insurance
130 flashcards · Other · by David Baty
An insurance company organized in Pennsylvania, with its home office in Philadelphia, is licensed to conduct business in New York. In New York, this company is classified as: a: an alien co b: a foreign co c: a domestic co d: a regional co
b: a foreign co 1.7.1
At the national level, the fed. gov. provides all if the following types of insurance except: A: war risk insurance B: unemployment insurance C: federal crop insurance D: flood insurance
b: unemployment insurance 1.7.2
which of the following statements pertaining to insurance companies is correct: A: the primary purpose of a stock company is to earn a profit for its stockholders B: in a mutual company, insureds are not owners of the company C: both mutual and stock companies have stockholders D: a stock company is owned by the policyholders
a: the primary purpouse of a stock company is to earn a 1.6.1
In an insurance transaction, who does the licensed agent legally represent A: National assoc. of insurance commissioners B: insurer C: applicant D: state insurance department
B: insurer 1.9
An insurance company owned by its policyholders, who receive a return of unused premiums in the form of policy dividends is a: A: stock company B: risk retention group C: mutual company D: reciporcal company
C: mutual company 1.6.2
The agent has many responsibilities to the applicant. One involves a trust relationship between the agent and the insured regarding the insured's finances and confidentiality. in this case, the agent acts in what capacity: A: Consultant B: Special Agent C: Fiduciary D: Attorney-in-fact
C: Fiduciary 1.9.2
Agency is a relationship in which one person is authorized to represent and act for another person or for a corporation. The person authorized to act on behalf of the other is called an: A: Agent B: Insured C: Prinicipal D: Corporation
C: Prinicipal Explanation The person authorized to act on behalf of the other is called an agent. The person on whose behalf the agent acts is called the principal. In insurance, the insurer is the principal and the sales representative or producer is the agent. An agency relationship is created through the consent of both the agent and the principal; no one can unknowingly become an agent for a principal. Reference: 1.9 in the License Exam Manual
Which one of the following is an example of a peril? A) Earthquake B) Indifference C) Gasoline stored on the premises D) Illness
A) Earthquake A peril is the actual cause of a loss. Examples of perils are fire, wind, hail, and collision. For example, if there is a house fire that destroys an entire house, the fire is the peril. Reference: 1.3 in the License Exam Manual
Which one of the following is considered a hazard? A) Trash B) Explosion C) Lightning D) Fire
D) Fire Explanation A hazard Is a situation or factor that increases the possibility of a loss. Reference: Reference: 1.3 in the License Exam Manual
Which type of authority does an insurer give to its agents by means of the agent's contract? A) Fiduciary B) Implied C) Express D) General
C) Express Express authority is what the insurer intends to give to its agent through means of the agent's contract. This authority explicitly appoints the agent to act on behalf of the insurer. Reference: 1.9.1 in the License Exam Manual
Fire would be an example of a A) risk B) hazard : C) loss D) peril
D) peril Perils include events such as fire, wind, hail, or collision with another car. A hazard is a situation or condition that increases the possibility of a loss occurring. Hazards may be classified as physical (a material, structural, or operational feature), moral (dishonest or character defects), or morale (relating to the attitude of the insured). Risk is the uncertainty regarding the occurrence of financial loss. Reference: 1.3 in the License Exam Manual
If an insurance company is organized in Detroit, where it maintains its home office, the company is classified in Michigan as what kind of company? A) Foreign B) Domestic C) Local D) Preferred
B) Domestic A domestic insurer is incorporated in the same state where it sells insurance. Reference: 1.7.2 in the License Exam Manual
A contract in which one insurer cedes all or part of a risk to another insurer is known as. A) reinsurance B) a participating policy C) assuming insurance D) retro insurance
A) reinsurance Explanation In @ reinsurance contract, an insurer protects itself from loss or liability arising from an original contract of insurance by insuring itself through another insurer. Reinsurance is the spreading or sharing of a risk too large for one insurer by ceding Part of the risk to another company or reinsurer, Reference: 1.5.4 in the License Exam Manual
Dishonesty on the part of an insured is an example of a A) morale hazard B) moral hazard C) physical hazard D) peril
B) moral hazard Explanation A peril is the specific event that causes a loss. A hazard is any factor that increases the chance of loss. A moral hazard involves dishonesty on the part of the insured (e.g., planning arson to collect the insurance claim). A morale hazard involves carelessness or indifference, such as not using a seatbelt or not locking a door. Reference: 1.3 in the License Exam Manual
The law of large numbers states that the A) smaller the number of risks combined into one group, the less uncertainty there will be as ta the amount of loss that will be incurred B) larger the number of risks combined into one group, the smaller the loss will be to any one individual in that group C) larger the number of risks combined into one group, the less uncertainty there will be as to the amount of loss that will be incurred D) smaller the number of risks combined into one group, the lar…
C) larger the number of risks combined into one group, the less uncertainty there will be as to the amount of loss that will be incurred Explanation The law of large numbers operates under the principle that the larger the number of similar risks combined into one group, the less uncertainty there will be as to the amount of loss that group will incur. Thus, an insurance company is able to predict and determine in advance the approximate number of claims it will receive in a given time period f…
The purpose of insurance is to A) reduce adverse selection B) eliminate hazards C) transfer risk D) eliminate risk
C) transfer risk Explanation The purpose of insurance is to protect against losses caused by pure risk. This is accomplished through the insurance contract, which requires one party to pay a specified sum to another if a previously identified event occurs. For the cost of a premium, a person or entity can purchase protection offered by the insurance contract and transfer risk to the insurer. Reference: 1.4.1 in the License Exam Manual
In the insurance business, the insurance company is also known as the A) principal B) agent C) policyowner D) insured
D) insured Explanation An agency relationship exists when one party (an agent) is authorized ta act on behalf of another (a principal). In the insurance business, the principal is the insurance company and the agent is authorized to act on the company’s behalf. Reference: 1.9 in the License Exam Manual
