Deck 23: Risk Management

Question 1

Nothing can be done to prevent losses from natural disasters.

Answer 1

False

Question 2

Wrongful acts or admissions for which an injured party can take legal action against the wrongdoer to seek monetary damages is called contractual liability.

Answer 2

False

Question 3

Product liability could be classified as a source of tort liability.

Answer 3

True

Question 4

According to the textbook, risk is a condition in which there will be a known and adverse deviation from a desired outcome that is expected or hoped for.

Question 5

Business risks can be classified into two broad categories-asset risk and pure risk.

Question 6

Risk management and insurance management are synonymous.

Question 7

Because of close management, small business owners are less vulnerable to business swindles than are their large firm counterparts.

Question 8

Personal property includes any property other than real property, including buildings, machinery, equipment, furniture, fixtures, stock, and vehicles.

Question 9

A property loss that arises from an inability to carry on normal business operations as a result of a direct loss is called an indirect loss.

Question 10

A fidelity bond protects against loss from employee fraud.

Question 11

Applied to a business, risk relates to the possibility of losses associated with the firm's reputation.

Question 12

Fortunately for the entrepreneur, many property-oriented risks are insurable.

Question 13

Small businesses are particularly vulnerable to employee fraud because their control systems are characteristically ineffective.

Question 14

Flood damage to movable property is insurable.

Question 15

Real property excludes anything physically attached to land, such as buildings.

Question 16

Risk management in a small firm is essentially the same as risk management in a large firm.

Question 17

Pure risk refers to a situation where only loss or no loss can occur-there is no potential gain.

Question 18

Partially self-funded insurance programs that limit the self-insured portion of an employee's medical coverage to a specific amount is commonly referred to as an aggregate stop loss limit.

Question 19

Actual cash value (ACV) refers to the purchased value of a property.

Question 20

Self-insurance requires designating part of a firm's earnings as a cushion against possible future losses.

Question 21

One risk that small businesses do not normally consider is loss due to the disability of a partner or other key employee of the company.

Question 22

Risk financing is the action of making funds available to cover losses that could not be eliminated by risk control.

Question 23

A risk management program requires all of the following except

A) identification of risks.
B) evaluation of risks.
C) controlling risks.
D) assessment of industry risk standards.

Question 24

A consulting firm that typically does not have clients visit its business location would have minimal premises liability exposure.

Question 25

Which of the following is one of the three groups into which risk can be classified?

A) Substantive
B) Emerging
C) Critical
D) Reportable

Question 26

Which of the following is not encompassed in the broad meaning of risk management?

A) Uninsurable risks
B) Impermeable risks
C) Insurable risks
D) Noninsurance approaches to reducing all types of pure risks

Question 27

A small company can protect itself against the death of important personnel by carrying key person insurance.

Question 28

Business interruption insurance pays for lost income.

Question 29

Market risk is uncertainty associated with a situation where only loss or no loss can occur.

Question 30

Harold's ownership of a moving van for use in his business represents which form of risk?

A) Uninsurable risk
B) Pure risk
C) Insurable risk
D) Market risk

Question 31

An approach to property insurance that covers all direct damage to property except damage caused by perils specifically excluded is called the all-risk approach.

Question 32

Studies have shown that almost all small business managers carry sufficient insurance protection.

Question 33

If a delivery truck is damaged in an accident, impairing the ability of a business to get its goods to customers, the type of loss incurred is a(n)

A) pure loss
B) indirect loss
C) direct loss
D) market loss

Question 34

Pure risk, as stated in the textbook, is

A) a chance all entrepreneurs take.
B) a probability that adverse conditions will result.
C) a condition in which there is a possibility that an adverse deviation from a desired outcome will occur.
D) the uncertainty associated with a situation where only loss or no loss can occur.

Question 35

In its general form, a self-insurance program

A) designates funds for property.
B) designates funds for workers' compensation.
C) is a contingency fund for potential losses, regardless of their source.
D) is administered by an insurance company.

