Deck 6: Insurance As a Risk Management Technique: Principles

Question 1

Pooling is the sharing of total losses among a group of insureds.

Answer 1

True

Question 2

A life insurance contract is not a contract of indemnity.

Answer 2

True

Question 3

When Ralph replaced his old eight track stereo for a new, more expensive CD player with insurance proceeds, the principle of indemnity was broken.

Answer 3

True

Question 4

The principle of insurable interest states that the insured must suffer a personal monetary loss due to the occurrence of some event.

Question 5

Insurable interest is required in all types of insurance.

Question 6

In life insurance there must be insurable interest at the time of loss, while in property and liability insurance, insurable interest must exist at the inception of the contract.

Question 7

Most life and health insurance contracts contain a subrogation clause.

Question 8

The insurer is entitled to its subrogation rights after the insured has been fully indemnified.

Question 9

In most states even if a warranty is not material to the risk, breach of warranty causes contract cancellation.

Question 10

A concealment would be illustrated by a false answer to a question asked by the agent of an applicant for insurance.

Question 11

Usually, legal mistakes in insurance contracts still bind both parties to the written terms.

Question 12

Insurance is often written when there is not a sufficient number of exposures to allow close calculation of the probable loss.

Question 13

An insurer will not accept risks that do not meet all the requisites of insurable risks.

Question 14

Insurance cannot be written against arson because arson produces a loss that is not accidental in its origin.

Question 15

The large-loss principle states that people should insure potentially serious and unlikely losses before insuring more likely and less serious losses.

Question 16

An insurance policy is an aleatory contract, but an entire book of business is not.

Question 17

The principle of adhesion states that ambiguities are construed against the insurer.

Question 18

A broker is a legal agent of the insurer.

Question 19

An agent may without authority perform some act concerning an insurer, and if the insurer assents to the act at a later time, the agent obtains authority by ratification.

Question 20

Social insurance needs advance funding to operate efficiently.

Question 21

Without the insurance mechanism, the reserves needed for the economy to pay for losses would be much greater.

Question 22

One social cost of insurance is attributed to the fact that if it were not for insurance, certain losses would not occur.

Question 23

Match the descriptions with their terms:

-An economic institution that reduces risk is _________________.

A) aleatory contract
B) Concealment
C) contract
D) Estoppel
E) express
F) insurable interest
G) insurance
H) large-loss principle
I) reasonable expectations
J) representation
K) requisites of insurable risk
L) subrogation
M) utmost good faith
N) waiver
O) warranty

Question 24

Match the descriptions with their terms:

-One of the _________________ is that a loss must be determinable and measurable.

A) aleatory contract
B) Concealment
C) contract
D) Estoppel
E) express
F) insurable interest
G) insurance
H) large-loss principle
I) reasonable expectations
J) representation
K) requisites of insurable risk
L) subrogation
M) utmost good faith
N) waiver
O) warranty

Question 25

Match the descriptions with their terms:

-Insuring a small, highly-probable loss before insuring a potentially severe but unlikely loss violates the _________________.

A) aleatory contract
B) Concealment
C) contract
D) Estoppel
E) express
F) insurable interest
G) insurance
H) large-loss principle
I) reasonable expectations
J) representation
K) requisites of insurable risk
L) subrogation
M) utmost good faith
N) waiver
O) warranty

Question 26

Match the descriptions with their terms:

-A contract in which one party might give up a great deal more than is received in the transaction is a/an _________________.

A) aleatory contract
B) Concealment
C) contract
D) Estoppel
E) express
F) insurable interest
G) insurance
H) large-loss principle
I) reasonable expectations
J) representation
K) requisites of insurable risk
L) subrogation
M) utmost good faith
N) waiver
O) warranty

Question 27

Match the descriptions with their terms:

-The principle of _________________ says that a person must demonstrate a loss due to an insured peril.

A) aleatory contract
B) Concealment
C) contract
D) Estoppel
E) express
F) insurable interest
G) insurance
H) large-loss principle
I) reasonable expectations
J) representation
K) requisites of insurable risk
L) subrogation
M) utmost good faith
N) waiver
O) warranty

Question 28

Match the descriptions with their terms:

-The principle that one who has indemnified another's loss is entitled to recovery from liable parties is called _______________.

