Principles of Risk Management and Insurance - Chapter 10

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Analysis of Insurance Contracts
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1

That part of a property and liability insurance contract that contains information about the property or activity to be insured is called the

  1. A) declarations.
  2. B) insuring agreement.
  3. C) exclusions.
  4. D) conditions.

Answer: A

2

What information is contained in the insuring agreement of an insurance policy?

  1. A) a description of the property or life to be insured
  2. B) a summary of the major promises of the insurer
  3. C) a summary of the obligations of the insured
  4. D) a list of the property, losses, and perils that are not covered

Answer: B

3

Which of the following statements about "open-perils" coverage is (are) true?

  1. All losses are covered except those losses specifically excluded.
  2. The burden of proof is on the insured to prove that a loss is covered.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: A

4

The exclusion of flood in a homeowners policy is an example of an

  1. A) excluded activity.
  2. B) excluded condition.
  3. C) excluded property.
  4. D) excluded peril.

Answer: D

5

Exclusions are used in insurance policies for all of the following reasons EXCEPT

  1. A) to reduce moral hazard.
  2. B) to waive policy conditions.
  3. C) to eliminate coverage for uninsurable perils.
  4. D) to eliminate coverage not needed by typical insureds.

Answer: B

6

Reasons why a peril may be considered uninsurable and therefore excluded from insurance contracts include which of the following?

  1. The losses from the occurrence of the peril may be due to a predictable decline in value.
  2. The losses from the occurrence of the peril may be incalculable and catastrophic.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: C

7

The policy provision requiring the filing of proof of loss with the insurer is an example of a(n)

  1. A) declaration.
  2. B) condition.
  3. C) insuring agreement.
  4. D) miscellaneous provision.

Answer: B

8

Which of the following statements about the definition of the insured is (are) true?

  1. In some cases, a person who is not specifically named may be classified as an insured.
  2. Under no circumstances can more than one person be named as an insured.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: A

9

All of the following statements about endorsements and riders are true EXCEPT

  1. A) They are usually written.
  2. B) They can be used to add or delete policy provisions.
  3. C) They normally take precedence over other conflicting policy provisions.
  4. D) They are primarily used to circumvent legislation requiring specific policy provisions.

Answer: D

10

Deductibles are not used in which of the following type of insurance?

  1. A) life insurance
  2. B) health insurance
  3. C) property insurance
  4. D) disability income insurance

Answer: A

11

One of the reasons that deductible are used in insurance policies is to

  1. A) eliminate coverage for small claims.
  2. B) place restrictions or limits on the insurer's promise to perform.
  3. C) provide broader coverage by increasing the number of perils covered.
  4. D) exclude perils that are not insurable.

Answer: A

12

The deductible used for automobile collision losses is an example of a(n)

  1. A) calendar year deductible.
  2. B) elimination period.
  3. C) straight deductible.
  4. D) aggregate deductible.

Answer: C

13

Which of the following statements about a calendar-year deductible is (are) true?

  1. It requires the insured to pay a specified amount of each claim regardless of when the claim occurs during the year and regardless of any previous claims during the year.
  2. It is used only in policies which cover direct property losses.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: D

Answer: D

14

A provision in a disability income insurance policy that requires a person to be disabled for 60 days before receiving benefits is an example of a(n)

  1. A) calendar year deductible.
  2. B) grace period.
  3. C) elimination period.
  4. D) probationary period.

Answer: C

15

At what point in time must an insured meet the coinsurance requirement in a property insurance policy in order to avoid having to pay a portion of the loss?

  1. A) only at the time of loss
  2. B) only at the time when the policy is issued
  3. C) only at the time of policy application
  4. D) both at the time when the policy is issued and at the time of loss

Answer: A

16

David owns a commercial building with a replacement cost of $4 million. The building is insured on a replacement cost basis for $2.4 million under a fire insurance policy that has an 80 percent coinsurance clause. How much will David collect if the building sustains a covered fire loss with a replacement cost of $80,000?

  1. A) $50,000
  2. B) $60,000
  3. C) $66,667
  4. D) $80,000

Answer: B

17

The primary purpose of coinsurance in property insurance is to

  1. A) reduce moral hazard.
  2. B) achieve equity in rating.
  3. C) minimize problems in settling claims.
  4. D) eliminate small losses.

