Principles of Risk Management and Insurance - Chapter 21

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1

Under financial responsibility laws, proof of financial responsibility is generally required under which of the following circumstances?

  1. A) The use of an auto by any driver with fewer than 3 years of driving experience
  2. B) When an individual renews his or her driver's license
  3. C) Failure to pay a final judgment resulting from an auto accident
  4. D) The accumulation of unpaid parking tickets exceeding a specified value

Answer: C

2

Defects of financial responsibility laws include which of the following?

  1. Accident victims may not be fully compensated for their injuries.
  2. They apply only to property damage losses, not to bodily injury claims.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: A

3

Criticisms of compulsory insurance laws include which of the following?

  1. They provide less than complete protection since they require only a minimum amount of liability insurance.
  2. Even with compulsory insurance laws, a substantial number of motorists continue to operate vehicles without insurance.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: C

4

Which of the following statements about unsatisfied judgment funds is (are) true?

  1. An accident victim must obtain a judgment against the motorist who caused an accident and must show the judgment cannot be collected.
  2. The major disadvantage is that the negligent uninsured motorist is relieved of legal liability.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: A

5

Which of the following statements about uninsured motorists coverage is true?

  1. A) An innocent motorist must establish that the uninsured motorist is legally liable.
  2. B) The amount of coverage in most states must be at least $300,000.
  3. C) Property damage is covered in all states but bodily injury is not covered in all states.
  4. D) The coverage is very expensive and beyond the affordability of all but wealthy insureds.

Answer: A

6

Which of the following statements is true with respect to a pure no-fault auto insurance plan?

  1. A) Under such a plan, you would collect from your own insurer and retain the right to sue the other party if your injuries surpass a dollar or verbal threshold.
  2. B) Most no-fault plans that have been adopted by states are pure no-fault plans.
  3. C) Under such a plan, you would collect from your own insurer and retain the right to sue the other party without having to satisfy a threshold.
  4. D) Under such a plan, an accident victim cannot sue the other party, and no payments are made for pain and suffering.

Answer: D

7

Which of the following statements about modified no-fault laws is (are) true?

  1. Claims less than a certain dollar threshold must be assumed by the injured accident victim, but the injured person has the right to sue a negligent driver.
  2. Claims above a certain dollar threshold are paid in full by an injured accident victim's insurer, and the right to sue a negligent driver is eliminated.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: D

8

A no-fault law under which benefits are paid to an accident victim without regard to fault and the accident victim can still sue the negligent driver who caused the accident is referred to as a(n)

  1. A) pure no-fault law.
  2. B) add-on no-fault law.
  3. C) modified no-fault law.
  4. D) choice no-fault law.

Answer: B

9

All of the following are arguments for no-fault automobile insurance laws EXCEPT

  1. A) No-fault is unnecessary as it's easy to determine which driver was negligent when a multiple-vehicle accident occurs.
  2. B) A large portion of each premium dollar is used for purposes other than compensating accident victims for their losses.
  3. C) There are delays in compensating accident victims under the tort system.
  4. D) Seriously injured accident victims tend to be overcompensated, while those with small economic losses are inadequately indemnified.

Answer: D

10

Arguments often used against no-fault automobile insurance laws include all of the following EXCEPT

  1. A) It is often difficult to determine which driver was negligent when a multiple-vehicle accident occurs.
  2. B) Many injured persons will not be compensated for their full losses because payments for pain and suffering will be eliminated.
  3. C) The defects of the negligence system are exaggerated, and the system needs only to be reformed.
  4. D) Claims of efficiency and premium saving are exaggerated, and automobile insurance premiums might actually increase.

Answer: A

11

Which of the following statements about the characteristics of current no-fault laws is true?

  1. A) Most laws in force today are pure no-fault laws.
  2. B) Most laws apply to both bodily injury and property damage.
  3. C) Most laws permit payment of survivor benefits to a surviving spouse and children.
  4. D) States with add-on plans restrict the right of accident victims to sue negligent drivers.

