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Principles of Risk Management and Insurance - Chapter 27

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Crime Insurance and Surety Bonds

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1

In the ISO Commercial Crime Coverage form, theft is defined as the

  1. A) unlawful taking of property to the deprivation of the insured.
  2. B) unlawful taking of property from the care and custody of a person by someone who has caused or threatens to cause bodily harm or who has committed an unlawful act witnessed by that person.
  3. C) unlawful taking of money or securities through the alteration of a negotiable instrument.
  4. D) unlawful taking of property from inside the premises by someone who unlawfully enters or leaves the premises as evidenced by marks of forcible entry or exit.

Answer: A

2

In the ISO Commercial Crime Coverage form, robbery is defined as the

  1. A) unlawful taking of property to the deprivation of the insured.
  2. B) unlawful taking of property from the care and custody of a person by someone who has caused or threatens to cause bodily harm or who has committed an unlawful act witnessed by that person.
  3. C) unlawful taking of money or securities through the alteration of a negotiable instrument.
  4. D) unlawful taking of property from inside the premises by someone who unlawfully enters or leaves the premises as evidenced by marks of forcible entry or exit.

Answer: B

3

In the ISO Commercial Crime Coverage form, safe burglary is defined as the

  1. A) unlawful taking of property to the deprivation of the insured.
  2. B) unlawful taking of property from the care and custody of a person by someone who has caused or threatens to cause bodily harm or who has committed an unlawful act witnessed by that person.
  3. C) unlawful taking of money or securities through the alteration of a negotiable instrument.
  4. D) unlawful taking of property from within a locked safe or vault by someone who enters the safe or vault as evidenced by marks of forcible entry upon the exterior.

Answer: D

4

Which of the following statements is (are) true with regard to the ISO commercial crime coverage forms?

  1. The discovery version only covers losses which occur during the policy period.
  2. The loss-sustained version covers losses which occur during the policy period and the loss is discovered during the policy period or within one year after the policy expires.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: B

5

A burglar took some blank checks during a break-in at XYZ Company. He was careful to make sure that the theft would be difficult to discover. Three months later, he wrote himself a check for $20,000 and signed the company treasurer's name on the check. After the check was cashed, the loss was discovered. Which commercial crime coverage form would cover this loss?

  1. A) Inside the Premises—Theft of Money and Securities
  2. B) Money Orders and Counterfeit Currency
  3. C) Forgery or Alteration
  4. D) Outside the Premises

Answer: C

6

All of the following are ISO commercial crime coverage exclusions EXCEPT

  1. A) dishonest acts committed by a named insured or partner of the named insured.
  2. B) indirect loss resulting from covered losses.
  3. C) theft committed by an employee of the named insured.
  4. D) losses from unauthorized trading in stocks and bonds.

Answer: C

7

Bernice is an underwriter. She is reviewing a commercial crime coverage application. The coverage will be written using the discovery form. Bernice is concerned that a large undiscovered loss may exist prior to the policy's inception date. Which provision should Bernice add to the policy to protect the insurer against liability for such previous losses?

  1. A) extended reporting endorsement
  2. B) loss sustained during prior insurance provision
  3. C) waiver of inventory provision
  4. D) retroactive date endorsement

Answer: D

8

Which of the following statements is (are) true with respect to financial institution bonds?

  1. Fidelity coverage covers losses resulting from the dishonest acts of employees.
  2. Financial institutions usually insure their crime exposures through financial institutions bonds.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: C

9

The head teller of a bank embezzled $50,000 from the bank. Which insuring agreement in a financial institution bond is designed to cover such losses?

  1. A) Insuring Agreement A—Fidelity
  2. B) Insuring Agreement B—On Premises
  3. C) Insuring Agreement C—In Transit
  4. D) Insuring Agreement D—Forgery or Alteration

Answer: A

10

An armed robber pulled a gun on a teller at the Fourth National Bank. He made off with over $10,000 in cash. Which insuring agreement in a financial institution bond is designed to cover such losses?

  1. A) Insuring Agreement A—Fidelity
  2. B) Insuring Agreement B—On Premises
  3. C) Insuring Agreement C—In Transit
  4. D) Insuring Agreement D—Forgery or Alteration

Answer: B

11

A Pony Express Armored Car was transporting bank receipts from six branch banks to the main bank. A group of robbers staged a daring robbery. They forced the armored car off the road, shot two guards, and took over $120,000 in cash. Which insuring agreement in a financial institution bond would cover the stolen money in this case?