Guides to insurance companies’ financial integrity and claims-paying ability are published regularly by rating services. All of the following are rating services EXCEPT A) Fitch's B) M. Best, Inc. C) Lloyd's of London D) Standard & Poor's
C) Lloyd's of London Explanation Lloyd's of London is an organization of individuals or groups who agree to share in insurance contracts. Moody's is another rating service. M. Best, Inc., for example, rates companies from Superior to Suspended, and recommends that consumers buy insurance from companies rated Superior to Excellent. Reference: 1.6.5 in the License Exam Manual
A group of individuals who agree to share each other's losses is known as a A) service organization B) reciprocal company C) mixed group D) reinsurer
B) reciprocal company Explanation A member of a reciprocal agrees to share the insurance responsibilities will all other members of the unincorporated group. A reciprocal exchange is an unincorporated mutual organized for the mutual protection of its members. A reciprocal is managed by an attarney-in-fact. Reference: 1.6.4 in the License Exam Manual
Agents have certain responsibilities when dealing with applicants and insureds. All of the following are agent responsibilities EXCEPT A) periodically reviewing the insured's coverage B) explaining coverages C) field underwriting each risk D) collecting the commission from the applicant Explanation
D) collecting the commission from the applicant Explanation Collecting the premium is a fiduciary responsibility of the agent, but the applicant does not pay the commission directly to the agent. All of the other answer choices are responsibilities of the agent. Reference: 1.9.2 in the License Exam Manua
Joan and Steven have applied for automobile insurance with ABC Auto Insurers. The ABC agent asked Joan and Steven if their resident 18-year-old son, Henry, has had any moving traffic violations in the past 2 years. Both answer no. The fact is that Henry had 4 speeding tickets, but never told his parents. What legal concept does this scenario describe? A) Misrepresentation B) Warranty C) Fraud D) Representation
D) Representation Explanation Joan and Steve made statements that they believed to be true. This was a representation, a factual statement on an application that is made to the best of one's knowledge. Reference: 2.3.2.8 in the License Exam Manual
The principle that restores someone to the condition he enjoyed before a loss is A) indemnity B) risk reduction C) insurance D) risk transfer
A) indemnity Explanation Insurance |s a contract of indemnity. The insurance contract seeks to return the policyholder to substantially the same financial position she enjoyed before the loss. No more, no less! Reference: 2.3.2.7 in the License Exam Manual
Jennifer and David signed a homeowners insurance application for coverage on their home. They did not divulge that last year their garage burned down after their 16-year-old son left a cigarette burning. The agent sent in the application and a policy was issued. When another fire occurred 2 months after the policy was issued, the company voiced the policy because the agent would not have sent in the application if he had known of the prior loss. Which contract principle does this situation desc…
A) Waiver and estoppel Explanation The insurance company relied on the facts supplied by Jennifer and David as the truth. Because Jennifer and David did not enter into the agreement in good faith by not divulging the loss, the insurance company may void the contract. Each party must assume that the other party is telling the truth. Reference: 2.3.2.3 in the License Exam Manual
Both parties rely on statements made to each other when writing a contract. This contract is known as a A) unilateral contract B) speculative contract C) contract of utmost good faith D) conditional contract
C) contract of utmost good faith Explanation The principle of utmost good faith imposes a higher degree of honesty on parties to an insurance contract. The insurer relies on the truthfulness on the application, and the insured relies on the company’s promise and ability to provide coverage and pay claims. Both parties must know all material facts and relevant information; neither may attempt to conceal facts or deceive the other party. A unilateral contract is one in which only one party makes…
The attempt to restore the policyholder to the same financial condition enjoyed before a loss is called A) indemnification B) subrogation G) coinsurance D) self-insurance
A) indemnification Explanation Indemnification is the process by which an insured is restored to a preloss condition. Indemnity indicates that compensation in the form of payment, repair, ar replacement has been given to an insured to make him whole again and to relieve him from his loss. Indemnity, as a legal principle, maintains that a person should not profit or collect more than the value of a loss, but should be restored to approximately the same financial position as existed before the lo…
Which one of the following is NOT an element of a valid contract? A) Legal purpose B) Competent parties C) Consideration D) Intent
D) Intent Explanation A valid contract must involve competent parties, legal purpose, offer and acceptance, and consideration. This means the parties to the agreement must have the legal capacity to act. The contract must have a legal purpose. For example, a valid contract could not be undertaken to smuggle illegal drugs. Every contract must contain one party's offer and the other party's acceptance of the offer. Finally, each party must give consideration— something of value. In an insurance p…
Knowingly lying on an application to obtain coverage would be an example of A) fraud B) concealment C) misrepresentation D) recession
A) fraud Explanation Fraud is a deliberate misrepresentation that causes harm. There are 4 elements in a fraudulent act: someone lies; the purpose of the lie is for someone else to rely on it; the other person relies on that lie; and as a result of relying on the lie, the other person suffers harm. Reference: 2.3.2.10 in the License Exam Manual
In insurance, a waiver is best considered as A) the suspension of a policy right B) a warranty C) the voluntary surrender of a known right D) a material representation
C) the voluntary surrender of a known right Explanation A waiver is the voluntary relinquishment of a known right. It may be intentional or unintentional. An unintentional waiver, when relied upon by another party, can result in the waiving party being estopped from reasserting a right it previously held. Reference: 2.3.2.11 in the License Exam Manual
An applicant for insurance intentionally told the insurance producer she did not have any driving violations. The producer sent the application to the insurer. The insurer ordered a motor vehicle record and discovered the applicant had a driving while intoxicated conviction three months ago. The insurer terminated the policy because her statement was a A) material misrepresentation. . B) material representation. C) material act of coercion. D) material act of concealment.