Answer: C

12

The term used to describe plans in which automobile insurers participate to make insurance available to drivers unable to obtain coverage in the standard market is the

  1. A) foreign market.
  2. B) fair market.
  3. C) residual (shared) market.
  4. D) high-premium market.

Answer: C

13

Under which type of automobile insurance arrangement are all automobile insurers in a state assigned their proportionate share of high-risk drivers based on the total volume of automobile business written in the state?

  1. A) automobile insurance plan
  2. B) unsatisfied judgment fund
  3. C) reinsurance facility
  4. D) specialty automobile plan

Answer: A

14

Disadvantages of automobile insurance plans include which of the following?

  1. High premiums may cause many high-risk drivers to go uninsured.
  2. Large underwriting profits have resulted in high-risk drivers subsidizing the cost of insurance for good drivers in the voluntary markets.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: A

15

Which of the following statements about joint underwriting associations for insuring high-risk drivers is (are) true?

  1. Underwriting losses are proportionately shared by all auto insurers based on premiums written in the state.
  2. Each company participating in a joint underwriting association sets it own rates.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: A

16

Which of the following statements about reinsurance facilities for insuring high-risk drivers is (are) true?

  1. Underwriting losses in the reinsurance facility are shared by all auto insurers in the state.
  2. An insurer must accept all applicants for insurance, but the insurer has the option of placing high-risk drivers in the reinsurance pool.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: C

17

Which of the following statements about automobile insurers that specialize in insuring high-risk motorists with poor driving records is (are) true?

  1. The actual premium paid by an applicant is set by the federal government and is independent of an applicant's driving record.
  2. The coverages available may be more limited than those written by insurers in the standard market.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: B

18

Which of the following statements about the factors affecting automobile insurance rates is true?

  1. A) The cost of collision coverage increases as a car gets older.
  2. B) Because of high speeds in rural areas, rural drivers tend to pay more for auto insurance than city drivers pay for auto insurance.
  3. C) Young unmarried male drivers tend to have fewer accidents than young married male drivers in the same age category.
  4. D) People who drive a car to and from work tend to be charged higher rates than those who use a car for pleasure purposes.

Answer: D

19

All of the following are major rating factors for determining private passenger automobile insurance premiums EXCEPT

  1. A) gender.
  2. B) age.
  3. C) race.
  4. D) marital status.

Answer: C

20

Which of the following statements about shopping for auto insurance is true?

  1. A) Adequate physical damage insurance on your auto is the most important consideration.
  2. B) Consideration should be given to dropping liability coverage if you drive an older car with a low market value.
  3. C) To obtain the lowest premium, an applicant should review his or her eligibility for all discounts offered.
  4. D) Price comparisons are of little value since auto insurers tend to charge the same premiums.

Answer: C

21

A state law that requires individuals who have been involved in an auto accident or who have been convicted for certain vehicle-related offenses to demonstrate the ability to pay liability claims up to a specified dollar amount is called a(n)

  1. A) financial responsibility law.
  2. B) compulsory insurance law.
  3. C) unsatisfied judgment fund law.
  4. D) "no pay, no play" law.

Answer: A

22

Bill was severely injured by an uninsured driver. Bill did not purchase uninsured motorists coverage, and the other driver, although held liable, could not pay the damages awarded. After exhausting other sources of recovery, Bill learned that his state is one of a few states that has a special fund to compensate innocent accident victims. These state funds are called

  1. A) guaranty funds.
  2. B) unsatisfied judgment funds.
  3. C) rainy-day funds.
  4. D) second injury funds.

Answer: B

23

Sharon lives in a state that has a no-fault automobile insurance law. Under the law, an injured person has the right to sue the negligent driver only if the bodily injury claim exceeds a dollar or verbal threshold. The no-fault law in Sharon's state is a(n)

  1. A) pure no-fault plan.
  2. B) modified no-fault plan.
  3. C) add-on plan.
  4. D) choice no-fault plan.

Answer: B

24

A few states have dual automobile insurance systems. A motorist can pay a higher premium and retain the right to sue under the tort system, or pay a lower premium and be covered under the state's no-fault law. This dual system is called a

  1. A) pure no-fault plan.
  2. B) modified no-fault plan.
  3. C) "no pay, no play" law.
  4. D) choice no-fault plan.

Answer: D

25

A number of benefits are payable under no-fault plans. Under one provision, benefits are paid for tasks normally performed by the insured, including such things as lawn care, housework, and home repairs. These tasks are called

  1. A) home health care services.
  2. B) hospice services.
  3. C) activities of daily living.
  4. D) essential services expenses.

