ARM 402 EXAMS SCRIPT QUESTIONS AND
ANSWERS SET A+
✔✔Contracting for Services -✔✔-an individual or org that performs a particular activity is
generally held primarily responsibly for any losses caused by that activity -- this can be
transferred by contracting with another org to perform the activity
-contractor is liable for his work but injured party could sue the property owner
-because courts want to compensate the injured, they favor restricting the rule
exempting the person who hires a contractor from liability for the contractor's torts; so
they have established some exceptions to this rule:
1. the principal is directly liable for negligence in selecting the contractor, giving
directions, or failing to stop any unnecessary dangerous practices of which the principle
was aware
2. the principal's (person who hired contractor) responsibility for certain duties to be
performed safely can't be delegated to another party
3. if the subcontracted work is inherently dangerous to others (blasting example), the
principal that hired the contractor can be held liable for a third-party injury caused by the
contractor's negligence
✔✔Waiver or Exculpatory Clause -✔✔-both can transfer responsibility for liability loss
exposures
-an individual or org can give up its right to sue another party through a waiver
-exculpatory clause: a contractual provision purporting to excuse a party from liability
resulting from negligence or an otherwise wrongful act
✔✔Disclaimer of Warranties -✔✔-sellers of property often assert disclaimers of
warranties
-a disclaimer in a sales contract may deny any express warranties during the property's
sale
-may also deny implied warranties
-implied warranty of fitness for a particular purpose: that the seller is aware of the
particular purpose for which the buyer will use the property and that the property is
suitable for that purpose
,-implied warranty of merchantability: that the property is suitable for the purpose for
which most buyers use it
✔✔Noninsurance Transfers for Risk Financing -✔✔-hold-harmless agreements
✔✔Hold-harmless agreements -✔✔-a contractual provision that obligates one of the
parties to assume the legal liability of another party
-the party that uses this to transfer the financial consequences of loss to a second party
is called the indemnitee; the second party, which agrees to indemnify the indemnitee, is
referred to as the indemnitor
-indemnitor may need to demonstrate proof of financial responsibility (through COIs)
-limited form: General Contractor agrees to indemnify building owner only for claims that
result from GC's own negligence, referred to as sole fault
-intermediate form: GC agrees to indemnify BO only for claims that result from GC's
sole fault or from both parties' joint fault
-broad form: GC agrees to indemnify BO for losses that result from GC's sole fault, both
parties' joint fault, or BO's sole fault
-many jurisdictions have anti-indemnity statutes that don't allow broad or intermediate
forms contained in construction contracts
-in some jurisdictions that don't have anti-indemnity statutes, they have judicial rules
that limit the use of HH agreements
-purpose of statutes and rules is to prevent a party with greater bargaining power from
taking advantage of another party to a contract, who is often less able to assume the
other's liability
-vary by state so determine legality before
-handling of punitive damages varies (auto included, specified, or illegal)
-in some cases, orgs use HH agreements to finance loss exposures that are not
economically feasible to insure; however, in many cases, an org using a HH agreement
to finance a particular loss exposure also has insurance that includes coverage for that
exposure -- not using insurance for claim ultimately reduces cost of risk
✔✔Ability of Hold-Harmless Agreement to Meet Risk Financing Goals -✔✔1. pay for
losses: yes provided loss exposures are covered by agreement and other party has the
financial means to pay
2. maintain liquidity: yes; requires less liquidity
3. manage uncertainty: yes subject to the extent of the agreement
4. comply with legal and regulatory requirements: can't be used to comply with a law or
regulation requiring insurance
5. minimize cost of risks: yes; subject to any other contractual demands the other party
requires before accepting the HH agreement
✔✔Self-Insurance Plans -✔✔-when an org is able to forecast their accidental losses
with enough accuracy to determine whether they can be retained through a formalized
plan to fund possible losses
-formal plan require orgs to have sufficient financial resources and risk tolerance to
retain potentially significant losses
,-orgs with self-insurance plans usually also embrace risk control as part of their
corporate culture
-purpose is to enable an org to lower its long-term cost of risk by allowing it to pay for its
own losses without incurring the transaction costs associated with insurance
-an org records its losses and maintains a formal system to pay for them
-best for losses that are of both high frequency and low severity (somewhat predictable)
