policy limit.
d. The replacement value.

7. In property insurance, a named insured

a. Is the secured lender(s) as identified on the declarations page.

b. Can be many parties based on the contract language and the situation.
c. Is the policyholder whose name appears on the declarations page.
d. Is the first name appearing on the declarations page.

8. Catastrophe perils, such as war, are generally excluded from property insurance policies because the risk
is considered to be uninsurable since

a. The losses could be prevented.

b. The premiums required to cover the exposure would be unaffordable by most families and
c. Most families and businesses do not face the loss exposure.
d. The funds of the entire insurance industry might be inadequate to pay for all the claims

9. Which one of the following describes the rights granted to a mortgagee versus the rights granted to a loss
payee under a property insurance policy?

a. A mortgagee and a loss payee have the same rights. The two clauses simply differentiate loans
for real and personal property.
b. In the event of a loss, the mortgagee is paid first, the named insured second, and any loss payee
is third.
c. The terms are used interchangeably depending on the insurance contract.
d. A mortgagee is granted some rights that are greater than those granted to the named insured;
however, the loss payee has the same rights as the named insured.

10. All of the following are property that might be exposed to losses and that can be covered by property
insurance, EXCEPT:

a. Motor vehicles and trailers

b. Money and securities
c. Ships and their cargo
d. Sentimental value of heirlooms

11. A fire that leaves its intended place is

a. A hostile fire.
b. A friendly fire.
c. A proximate cause of loss.
d. An ensuing loss.

12. All of the following statements regarding deductibles are true, EXCEPT:

a.Because the insurer bears a part of any loss, deductibles encourage the insured to prevent losses.
b.Shifting the cost of small claims to the insured enables the insurer to reduce premium.
c.Handling claims for small amounts often costs more than the dollar amount of the claim.
d.Deductibles enable people to purchase coverage for small losses at a reasonable price without
unnecessarily involving the insurer in larger losses.

13. The cost to repair or replace property using new materials of like kind and quality with no deduction for
depreciation is

a. Actual cash value.

b. Replacement cost.
c. Market value.
d. Original cost new.

14. The Printer's Thumb is a store specializing in printing and photocopying for local businesses. The
Printer's Thumb's customers depend on fast and accurate service for their printing needs. The Printer's
Thumb has developed a positive reputation by providing that service. The Printer's Thumb occupies a
building it owns; Ultimate Lender holds the mortgage to the building. All of the equipment used for
printing and photocopying was purchased with cash and is located in the building. The building and its
contents are covered by a property insurance "special form coverage" policy.

One evening after working hours, lightning struck the building resulting in a fire in the electrical wiring.
Papers that had accumulated in the trash ignited and substantial fire damage resulted. Damage resulted to
the building, contents, and a customer's original documents and files that were waiting to be copied.

Until repairs could be made, the Printer's Thumb rented a temporary office in an available space in a local
mall. The manager of The Printer's Thumb did not want to lose the customers that he had worked so hard
to develop by shutting down servicing while repairs were made. All of The Printer's Thumb's customers
have agreed to continue business at the new location.

i) How will the claim representative assigned to The Printer's Thumb loss determine whether the peril is
covered by the property policy?

a. If the peril is not specifically excluded by the policy, coverage is provided.

b. If the peril is listed and described in the policy, coverage is provided.
c. If the manager of The Printer's Thumb can prove that the loss was caused by a covered peril,
coverage is provided.
d. If the manager of The Printer's Thumb can prove that he was not responsible for the loss,
coverage is provided.

15. What was the Printer's Thumb's relationship to the customer whose original documents and files were
destroyed in the fire as they were waiting to be copied?

a. The customer was an unsecured lender.

b. The Printer's Thumb was a user of property.
c. The Printer's Thumb was a bailee.
d. The customer was a bailee.

