Fundamentals to Insurance Exam Questions & Answers Solved 100%

Chapter 1 - Intro - ANSWER List the 5 functions of insurance: - ANSWER1) Spread of risk 2) Basis of credit system 3) Eliminate worry and develop entrepreneurship 4) Loss reduction and prevention (road safety, alarms, etc.) 5) Employment opportunity Definition of insurance (3 parts) - ANSWER1) insurance provides a means of shifting ones financial responsibility from a loss to another party ii) payment will be made only in the event of the happening of a certain risk or peril iii) the amount of the payment is restricted to the amount required to indemnify the insured 5 points of insurance - ANSWER1) Shift financial responsibility for a loss 2) payment made only in the event of a loss 3) Payment restricted to amount to indemnify (no more, no less) 4) Cover loss to which object of insurance may be exposed (accidental and future) 5) Indemnify in form of money or other thing of value (rebuild/repair) 3 types of property and casualty insurance - ANSWERAuto, property (home and business), and liability (injury or damage to a third party) What are the 2 major types of insurers and provide an example for each - ANSWERPrivate (stock profit or mutual policy holder), or government (ICBC, employment insurance) What is the difference between mutual companies and stock companies? - ANSWERStock - main purpose is to derive a profit, ownerships in the hand of the company's shareholder. Money to operate comes from private funds and public sales of stock Mutual - main purpose is to provide insurance at the lowest cost possible, corporation owned by policy holders, money made goes to policyholders What is known as the major function of insurance? - ANSWERSpread of the losses of the few among the many Where is the definition of insurance usually found - ANSWERThe Insurance Act Define peril - ANSWERCause of loss Define risk - ANSWERChance of loss to which the object of insurance is exposed At what point in time is indemnity calculated? - ANSWERMoments before the loss What two factors regarding losses must be present for them to be insured? - ANSWERFuture and accidental Who retains the option to repair or replace damaged property rather than pay cash settlements? - ANSWERInsurer Main purpose of stock companies? - ANSWERProfit maximization Identify the two main distribution methods used by insurers for their products - ANSWERDirect writers (work for one insurance company) and independent brokers (work for multiple insurance companies - can offer multiple options for insurance, not limited) Major function of insurance is to: - ANSWERShare losses of the few among the many Does insurance allow payment to be in another form than money? - ANSWERYes, replacement or repair Chapter 2 - Insurance Contracts - ANSWER There are 4 ways changes can be made to a policy. What are the 4 ways? - ANSWER1) Rider (adding additional coverage) 2) Floater (provides coverage for items not on the insured premise) 3) Endorsement (acknowledges changes in the actual contract) 4) Separate policy (additional coverage, but no change in the original contract - new policy altogether) 4 ways to deal with risk - ANSWER1) Avoidance (don't buy the car in the first place) 2) Controlling (car alarms) 3) Retention (increase in deductible or putting money aside) 4) Transfer (buying insurance) 3 categories of risk insurance - ANSWERPersonal (health, anything directly affecting you), property (house, care), and liability (3rd party) Define contract - ANSWERAn agreement between two or more parties, enforceable at law What are the 2 kinds of risk? Which one is not insurable? - ANSWERPure risk (no chance for profit gain, insurable), and speculative (chance for profit or loss, for example gambling or starting a new business, not insurable) Identify four options people have when dealing with risk - ANSWERAvoidance, risk control, retention, transfer What type of risk control reduces loss frequency? - ANSWERLoss prevention Which method of dealing with losses and risk is most practical? - ANSWERInsurance What type of risk is insurable? - ANSWERPure risk Identify 5 elements that must be present in all contracts - ANSWERAgreement (offer and unconditional acceptance), consideration (exchange of something of value), legality of object (not illegal), legal capacity of the parties (not children, not mentally incompetent), genuine intention (no inducement, needs to be intended) What is consideration? - ANSWERExchange of something of value 3 unique elements of insurance contracts - ANSWERInsurable interest (insured person derives a financial or other kind of benefit), indemnity (no more no less), utmost good faith (honest, trust each other) What are binders? - ANSWERTemporary insurance placed by brokers on behalf of clients, written or oral commitment by the broker to provide a contract of insurance on the subject matter under discussion How are endorsements different than riders? - ANSWEREndorsements are extra sheets or slips of paper that change the terms of an existing contract. Riders add additional coverage to those already in place - to have a rider you must endorse the contract Who would not have insurable interest? Business partner Heir or beneficiary Bailee Mortgagee - ANSWERHeir or beneficiary Property with a high degree of mobility associated with it is generally insured under a: - ANSWERFloater Chapter 3 - The Role of Government in Insurance - ANSWER What is solvency, how is it different than insolvency? - ANSWERSolvency is when insurers are capable of fulfilling their financial obligations. If they are unable to meet these obligations, they are insolvent What 3 things does the basic fire policy cover? - ANSWERFire (hostile), lightning, and explosion due to natural gas, coal and manufactured gas Define fiduciary - ANSWEROne who handles other people's money insurers and brokers are both fiduciaries 3 conditions (rules) of removal coverage change - 3 conditions when someone needs to move their insured property - ANSWER1) Removed to protect from future or further loss 2) Amount of coverage is whatever is left over 3) Up to 7 days of coverage maximum (or expiry of policy, whichever is first) What are the 6 contents of insurance policies legislated? (first page of policy - declaration) - ANSWER1) Parties to the contract 2) Policy period (policy takes effect art 12:01Am local time at the