-usually coupled with excess insurance to cover severe or accumulated losses and limit
the org's retention to an acceptable level
-well-suited to losses that can be budgeted and paid out over time, bc org saves the
money it would be paying toward insurance premiums
-orgs start to consider this when annual premium exceeds $500,000 for any one type of
insurance coverage
✔✔Individual self-insurance plans -✔✔-involves only one org
-anyone can do it provided the state it operates in permits it
-generally only WC, Auto, and GL are subject to state regulatory control
✔✔Group Self-Insurance Plans -✔✔-several similar employers form a not-for-profit
association or corporation to which they pay premiums to manage their self-insurance
-can be used only for WC loss exposures and healthcare benefits
-operates like an insurer in that it pools the loss exposures of its members
-plan's administrator issues member agreements, collects premiums, and manages
claims; admin also purchased excess liability insurance and makes required state
regulatory filings
-can benefit an org that is too small to self-insure its loss exposures on its own
-plan offers savings through economies of scale in administration, claims handling, and
the purchase of excess liability insurance
✔✔Advantages of Self-Insurance Plans -✔✔-self-insured orgs have direct control over
claim settlement
-emphasis on loss control - when an org directly pays the cost of its own losses, it has
an incentive to prevent and reduce losses to avoid the expense of loss payments and
settling claims
-in the long-run, the cost tends to be lower than insurance (no risk charge; but self
insurance is subject to various other taxes, assessments, and fees)
✔✔Disadvantages of Self-insurance plans -✔✔-the associated uncertainty of retained
loss outcomes, which can reduce an org's earnings, net worth, and cash flow
-faces the possibility that losses will be much more frequent and severe than expected:
orgs should limit retention to a level that fits within its risk criteria
-administrative requirements: lots of work
-tax deductions are delayed when compared with the timing of deductions under many
other types of risk-financing plans: more significant for liability losses than property
losses, which tend to paid soon after they occur
, ✔✔Ability of Self-insurance Plans to Meet Risk Financing Goals -✔✔1. pay for losses:
yes if org carefully chooses retention level, purchases appropriate excess coverage,
and has sufficient cash flow or liquid assets
2. maintain liquidity: yes if org carefully chooses retention level, purchases appropriate
excess coverage, and has sufficient cash flow or liquid assets
3. manage uncertainty: no, the higher the retention, the higher the degree of uncertainty
4. comply with legal and regulatory requirements: a self-insurer must meet certain legal
requirements
5. minimize cost of risk: must administer its own claims but can save insurer operating
expenses, profits, and risk charges
✔✔Retrospective Rating Plans -✔✔-adjusts the premium for guaranteed-cost insurance
to reflect the insured org's current losses, rather than industry-wide loss experience
-for orgs that want to retain risk in connection with their insurance programs
-a risk transfer plan
-commonly used for WC, Auto, and GL: a single plan can be used for more than one
type of policy
-orgs use these plans to fiance their low to medium-severity losses
-an org must have a substantial insurance premium to benefit from this
-insured pays a deposit premium at the beginning of the policy period, and the insurer
(using a rating formula agreed on before policy period) adjust the premium after the end
of the policy period to include a portion of the insured org's covered losses that occurred
during that period
-bc the premium is adjusted upward or downward based directly on a portion of covered
losses, the insured org is retaining a portion of its own losses
-as long as the insured has a sufficiently large premium, the plan can be designed to
cap losses and therefore minimize the insured's retention by using a loss limit
-ex: if loss limit is $100,000 per occurrence, only the first $100,000 of each covered
occurrence will be included in the retrospective rating premium; the amount of each
occurrence that exceeds $100,000 and is less than the policy limit will be transferred to
the insurer
-max and min premiums
✔✔retrospective rating -✔✔adjust the premium for the current policy period to recognize
the insured's loss experience during the current policy period
✔✔experience rating -✔✔a rating plan that adjust the premium for the current policy
period to recognize the loss experience of the insured org during past policy periods
✔✔loss limit -✔✔-the level at which a loss occurrence is limited for the purpose of
calculating a retrospectively rated premium
-ex: if loss limit is $100,000 per occurrence, only the first $100,000 of each covered
occurrence will be included in the retrospective rating premium; the amount of each
occurrence that exceeds $100,000 and is less than the policy limit will be transferred to