  1. A) Insuring Agreement A—Fidelity
  2. B) Insuring Agreement B—On Premises
  3. C) Insuring Agreement C—In Transit
  4. D) Insuring Agreement D—Forgery or Alteration

Answer: C

12

Fifth National Bank decided to loan $200,000 to Fred Franklin. As collateral for the loan, Fred posted stock certificates. When Fred defaulted on the loan, Fifth National tried to sell the stock. They discovered the stock certificates were stolen from someone else. Which insuring agreement in a financial institution bond is designed to cover such losses?

  1. A) Insuring Agreement B—On Premises
  2. B) Insuring Agreement C—In Transit
  3. C) Insuring Agreement D—Forgery or Alteration
  4. D) Insuring Agreement E—Securities

Answer: D

13

Smith is Manager of ABC Department Store. Jones, ABC's Security Director, visited Smith to ask some questions. During questioning, Smith admitted that he stole $10,000 in merchandise. He was disciplined, but not fired. The loss was not reported to the insurer that wrote ABC's crime insurance. Six weeks later, Smith was observed on a surveillance camera stealing over $50,000 in jewelry from ABC. ABC immediately reported the loss to its crime insurer. Which ISO crime coverage condition may prevent ABC from collecting for this loss?

  1. A) termination as to any employee
  2. B) discovery form
  3. C) loss sustained form
  4. D) loss sustained under prior insurance

Answer: A

14

National Bank believed it had been properly authorized to transfer $250,000 to the off-shore account of one of its corporate customers. The authorization was fraudulent, however, and the transferred funds were stolen. Under which commercial crime coverage insuring agreement would such a loss be covered?

  1. A) Money Orders and Counterfeit Currency
  2. B) Forgery or Alteration
  3. C) Outside the Premises
  4. D) Computer and Funds Transfer Fraud

Answer: D

15

Jack, owner of Jack's Bar and Grill, was robbed while attempting to deposit receipts at his bank's night depository. Jack had purchased an ISO commercial crime coverage form. This loss would be covered under which insuring agreement?

  1. A) Inside the Premises—Theft of Money and Securities
  2. B) Outside the Premises
  3. C) Money Orders and Counterfeit Currency
  4. D) Inside the Premises—Robbery or Safe Burglary of Other Property

Answer: B

16

In the context of a surety agreement, the party who agrees to perform certain acts or fulfill certain obligations is called the

  1. A) fidelity.
  2. B) obligee.
  3. C) surety.
  4. D) principal.

Answer: D

17

In the context of a surety agreement, the party who agrees to answer for the debt, default, or obligation of another party is called the

  1. A) principal.
  2. B) obligee.
  3. C) surety.
  4. D) fidelity.

Answer: C

18

Which of the following statements about surety bonds is (are) true?

  1. The surety has a legal right to recover a loss payment it made on behalf of a defaulting principal.
  2. The obligee is the party who benefits from the bond if the principal fails to perform.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: C

19

Tracy is a trust officer at a bank. One of her responsibilities is to manage funds that have been set aside for the benefit of minor children. What type of bond guarantees that Tracy will faithfully execute her required duties in this capacity?

  1. A) fiduciary bond
  2. B) public official bond
  3. C) court bond
  4. D) performance bond

Answer: A

20

Which of the following statements about various types of surety bonds is true?

  1. A) A judicial bond guarantees that a public official will faithfully perform his or her duties for the protection of the public.
  2. B) A payment bond guarantees that the bonded person will appear in court.
  3. C) A license and permit bond guarantees that the bonded party will comply with all the laws and regulations governing his or her activities.
  4. D) A bid bond guarantees that the principal will complete a construction project on time.

Answer: C

21

A bond that guarantees that the person responsible for the property of another will faithfully exercise his or her duties is called a

  1. A) fiduciary bond.
  2. B) performance bond.
  3. C) court bond.
  4. D) contract bond.

Answer: A

22

Appliance World sells small appliances. The store purchased an ISO crime coverage policy. Last night, someone used a crowbar to pry open a locked door, leaving marks of forced entry. The thief took a number of appliances. The crime that occurred in this case is called

  1. A) burglary.
  2. B) shoplifting.
  3. C) larceny.
  4. D) robbery.

Answer: A

23

Which of the following statements is (are) true with respect to the differences between insurance and surety bonds?

