NC CLAIMS ADJUSTER UPDATED COMPREHENSIVE EXAM
QUESTIONS AND SOLUTIONS RATED A+
✔✔Law of Large Numbers (Law of Averages) - ✔✔Mathematical principle that makes it
possible to predict future losses based upon prior experience.
✔✔Spread of Risk (Geographic Dispersion) - ✔✔Also used to decrease loss probability.
This process involves spreading the company's policies (exposures) over a broad
geographical area in order to avoid large losses in the vent of a catastrophic event. An
example is a hurricane.
✔✔Adverse Selection - ✔✔Adverse selection occurs when insureds with a high risk of
loss attempt to purchase insurance and are successful in obtaining insurance.
✔✔Perils - ✔✔Are the actual cause of loss such as a fire, theft, wind, hail, etc.
✔✔Hazards - ✔✔Increase the probability of a peril occurring. Bald tires on an
automobile increase the chance of a wreck happening. The tires are the hazard, the
wreck is the peril.
✔✔Property Insurance - ✔✔Indemnified (repays) a person or business with an interest
in the physical integrity of tangible property for its loss or the loss of income produced
by that property.
✔✔Casualty Insurance - ✔✔Provides protection to meet the unexpected costs imposed
by law due to acts that have caused bodily injury or property damage to another
individual. Included isn't he field of casualty (liability) insurance are automobile, crime
and surety bonds.
✔✔Private or Voluntary Insurance - ✔✔Portion of the insurance industry where
individuals seek coverage to meet recognized needs. These coverages are neither
required nor made available by government. An example would be collision insurance in
a personal automobile insurance policy.
✔✔Social Insurance - ✔✔Programs either required or made available by government.
✔✔Reinsurance - ✔✔Filed of the industry where insurers sell portions of their individual
contracts of insurance to other companies. This activity helps with the spread of risk
and/or improves cash positions by lowering reserve requirements for these contracts.
Insurance companies also purchase reinsurance to protect themselves in case of
catastrophic losses.
✔✔Capital Stock Companies - ✔✔Proprietary companies that are in business to make a
profit for their stockholders. These companies are owned by stockholders who retain
management responsibility through the selection of a Board of Directors. Profits are
,paid to the stockholders in the form of a commercial stock dividend that is fully taxable
to the stockholder.
✔✔Mutual Insurance Companies - ✔✔Are owned by their policyholders. Each
policyholder "owns" a part of the company equal to their proportionate share of the
company's total insurance in force. The policyholders select a board of directors who
appoint officers to be in charge of the company's daily operations. Operating surpluses
of these companies may be returned to their policyholders in the form of a non-taxable
policy dividend. The dividend is non-taxable because it is a return of premium (the
company charged too much).
✔✔Reciprocal (Assessment) Companies - ✔✔Are non-incorporated associations of
individuals or businesses (subscribers) who engage in cooperative insurance. Each
policyholder is insured by all other policyholders and each policyholder insures the
others as coverage is exchanged on a reciprocal basis. Two important facts to
remember about reciprocals are: 1. Managed by Attorney-in-Fact (not necessarily a
lawyer), 2. The Attorney-in-Fact can assess the policyholders for additional premiums if
underwriting losses jeopardize financial solvency.
✔✔Domestic Companies - ✔✔Companies organized in this state.
✔✔Foreign Companies - ✔✔Organized in another state.
✔✔Alien Companies - ✔✔Organized in another country.
✔✔Certificate Of Authority - ✔✔When authorized by the state and become known as an
Admitted or Authorized company.
✔✔Non-Admitted or non-authorized companies - ✔✔For basic understanding, property,
casualty and personal lines insurance agents are not permitted to represent or place
insurance with non-admitted companies.
✔✔Independent Agency System - ✔✔System in which an agent may represent more
than one insurance company in the marketing of property and liability insurance
products. Independent agents own the business and they retain all rights to the
accounts they have placed with a company.
✔✔Direct Writers - ✔✔Use captive or exclusive agents or employees in the sale of
property and liability insurance products. Agents or employees can only represent that
particular insurance company.
✔✔Agents - ✔✔Representatives of the insurer. Agents must be licensed with the state
to legally conduct insurance transactions. Agents receive their authority to operate on
behalf of the company by the agency contract and by an appointment.