D) material act of concealment. Explanation In order to void a contract, misrepresentations must be material misrepresentations. Her stating that she had no driving violations is a material misrepresentation because that information was a factor in the insurera™s decision to accept the risk. Reference: 2.3.2.8 in the License Exam Manual
Joan and Steven have applied for automobile insurance with ABC Auto Insurers. The ABC agent asked Joan and Steven if their resident 18-year-old son, Henry, has had any moving traffic violations in the past 2 years. Both answer no. The fact is that Henry had 4 speeding tickets, but never told his parents. Once the company found out about Henry's record, they declined the application citing misrepresentation as the reason. Did Joan and Steve misrepresent Henry's driving record? A) No. They answer…
A) No. They answered to the best of their knowledge. Explanation Joan and Steve made statements that they believed to be true. However, voidable misrepresentations involve a material fact that turns out to be false. A material fact is a statement that may have caused the insurance company to reject the application or issue the policy with substantially different terms. Reference: 2.3.2.8 in the License Exam Manual
Statements made on an application that are guaranteed to be true are A) misrepresentations B) promises C) warranties D) representations
Explanation A warranty is a statement guaranteed to be true. A warranty may also include a promise by the insured that is stated in the insurance policy. A breach of a warranty, meaning that the statement is not correct, may give grounds for voidance of a policy. Reference: 2.3.2.8 in the License Exam Manual
Joan and Steven have applied for automobile insurance with ABC Auto Insurers. When the agent asks if anyone else drives the car, they lie and do not tell him that their neighbor, George, who lost his driver's license due to drunk driving, uses one of their cars on a regular basis to drive to work. Once the company found out about George after he had an accident, they denied the claim, citing what legal concept as the reason? A) Fraud B) Concealment C) Misrepresentation D) Breach of warranty
B) Concealment Explanation Fraud is an intentional misrepresentation of material facts. Joan and Steve intentionally lied that no one else used the car. The normal use of an insured car would be considered material to the application facts; therefore, fraud was committed. The company can rescind the policy, deny the claim, and even pursue legal action against Joan and Steve because fraud is a felony. Reference: 2.3.2.10 in the License Exam Manual
Ralph asks his insurance agent to explain how the homeowners policy covers stolen jewelry. The agent spends some time explaining how, when, where, and what jewelry theft coverage exists in the policy. As a result, Ralph believes that his $5,000 watch is covered in full under the basic policy. After the watch is stolen, Ralph is surprised to learn that he has only limited coverage. What legal doctrine might Ralph rely upon to get full coverage for his loss? A) Reasonable expectation B) Utmost go…
C) Adhesion Explanation Ralph may use the legal doctrine of estoppel. Ralph relied on his agent to provide an honest and detailed explanation of his homeowners coverage. The agent overstated the coverage and gave Ralph a false sense of what was covered. The insurance company will be responsible for covering the full loss, since Ralph believed he did have the appropriate amount. Reference: 2.3.2.11 in the License Exam Manual
A warranty is a statement made by the applicant regarding the risk to be insured. Which of the following statements is NOT true about warranties? A) A warranty is guaranteed to be true. B) A warranty is part of the contract. C) A warranty must refer to a material fact. D) A policy can be canceled if the warranty is false.
D) A policy can be canceled if the warranty is false. Explanation A warranty is an answer to a specific question and literally becomes part of the insurance contract. A breach of warranty, meaning that the answer is nat correct, may be grounds for cancellation by the company. However, the materiality of the statement is not required to cancel the policy. Reference: 2.3.2.8 in the License Exam Manual
Ann and her agent meet to discuss automobile insurance. The agent completes an application for coverage, takes Ann's check for $200, and mails the application to the insurance company. Two weeks later, Ann receives the policy in the mail. When did the consideration take place? A) When the agent submitted the application B) When Ann wrote the premium check C) When the agent quoted the premium D) When the company mailed the application
A) When the agent submitted the application Explanation The consideration is the exchange of value. In insurance, the insured's consideration is paying the premium. The insurance company's consideration is the promise to pay in case of a covered loss. When you hear the term consideration, think money.