A) aleatory contract
B) Concealment
C) contract
D) Estoppel
E) express
F) insurable interest
G) insurance
H) large-loss principle
I) reasonable expectations
J) representation
K) requisites of insurable risk
L) subrogation
M) utmost good faith
N) waiver
O) warranty

Question 29

Match the descriptions with their terms:

-The principle of _________________ imposes a higher standard of honesty on parties to an insurance agreement than is imposed in ordinary commercial contracts.

A) aleatory contract
B) Concealment
C) contract
D) Estoppel
E) express
F) insurable interest
G) insurance
H) large-loss principle
I) reasonable expectations
J) representation
K) requisites of insurable risk
L) subrogation
M) utmost good faith
N) waiver
O) warranty

Question 30

Match the descriptions with their terms:

-A statement made by an applicant for insurance before the contract is effected is a/an _________________.

A) aleatory contract
B) Concealment
C) contract
D) Estoppel
E) express
F) insurable interest
G) insurance
H) large-loss principle
I) reasonable expectations
J) representation
K) requisites of insurable risk
L) subrogation
M) utmost good faith
N) waiver
O) warranty

Question 31

Match the descriptions with their terms:

-_________________ has been defined as "silence when obligated to speak."

A) aleatory contract
B) Concealment
C) contract
D) Estoppel
E) express
F) insurable interest
G) insurance
H) large-loss principle
I) reasonable expectations
J) representation
K) requisites of insurable risk
L) subrogation
M) utmost good faith
N) waiver
O) warranty

Question 32

Match the descriptions with their terms:

-A/An _________________ is a statement saying that before the insurer is liable, a certain fact, condition, or circumstance affecting the risk must exist.

A) aleatory contract
B) Concealment
C) contract
D) Estoppel
E) express
F) insurable interest
G) insurance
H) large-loss principle
I) reasonable expectations
J) representation
K) requisites of insurable risk
L) subrogation
M) utmost good faith
N) waiver
O) warranty

Question 33

Match the descriptions with their terms:

-Implied warranties are those stated in the contract while _________________ warranties are not found in the contract but are assumed by the parties to the contract.

A) aleatory contract
B) Concealment
C) contract
D) Estoppel
E) express
F) insurable interest
G) insurance
H) large-loss principle
I) reasonable expectations
J) representation
K) requisites of insurable risk
L) subrogation
M) utmost good faith
N) waiver
O) warranty

Question 34

Match the descriptions with their terms:

-A/An _________________ is an agreement embodying a set of promises that are enforceable at law.

A) aleatory contract
B) Concealment
C) contract
D) Estoppel
E) express
F) insurable interest
G) insurance
H) large-loss principle
I) reasonable expectations
J) representation
K) requisites of insurable risk
L) subrogation
M) utmost good faith
N) waiver
O) warranty

Question 35

Match the descriptions with their terms:

-_________________ is a legal doctrine under which a person may be required to do something or refrain from doing something that is inconsistent with previous behavior.

A) aleatory contract
B) Concealment
C) contract
D) Estoppel
E) express
F) insurable interest
G) insurance
H) large-loss principle
I) reasonable expectations
J) representation
K) requisites of insurable risk
L) subrogation
M) utmost good faith
N) waiver
O) warranty

Question 36

Match the descriptions with their terms:

-A/An _________________ is a voluntary relinquishing of a known right.

A) aleatory contract
B) Concealment
C) contract
D) Estoppel
E) express
F) insurable interest
G) insurance
H) large-loss principle
I) reasonable expectations
J) representation
K) requisites of insurable risk
L) subrogation
M) utmost good faith
N) waiver
O) warranty

Question 37

Match the descriptions with their terms:

-The doctrine of _________________ states that policy language should be interpreted as a layperson would comprehend it and not according to the interpretation of a trained underwriter.