16. The claim representative assigned to The Printer's Thumb loss is trying to identify the coverage limits
in the property insurance policy that apply to the photocopiers that were destroyed. Under what category of
covered property should the claim representative find coverage for the photocopiers?

a. Floater coverage
b. Building equipment
c. Business personal property
d. Nonowned property

17. For the loss that occurred at The Printer's Thumb building, what was the proximate cause of loss?

a. The lightning
b. The fire
c. The electrical wiring
d. The trash accumulation

18. The financial expenses incurred by The Printer's Thumb to rent the office space at the mall is which
form of financial consequence that might be covered by their property insurance policy?

a. A direct loss
b. Lost income
c. Extra expense
d. Optional rental reimbursement

Assignment 9
In speaking with John, Mark said that Peter embezzled $500,000 from their employer. If this statement is
false, it is an example of:

a. Slander
b. Libel
c. Breach of warranty
d. Misdemeanor
The liability that someone could incur because of an inherently dangerous activity like building demolition
is called

a. Nonretractable liability.
b. Nontransferable.
c. Absolute liability.
c. Compulsory liability.
A man told a pedestrian that he would break her arm if she did not give him her purse. This is an example

a. False arrest
b. Invasion of privacy
c. Assault
d. Battery
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. He damaged the stopped car he collided with. What is the basis for John's

a. Negligence
b. Absolute liability
c. Statutory liability
d. No-fault statutes
The intentional and unlawful threat of bodily harm is

a. Statutory injury
b. Encroachment
c. Battery
d. Assault
The damages awarded for pain and suffering due to an injury are part of:

a. Judicial damages
b. Punitive damages
c. Special damages
d. General damages
A tort is

a. The legal right of recovery for damage or injury.

b. A failure to act in a reasonably prudent manner.
c. Any wrongful act other than a crime or breach of contract.
d. An unbroken chain of events that causes injury or damage.
Advertising injury, which is covered by most commercial general liability policies, typically includes
which of the following types of offenses?

a. Pain and suffering

b. Libel and slander
c. Battery and assault
d. All of the above
Laws made by formal enactments of legislative bodies are referred to as

a. Statutory law.
b. Common law.
c. Case law.
d. Constitutional law.
The legal right of recovery can be based on all of the following, EXCEPT:

a. Torts
b. Contracts
c. Statutes
d. Exposures
Under tort law, an individual can face a claim for legal liability on the basis of any of the following,

a. Negligence
b. Contracts
c. Intentional torts
d. Absolute liability

Liability insurance differs from property insurance in all of the following ways, EXCEPT:

a. Property insurance covers losses resulting from property damage to others, but liability insurance
involves bodily injury to an insured.
b. Property insurance claims usually involve only two parties, but liability insurance claims involve three
c. In property insurance insurers pay claims to insureds, but in liability insurance insurers pay a third party
on behalf of insureds against whom a claim has been made.
d. Property insurance policies clarify which property and cause of loss the policy covers, but liability
insurance policies indicate the activities and types of injury or damage that are covered.
Which one of the following statements is true regarding liability insurance policy limits?

a. An each person limit is the maximum amount an insurer will pay for injury to any one person for a
covered loss.
b. Separate limits for bodily injury and property damage liability coverage are known as individual
occurrence limits.
c. A split limit applies to any combination of bodily injury and property damage liability claims arising
from the same occurrence.
d. Single limits are separate limits that insurers will pay for bodily injury and for property damage.

In a liability insurance policy, personal injury means injury arising from all of the following, EXCEPT:

a. Invasion of privacy
b. Libel
c. Slander
d. Battery
The amount of the insurer's claim payment depends on all of the following types of policy provisions,

a. Policy limits
b. Defense cost provisions
c. Loss mitigation provisions
d. "Other Insurance" provisions
All of the following are true, EXCEPT:

a. Liability insurance claims involve three parties

b. Property insurance claims involve one party
c. Liability insurance pays claims on behalf of the insured
d. Property insurance pays claims to an insured
The law that consists of the body of principles and rules established over time by courts on a case-by-case
basis is called:

a. Administrative law
b. Constitutional law
c. Common law
d. Regulatory law
Liability insurance policies typically include supplementary payments consisting of all of the following,

a. Damage payments
b. All expenses incurred by the insurer
c. The cost of bail bonds or other required bonds
d. Expenses incurred by the insured at the insurer's request