the insurer
ANSWERS SET A+
✔✔Contracting for Services -✔✔-an individual or org that performs a particular activity is
generally held primarily responsibly for any losses caused by that activity -- this can be
transferred by contracting with another org to perform the activity
-contractor is liable for his work but injured party could sue the property owner
-because courts want to compensate the injured, they favor restricting the rule
exempting the person who hires a contractor from liability for the contractor's torts; so
they have established some exceptions to this rule:
1. the principal is directly liable for negligence in selecting the contractor, giving
directions, or failing to stop any unnecessary dangerous practices of which the principle
was aware
2. the principal's (person who hired contractor) responsibility for certain duties to be
performed safely can't be delegated to another party
3. if the subcontracted work is inherently dangerous to others (blasting example), the
principal that hired the contractor can be held liable for a third-party injury caused by the
contractor's negligence
✔✔Waiver or Exculpatory Clause -✔✔-both can transfer responsibility for liability loss
exposures
-an individual or org can give up its right to sue another party through a waiver
-exculpatory clause: a contractual provision purporting to excuse a party from liability
resulting from negligence or an otherwise wrongful act
✔✔Disclaimer of Warranties -✔✔-sellers of property often assert disclaimers of
warranties
-a disclaimer in a sales contract may deny any express warranties during the property's
sale
-may also deny implied warranties
-implied warranty of fitness for a particular purpose: that the seller is aware of the
particular purpose for which the buyer will use the property and that the property is
suitable for that purpose
,-implied warranty of merchantability: that the property is suitable for the purpose for
which most buyers use it
✔✔Noninsurance Transfers for Risk Financing -✔✔-hold-harmless agreements
✔✔Hold-harmless agreements -✔✔-a contractual provision that obligates one of the
parties to assume the legal liability of another party
-the party that uses this to transfer the financial consequences of loss to a second party
is called the indemnitee; the second party, which agrees to indemnify the indemnitee, is
referred to as the indemnitor
-indemnitor may need to demonstrate proof of financial responsibility (through COIs)
-limited form: General Contractor agrees to indemnify building owner only for claims that
result from GC's own negligence, referred to as sole fault
-intermediate form: GC agrees to indemnify BO only for claims that result from GC's
sole fault or from both parties' joint fault
-broad form: GC agrees to indemnify BO for losses that result from GC's sole fault, both
parties' joint fault, or BO's sole fault
-many jurisdictions have anti-indemnity statutes that don't allow broad or intermediate
forms contained in construction contracts
-in some jurisdictions that don't have anti-indemnity statutes, they have judicial rules
that limit the use of HH agreements
-purpose of statutes and rules is to prevent a party with greater bargaining power from
taking advantage of another party to a contract, who is often less able to assume the
other's liability
-vary by state so determine legality before
-handling of punitive damages varies (auto included, specified, or illegal)
-in some cases, orgs use HH agreements to finance loss exposures that are not
economically feasible to insure; however, in many cases, an org using a HH agreement
to finance a particular loss exposure also has insurance that includes coverage for that
exposure -- not using insurance for claim ultimately reduces cost of risk
✔✔Ability of Hold-Harmless Agreement to Meet Risk Financing Goals -✔✔1. pay for
losses: yes provided loss exposures are covered by agreement and other party has the
financial means to pay
2. maintain liquidity: yes; requires less liquidity
3. manage uncertainty: yes subject to the extent of the agreement
4. comply with legal and regulatory requirements: can't be used to comply with a law or
regulation requiring insurance
5. minimize cost of risks: yes; subject to any other contractual demands the other party
requires before accepting the HH agreement
✔✔Self-Insurance Plans -✔✔-when an org is able to forecast their accidental losses
with enough accuracy to determine whether they can be retained through a formalized
plan to fund possible losses
-formal plan require orgs to have sufficient financial resources and risk tolerance to
retain potentially significant losses
,-orgs with self-insurance plans usually also embrace risk control as part of their
corporate culture
-purpose is to enable an org to lower its long-term cost of risk by allowing it to pay for its
own losses without incurring the transaction costs associated with insurance
-an org records its losses and maintains a formal system to pay for them
-best for losses that are of both high frequency and low severity (somewhat predictable)