Answer: D

26

Alan has been involved in three accidents and has been ticketed for a number of driving violations. He tried to purchase auto insurance, but three insurers refused to sell him coverage. The generic name for state plans designed to insure drivers like Alan is the

  1. A) exchange market.
  2. B) residual market.
  3. C) voluntary market.
  4. D) excess market.

Answer: B

27

Janet was unable to obtain auto insurance in the voluntary insurance market. She was contacted by the state insurance department and notified that XYZ Insurance would be her insurer. The mechanism used in Janet's state to provide auto insurance to high-risk drivers is a(n)

  1. A) automobile insurance plan.
  2. B) joint underwriting association.
  3. C) specialty automobile insurer.
  4. D) reinsurance facility.

Answer: A

28

In the state where Susan lives, drivers whom private insurance companies do not want to insure are placed in a common pool, and each insurer pays its pro rata share of pool losses and expenses. A common policy is used for all high-risk drivers. Susan's state handles high-risk drivers through a(n)

  1. A) automobile insurance plan.
  2. B) joint underwriting association.
  3. C) pure no-fault plan.
  4. D) specialty auto insurer.

Answer: B

29

Scott had trouble obtaining auto insurance. After three companies refused to insure him, he called the state insurance department. A representative suggested he obtain coverage through Last Chance Insurance Company because "that's all they insure—high-risk drivers." Scott contacted Last Chance. He was not refused coverage; however, the premium Scott was required to pay was three times greater than the average premium in the market. Last Chance Insurance Company is a(n)

  1. A) reinsurance facility.
  2. B) automobile insurance plan.
  3. C) specialty auto insurer.
  4. D) joint underwriting association.

Answer: C

30

Amber believes that her auto insurance premium is too high. Which of the following would most likely lower Amber's premium?

  1. A) Amber could increase her physical damage deductible.
  2. B) Amber could move from the rural area where she lives to an urban or suburban area.
  3. C) Amber could increase the amount of liability insurance that she carries.
  4. D) Amber could add "other-than-collision loss" coverage to her policy.

Answer: A

31

Which of the following statements is (are) true with respect to the use of credit-based insurance scores as an auto insurance rating factor?

  1. Insurers claim that drivers who have poor insurance scores are expected to have relatively more accidents.
  2. The use of insurance scores has been banned as a rating factor in all states as it unfairly discriminates against certain groups of individuals.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: A

32

Some states have enacted laws which prohibit uninsured drivers from suing a negligent driver for noneconomic damages, such as pain and suffering. These laws are called

  1. A) comparative negligence laws.
  2. B) "no pay, no play" laws.
  3. C) financial responsibility laws.
  4. D) unsatisfied judgment laws.

Answer: B

33

A credit-based score that insurers claim is highly predictive of future claims costs is an individual's

  1. A) combined ratio.
  2. B) loss ratio.
  3. C) insurance score.
  4. D) underwriting score.

Answer: C

34

A few states have enacted laws to make minimum amounts of liability insurance available at reduced rates to individuals who cannot afford regular insurance or who have limited financial assets to protect. The coverage made available through such a plan is called

  1. A) probationary insurance.
  2. B) uninsured motorists insurance.
  3. C) no-fault auto insurance.
  4. D) low-cost auto insurance.