Answer: B

18

Which of the following statements about problems arising from the use of a coinsurance clause is (are) true?

  1. The amount of insurance should be periodically evaluated to avoid a coinsurance penalty because of inflation.
  2. An agreed value coverage option is one method used to solve the problem of values that fluctuate throughout the policy term.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: C

19

Connie has an individual medical expense policy with a $1,000 deductible. She is required to pay 20 percent of covered expenses in excess of the deductible. The insurer will pay 80 percent of expenses in excess of the deductible. If Connie has eligible medical expenses of $26,000, how much will be paid by her insurer?

  1. A) $10,000
  2. B) $11,000
  3. C) $20,000
  4. D) $21,000

Answer: C

20

Purposes of the coinsurance clause in health insurance contracts include which of the following?

  1. To reduce premiums.
  2. To exclude coverage for certain medical procedures.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: A

21

The purpose of other-insurance provisions is to

  1. A) eliminate the need for deductibles.
  2. B) penalize those insureds who carry inadequate amounts of insurance.
  3. C) specify who will pay losses if the insurer is bankrupt.
  4. D) preserve the principle of indemnity.

Answer: D

22

Lisa has three fire insurance policies on her office building. The policy from company A is for $400,000, and the policies from companies B and C are for $100,000 each. If Lisa has a $360,000 loss, how much of the loss will be covered by each policy if the loss is settled on a pro rata basis by the insurers?

  1. A) each policy: $120,000
  2. B) policy A: $160,000; policies B and C: $100,000 each
  3. C) policy A: $240,000; policies B and C: $60,000 each
  4. D) policy A: $360,000; policies B and C: nothing

Answer: C

23

Kevin has three liability policies which provide for contribution by equal shares if other insurance applies to a loss. How much will each policy pay for a $3,000,000 liability judgment if policy A provides $500,000 of coverage, policy B provides $1,000,000 of coverage, and policy C provides $3,000,000 of coverage?

  1. A) Each policy will pay $500,000, and Kevin must pay the remaining $1,500,000.
  2. B) Policy A will pay $500,000, policies B and C will each pay $1,000,000, and Kevin must pay the remaining $500,000.
  3. C) Policy A will pay nothing, policy B will pay $1,000,000, and policy C will pay $2,000,000.
  4. D) Policy A will pay $500,000, policy B will pay $1,000,000, and policy C will pay $1,500,000.

Answer: D

24

Helen and John both own automobiles on which they carry liability insurance. If Helen is negligent and has an accident while driving John's car with his permission, how will each insurer respond to any liability judgment against Helen?

  1. A) The insurers will pay the judgment on a pro rata basis.
  2. B) John's insurer will pay on an excess basis if Helen's insurance is insufficient to cover the judgment.
  3. C) Helen's insurance will pay on an excess basis if John's insurance is insufficient to cover the judgment.
  4. D) The policies will pay the judgment on the basis of contribution by equal shares.

Answer: C

25

Kate is covered under her employer's group health plan. She is also covered as a dependent under her husband's group health plan. Under the usual coordination-of-benefits provision, how will each company respond to a claim filed by Kate?

  1. A) Kate's plan is primary, and her husband's plan is excess.
  2. B) Her husband's plan is primary, and Kate's plan is excess.
  3. C) The plan of the person with the birthday earliest in the year pays first, and the other plan is excess.
  4. D) Each plan will pay 50 percent of the claim.

Answer: A

26

Eric's property was damaged in an accident. He phoned his agent to see if the loss was covered under his property insurance policy. The agent said, "As long as the cause of loss is not specifically excluded in the policy, the loss is covered." Based on the agent's answer, what type of insuring agreement appears in the policy?

