Deck 23: A: Managing Risk in the Small Business

Question 1

Self-insurance requires designating part of a firm's insurance proceeds to provide life insurance on key employees.

Answer 1

False

Question 2

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

Answer 2

True

Question 3

Specific and aggregate stop loss limits would be the best insurance plans of small businesses which have at least 80 employees.

Answer 3

True

Question 4

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

Question 5

Monitoring social media is a form of risk transfer.

Question 6

An insurance agent should provide information in designing an insurance plan; the small business owner will only need to determine the price the company can afford.

Question 7

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

Question 8

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

Question 9

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

Question 10

Since the small business owner needs to rely heavily on an insurance agent for advice, risk management and insurance management are synonymous.

Question 11

ACV refers to the depreciated value of a property.

Question 12

Risk is the possibility of suffering harm or pain.

Question 13

A lease on a real property structure will relieve the lessee of any damage or loss to the leased premises.

Question 14

Business risk is the possibility of losses associated with the assets and earnings potential of a company, including the firm's reputation.

Question 15

Indemnification clauses should be reviewed by an insurance agent or broker to limit liabilities to a small business.

Question 16

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

Question 17

Real property risks include damage to buildings.

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

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

Question 20

Securing insurance coverage for all major potential losses would involve making certain that insurance covers the full replacement value of the firm's real and personal property.

Question 21

Morton is discussing with his insurance agent the possibility that he might lose his building and equipment in the event of a fire or windstorm. Should that happen, Morton's company would not be able to earn revenues. These two people are discussing:

A) risk
B) pure risk
C) business risk
D) market risk

Question 22

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

Question 23

Property insurance that covers all direct damage to property except damage caused by perils specifically excluded is called CGL.

Question 24

Brenda expects there will be uncertainty regarding the outcome of her business decisions. The final result of those decisions will not be known until she has ______________, developed strategies, and committed resources to her business.

A) secured financing
B) purchased inventory
C) identified the investment opportunity
D) performed market research

Question 25

Perry's business is not in the safest neighborhood. He is concerned about robbery and vandalism, two types of:

A) business risk.
B) market risk.
C) pure risk.
D) uninsurable risk.

Question 26

As a general rule, only ______ is insurable.

A) business risk
B) market risk
C) pure risk
D) risk

Question 27

Which term describes 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 28

Risk 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 29

Quentin is getting quotes for insurance on his building. His agent recommends he purchase enough to cover the ___________________ even though this amount is more than Quentin paid for it.

A) replacement value
B) actual cash value
C) coinsurance value
D) minimum value

Question 30

Pure risk is

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

Question 31

Business interruption insurance pays for lost income following the interruption of business operations.

Question 32

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

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

Question 33

Small businesses are particularly vulnerable to employee fraud because of weak financial controls.

Question 34

Patrick has a great idea for a new business venture. Even after conducting research he is not certain whether he can make a go of it. Patrick is concerned about:

A) risk.
B) pure risk.
C) business risk.
D) market risk.

Question 35

One risk that small businesses normally cover is loss due to the disability of a partner or other key employee of the company.

Question 36

The cost to replace or replicate property at today's prices is described by________.

A) real property
B) personal property
C) replacement value of property
D) actual cash value

Question 37

A property insurance policy is used by a business owner to insure buildings and personal
property owned but not leased by the business.

Question 38

For the most part, the dollar value of employment practice claims ranges from $100,000 to $250,000, with insurance premiums ranging from $12,500 to $17,500.

Question 39

Flood insurance can be purchased for only real property.

Question 40

The company's ability to absorb losses will determine what smaller potential losses will be insured.

Question 41

Richard must carry workers' compensation insurance to fulfill his ________________ obligation.

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

Question 42

For a person to be found guilty of a negligent act, the negligent act must be the ____ cause of the loss in a tort liability claim.

A) assumed
B) compensatory
C) proximate
D) statutory

Question 43

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 44

Review and evaluate is an important step in the risk management process because

A) conditions change and mistakes may be identified.
B) it is nearly impossible to evaluate risk effectively.
C) of the challenges in identifying small business risks.
D) of the difficulty in selecting effective methods.

Question 45

A carton of eggs broke onto the floor in the dairy section, making the floor slippery. Little Johnny slipped, fell, and hit his head on the floor, causing a cut and mild concussion. The grocery store incurs _________________ liability for his injuries.

A) premises
B) operational
C) professional
D) product

Question 46

A defect resulting from failure to convey to the user that hazards are associated with a product or to provide adequate instructions on safe product use is known as a(n)

A) marketing defect.
B) manufacturing defect.
C) design defect.
D) engineering defect.

Question 47

A contractual clause that requires one party to assume the financial consequences of another party's legal liabilities is called a

A) worker's compensation clause.
B) extra clause.
C) indemnification clause.
D) tort.

Question 48

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 49

Which risk type directly affects the employee but indirectly impact the business?

A) Liability
B) Personnel
C) Property
D) Pure

Question 50

Requiring all servers in a restaurant to know how to properly lift heavy objects is an example of loss

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

Question 51

Assume a contract exists between Mr. Jones, a college professor, and his student, Mr. Smith. Jones provides a syllabus, instruction, tutoring, and assessments of learning but Smith fails the class. Which of the following elements is absent in this case?