  1. Insurance is a two-party contract; surety involves three parties.
  2. Insurers usually do not have the right to recover a loss payment from an insured, while a surety does have the legal right to recoup a loss payment.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: C

24

All of the following statements about a surety are true EXCEPT

  1. A) A surety theoretically expects no losses to occur.
  2. B) The principal is the party who agrees to answer for the debt, default, or obligation of another party.
  3. C) The surety has the legal right to recover a loss payment from the defaulting principal.
  4. D) There are three parties to a surety bond: the principal, the surety, and the obligee.

Answer: B

25

Graham is a cashier at a convenience store. A customer pulled a gun on him, and said that he would shoot Graham unless he gave him all the money in the cash register. This crime, which is covered under the ISO commercial crime coverage form, is called

  1. A) extortion.
  2. B) murder.
  3. C) robbery.
  4. D) burglary.

Answer: C

26

A cashier at Food World Supermarket accepted a phony $100 bill. Which ISO commercial crime coverage is designed to cover such a loss?

  1. A) Forgery or Alteration
  2. B) Money Orders and Counterfeit Currency
  3. C) Inside the Premises—Theft of Money and Securities
  4. D) Inside the Premises—Robbery or Safe Burglary of Other Property

Answer: B

27

XYZ Insurance Company markets a wide range of coverages. One type of coverage provides monetary compensation if a bonded party fails to perform certain acts. This coverage is called

  1. A) property insurance.
  2. B) liability insurance.
  3. C) a fidelity bond.
  4. D) a surety bond.

Answer: D

28

Al's Electric Service is an electric contracting company in Metro City. The owner of the company, Al Richards, posted a bond guaranteeing that all work performed by his company will comply with local building codes. This bond is an example of a

  1. A) fiduciary bond.
  2. B) license and permit bond.
  3. C) contract bond.
  4. D) judicial bond.

Answer: B

29

State X hired Build-Right Construction to build a bridge. State X required that construction be completed within 2 years after the contract was signed. Les Johnson is the president of Build-Right. State X required that Build-Right's promise to perform be guaranteed by a third party. Build-Right purchased a performance bond from Rock Solid Indemnity. The bond requires Rock Solid to be responsible if Build-Right does not have the project completed on time. In this scenario, which party is the principal?

  1. A) State X
  2. B) Build-Right Construction
  3. C) Les Johnson
  4. D) Rock Solid Indemnity

Answer: B

30

State X hired Build-Right Construction to build a bridge. State X required that construction be completed within 2 years after the contract was signed. Les Johnson is the president of Build-Right. State X required that Build-Right's promise to perform be guaranteed by a third party. Build-Right purchased a performance bond from Rock Solid Indemnity. The bond requires Rock Solid to be responsible if Build-Right does not have the project completed on time. In this scenario, which party is the obligee?

  1. A) State X
  2. B) Build-Right Construction
  3. C) Les Johnson
  4. D) Rock Solid Indemnity

Answer: A

31

State X hired Build-Right Construction to build a bridge. State X required that construction be completed within 2 years after the contract was signed. Les Johnson is the president of Build-Right. State X required that Build-Right's promise to perform be guaranteed by a third party. Build-Right purchased a performance bond from Rock Solid Indemnity. The bond requires Rock Solid to be responsible if Build-Right does not have the project completed on time. In this scenario, which party is the surety?

  1. A) State X
  2. B) Build-Right Construction
  3. C) Les Johnson
  4. D) Rock Solid Indemnity

Answer: D

32

In a surety arrangement, the party who benefits from the bond if the bonded party fails to perform is the

  1. A) principal.
  2. B) obligee.
  3. C) fidelity.
  4. D) surety.

Answer: B

33

Tenth National Bank extended a $2 million loan to ABC Development Company. Tenth National accepted a mortgage on a building as collateral for the loan. The mortgagee's signature on the loan, however, was a forgery. The resulting loss is covered by which financial institution bond coverage?