  1. A) unconditional coverage
  2. B) named-perils coverage
  3. C) extended-perils coverage
  4. D) "open-perils" coverage

Answer: D

27

Janet hit a wall causing a large dent in the fender of her car. She was busy at work and delayed reporting the damage to her insurer for 9 months. When she finally reported the claim, her insurer denied payment, stating, "Although such a loss is usually covered, you are required under the terms of the contract to provide prompt notification in case of loss." The prompt notification requirement is an example of a(n)

  1. A) declaration.
  2. B) definition.
  3. C) insuring agreement.
  4. D) condition.

Answer: D

28

Mark reviewed his homeowners policy. He learned that his personal property was insured on an actual cash value basis. He would like replacement cost coverage on his personal property. He contacted his agent who said, "I'll simply add an amendment to your contract that changes the basis of recovery to replacement cost." The written provision the agent was referring to is called a(n)

  1. A) endorsement.
  2. B) coinsurance clause.
  3. C) binder.
  4. D) deductible.

Answer: A

29

Under the terms of Jenny's auto insurance policy, she must pay the first $500 of any physical damage loss to her vehicle before her insurer will pay anything. What type of deductible is included in Jenny's auto insurance policy?

  1. A) calendar-year deductible
  2. B) waiting period
  3. C) straight deductible
  4. D) aggregate deductible

Answer: C

30

Shauna hurt her back and was unable to work. She filed a claim under her disability income insurance policy. Under terms of the policy, a period of time must pass between when the injury occurred and when the insurer begins to replace lost earnings. This time period is called a(n)

  1. A) grace period.
  2. B) enrollment period.
  3. C) probationary period.
  4. D) elimination (waiting) period.

Answer: D

31

ABC Company insured its building on a replacement cost basis for $700,000 under a property insurance policy that included an 80 percent coinsurance clause. The building had a replacement cost of $1 million when it sustained a $40,000 loss. How much will ABC Company receive from its insurer, assuming no deductible applies?

  1. A) $33,333
  2. B) $35,000
  3. C) $36,000
  4. D) $40,000

Answer: B

32

XYZ Company insured its building on a replacement cost basis for $450,000 under a property insurance policy that included an 80 percent coinsurance clause. The building had a replacement cost of $500,000 when it sustained a $50,000 loss. How much will XYZ Company receive from its insurer, assuming no deductible applies?

  1. A) $42,500
  2. B) $45,000
  3. C) $50,000
  4. D) $56,250

Answer: C

33

Laura's medical insurance policy includes a $500 deductible. Laura is required to pay 20 percent of covered expenses in excess of the deductible, and her insurer will pay 80 percent of covered expenses in excess of the deductible. Laura was hospitalized and her covered medical expenses were $10,500. How much of the $10,500 will be paid by the insurer?

  1. A) $7,500
  2. B) $7,900
  3. C) $8,000
  4. D) $10,000

Answer: C

34

James purchased liability insurance with a $100,000 limit from Insurer A. When Insurer A denied a claim that James thought should be covered, he bought a second liability insurance policy with a $150,000 limit from Insurer B. Before he cancelled the policy with Insurer A, a $60,000 loss occurred. If this loss is settled on a pro rata basis, how much must each insurer pay?

  1. A) Insurer A will pay $10,000 and Insurer B will pay $50,000.
  2. B) Insurer A will pay $20,000 and Insurer B will pay $40,000.
  3. C) Insurer A will pay $24,000 and Insurer B will pay $36,000.
  4. D) Insurer A will pay $40,000 and Insurer B will pay $20,000.

Answer: C

35

Jane purchased a $50,000 liability insurance policy from Insurer A. Fearing that she did not have enough liability insurance, she purchased an additional $100,000 of liability coverage from Insurer B. As a result of a negligent act, Jane was ordered to pay $75,000 in damages. Assuming the coverage from Insurer A is primary and the coverage from Insurer B is excess, how will this claim be settled?

  1. A) Insurer A will pay $50,000 and Insurer B will pay $25,000.
  2. B) Insurer A will pay $37,500 and Insurer B will pay $37,500.
  3. C) Insurer A will pay $25,000 and Insurer B will pay $50,000.
  4. D) Insurer A will pay nothing and Insurer B will pay $75,000.

Answer: A

36

The purpose of a coordination-of-benefits provision in group health insurance plans is to

  1. A) determine which plan pays first if more than one plan covers a loss.
  2. B) determine which health care provider an insured may use for his or her care.
  3. C) determine if the calendar-year deductible has been satisfied by the insured.
  4. D) determine if the employee is eligible for coverage under the group health plan.