Which of the following terms describes an insured's oral or written statement that becomes part of an insurance contract and can void a policy if they are breached? A) Warranty B) Representation C) Misrepresentation D) Waiver
C) Misrepresentation Explanation A warranty is a specific agreement between the insured and the insurer that becomes a part of the insurance policy. A breach of warranty can void the policy. Reference: 2.3.2.8 in the License Exam Manual
Bryce owns a $50,000 lake cabin that he has insured for $40,000. He sustains a $5,000 covered loss. According to the principle of indemnity, how much will his insurer pay? A) $5,000 B) $40,000 C) $4,000 D) $50,000
A) $5,000 Explanation Under the principle of indemnity, a person should not profit from his loss or collect more than the actual cash value of a loss. The insured should be restored to approximately the same financial pasition as existed before the loss. In the example, Bryce's loss is $5,000, and he is limited to a $5,000 recovery—no more, no less. Reference: 2.3.2.7 in the License Exam Manual
An insurance company issued a homeowners policy that included ambiguous language regarding how a loss was settled. The insured sued the insurance company and won. The judge stated that due to the ambiguous language in the contract, the decision must be made in favor of the insured. The judge was basing this decision on which of the following types of insurance contract? A) Conditional contract B) Aleatory contract C) Contract of adhesion D) Unilateral contract
C) Contract of adhesion Explanation The insurance company writes the contract, which is either accepted or rejected by the applicant. Modifications by the applicant cannot be made. As a result, courts generally have held that any ambiguity in the contract should be interpreted in favor of the insured. When doing so, the courts may rely on the doctrine of reasonable expectations, which states that a policy includes coverages that an average person would reasonably expect it to include, regardles…
Joan and Steven have applied for automobile insurance with ABC Auto Insurers. They were NOT asked and did NOT tell the agent that their neighbor, George, who lost his driver's license due to drunk driving, uses one of their cars on a regular basis to drive to work. Once the company found out about George after he had an accident, they denied the claim, citing what legal concept as the reason? A) Fraud B) Concealment C) Breach of warranty D) Misrepresentation
A) Fraud Explanation Concealment is the failure to disclose accurate information voluntarily. This includes material facts that may adversely affect the underwriting of the application. The agent would not normally ask if a neighbor regularly uses the car, so this material fact is extraordinary, and is grounds for cancellation or denial of the claim. Reference: 2.3.2.9 in the License Exam Manual
In legal terms, voluntary relinquishment of a known right is called a A) warranty B) withdrawal C) waiver D) concealment
C) waiver Explanation A waiver is a voluntary ralinquishment of a known right. If an insurer waives a legal right under an insurance policy, it cannot deny a future claim on the basis of a violation of that right. This is known as estoppel, because the insurer is estopped from denying the claim. Reference: 2.3.2.11 in the License Exam Manual
Faulty wiring causes a fire that destroys a building. The faulty wiring is considered to be A) a proximate cause B) an indirect cause C) a hazard D) a peril
D) a peril Explanation A hazard is a situation or factor that increases the possibility of a loss occurring or increases the probable size of a loss. The peril is the actual cause of the loss. Reference: 1.3 in the License Exam Manual
Self-insurance is an example of what type of risk management? A) Transference B) Reduction C) Avoidance D) Retention
A) Transference Explanation Self-insurance is a form of risk retention because the individual personally retains the risk and must accept the economic loss if the risk becomes a reality. Reference: 1.6.8 in the License Exam Manual
Transferring is a method of handling risk. Which of the following best describes the concept of transfer? A) Having a cosigner sign off on the risk and take all financial responsibility B) Avoiding situations where there is a high risk for loss C) Buying a car with a friend to share the risk D) Purchasing insurance
B) Avoiding situations where there is a high risk for loss Transfer means shifting the risk of a loss to another, usually an insurance company. Reference: 1.4 in the License Exam Manual
An insurance company that sells insurance only to people who meet specific membership requirements is known as what kind of insurance company? A) Fraternal B) Reciprocal exchange C) Mutual D) Stock
A) Fraternal Explanation A fraternal insurance company, or fraternal benefit society, provides limited insurance benefits to its members, usually restricted to life and health insurance. These organizations are formed to cover members of affiliated lodges, religious and social organizations, and similar groups. Fraternals may not be regulated as strictly as insurance companies that offer coverage to the general public. Reference: 1.6.3 in the License Exam Manual
Agency is a relationship in which one person is authorized to represent and act for another person, or for a corporation. The person authorized to act on behalf of the other is called an A) Corporation B) Insured C) Agent D) Principal
C) Agent Explanation The person authorized to act on behalf of the other is called an agent. The person on whose behalf the agent acts is called the principal. In insurance, the insurer is the principal and the sales representative or producer is the agent. An agency relationship is created through the consent of both the agent and the principal; no one can unknowingly become an agent for a principal. Reference: 1.9 in the License Exam Manual
Uncertainty regarding financial loss is also known as A) hazard B) peril C) insurance D) risk
C) insurance Explanation In the strict insurance definition, risk is the uncertainty regarding financial loss. Insurance is used to minimize the risk of uncertainty by spreading the risk over a large enough number of similar exposures to predict the individual chance of loss. Reference: 1.3 in the License Exam Manual