,✔✔Property Casualty and Personal Lines Agents - ✔✔May be given "binding" authority.
A binding premium receipt (binder) is temporary evidence that insurance is in effect
without condition.
✔✔Binder - ✔✔Temporary evidence that insurance is in effect without condition.
Binders may be written or oral. Oral binders must be replaced by a written binder as
soon as possible. The binder provides coverage until the policy arrives.
✔✔Brokers and representatives - ✔✔They "shop the market" on behalf of their clients
and obtain coverage best fills the client's needs. In order to obtain a broker's license,
the individual must have a valid agent's license and post a bond of not less than
$15,000 in favor of the State of North Carolina.
✔✔Responsibilities of Agents and Companies - ✔✔1. Agents deal with their clients in a
fiduciary capacity. A fiduciary relationship develops when an individual places trust in
someone else to perform certain duties or actions. This is particularly true in the
insurance business when an agent accepts money from the client to purchase or pay for
a policy. The agent who diverts this money for their own use will be guilty of theft or
embezzlement. Agents who perform their duties in an acceptable manner are not liable
for contracts entered into on behalf of their principal. An agent can, however, be held
personally liable for certain contracts when: A. The agent has breached their authority,
B. The agent represents an incompetent principal, C. The agent commits a civil tort or a
crime. 2. An agent's duties to the principal (insurance company) include: A. Loyalty, B.
Obedience, C. Use of reasonable care, D. Accurate accounting, E. Communication of
information held by the agent to the company. 3. Even without intent, it is possible for an
agent to make an error or an omission through negligence or lack of knowledge.
✔✔Underwriting - ✔✔Selects those applications that the company wishes to insure
using standards established by the company, but always guarding against adverse
selection. Loss ratios can be directly affected by the underwriting standards of the
company. Loss ratios are determined by dividing the losses (claims) of the company by
the premiums collected.
✔✔Offer and Acceptance Agreement - ✔✔In the insurance contract, the offer is made
by the proposed insured. The acceptance occurs when the policy is issued. However,
sometimes it is necessary for the company to rate-up a substandard risk. This action
becomes a counteroffer and the applicant must then either accept or reject the
counteroffer. Regardless, all contracts must have an offer and acceptance.
✔✔Consideration - ✔✔This is the exchange of something of value by both parties.
Information provided by the applicant is legally considered to be a part of the
consideration.
✔✔Legal object - ✔✔Contracts must fulfill a legal purpose in order to be enforced.
, ✔✔Competent Parties - ✔✔Enforceable contracts can only be executed by individuals
who have the legal capacity to enter such an agreement.
✔✔Incompetent parties - ✔✔1. Minors, 2. The mentally infirm, 3. Persons under the
influence of drugs or alcohol.
✔✔Declarations Page - ✔✔A. The parties to the contract, B. The policy term, C. The
amount of insurance purchased, D. The amount of the premium, E. The object or
person insured.
✔✔Insuring Agreements - ✔✔The "heart" of the contract that states the perils that are
insured against. The insuring agreement also establishes the insurer's responsibility to
pay claims in the event a covered peril occurs.
✔✔Conditions - ✔✔These are the provisions and stipulations of the policy. Conditions
state the rules of conduct for both the insurance and insurer. Important conditions are
the payment of premium, providing proof of loss and accurate responses to application
questions.
✔✔Exclusions - ✔✔These list what perils are not covered. Exclusions tend to be those
things considered uninsurable.
✔✔Endorsements - ✔✔Endorsements modify (add or take away rights) the basic
contract.
✔✔Definitions - ✔✔This part of the contract explains the meaning of important terms
found in the contract, such as who is a named insured, who is an insured and what
constitutes a premises.
✔✔Insurance contract consists of: - ✔✔1. Declarations page, 2. Insuring Agreements,
3. Conditions, 4. Exclusions, 5. Endorsements, 6. Definitions
✔✔Unilateral Contract - ✔✔Can only be enforced by one party. Only insurance
company makes legally enforceable promise.
✔✔Adhesion - ✔✔Insurance contract and its wording are prepared by the insurer. The
applicant cannot bargain over that wording. Therefore, the contract is purchased as it is
worded and the insured is "stuck with" that wording.
✔✔Waiver - ✔✔A legal doctrine placed in writing that means the voluntary
abandonment of a right or advantage.