Answer: A

37

As an alternative to coinsurance, rate discounts can be given as the amount of insurance to value increases. This alternative is called

  1. A) graded rates.
  2. B) agreed value coverage.
  3. C) retrospective rating.
  4. D) manual rating.

Answer: A

38

Mark owns a building that he insured for $90,000. The replacement cost of the building is $100,000. Mark's property insurance policy has an 80 percent coinsurance clause. Ignoring any deductible, if Mark's building is destroyed by a covered peril, how much will Mark receive from his insurer?

  1. A) $80,000
  2. B) $90,000
  3. C) $101,250
  4. D) $112,500

Answer: B

39

A special coverage policy is a policy that

  1. A) has no exclusions.
  2. B) provides open-perils coverage.
  3. C) provides coverage under special conditions.
  4. D) has coverage for multiple lines of insurance.

Answer: B

40

The section of the insurance policy that includes provisions that qualify or limit the insurer's promise to perform is the

  1. A) definitions.
  2. B) insuring agreement.
  3. C) exclusions.
  4. D) conditions.

Answer: D

41

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

  1. A) exclusion.
  2. B) deductible.
  3. C) other-insurance provision.
  4. D) coinsurance provision.

Answer: B

42

Roger owns some farmland that he rents to a tenant. The tenant lives in an old farmhouse on the property and raises crops on the land. Roger is concerned about possible legal liability if the tenant injures someone. Roger requires the tenant to have liability insurance and to add himself to the liability coverage through an endorsement. Under the tenant's liability insurance, Roger is a(n)

  1. A) additional insured.
  2. B) first-named insured.
  3. C) second-named insured.
  4. D) other insured.

Answer: A

43

Maria's home was damaged by an earthquake. As Maria has open-perils coverage on her home, she was surprised to learn that her loss was not covered. Which section of a property insurance policy specifies which perils, property, and types of losses are not covered?

  1. A) the declarations
  2. B) the exclusions
  3. C) the conditions
  4. D) the insuring agreement

Answer: B

44

In determining insurance limits and deductibles, an important concept is that insurance should be used to pay big losses rather than small losses. The objective is to insure big losses that could cause financial ruin and to exclude small losses that can be budgeted out of current income. This concept is called the

  1. A) law of large numbers.
  2. B) efficient loss-cost concept.
  3. C) large-loss principle.
  4. D) retention-transfer tradeoff.

Answer: C

45

An insurance policy provision that specifies how a property loss will be settled if more than one property insurance policy covers the loss is the

  1. A) insuring agreement provision.
  2. B) loss settlement provision.
  3. C) other insurance provision.
  4. D) coinsurance provision.

Answer: C

46

Property insurance policies contain declarations, conditions, definitions, exclusions, and an insuring agreement. However, some policy terms, such as subrogation, cancellation, other insurance, and assignment do not fall into these categories. The part of an insurance contract in which these provisions can be found is the

  1. A) endorsements.
  2. B) binders.
  3. C) conditions.
  4. D) miscellaneous provisions.

Answer: D

47

Ann Parks and Robert Evans jointly own a grocery store. Ann and Robert are both named insureds on the property insurance covering the store, but Ann is the first named insured. Which of the following statements is true with regard to Ann’s status as the first named insured?

  1. A) Any loss settlement is paid to Ann only.
  2. B) Ann is responsible for making sure that the premium has been paid.
  3. C) Ann can assign the policy without the consent of the insurer.
  4. D) Ann can waive policy conditions.

Answer: B

48

Maggie purchased a life insurance policy. She was concerned that if she became disabled, she would no longer be able to pay the premiums. Her agent added an amendment of the policy stating that if she became disabled, future premium payments would be waived. Such an amendment to a life insurance policy is called a(n)

  1. A) binder.
  2. B) rider.
  3. C) warranty.
  4. D) schedule.

Answer: B

49

Homeowners insurance policies usually cover resident relatives of the named insured who are under age 24 and who are full-time students away from home. Under the homeowners policy, these full-time students are considered

  1. A) first named insureds.
  2. B) second named insureds.
  3. C) other insureds.
  4. D) additional insureds.

Answer: C