What is the term for an individual who occupies a position of trust when handling the financial affairs of another? A) Trustee B) Consultant C) Fiduciary D) Superior
C) Fiduciary Explanation A fiduciary is an individual occupying a position of trust and confidence when handling or supervising the funds or the affairs of another. A trustee is a person appointed or required by law to execute a trust to the benefit or use of another. Reference: 1.9.2 in the License Exam Manual
XYZ Insurance Company gives its agents authority that was not formally expressed or communicated. The authority given to the agents by XYZ can be called A) implied authority B) apparent authority C) express authority D) traditional authority
A) implied authority Explanation This implied authority allows the agent to perform all of the usual and necessary tasks to sell and serve insurance contracts. Implied authority may be established by custom or prior experience. Reference: 1.9.1 in the License Exam Manual
The insurer of an insurance company is known as a A) reinsurer B) mixed group C) service organization D) reciprocal
A) reinsurer Explanation Areinsurer insures part of the insurance underwritten by another insurance company to reduce the possible large loss of the latter. Reference: 1.5.4 in the License Exam Manual
All of the following are characteristics of Lloyd’s Associations EXCEPT A) is insurance provided by individual underwriters, not companies B) it is an insurance company C) its members are individually liable for the contracts in which they enter D) it insures unusual risks like a hole-in-one contest
B) it is an insurance company Explanation Lloyd's Associations are voluntary organizations of individuals or groups of individuals who agree to share in insurance contracts. They are not insurance companies. Each individual, or "syndicate," is individually responsible for the amounts of insurance he agrees to write. Reference: 1.6.5 in the License Exam Manual
Which of the fallowing is NOT an element of an insurable risk? A) The loss must be catastrophic. B) The loss must be accidental from the insured's perspective. C) The loss must be due to chance. D) The loss must have a determinable value.
A) The loss must be catastrophic. Explanation One of the criteria for an insurable risk |s that it is not catastrophic. A principle of insurance holds that only a small portion of a given graup will experience loss at any one time. Risks that would adversely affect large numbers of people or large amounts of property, such as wars, are typically not insurable. Reference: 1.5.2 in the License Exam Manual
A chance, possibility, or uncertainty of loss is known as a A) risk B) proximate cause C) peril D) hazard
A) risk Explanation Risk is the uncertainty regarding the occurrence of financial loss. A peril is the actual cause of a loss and is specifically identified in the policy. A hazard is a situation or condition that may increase the possibility of a loss occurring. Proximate cause is the action that produces a loss through an unbroken chain of events. Reference: 1.3 in the License Exam Manual
At the national level, the federal government provides all of the following types of insurance EXCEPT A) flood insurance B) unemployment insurance C) war risk insurance D) federal crop insurance
B) unemployment insurance Explanation At the state level, the government is involved in providing unemployment insurance, and may provide workers’ compensation benefits through state funds. Nationally, the federal government provides war risk insurance, nuclear energy liability insurance, flood insurance, and federal crop insurance. Reference: 1.7.1 in the License Exam Manual
Dishonesty on the part of an insured is an example of a A) physical hazard B) peril C) morale hazard D) moral hazard
D) moral hazard Explanation A peril is the specific event that causes a loss. A hazard is any factor that increases the chance of loss. A moral hazard involves dishonesty on the part of the insured (e.g., planning arson to collect the insurance claim). A morale hazard involves carelessness or indifference, such as not using a seatbelt or not locking a door. Reference: 1.3 in the License Exam Manual
Which one of the following risks is insurable? A) Whole B) Pure C) Speculative D) Partial
B) Pure Explanation Only pure risks are insurable because they involve the chance of loss only. Speculative risks are risks in which both the possibility of loss and gain exists. Reference: 1.3 in the License Exam Manual
With regard to insurance, risk can be defined as A) uncertainty of financial loss B) certainty of financial loss C) certainty of financial gain D) uncertainty of financial gain
A) uncertainty of financial loss Explanation Risk refers to the uncertainty of financial loss. Insurance replaces the uncertainty of risk with certain guarantees of financial stability. Remember, only pure risk is insurable. Pure risk is the chance of loss without any chance of gain. Reference: 1.3 in the License Exam Manual
A contract in which one insurer cedes all or part of a risk to another insurer is known as A) assuming insurance B) retro insurance C) a participating policy D) reinsurance
D) reinsurance Explanation In a reinsurance contract, an insurer protects itself from loss or liability arising from an original contract of insurance by insuring itself through another insurer. Reinsurance is the spreading or sharing of a risk too large for one insurer by ceding part of the risk to another company or reinsurer. Reference: 1.5.4 in the License Exam Manual
What kind of insurance company is an insurance company owned by its policyowners (insureds)? A) Parent B) Stock C) Mutual D) Domestic
C) Mutual Explanation A mutual insurance company is owned by its policyowners, from whom its resources are derived. Its assets and income are held for the benefit of the policyowners, who have the right to-vote for directors or trustees. Profits are returned to the insureds in the form of dividends or reductions future premiums. Reference: 1.6.2 in the License Exam Manual
guides to insurance companies’ financial integrity and claims-paying ability are published regularly by rating services. All of the following are rating services EXCEPT _ A) Fitch's B) M. Best, Inc. C) Standard & Poor's D) Lloyd's of London