Liability coverage that covers an accident that occurs during the policy period, regardless of when the claim
is submitted to the insurer is which one of the following types of coverages?

a. Claims made coverage

b. Occurrence basis coverage
c. Retroactive coverage
d. Perpetual coverage

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. A policy provision would
generally identify which of the following as the insured(s) with whom the insurer has legal contact?

a. Bart Danner
b. Paul Binder
c. Iron Works, Inc.
d. All of the above
Under a liability policy, damages awarded for out-of-pocket expenses are called:

a. Special damages
b. General damages
c. Indirect damages
d. Consequential damages
Assuming the retroactive date is the same as the policy inception date of a claims-made liability policy,
which one of the following is true for coverage to apply?

a. Coverage will never apply when the retroactive date is the same as the policy inception date.
b. Bodily injury or property damage must occur during the policy period or anytime before policy
c. Claims must be submitted during the policy period.
d. Claims can be submitted anytime during or after the policy period
All of the following are the elements of negligence, EXCEPT:

a. Duty owed to another

b. Breach of duty owed
c. Injury or damage
d. Minimum threshold of loss
The event that sets in motion an uninterrupted chain of events contributing to the loss is called:

a. Absolute liability
b. Proximate cause
c. Intentional tort
d. Negligence
A person who has suffered bodily injury, property damage, or personal injury for which the insured is
allegedly responsible might make a claim for damages. If the case goes to court, the claimant might be
awarded two types of damages: compensatory damages and

a. Monetary damages.
b. Out-of-pocket damages.
c. Medical damages.
d. Punitive damages.
Amanda's Bakery sold muffins that contained shards of glass. The glass shards inadvertently became
mixed with the muffin batter when the baker's water glass fell and broke on the counter next to the flour
container. The baker failed to follow procedures for preventing contaminants from becoming mixed with
the ingredients of baked goods. Two customers were injured after eating the muffins.
The possibility of Amanda's Bakery being sued by the injured customers is the

a. Loss exposure.
b. Proximate cause.
c. Hazard.
d. Accident.

Assignment 10

Alan Peachtree owns a hobby shop which he runs from a small garage-like structure that is not attached to
his home. Alan, in deciding not to purchase property coverage on the building has set aside funds to pay
for possible property damage losses. What risk management technique, if any, is Alan using?

a. Avoidance
b. Non-Insurance transfer
c. Retention
d. Loss control
What information can a risk manager gather from a flowchart to identify loss exposures?

a. Bottlenecks that can stop production

b. Critical areas with unskilled workers
c. Competition that can reach the market before the client
d. Inefficiencies that can be corrected through automation
A risk manager in an industrial plant is trying to determine where she needs to spend most of her time in
reducing the number of accidents. The plant has a history of work-related injuries, and she wants to make
sure that is reduced.

What should the risk manager measure to determine where she should expend her efforts?

a. The number of workers in each area

b. The flow chart bottlenecks
c. The loss frequency
d. The loss severity
Pete Morrow is implementing a set of risk management techniques at his company to help reduce the
frequency of products liability claims that his company has experienced. Which one of the following is an
important step for Pete to include in this implementation process?

a. Identifying exposures
b. Determining which exposures can be retained
c. Communicating the risk management information
d. Monitoring the results
The dollar amount of damage that results or might result from a loss exposure is the

a. Loss severity.
b. Loss frequency.
c. Loss prevention.
d. Loss reduction.
Which one of the following in the risk management process is inaccurate?

1. Identifying and analyzing loss exposures

2. Gathering information to support assumptions about the loss exposures
3. Selecting the most appropriate risk management techniques
4. Implementing the chosen techniques in a risk management program

a. 1
b. 2
c. 3
d. 4
Businesses, individuals, and families that practice sound risk management can benefit society by doing all
of the following, 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
How might the monitoring and modifying step in the risk management process be simply described?