A) Existence of a legal duty between the parties.
B) Failure to provide the appropriate standard of care.
C) Presence of injury or damages.
D) Evidence that the negligent act is the proximate cause of the loss.

Question 52

Mistakes that an employee makes in assembling a product for a customer could be a(n)

A) employee liability.
B) operations liability.
C) premises liability.
D) product liability.

Question 53

The striking dock workers on the west coast refused to unload the ships carrying merchandise for retail stores. These stores suffered loss of revenue during the Christmas season, their highest earnings period of the year. This revenue reduction is ________________ that ___________ covered by insurance.

A) a direct loss, can be
B) indirect loss, can be
C) direct loss, cannot be
D) indirect loss, cannot be

Question 54

Which action is part of the second step of a risk management program analysis?

A) Classification of risks
B) Deciding on an action
C) Determining risk control methods
D) Systematic risk analysis

Question 55

Barney places his new extension ladder on a slippery surface when he leans it against the wall. He climbs up; the ladder slips out from under him and he falls. Which type of product liability may exist in this situation?

A) Manufacturing since ladder may not have been intended for this use.
B) Design since the ladder may not have been made to specifications
C) Marketing if the manufacturer did not provide instructions on how to use the ladder.
D) There is no liability. The users assumes all risk in using any type of ladder.

Question 56

A "prudent person" is also known as:

A) a tort.
B) the reasonable standard.
C) indemnification.
D) a personnel risk.

Question 57

A small business customer slips on a wet floor (due to a slow water leak), falls and breaks an arm. Damages that could potentially be awarded to the customer might include:

A) economic since the customer has a loss of physical abilities.
B) noneconomic since the customer has medical bills.
C) punitive due to the leak.
D) compensatory to cover the cost of repairing the leak.

Question 58

A delivery truck owned by Martin's Lumber backed into a car owned by Bonnie. Bonnie asked Martin's Lumber to pay for the repairs to her car. Bonnie is asking for:

A) exemplary damages.
B) non-economic damages.
C) compensatory damages.
D) punitive damages.

Question 59

Philip leases retail space in a building owned by Roger. The lease agreement contains a(n) _____________ excusing Roger from responsibility for any financial consequences of Philip's actions.

A) premises liability clause
B) indemnification clause
C) operations liability clause
D) lessor's release of action clause

Question 60

Compensatory damages include ________ damages.

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

Question 61

Identifying in an insurance policy the specific perils covered is a __________ approach.

A) no-risk
B) named-peril
C) coinsurance
D) all-risk

Question 62

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 63

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

A) 60
B) 70
C) 80
D) 90

Question 64

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

A) foreseen risk
B) insurance-to-value
C) all-risk
D) named-peril

Question 65

A policy for small businesses that do not qualify for a BOP that combines property insurance and commercial general liability insurance is called a

A) personal policy.
B) package policy.
C) health policy.
D) business owner's policy.

Question 66

A managed-care network providing health insurance that is more expensive than an HMO but offers a broader choice of medical providers is called a

A) key-person organization.
B) package policy.
C) personal maintenance organization.
D) preferred provider organization.

Question 67

Typically, the dollar values for employee lawsuits have start at

A) $50,000
B) $100,000
C) $150,000
D) The amount differs from the above values.

Question 68

Commercial general liability insurance covers

A) business interruption expenses.
B) injury to customers.
C) injury to employees.
D) profession liability.

Question 69

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

Question 70

Concern about the employees is considered in which principle of a sound insurance program?

A) What kinds of risk can be covered by insurance?
B) What types of coverage should be purchased?
C) How much coverage is adequate?
D) All of the above will concern employees.

Question 71

Business interruption insurance is

A) included in a PPO policy.
B) may be part of an umbrella liability policy.
C) not recognized as important by small business owners.
D) part of a CGL no fault coverage plan.

Question 72

Self-insurance requires

A) an analysis for stop loss limits.
B) implementing risk control methods.
C) owning stock in an insurance company.
D) saving money to cover possible future losses.

Question 73

To evaluate an insurance program, which question should be answered first?

A) How much coverage is adequate?
B) What kinds of risk can be covered by insurance?
C) What types of coverage should be purchased?
D) What pricing is available?

Question 74

Concern about the replacement value is considered in which principle of a sound insurance program?

A) Identify business risks that can be insured.
B) Secure insurance coverage for all major potential losses.
C) Consider the feasibility and affordability of insuring smaller potential losses.
D) Review and evaluate.

Question 75

Driving as safely as possible is an example of loss

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

Question 76

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

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

Question 77

Business interruption insurance covers

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

Question 78

When considering the feasibility and affordability of insuring small potential losses, which company program will impact this decision?

A) ACV
B) FICA
C) Self-insurance
D) Workers' compensation

Question 79

Crime insurance is most critical for a small business when

A) the business has financial controls.
B) the firm is struggling.
C) the owner has a personal distraction.
D) the owner employs family members.

Question 80

Which insurance coverage is required by law in most states?

A) Workers' compensation
B) Product liability insurance
C) Key executive coverage
D) Employee bonding