D) Lloyd's of London Explanation Lloyd's of London is an organization of individuals or groups who agree to share in insurance contracts. Moody's is another rating service. M. Best, Inc., for example, rates companies from Superior to Suspended, and recommends that consumers buy insurance from companies rated Superior to Excellent. Reference: 1.6.5 in the License Exam Manual
The purpose of insurance is to A) eliminate risk B) eliminate hazards C) reduce adverse selection D) transfer risk
A) eliminate risk Explanation The purpose of insurance is to protect against losses caused by pure risk. This is accomplished through the insurance contract, which requires one party to pay a specified sum to another if a previously identified event occurs. For the cost of a premium, a person or entity can purchase protection offered by the insurance contract and transfer risk to the insurer. Reference: 1.4.1 in the License Exam Manual
All of the following are the insured’s duties following a loss EXCEPT A) giving prompt notice of claim to the agent or insurer B) assisting the investigator during the claim investigation procedure C) protecting the property from further damage D) completing a detailed proof of loss
B) assisting the investigator during the claim investigation procedure Explanation The duties following a loss include giving prompt notice of claim, protecting the property from further damage, submitting a detailed inventory of damages, making property available for inspection, submitting to examination under oath if required, and assisting the insurer (not the investigator) as required during the claim investigation procedure. Reference: 3.4.6.1 in the License Exam Manual
The coverages offered by an insurance policy are described in the A) definitions section B) insuring agreement C) declarations page D) conditions section
B) insuring agreement Explanation The insuring agreement contains the insurer's promise to pay for loss if the loss should result from the perils insured against. This section also indicates what coverages the contract offers. The declarations page has information about the risk, effective date of coverage, deductible, premium, coinsurance percentage, and location of the property. The definitions section specifies the meaning of certain terms as used in the policy. The conditions section define…
For a loss to be covered under the TRIA, the cause of the loss must A) result in loss of life B) be the result of criminal activity C) be certified as an act of terrorism D) result in losses in excess of $10 million
C) be certified as an act of terrorism Explanation For an act of terrorism to be covered under the TRIA, it must be certified as such by the Secretary of the Treasury, the Secretary of State, and the Attorney General of the United States. Reference: 3.8.2 in the License Exam Manual
A policy may be amended only with A) an endorsement B) a declaration C) acondition D) a warranty
A) an endorsement Explanation An endorsement is a form attached to the policy that changes the policy to fit special circumstances and is agreed to by both parties. The endorsement may be attached at the beginning of the policy or added during the policy's term. Reference: 3.3 in the License Exam Manual
Which one of the following best describes a short-rate cancellation? A) Upon cancellation, all earned premium is returned minus overhead expenses incurred. B) Upon cancellation, 100% of the premium is returned. C) Upon cancellation, the insurer keeps all earned premium plus overhead expenses incurred. D) Upon cancellation, the insurer returns all unearned premium.
A) Upon cancellation, all earned premium is returned minus overhead expenses incurred. Explanation Short-rate cancellation is the method used when a policy is canceled by the policyholder before it reaches its natural expiration, and the insured receives a less than pro rata return of premium. Short rates are computed to make allowances for expenses incurred by the company to issue and maintain the policy. The company pays a return premium less than the proportionate or pro rata part that is st…
The TRIA removes the exclusion of coverage for which of the following causes of loss? A) Acts of terrorism B) Damage caused in the act of committing a crime C) War D) Intentional acts
A) Acts of terrorism Explanation The passage of the TRIA voids any existing terrorism exclusions in commercial property and casualty insurance policies. Presently, all commercial policies must offer coverage for certified acts of terrorism. This coverage may be waived, but it must be done in writing. Reference: 3.8.2 in the License Exam Manual
What does the liberalization clause do to a property policy? A) Gives the insurer subrogation rights B) Waives the premium in some situations C) Eases the criteria for concealment or fraud D) Broadens coverage
D) Broadens coverage Explanation A liberalization clause in an insurance policy provides that if the insurer changes its form to provide more coverage without additional premium, or if a legislative change requires a change in coverage, any policy already issued automatically provides the additional coverage. An endorsement is not required. Reference: 3.4.7.1 in the License Exam Manual
The insuring agreement section of a policy describes A) duties of the insured after a loss B) losses excluded C) description of the property insured D) perils insured against
D) perils insured against Explanation The insuring agreement is the section of an insurance contract containing the obligation of the insurer to pay covered claims, subject to specified conditions and exclusions. It contains the insurance company's promise to pay for loss, if it should result from the perils insured against. Reference: 3.3 in the License Exam Manual
When an insurance company cancels a policy, what is the method used to determine the premium due? A) Pro rata B) Flat C) Premature D) Short-rate
D) Short-rate Explanation When the insurer cancels a policy, the premium refund is determined on a pro rata basis. Under this method, the premium refund equals the premium paid for the unexpired term of the policy. A short-rate method is used when the insured cancels the policy. A policy terminated by either the insured or insurer on its effective date results in a flat cancellation. The entire premium is returned to the policyholder. There is no premature method of determining how much premium…