Question 36

Loss prevention is defined as lessening the frequency, severity, or unpredictability of losses.

Question 37

Driving as safely as possible is an example of

A) loss prevention.
B) loss avoidance.
C) loss reduction.
D) loss control.

Question 38

One of the advantages of a Business Owners Policy (BOP) is the automatic inclusion of business interruption coverage.

Question 39

Purchasing a fidelity bond on the company treasurer is a form of risk ____.

A) financing
B) provisioning
C) retention
D) transfer

Question 40

Risk, as stated in the textbook, is

A) a chance all entrepreneurs take.
B) a probability that adverse conditions will result.
C) a possibility of suffering harm or loss.
D) usually avoidable.

Question 41

Theft due to a burglary would be classified as a

A) real property loss.
B) personal property loss.
C) consumer loss.
D) direct loss.

Question 42

A business owner's policy is unique in that

A) it contains automatic replacement protection.
B) the business owner cannot be the designated beneficiary.
C) property insured by the policy must have an after-loss residual value.
D) it cannot exclude named perils.

Question 43

Damage to a building by fire is an example of

A) a benign neglect loss.
B) a direct loss.
C) a tort-based liability claim.
D) a depreciated cash value loss.

Question 44

Compensatory damages include ____ damages.

A) economic
B) breach
C) tort
D) punitive

Question 45

Traditionally, commercial property insurance has valued all property loss at

A) the depreciated value of the damaged or lost property.
B) the undepreciated value of the damaged or lost property.
C) the actual cash value of the damaged or lost property.
D) the purchase value of the damaged or lost property.

Question 46

Which of the following is not one of the legal liabilities that may arise from various business activities?

A) statutory liability
B) contractual liability
C) tort liability
D) pure liability

Question 47

Punitive damages are intended to have a ____ effect, sending a message to society that such conduct will not be tolerated.

A) chilling
B) deterrent
C) provocative
D) statutory

Question 48

Evaluation and review is an important step in the risk management process because

A) it is difficult to select an effective method to manage risks.
B) conditions change.
C) it is nearly impossible to evaluate risk effectively.
D) entrepreneurs find it challenging to identify the major risks that they face.

Question 49

Business interruption insurance covers

A) lost income.
B) shoplifting.
C) debts to suppliers.
D) defective products.

Question 50

Under a coinsurance provision requiring the building insured for at least 80 percent of its value, the recovery on an insured loss of $100,000 on the building with a replacement value of $500,000 that was insured for only $300,000 would be limited to ____.

A) $20,000
B) $30,000
C) $50,000
D) $75,000

Question 51

Most entrepreneurs do not realize the value of which of the following types of insurance?

A) Fire insurance
B) Business interruption insurance
C) Property insurance
D) Theft insurance

Question 52

The negligent act is the ____ of the loss in a tort liability claim.

A) circumstantial relationship
B) obvious injury
C) proximate cause
D) assumed basis

Question 53

The following are elements that must be present for someone to be found guilty of a negligent act in a tort claim except

A) existence of a legal duty between the parties
B) failure to provide an extraordinary standard of care
C) presence of injury or damages
D) evidence that the negligence is the proximate cause of the loss

Question 54

Pain, suffering, mental anguish and loss of physical abilities are included in which type of damages in a tort case?

A) non economic
B) compensatory
C) economic
D) punitive

Question 55

Self-insurance means

A) owning an insurance company.
B) owning stock in an insurance company.
C) saving to have money to cover possible future losses.
D) having coverage on the owner of the business.

Question 56

Which of the following is not defined as personal property?

A) Buildings
B) Furniture
C) Fixtures
D) Vehicles

Question 57

A unique, attractive feature of a BOP is that both real and personal property are valued on

A) an appraised cash value basis.
B) a market-adjusted depreciated value basis.
C) a replacement-cost basis.
D) a proximal-to-value basis.