QUESTIONS AND SOLUTIONS RATED A+
✔✔Law of Large Numbers (Law of Averages) - ✔✔Mathematical principle that makes it
possible to predict future losses based upon prior experience.
✔✔Spread of Risk (Geographic Dispersion) - ✔✔Also used to decrease loss probability.
This process involves spreading the company's policies (exposures) over a broad
geographical area in order to avoid large losses in the vent of a catastrophic event. An
example is a hurricane.
✔✔Adverse Selection - ✔✔Adverse selection occurs when insureds with a high risk of
loss attempt to purchase insurance and are successful in obtaining insurance.
✔✔Perils - ✔✔Are the actual cause of loss such as a fire, theft, wind, hail, etc.
✔✔Hazards - ✔✔Increase the probability of a peril occurring. Bald tires on an
automobile increase the chance of a wreck happening. The tires are the hazard, the
wreck is the peril.
✔✔Property Insurance - ✔✔Indemnified (repays) a person or business with an interest
in the physical integrity of tangible property for its loss or the loss of income produced
by that property.
✔✔Casualty Insurance - ✔✔Provides protection to meet the unexpected costs imposed
by law due to acts that have caused bodily injury or property damage to another
individual. Included isn't he field of casualty (liability) insurance are automobile, crime
and surety bonds.
✔✔Private or Voluntary Insurance - ✔✔Portion of the insurance industry where
individuals seek coverage to meet recognized needs. These coverages are neither
required nor made available by government. An example would be collision insurance in
a personal automobile insurance policy.
✔✔Social Insurance - ✔✔Programs either required or made available by government.
✔✔Reinsurance - ✔✔Filed of the industry where insurers sell portions of their individual
contracts of insurance to other companies. This activity helps with the spread of risk
and/or improves cash positions by lowering reserve requirements for these contracts.
Insurance companies also purchase reinsurance to protect themselves in case of
catastrophic losses.
✔✔Capital Stock Companies - ✔✔Proprietary companies that are in business to make a
profit for their stockholders. These companies are owned by stockholders who retain
management responsibility through the selection of a Board of Directors. Profits are
,paid to the stockholders in the form of a commercial stock dividend that is fully taxable
to the stockholder.
✔✔Mutual Insurance Companies - ✔✔Are owned by their policyholders. Each
policyholder "owns" a part of the company equal to their proportionate share of the
company's total insurance in force. The policyholders select a board of directors who
appoint officers to be in charge of the company's daily operations. Operating surpluses
of these companies may be returned to their policyholders in the form of a non-taxable
policy dividend. The dividend is non-taxable because it is a return of premium (the
company charged too much).
✔✔Reciprocal (Assessment) Companies - ✔✔Are non-incorporated associations of
individuals or businesses (subscribers) who engage in cooperative insurance. Each
policyholder is insured by all other policyholders and each policyholder insures the
others as coverage is exchanged on a reciprocal basis. Two important facts to
remember about reciprocals are: 1. Managed by Attorney-in-Fact (not necessarily a
lawyer), 2. The Attorney-in-Fact can assess the policyholders for additional premiums if
underwriting losses jeopardize financial solvency.
✔✔Domestic Companies - ✔✔Companies organized in this state.
✔✔Foreign Companies - ✔✔Organized in another state.
✔✔Alien Companies - ✔✔Organized in another country.
✔✔Certificate Of Authority - ✔✔When authorized by the state and become known as an
Admitted or Authorized company.
✔✔Non-Admitted or non-authorized companies - ✔✔For basic understanding, property,
casualty and personal lines insurance agents are not permitted to represent or place
insurance with non-admitted companies.
✔✔Independent Agency System - ✔✔System in which an agent may represent more
than one insurance company in the marketing of property and liability insurance
products. Independent agents own the business and they retain all rights to the
accounts they have placed with a company.
✔✔Direct Writers - ✔✔Use captive or exclusive agents or employees in the sale of
property and liability insurance products. Agents or employees can only represent that
particular insurance company.
✔✔Agents - ✔✔Representatives of the insurer. Agents must be licensed with the state
to legally conduct insurance transactions. Agents receive their authority to operate on
behalf of the company by the agency contract and by an appointment.