In describing the concept of subrogation, the insurer claims the right to A) collect damages from the insured B) collect from a negligent third party C) send the disputed claim into arbitration D) sue a third party
A) collect damages from the insured Explanation When an insurer pays the insured for a loss for which some person other than the policyholder is responsible, the insurer has the right to recover its loss from the negligent party. The insurer essentially steps into the insured's place to take legal action against the negligent party, but only to the extent of the amount the insurer paid to the insured. Subrogation prevents the insured from collecting from the insurer and then taking legal action…
An auto is sold for salvage value following payment of a loss. Who receives the proceeds? A) Claimant B) Insured C) Insurance company D) Lien holder
D) Lien holder Explanation When an insurance company settles a loss, they have the right to any salvage. The company may take possession of the damaged property and pay the insured the appropriate value of the loss. The property may be sold or otherwise disposed of to reduce the overall cost of the claim. In the case of an auto accident, the insurer may total the vehicle by paying the actual cash value to the policyholder. The company becomes the legal owner of the salvaged auto, and may dispos…
The Terrorism Risk Insurance Act of 2002 addresses only a defined category of terrorism losses. To come within the new federal program, an act of terrorism must be certified as such by the Secretary of the Treasury and must have all the following characteristics EXCEPT A) it must be a violent act or an act that is dangerous to human life, property, or infrastructure B) it must have resulted in damage within the United States, to an air carrier as defined in the U.S. code, to a U.S. flag vessel…
C) it must produce property and casualty insurance losses in excess of $30 million Explanation As of January 1, 2007, covered acts of terrorism must produce property and casualty insurance losses in excess of $100 million. It will increase to $200 million from 2015 to 2020 in $20 million increments. Acts that might otherwise meet these criteria, but that occur during the course of a declared war, cannot be certified as acts of terrorism under the act—except with respect to workers’ compensation…
Which of the following terms is the process of evaluating the risk and exposures to potential clients? A) Underwriting B) Applying C) Interviewing D) Researching
A) Underwriting Explanation Reviewing sources of underwriting information, such as the application, agent's report, inspection report, and a physical inspection of the property, is a step in the underwriting process. Basic underwriting principals include properly selecting the insured, balancing below-average and above-average insureds to assure that the class or manual rate of the whole group will be adequate to pay claims, and charging equitable rates so that one group of insureds does not un…
All of the following are basic parts of an insurance contract EXCEPT A) binders B) conditions C) exclusions D) declarations
A) binders Explanation The 4 basic parts of an insurance contract are declarations, insuring agreement, conditions, and exclusions. A binder is an oral or written statement that provides immediate insurance protection for a temporary period. Reference: 3.3 in the License Exam Manual
An insurance company takes possession of a damaged auto it has covered. When the company becomes the legal owner of the auto, it is exercising the right of A) salvage B) liability C) condemnation D) leasing
A) salvage Explanation The insurance company has the right to any salvage when it settles a loss. The company may take possession of the damaged property and pay the insured the value of the loss. It then can sell or otherwise dispose of this salvaged property to reduce the claim's overall cost. Reference: 3.4.6.4 in the License Exam Manual
Which of the following is NOT a source of information important to an underwriter? A) Government bureaus B) Consumer reports C) Employer reference D) Agent or producer comments
C) Employer reference Explanation The sources of information include the application, agent or producer, consumer reports, government records, financial rating.services, and previous insurers. Reference: 3.6 in the License Exam Manual
Which one of the following requires that insurance applicants be advised that a consumer report may be requested on them and the scope of any investigation resulting from the application? A) Freedom of Privacy Act B) Fair Disclosure Act C) Financial Freedom Act D) Fair Credit Reporting Act
D) Fair Credit Reporting Act Explanation The federal Fair Credit Reporting Act (FCRA) requires that insurance applicants be advised that a consumer report may be requested on them and the scope of any investigation resulting from the application. If coverage is denied or restricted based solely on the report, the applicant must be supplied with the name and address of the reporting company that collected the information. The applicant may obtain from this company a copy of the information in it…
The list of perils covered under a policy is found in which part of the policy? A) Declarations page B) Conditions section C) Exclusions section D) Insuring agreement
D) Insuring agreement Explanation The insuring agreement contains the insurance company's promise to pay for loss if the loss should result from the perils insured against. This section also specifies the coverage the contract provides. Reference: 3.3 in the License Exam Manual
Which type of return premium computation is used when the policyholder cancels a policy? A) Short-rate B) Pro rata C) Aggregate D) Flat
A) Short-rate Explanation The short-rate method is used when a policyholder cancels his policy before it reaches its natural expiration. In this case, the company pays a return premium less the pro rata part that remains unearned. The pro rata method is used when the insurance company cancels the policy. When a policy is terminated on its effective date, it is called a flat cancellation and the entire premium is refunded to the policyholder. Aggregate does not refer to a method of computing pre…
The provisions of the Terrorism Risk Insurance Act of 2002 apply to which of the following lines of insurance? A) Dwelling B) Automobile C) Homeowners D) Commercial property