Question 58

A coinsurance provision requires that a property be insured for at lease ____ percent of its value.

A) sixty
B) seventy
C) eighty
D) ninety

Question 59

Damage to a building due to a tornado is a ____ loss.

A) real property
B) personal property
C) consumer
D) uninsurable

Question 60

Mistakes that an employee makes made in assembling a product for a customer could be a source of ____.

A) premises liability
B) employee liability
C) product liability
D) personal liability

Question 61

Assume that the physical property of a business is valued at $50,000. The company's commercial property policy contains a coinsurance clause with a stated percentage of 80 percent. The company insures the property for $30,000 (75 percent of the specified minimum). The company incurs a fire loss of $20,000. How much of the loss will the insurance company pay for?

A) $20,000
B) $15,000
C) $0
D) $10,000

Question 62

Doug's BOP on his fishing guide business excludes property losses due to the wakes of other fishing boats. This is an example of the ____ approach to property insurance.

A) foreseen risk
B) reasonable-person standard
C) named-peril
D) insurance-to-value

Question 63

Which of the following is not a tort liability discussed in the book?

A) Premises liability
B) National liability
C) Employee liability
D) Directors and officers liability

Question 64

What are the five steps required to implement risk management and its goal of preserving a firm's assets and earning power?

Question 65

Most small business advisors recommend ____ life insurance for key-person policies.

A) whole
B) universal
C) term
D) blanket coverage

Question 66

John Dresser, who owns a small manufacturing concern, has just signed a commercial property policy with a clause requiring Dresser to maintain insurance equal to 80 percent of the property's value at the time of an actual loss. Dresser has accepted what is known as a ____ clause.

A) coinsurance
B) realty protection
C) realty reserve
D) override protection

Question 67

Key-person disability insurance

A) is common in small firms.
B) protects the firm from losses due to the death of a key employee.
C) replaces revenue lost when a key employee is disabled.
D) is rarely recommended by advisors to small businesses.

Question 68

List the two basic ways to cope with risk in a small business and identify tools associated with each of these. Which method involves an insurance program?

Question 69

List the basic principles in evaluating an insurance program.

Question 70

A customer's slip and fall injury would be covered by

A) general liability insurance.
B) surety bonds.
C) business interruption insurance.
D) commercial property coverage.

Question 71

Which of the following describe land and anything physically attached to the land, such as buildings?

A) Real property
B) Personal property
C) Replacement value of property
D) Actual cash value

Question 72

Aloft Aircraft Company can purchase ____ life insurance on its chief aircraft designer as an inexpensive way to cover its losses should something untoward happen to that key person.

A) whole
B) universal
C) term
D) blanket coverage

Question 73

List and briefly explain the different types of property.

Question 74

General liability insurance covers

A) business interruption.
B) injury to customers caused by a firm's product.
C) injury to employees.
D) explosion.

Question 75

Regarding partners in a small business, statistics reveal that the risk of disability is ____ the risk of death.

A) greater than
B) less than
C) about the same as
D) correlated with

Question 76

Which of the following is an insurance coverage that is required by law in most states?

A) Workers' compensation
B) Employee bonding
C) Product liability insurance
D) Loss of key executive coverage

Question 77

Life insurance purchased by a company with the company as sole beneficiary is

A) key-person insurance.
B) a surety bond.
C) business interruption insurance.
D) credit insurance.

Question 78

The type of insurance that provides protection against a type of customer-oriented risk is

A) general liability insurance.
B) surety bonds.
C) business interruption insurance.
D) commercial property coverage.

Question 79

Which statement is false concerning Workers' Compensation Legislation?

A) Creates an absolute liability on the employer
B) Provide certain benefits to employees
C) Covers all injuries
D) Covers injuries occurring in the workplace only

Question 80

Which of the following describe the cost to replace or replicate property at today's prices?

A) Real property
B) Personal property
C) Replacement value of property
D) Actual cash value