Answer: D

35

New Jersey's dollar-a-day auto insurance coverage is limited to

  1. A) elderly individuals.
  2. B) Medicaid recipients.
  3. C) drivers under age 25.
  4. D) high-risk drivers.

Answer: B

36

In Maryland, drivers who are unable to obtain auto insurance in the voluntary market are insured through a(n)

  1. A) state fund.
  2. B) reinsurance facility.
  3. C) joint underwriting association
  4. D) automobile insurance plan.

Answer: A

37

The multi-car discount is based on the assumption that

  1. A) two cars owned by the same person will not be driven as frequently as one car.
  2. B) multiple vehicle owners are safer drivers.
  3. C) owners of more than one vehicle are more likely to be financially responsible.
  4. D) lower liability limits are needed if there are multiple autos insured.

Answer: A

38

The residual market for auto insurance is designed to provide insurance to

  1. A) superior risks who qualify for substantial discounts.
  2. B) owners of vintage/antique autos where the replacement cost far exceeds the actual cash value.
  3. C) drivers who are unable to obtain coverage in the standard market.
  4. D) businesses that need to insure a fleet of vehicles under a single policy.

Answer: C

39

No-fault benefits are provided by adding an endorsement to the auto insurance policy. What is this endorsement typically called?

  1. A) uninsured motorists coverage
  2. B) personal injury protection coverage
  3. C) nonowned vehicle liability coverage
  4. D) add-on benefits coverage

Answer: B

40

"No pay, no play" laws have which of the following characteristics?

  1. A) Uninsured motorists are prevented from suing for noneconomic damages.
  2. B) Recovery by accident victims is limited to the amount of liability coverage that they have purchased.
  3. C) Driving privileges are automatically terminated if the vehicle operator is stopped by the police and does not have liability insurance.
  4. D) They require auto insurance purchasers to subsidize state unsatisfied judgment funds.

Answer: A

41

Which of the following statements is true regarding unsatisfied judgment funds?

  1. A) An accident victim can choose to collect from the negligent driver or from the fund.
  2. B) The negligent driver is relieved of legal responsibility when the fund makes a payment to the accident victim.
  3. C) The maximum amount an individual can collect from the fund is usually much more than the minimum liability limits required by the state.
  4. D) An accident victim must have exhausted other means of recovery before collecting from the fund.

Answer: D

42

One benefit payable under a typical no-fault plan is "essential services expenses." Which of the following would be covered under this benefit?

  1. A) funeral expenses
  2. B) housekeeping expenses
  3. C) hospital bills
  4. D) loss of income

Answer: B

43

Some insurers are experimenting with the use of an electronic device that can be installed in a vehicle to track driving behavior. The insurers then use the information to help determine the appropriate auto insurance premium to charge. Such devices are called

  1. A) data recorders.
  2. B) radar detectors.
  3. C) original equipment manufacturer parts.
  4. D) thresholds

Answer: A

44

Some insurance companies intentionally seek to insure motorists with poor driving records. These insurers commonly insure drivers who have been turned-down or canceled by other insurers. What name is given to insurers who provide coverage to these higher-than-average risks drivers?

  1. A) alien insurers
  2. B) guaranty fund insurers
  3. C) specialty insurers
  4. D) surplus lines insurers

Answer: C

45

Ben lives in a state that has a no-fault auto insurance law. Another motorist failed to yield the right of way, and hit his car. Ben filed a claim with his own insurer. He also contacted a lawyer to discuss suing the other driver. The lawyer told Ben that while lawsuits resulting from auto accidents are permitted in the state, Ben’s injuries were not severe enough to provide legal standing for a lawsuit. What type of no-fault law is in effect in the state where Ben lives?

  1. A) pure no-fault
  2. B) add-on no-fault
  3. C) choice no-fault
  4. D) modified no-fault

Answer: D

46

Some states do not require an individual to demonstrate the ability to pay an automobile liability claim until after the individual has been involved in an accident or has been convicted for certain offenses, such as driving under the influence of alcohol. This approach to dealing with compensating innocent auto accident victims is called a(n)

  1. A) unsatisfied judgement fund.
  2. B) financial responsibility law.
  3. C) uninsured motorist law.
  4. D) compulsory insurance law.

Answer: B