D) Commercial property Explanation The Terrorism Risk Insurance Act of 2002 established a federal program to provide compensation for insured losses resulting from terrorist acts. Most commercial property and casualty policies are required to offer coverage for certified acts of terrorism. The program does not apply to personal lines coverages. Reference: 3.8.2 in the License Exam Manual
An insurer incorporated under the laws of Illinois with its home office in Chicago and NOT licensed in the state of Michigan would be identified as A. a foreign company B. an unauthorized domestic company C. an alien company D. an unauthorized foreign company
D. an unauthorized foreign company
Which of the following producers must designate an individual to be responsible for compliance with state laws? A. Temporary B. Individual C. Partnership D. Insurer
C. Partnership
All of the following are examples of insurance transactions EXCEPT A. soliciting applications for insurance B. delivering policies C. licensing of producers D. collecting premiums
C. licensing of producers
Enforcement of the Michigan insurance regulations is the responsibility of the A. state legislature B. state attorney general C. Director of Insurance D. governor
C. Director of Insurance
Which of the following is a producer NOT required to report to the Director of Insurance within 30 days? A. Change of address B. Change of name C. Assumed name D. Administrative action against the producer
C. Assumed name
In Michigan, all property and casualty insurers are responsible for A. the acts of their appointed producers B. licensing their producers C. filing a notice of appointment with the Director within 45 days from the contract date of a producer D. notifying the Director within 60 days when a producer is terminated
A. the acts of their appointed producers
Which of the following statements regarding maintenance of an insurance liccnse is NOT correct? A. To keep licenses in effect, producers must complete 24 hours of approved continuing education every 2 years. B. The Director may revoke a license if a producer was convicted of a felony. C. An insurance license can be revoked by the producer’s company for violation of insurance laws. D. In an emergency, the Director may suspend a license to protect the public interest.
C. An insurance license can be revoked by the producer’s company for violation of insurance laws.
The purpose of the Michigan Property and Casualty Insurance Guaranty Association is to A. protect persons against failure in the performance of contractual obligations of certain insurance policies B. guarantee the replacement cost value of a home against devaluation C. guarantee the competency of all producers D. reward residents for turning in bad producers or companies for prosecution
A. protect persons against failure in the performance of contractual obligations of certain insurance policies
At the time a relationship is established, to whom must a licensee give a privacy notice? A. Insurers B. Brokers C. Existing insureds D. Customers
D. Customers
To motivate a buyer to sign an application for insurance, a producer promises a gift equal to one- half of the commission. This is an example of A. trebating B. twisting C. misrepresentation D. coercion
A. trebating
Jeffrey, an insurance producer, publishes a written statement that is false and derogatory. It concerns the financial condition of Wesley, another licensed producer in the insurance business, and it is designed to injure Wesley’s reputation. This can be considered an act of A. coercion B. twisting C. misrepresentation D. defamation
D. defamation
The maximum fine for knowingly violating a cease and desist order is A. $1,000 and imprisonment for up to 90 days B. $2,500 and possible license revocation C. $5,000 and imprisonment for up to 1 year D. $20,000 and possible license revocation
D. $20,000 and possible license revocation
Which of the following statements regarding the payment of commissions is NOT correct? A. A producer may share commissions with another licensed producer. B. A producer may not share commissions with unlicensed person. C. A producer may not share commissions as a reward for sales leads. D. A producer may not share commissions with a licensed nonresident producer.
D. A producer may not share commissions with a licensed nonresident producer.
An applicant for an insurance license must have all of the following qualifications EXCEPT A. a good business reputation B. US citizenship C. honesty and trustworthiness D. good moral character
B. US citizenship
Michigan issues a license to all the following EXCEPT A. resident producers B. nonresident producers C. counselors D. field underwriters
D. field underwriters
A person may NOT act as a Michigan insurance producer unless she A. secures employment with a Michigan insurance company B. is licensed by the state of Michigan C. is at least 21 years old D._ has lived in Michigan for at least 2 years
B. is licensed by the state of Michigan
Which of the following statements describes the authority of a licensed insurance counselor? A. An insurance counselor may not accept a commission on any insurance business he places. B._ An insurance counselor provides advice concerning an insurance policy and charges a fee for such advice. C. An insurance counselor issues insurance policies. D. An insurance counselor may not be an attorney-at-law.
B._ An insurance counselor provides advice concerning an insurance policy and charges a fee for such advice.
An applicant who has been denied an insurance license has how many days to request a hearing to protest the denial? A. 21 B. 30 C. 60 D. 90
B. 30
If, after a hearing, the Director believes a producer knowingly violated insurance licensing laws, the Director may A. fine the producer a maximum of $5,000 for each violation B. sue the producer on behalf of the public C. initiate a federal court action D. cancel any policy purchased by a customer of the producer
A. fine the producer a maximum of $5,000 for each violation
A producer owes a fiduciary responsibility to all of the following EXCEPT A. the insured, on cancelled policies B. the insurer, for premiums due C. the Director, for license fees D. the prospective purchaser of insurance, when the application is rejected
C. the Director, for license fees