Deck 23: Managing Risk in the Small Business

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

False

Question 4

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

Question 5

Monitoring social media is a form of risk transfer.

Question 6

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

Question 7

ACV refers to the depreciated value of a property.

Question 8

Real property risks include damage to buildings.

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

Loss reduction is defined as preventing losses from ever happening.

Question 14

Risk is the possibility of suffering harm or pain.

Question 15

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 16

Partially self-funded insurance programmes 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 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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 22

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

Question 23

Flood insurance can be purchased for only real property.

Question 24

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 25

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

Question 26

As a general rule, only ______ is insurable.

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

Question 27

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 28

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

Question 29

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 30

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 31

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 32

For the most part, the rand value of employment practice claims ranges from R50 000 to R150 000, with insurance premiums ranging from R12 500 to R17 500.

Question 33

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

Question 34

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

Question 35

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 36

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 identified the investment opportunity, developed strategies and __________ to her business.

A)secured financing
B)purchased inventory
C)committed resources
D)performed market research

Question 37

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 38

Funds transfer fraud provides coverage primarily against employee dishonesty.

Question 39

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 40

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

Question 41

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)non-economic since the customer has medical bills.
C)punitive due to the leak.
D)compensatory to cover the cost of repairing the leak.

Question 42

A "prudent person" is also known as:

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

Question 43

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 44

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

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

Question 45

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 46

Assume a contract exists between Mr Jones, a college professor, and his student, M.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 47

Damage to a building by flooding 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 48

Compensatory damages include ________ damages.

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

Question 49

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 50

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 51

Richard must carry employers' liability insurance to fulfill his ________________ obligation.

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

Question 52

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 53

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

A)Identify and understand risks.
B)Evaluate the potential severity of risks.
C)Select method to manage risks.
D)Implement the decision.

Question 54

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 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 assume all risk in using any type of ladder.

Question 56

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 57

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 58

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)an extra clause.
C)an indemnification clause.
D)a tort.

Question 59

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 60

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 61

Doug's commercial insurance policy 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 62

Which insurance coverage is required by law in most states?

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

Question 63

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

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 64

Assume that the physical property of a business is valued at R5 000 000.The company's commercial property policy contains a coinsurance clause with a stated percentage of 80 per cent.The company insures the property for R3 000 000 (75 per cent of the specified minimum).The company incurs a fire loss of R2 000 000.How much of the loss will the insurance company pay for?

A)R0
B)R1 500 000
C)R2 000 000
D)R1 000 000

Question 65

To evaluate an insurance programme, 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 66

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

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

Question 67

A policy for small businesses that do not qualify for a commercial insurance policy 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 68

A unique, attractive feature of a commercial insurance policy 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 69

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

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

Question 70

Self-insurance requires:

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

Question 71

Business interruption insurance is:

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

Question 72

Driving as safely as possible is an example of loss:

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

Question 73

Commercial crime insurance is most critical for a small business when:

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

Question 74

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

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

Question 75

A managed-care network providing health insurance that is approved by a medical aid scheme called a:

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

Question 76

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

A)combined public 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

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 79

Typically, insurance premiums to cover employee lawsuits start at:

A)R2 500.
B)R7 500.
C)R15 000.
D)The amount differs from the above values.

Question 80

Combined public liability insurance covers:

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