-usually coupled with excess insurance to cover severe or accumulated losses and limit
the org's retention to an acceptable level
-well-suited to losses that can be budgeted and paid out over time, bc org saves the
money it would be paying toward insurance premiums
-orgs start to consider this when annual premium exceeds $500,000 for any one type of
insurance coverage
✔✔Individual self-insurance plans -✔✔-involves only one org
-anyone can do it provided the state it operates in permits it
-generally only WC, Auto, and GL are subject to state regulatory control
✔✔Group Self-Insurance Plans -✔✔-several similar employers form a not-for-profit
association or corporation to which they pay premiums to manage their self-insurance
-can be used only for WC loss exposures and healthcare benefits
-operates like an insurer in that it pools the loss exposures of its members
-plan's administrator issues member agreements, collects premiums, and manages
claims; admin also purchased excess liability insurance and makes required state
regulatory filings
-can benefit an org that is too small to self-insure its loss exposures on its own
-plan offers savings through economies of scale in administration, claims handling, and
the purchase of excess liability insurance
✔✔Advantages of Self-Insurance Plans -✔✔-self-insured orgs have direct control over
claim settlement
-emphasis on loss control - when an org directly pays the cost of its own losses, it has
an incentive to prevent and reduce losses to avoid the expense of loss payments and
settling claims
-in the long-run, the cost tends to be lower than insurance (no risk charge; but self
insurance is subject to various other taxes, assessments, and fees)
✔✔Disadvantages of Self-insurance plans -✔✔-the associated uncertainty of retained
loss outcomes, which can reduce an org's earnings, net worth, and cash flow
-faces the possibility that losses will be much more frequent and severe than expected:
orgs should limit retention to a level that fits within its risk criteria
-administrative requirements: lots of work
-tax deductions are delayed when compared with the timing of deductions under many
other types of risk-financing plans: more significant for liability losses than property
losses, which tend to paid soon after they occur
, ✔✔Ability of Self-insurance Plans to Meet Risk Financing Goals -✔✔1. pay for losses:
yes if org carefully chooses retention level, purchases appropriate excess coverage,
and has sufficient cash flow or liquid assets
2. maintain liquidity: yes if org carefully chooses retention level, purchases appropriate
excess coverage, and has sufficient cash flow or liquid assets
3. manage uncertainty: no, the higher the retention, the higher the degree of uncertainty
4. comply with legal and regulatory requirements: a self-insurer must meet certain legal
requirements
5. minimize cost of risk: must administer its own claims but can save insurer operating
expenses, profits, and risk charges
✔✔Retrospective Rating Plans -✔✔-adjusts the premium for guaranteed-cost insurance
to reflect the insured org's current losses, rather than industry-wide loss experience
-for orgs that want to retain risk in connection with their insurance programs
-a risk transfer plan
-commonly used for WC, Auto, and GL: a single plan can be used for more than one
type of policy
-orgs use these plans to fiance their low to medium-severity losses
-an org must have a substantial insurance premium to benefit from this
-insured pays a deposit premium at the beginning of the policy period, and the insurer
(using a rating formula agreed on before policy period) adjust the premium after the end
of the policy period to include a portion of the insured org's covered losses that occurred
during that period
-bc the premium is adjusted upward or downward based directly on a portion of covered
losses, the insured org is retaining a portion of its own losses
-as long as the insured has a sufficiently large premium, the plan can be designed to
cap losses and therefore minimize the insured's retention by using a loss limit
-ex: if loss limit is $100,000 per occurrence, only the first $100,000 of each covered
occurrence will be included in the retrospective rating premium; the amount of each
occurrence that exceeds $100,000 and is less than the policy limit will be transferred to
the insurer
-max and min premiums
✔✔retrospective rating -✔✔adjust the premium for the current policy period to recognize
the insured's loss experience during the current policy period
✔✔experience rating -✔✔a rating plan that adjust the premium for the current policy
period to recognize the loss experience of the insured org during past policy periods
✔✔loss limit -✔✔-the level at which a loss occurrence is limited for the purpose of
calculating a retrospectively rated premium
-ex: if loss limit is $100,000 per occurrence, only the first $100,000 of each covered
occurrence will be included in the retrospective rating premium; the amount of each
occurrence that exceeds $100,000 and is less than the policy limit will be transferred to
the insurer