,✔✔Property Casualty and Personal Lines Agents - ✔✔May be given "binding" authority.
A binding premium receipt (binder) is temporary evidence that insurance is in effect
without condition.
✔✔Binder - ✔✔Temporary evidence that insurance is in effect without condition.
Binders may be written or oral. Oral binders must be replaced by a written binder as
soon as possible. The binder provides coverage until the policy arrives.
✔✔Brokers and representatives - ✔✔They "shop the market" on behalf of their clients
and obtain coverage best fills the client's needs. In order to obtain a broker's license,
the individual must have a valid agent's license and post a bond of not less than
$15,000 in favor of the State of North Carolina.
✔✔Responsibilities of Agents and Companies - ✔✔1. Agents deal with their clients in a
fiduciary capacity. A fiduciary relationship develops when an individual places trust in
someone else to perform certain duties or actions. This is particularly true in the
insurance business when an agent accepts money from the client to purchase or pay for
a policy. The agent who diverts this money for their own use will be guilty of theft or
embezzlement. Agents who perform their duties in an acceptable manner are not liable
for contracts entered into on behalf of their principal. An agent can, however, be held
personally liable for certain contracts when: A. The agent has breached their authority,
B. The agent represents an incompetent principal, C. The agent commits a civil tort or a
crime. 2. An agent's duties to the principal (insurance company) include: A. Loyalty, B.
Obedience, C. Use of reasonable care, D. Accurate accounting, E. Communication of
information held by the agent to the company. 3. Even without intent, it is possible for an
agent to make an error or an omission through negligence or lack of knowledge.
✔✔Underwriting - ✔✔Selects those applications that the company wishes to insure
using standards established by the company, but always guarding against adverse
selection. Loss ratios can be directly affected by the underwriting standards of the
company. Loss ratios are determined by dividing the losses (claims) of the company by
the premiums collected.
✔✔Offer and Acceptance Agreement - ✔✔In the insurance contract, the offer is made
by the proposed insured. The acceptance occurs when the policy is issued. However,
sometimes it is necessary for the company to rate-up a substandard risk. This action
becomes a counteroffer and the applicant must then either accept or reject the
counteroffer. Regardless, all contracts must have an offer and acceptance.
✔✔Consideration - ✔✔This is the exchange of something of value by both parties.
Information provided by the applicant is legally considered to be a part of the
consideration.
✔✔Legal object - ✔✔Contracts must fulfill a legal purpose in order to be enforced.
, ✔✔Competent Parties - ✔✔Enforceable contracts can only be executed by individuals
who have the legal capacity to enter such an agreement.
✔✔Incompetent parties - ✔✔1. Minors, 2. The mentally infirm, 3. Persons under the
influence of drugs or alcohol.
✔✔Declarations Page - ✔✔A. The parties to the contract, B. The policy term, C. The
amount of insurance purchased, D. The amount of the premium, E. The object or
person insured.
✔✔Insuring Agreements - ✔✔The "heart" of the contract that states the perils that are
insured against. The insuring agreement also establishes the insurer's responsibility to
pay claims in the event a covered peril occurs.
✔✔Conditions - ✔✔These are the provisions and stipulations of the policy. Conditions
state the rules of conduct for both the insurance and insurer. Important conditions are
the payment of premium, providing proof of loss and accurate responses to application
questions.
✔✔Exclusions - ✔✔These list what perils are not covered. Exclusions tend to be those
things considered uninsurable.
✔✔Endorsements - ✔✔Endorsements modify (add or take away rights) the basic
contract.
✔✔Definitions - ✔✔This part of the contract explains the meaning of important terms
found in the contract, such as who is a named insured, who is an insured and what
constitutes a premises.
✔✔Insurance contract consists of: - ✔✔1. Declarations page, 2. Insuring Agreements,
3. Conditions, 4. Exclusions, 5. Endorsements, 6. Definitions
✔✔Unilateral Contract - ✔✔Can only be enforced by one party. Only insurance
company makes legally enforceable promise.
✔✔Adhesion - ✔✔Insurance contract and its wording are prepared by the insurer. The
applicant cannot bargain over that wording. Therefore, the contract is purchased as it is
worded and the insured is "stuck with" that wording.
✔✔Waiver - ✔✔A legal doctrine placed in writing that means the voluntary
abandonment of a right or advantage.