A) aleatory contract
B) Concealment
C) contract
D) Estoppel
E) express
F) insurable interest
G) insurance
H) large-loss principle
I) reasonable expectations
J) representation
K) requisites of insurable risk
L) subrogation
M) utmost good faith
N) waiver
O) warranty

Question 38

Insurance and gambling differ in that, in contrast to insurance,

A) gambling is always illegal,
B) gambling involves creation of new risk,
C) gambling is not an aleatory contract,
D) the gambler usually wins in the long run,
E) gambling is an example of hedging.

Question 39

An exception to the principle of indemnity in about half of the United States is the concept of

A) subrogation,
B) misrepresentation,
C) valued policies.

Question 40

Which of the following is false?

A) An individual always has an insurable interest in his or her own life,
B) Any creditor has an insurable interest in the property of a debtor,
C) The holder of a contract who receives oil royalties has an insurable interest in the property,
D) The lessee of a building may have an insurable interest in the building even though he or she does not own it,
E) A father has an insurable interest in the life of his minor child.

Question 41

Insurable interest exists when

A) Cobb has insurance on a car he just sold,
B) Whitten lends Umble $20,000 to buy a home and buys insurance on the home,
C) Jones, a student, buys fire insurance on the College of Business,
D) all of these.

Question 42

Insurable interest in property-liability insurance must exist

A) at the time of the loss,
B) when the coverage is paid for,
C) when the policy is received.

Question 43

If Greene's car collides with Alarcon's and it is Alarcon's fault, Greene's insurance company can collect from Alarcon if it pays Greene under the doctrine of

A) adhesion,
B) subrogation,
C) insurable interest.

Question 44

The Smallville Mall has assumed the responsibility for payment of liability losses caused by Chuck's Famous Pizza to attract the pizza chain to the mall. One of Chuck's employees is found guilty of sexual harassment in the mall. Smallville Mall's insurer pays the liability judgment. Who does Smallville Mall's insurer collect from under its subrogation rights?

A) Chuck's Famous Pizza,
B) Smallville Mall,
C) Chuck's Famous Pizza's insurer,
D) no collection would take place since Smallville Mall is ultimately responsible.

Question 45

A misrepresentation

A) always voids a contract,
B) voids a contract if it is material,
C) usually renders the contract voidable at the option of the insurer if it is material,
D) has a different legal effect from a concealment,
E) is identical to a warranty.

Question 46

An applicant for life insurance informs the agent that he has had rheumatic fever, but the agent fails to record this information for fear the application will be denied and he will lose a commission. The applicant signs the application, and in so doing, indicates that he has read the application and certifies its accuracy. Under which of the following doctrines, if any, might the insurer be denied the opportunity to void the policy if the facts are discovered?

A) subrogation,
B) indemnity,
C) insurable interest,
D) waiver,
E) none of these is applicable.

Question 47

When a contract provision is broken and the contract is voided, a breach of

A) representation has occurred,
B) utmost good faith has occurred,
C) warranty has occurred.

Question 48

The type of warranty that must exist only at the time the contract is first put into effect is the

A) express warranty,
B) implied warranty,
C) promissory warranty,
D) affirmative warranty.

Question 49

To be properly classed as "insurance," an arrangement must have all but one of the following elements:

A) it must cover accidental losses,
B) it must be described by a legal contract between the parties,
C) an insurable interest must exist among those insured,
D) it contemplates the prediction and distribution of losses among members of the insured group,
E) all of the these are necessary elements of insurance.

Question 50

Which of the following represents a risk that usually does not meet the tests of insurability?

A) loss from legal liability,
B) loss of income due to old age,
C) loss from bankruptcy,
D) loss from lifetime disability,
E) loss of future business income due to fire.

Question 51

An agent is a representative of the

A) insurer,
B) insured,
C) broker,
D) beneficiary.

Question 52

An agent who has authority to perform only a specific act or function is called a

A) licensed agent,
B) special agent,
C) general agent.

Question 53

Social insurance does not have which of the following characteristics?

A) compulsory,
B) set level of benefits,
C) predictable losses,
D) attachment to labor force.