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.
Why is it easier to gauge the potential severity of property losses than of liability losses?

a. Property loss exposures are confined to the building and contents. Liability losses can encompass
the surrounding grounds of the business.
b. Property loss exposures have a documented annual frequency and severity that can be determined
as an average according to the type of business. Liability loss exposures cannot be determine with this
level of accuracy.
c. Property loss exposures have a calculable frequency. The frequency of liability loss exposures
cannot be determined with accuracy.
d. Property loss exposures have a calculable severity. The severity of liability loss exposures is much
harder to determine.
What is 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.
The risk management technique that eliminates a loss exposure and reduces the chance of loss to zero is

a. Retention.
b. Loss control.
c. Noninsurance transfer.
d. Avoidance.

Frank and Jan are each twenty-five years old, and they have purchased their first home together. It required
all of their savings and some money from their parents to make their down payment. The house needs
repairs that they will do themselves and with the help of friends. The first project will be to seal the lead
paint that is on the interior of the house and remove flaking lead paint that is on the exterior of the house.

Frank and Jan are also aware that a buried heating-oil tank in the yard is leaking slowly, but they have
decided that replacing that tank must wait until they have the funds in a year or two.
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 to look for items and activities that might cause injury or damage
Frank and Jan researched lead paint hazards and abatement techniques on the Internet. They discovered
that the best action they can take inside the house is to remove loose paint chips and dust, replace the
windows, and seal the walls with a paint designed for that purpose.

What risk management technique does this activity involve?

a. Avoidance
b. Loss control
c. Retention
d. Noninsurance transfer
Frank and Jan have discovered that the pollution that is resulting from the fuel oil leaking into the soil is
not covered by their homeowners insurance policy. They fear that the oil might seep into the water table
and contaminate their neighbors' well water. Illness and damage that might result would be very expensive.
Frank and Jan can purchase an endorsement that will provide coverage for this pollution exposure. The
endorsement would cost $50 per year.

Is this an effective risk management selection for Frank and Jan 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.
Jane owns a ten-year-old compact car that she uses to drive to work each day. Jane drives 20 miles into the
city and parks her car on a street near her office.

Jane's son, Joe, is 15-years-old, and he will obtain his driver's license this summer when he becomes 16.
Joe has already expressed an interest in buying his own vehicle or driving Jane's compact car.

Jane is concerned about the cost of owning a vehicle, buying the insurance, and the risk of parking the
vehicle on the street. If Joe buys his own vehicle, she knows that her expenses and her concerns will

Jane is considering risk management alternatives to help her reduce expenses and risks.
If Jane sells her vehicle, and begins using public transportation, which one of the following risk
management techniques will she be applying to her situation?

a. Avoidance
b. Loss control
c. Noninsurance transfer
d. Retention
Jane is concerned that Joe might be hurt in her compact car if he is involved in an accident. She has read
consumer reports indicating that people occupying trucks and sports utility vehicles suffer less injuries
when their vehicles are involved in accidents.

If Jane trades her compact car in for a sports utility vehicle, which one of the following risk management
techniques will she be applying?

a. Avoidance
b. Loss prevention
c. Loss reduction
d. Noninsurance transfer
While she is at work, Jane has begun parking in a lot that has an attendant to reduce the chance of her
vehicle being damaged while it is parked on the street. Which one of the following risk management
techniques is Jane applying?

a. Avoidance
b. Loss prevention
c. Noninsurance transfer
d. Retention
Jane has decided to apply a retention risk management technique to reduce her insurance premium. She is
deleting the physical damage coverage (collision and other-than-collision) on her car. Her car is currently
worth $3,000. She will be able to save $250 every six months.

Based on informal guidelines for selecting risk management techniques, is this a good decision?
a. Yes, Jane will save $500 per year.
b. Yes, if Jane can afford to lose $3,000.
c. No, because the plan does not include loss control.
d. No, this type of coverage is required in most states.