RMIN Test 3 Study Guide Review Questions
1. Legal principles of insurance (4): -Principle of Indemnity
-Principle of Insurable Interest
-Principle of Subrogation
-Principle of Utmost Good Faith
2.Principle of Indemnity: the insurer agrees to pay no more than the
actual amount of the loss
-purpose is to prevent the insured from profiting the loss
3. what is the purpose of the principle of indemnity?: to prevent the
insured from profiting from the loss
4. replacement cost (RC): - the cost to replace property with an item of
like kind and quality (similar workmanship and materials)
- not the same as historical cost!!!
5. what is replacement cost NOT the same as?: Historical Cost
6. Actual Cash Value (ACV): The required amount to pay damages or for
property loss, which is calculated based on the property's current
replacement value minus depreciation.
(ACV=RC-depreciation)
-in property insurance, indemnification is usually based on the actual
cash value of the property at the time of loss
7. Actual Cash Value formula: ACV=RC-depreciation
8. ACV example: A samsung 50" TV cost $750 when purchased in 2017. its
useful life is 10 years and a current model (like kind/quality) is $450. what
is the ACV?: -RC=450
-depreciation=(4/10) x 450
- 450-180
-ACV= 270
9. ACV example: a warehouse building cost $2,500,000 when built in 2015.
Its useful life is 20 years but the fire completely destroys the building in
2021. current reconstruction cost is $3,000,000, what is the ACV?: -
RC=3,000,000
-depreciation=(6/20) x 3,000,000
- 3,000,000-900,000
-ACV= 2,100,000
10.other types of indemnity (3): -market value
-valued policy
-valued policy law (in some states)
11.Market Value: price a buyer would be willing to pay in a free market
12.valued policy: a policy that pays the face amount of insurance if a
,total loss occurs (life insurance)
, 13.Valued Policy Law (in some states): requires payment of the face
amount of insurance if a total loss to real property occurs from a peril
specified in law
14.principal of insurance interest: the insured/beneficiary must be in a
position to lose financially if a covered loss occurs
-why? *prevents gambling on losses *reduces moral hazard
15.Why principal of insurance interest?: -prevents gambling on losses
-reduces moral hazard
16.Examples of Insurable Interest (4): -Ownership of property (house, car)
-Potential legal liability (business owner)
-Secured creditors (mortgage company, auto lender)
-Contractual right (goods in transit)
17.When must an insurable interest exist?: -Property insurance: at the
time of the loss (can't collect on an insurance policy after you sell your
home)
-Life insurance: only at inception of the policy (ex-spouse can collect on
life insurance if listed as policy beneficiary)
18.when should insurable interest exist in property insurance?: at the time
of the loss
-cant collect on an insurance policy after you sell your home
19.when should insurable interest exist in life insurance?: at the
inception of policy
-ex-spouse can collect on life insurance if listed as policy beneficiary
20.principle of subrogation: substitution of the insurer in place of the
insured for the purpose of claiming indemnity from a third party for a
loss covered by insurance
-example: someone steals your car, your insurance company pays you
for the damages to your vehicle, your insurance company sues the
other driver for reim- bursement
21.example of principle of subrogation: someone steals your car, your
insurance company pays you for the damages to your vehicle, your
insurance company sues the other driver for reimbursement
22.reasons for subrogation: -prevents insured from collecting twice
(once from insurer, once from responsible party)
- holds the negligent party responsible for the loss
- reduces insurance claims costs and therefore rates
23.Principle of Utmost Good Faith: A higher degree of honesty is
imposed on both parties to an insurance contract than is imposed on
parties to other contracts
1. Legal principles of insurance (4): -Principle of Indemnity
-Principle of Insurable Interest
-Principle of Subrogation
-Principle of Utmost Good Faith
2.Principle of Indemnity: the insurer agrees to pay no more than the
actual amount of the loss
-purpose is to prevent the insured from profiting the loss
3. what is the purpose of the principle of indemnity?: to prevent the
insured from profiting from the loss
4. replacement cost (RC): - the cost to replace property with an item of
like kind and quality (similar workmanship and materials)
- not the same as historical cost!!!
5. what is replacement cost NOT the same as?: Historical Cost
6. Actual Cash Value (ACV): The required amount to pay damages or for
property loss, which is calculated based on the property's current
replacement value minus depreciation.
(ACV=RC-depreciation)
-in property insurance, indemnification is usually based on the actual
cash value of the property at the time of loss
7. Actual Cash Value formula: ACV=RC-depreciation
8. ACV example: A samsung 50" TV cost $750 when purchased in 2017. its
useful life is 10 years and a current model (like kind/quality) is $450. what
is the ACV?: -RC=450
-depreciation=(4/10) x 450
- 450-180
-ACV= 270
9. ACV example: a warehouse building cost $2,500,000 when built in 2015.
Its useful life is 20 years but the fire completely destroys the building in
2021. current reconstruction cost is $3,000,000, what is the ACV?: -
RC=3,000,000
-depreciation=(6/20) x 3,000,000
- 3,000,000-900,000
-ACV= 2,100,000
10.other types of indemnity (3): -market value
-valued policy
-valued policy law (in some states)
11.Market Value: price a buyer would be willing to pay in a free market
12.valued policy: a policy that pays the face amount of insurance if a
,total loss occurs (life insurance)
, 13.Valued Policy Law (in some states): requires payment of the face
amount of insurance if a total loss to real property occurs from a peril
specified in law
14.principal of insurance interest: the insured/beneficiary must be in a
position to lose financially if a covered loss occurs
-why? *prevents gambling on losses *reduces moral hazard
15.Why principal of insurance interest?: -prevents gambling on losses
-reduces moral hazard
16.Examples of Insurable Interest (4): -Ownership of property (house, car)
-Potential legal liability (business owner)
-Secured creditors (mortgage company, auto lender)
-Contractual right (goods in transit)
17.When must an insurable interest exist?: -Property insurance: at the
time of the loss (can't collect on an insurance policy after you sell your
home)
-Life insurance: only at inception of the policy (ex-spouse can collect on
life insurance if listed as policy beneficiary)
18.when should insurable interest exist in property insurance?: at the time
of the loss
-cant collect on an insurance policy after you sell your home
19.when should insurable interest exist in life insurance?: at the
inception of policy
-ex-spouse can collect on life insurance if listed as policy beneficiary
20.principle of subrogation: substitution of the insurer in place of the
insured for the purpose of claiming indemnity from a third party for a
loss covered by insurance
-example: someone steals your car, your insurance company pays you
for the damages to your vehicle, your insurance company sues the
other driver for reim- bursement
21.example of principle of subrogation: someone steals your car, your
insurance company pays you for the damages to your vehicle, your
insurance company sues the other driver for reimbursement
22.reasons for subrogation: -prevents insured from collecting twice
(once from insurer, once from responsible party)
- holds the negligent party responsible for the loss
- reduces insurance claims costs and therefore rates
23.Principle of Utmost Good Faith: A higher degree of honesty is
imposed on both parties to an insurance contract than is imposed on
parties to other contracts