  1. A) Insuring Agreement A— Fidelity
  2. B) Insuring Agreement D—Forgery or Alteration
  3. C) Insuring Agreement E—Securities
  4. D) Insuring Agreement G—Fraudulent Mortgages

Answer: D

34

Insurer A began to provide crime insurance coverage for JKL Company three months ago. Insurer B provided coverage up until the time Insurer A's coverage became effective. Forty-five days after the effective date of Insurer A's coverage, a loss was discovered that occurred while Insurer B was providing coverage. The loss would have been covered under Insurer A's policy had it been in effect the previous period. Which policy provision in the current Insurer A policy would make Insurer A responsible for this loss?

  1. A) loss sustained during prior insurance not issued by us
  2. B) termination as to any employee
  3. C) extended reporting period
  4. D) loss sustained form

Answer: A

35

One commercial crime policy condition is "termination as to any employee." This condition terminates crime coverage

  1. A) on any employee once he or she is no longer employed by the company.
  2. B) on any employee once it is learned that he or she has committed a theft or dishonest act.
  3. C) on any employee who does not wish to be covered under the policy.
  4. D) on a selected category of employees (e.g. cashiers or clerical employees).

Answer: B

36

Bishop Appliance Store is covered by a commercial crime insurance policy. The policy provides coverage for "Employee Theft" on a blanket basis. When the store owner arrived to open the store for business one morning, he discovered that many small electrical appliances were missing. A surveillance tape showed a company employee had disabled the burglar alarm before leaving work, and had returned to the store later and had taken the appliances. Which of the following statements regarding this loss is true?

  1. A) There is no coverage under "Employee Theft" as the loss was property, not money.
  2. B) There is no coverage as the employee was not specifically named in the policy.
  3. C) There is coverage because "Employee Theft" includes coverage for property.
  4. D) There is no coverage as it requires that the employee be caught while committing the theft.

Answer: C

37

Which of the following statements about the commercial crime insurance policy is true?

  1. A) Loss from the unauthorized disclosure of confidential information is covered.
  2. B) Theft committed by the named insured or his/her partners is covered.
  3. C) Inventory shortages are only covered if proof of loss depends on an inventory computation or on a profit and loss computation.
  4. D) Indirect losses, such as loss of profits after a business is closed because of a burglary, are excluded.

Answer: D

38

Metro City would like a pedestrian bridge constructed across Big Creek. The city will accept bids on the project until a specified date. Bidders must submit a bid bond that guarantees if the bid is accepted, the bidder will sign the construction contract and furnish a bond that guarantees the construction work will be completed according to contract specifications. This second bond the bidder must post is a

  1. A) performance bond.
  2. B) payment bond.
  3. C) maintenance bond.
  4. D) completion bond.

Answer: A

39

Two tellers of a Tenth National Bank branch colluded to embezzle $40,000 over a six-month period. State bank examiners detected the embezzlement during a routine bank examination. Tenth National purchased a financial institution bond. Under which of the following insuring agreements is this loss covered?

  1. A) Insuring Agreement A—Fidelity
  2. B) Insuring Agreement B—On Premises
  3. C) Insuring Agreement C—In Transit
  4. D) Insuring Agreement D—Forgery or Alteration

Answer: A

40

Which of the following statements is (are) true with respect to the kidnap/ransom and extortion coverage available through ISO’s Commercial Crime Coverage program?

  1. It covers the loss of money that is paid for ransom if someone is kidnaps.
  2. It covers some indirect costs association with a kidnapping, such as hiring a hostage negotiator.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: C

41

Which of the following statements is true with regard to the kidnap/ransom extortion coverage available through ISO’s Commercial Crime Coverage program?

  1. A) Ransom is covered only if the hostage is returned alive.
  2. B) Money surrendered as a result of an extortion threat is covered.
  3. C) The kidnap/ransom coverage is limited to the direct loss associated with the kidnapping–the ransom payment.
  4. D) This coverage can only be written on a monoline basis and cannot be combined with other crime coverages.

Answer: B

42

Which of the following statements is true regarding covered losses under the commercial crime coverage form?

  1. A) Theft committed by business partners of the named insured is covered.
  2. B) Money surrendered as a result of an extortion threat is covered.
  3. C) A loss that results from disclosure of confidential business information, such as a patent to trade secret, is covered.
  4. D) Liability associated with data security breaches is excluded.

Answer: D