address of the name insured) 3) Loss payable (mortgagee) 4) Type of coverage and amount 5) Rate and premium 6) Subject matter (what is being insured) What is the fiduciary responsibility of insurers? When is the full premium earned? - ANSWERTo clients. Premium not fully earned until expiry of policy What is the role of the property and casualty insurance compensation corporation (PACICC) what up to what monetary value will they pay out if required? - ANSWERPACICC provides insurers protection in case of insolvency (bankruptcy). They will pay up to $250,000 for single claim or 70% in premiums Why must unearned premiums be held in trust by the insurance company? - ANSWERIn order to refund to the clients when they cancel prior to expiry (pro rata) 3 components of the removal clause: - ANSWER1) Coverage provided when property is removed to protect it from further loss 2) Coverage amounts are the remaining coverage after loss at named location 3) Coverage provided for 7 days or the unexpired term of policy, whichever is less Right of subrogation - ANSWERRight of insurer to go after 3rd parties for damage they had to pay to client in claim What are 2 kinds of fires and which type is insurable? - ANSWERFriendly and hostile, only hostile is insurable Is what situations may a new party benefit from a policy of insurance? ie. not named on the policy itself (4) - ANSWERAuthorized assignment in the bankruptcy act, change in title due to succession (inheritance), operation of law, or death What methods may insurers use to cancel fire policies? (to provide notice) - ANSWER15 days notice by registered letter, 5 days notice when personally delivered Solvency refers to - ANSWERAbility of an insurer to pay insured losses What is a major fiduciary responsibility placed on brokers by law? - ANSWERUnearned commissions must be held in trust to refund to the insured in the event the policy is cancelled prior to expiry date When does insurance coverage commence? - ANSWER12:01 am standard time at the address of name insured Policy of fire insurance covers smoke? T/F? - ANSWERFalse What are reasons for an insurer to void the contract? - ANSWERFraud or misrepresentation What is material change - ANSWERAny substantial and continuing change to the property - must be reported What is salvage? - ANSWERAny attempt to save items as long as it does not endanger life,required by insurers of insureds If fraud is proven, only that portion of the claim is invalid? T/F? - ANSWERFalse - entire contract can be terminated What are the 7 components of the standard property policy regarding the peril of fire? - ANSWER1) contents of policy (declaration) - 6 things 2) removal coverage (3 rules) 3) limitation of liability clause (if pay less then indemnified, must state on contract) 4) right of subrogation 5) waiver of term or condition (must be agreed on and signed by insured) 6) effect of delivery of policy (if policy is delivered but not paid for, must still be treated as if it was paid for - promise to pay) 7) policies of insurance with fire peril (covered, exclusions, and statutory conditions) what perils are covered in a basic fire peril policy? - ANSWERfire, lightning, explosion due to natural gas, manufactured gas, or coal what perils are excluded in a basic firepolicy - ANSWERapplied heat, lightning damage to electrical device, electrical currents, contamination by radioactive material there are 15 statutory conditions. list them all - ANSWER1) misrepresentation - false description, insurer can void 2) property of others - covered if stated in contract 3) change of interest - change of primary policy holder, can be due to 4 reasons: bankruptcy law, succession, death, or law (mental incompetency) 4) material change - any change within knowledge of insured, can cause loss, and is substantial must be reported 5) termination - must give 15 days notice in mail to 5 in person, if contract is terminated by client they receive any unearned premium as refund 6) requirements after loss - must provide notice, proof of loss, inventory count, etc. 7) fraud 8) who may give notice and proof - if insured is unable, any agent of insured can give proof of loss (friends, family, lawyer) 9) salvage 10) entry, control and abandonment - insured is entitled to see loss 11) appraisal - if disagreement on value, outside expert brought in 12) when is loss payable? - 60 days after proof 13) replacement - must give notice of intention to replace within 30 days of proof, and begin process within 40 days of proof 14) action - recovery of any claim done within a year of loss 15) notice - establishes rules of how insured and insurer communicate during policy period Chapter 4 - Insurance Process - ANSWER What is the broker's primary duty? (to client and to insurer) - ANSWERTo clients - ensure they receive the right insurance advice and coverage, and exercise reasonable skill, care and diligence. To insurers - follow legal standards and tell the truth What is the most common cause of errors and omissions? - ANSWERInadequate coverage What is a broker and their duties? - ANSWERA broker works in an insurance office as an intermediary between clients and insurers - primarily represent the client's interest and provide the right coverage. They can represent various companies Difference between a company claims adjuster (staff adjuster) and an independent adjuster? - ANSWERCompany adjuster work for the insurer and IA's work for multiple insurers and are brought in when there are staff adjuster shortages or specific expertise is needed What do underwriters do? - ANSWERUse 4 aspects in decision making to make policies: 1) Application (positive or negative response) 2) Broker (ask for more info) 3) Loss experience data (for type of risk) 4) Inspection reports (previous claims data investigation and field reports) 2 types of hazards and 3 examples of each (property) - ANSWERPhysical hazards - type of building, occupancy, and housekeeping Moral hazards - financial intention, moral character, and indifference to loss Identify the primary obligation brokers owe their customers - ANSWERprovide the right advice and coverage leading cause of errors and omissions from brokers? - ANSWERinadequate coverage primary obligation brokers owe to their INSURERS - ANSWERtell the truth define hazard - ANSWERa condition that may cause a peril to occur define physical hazard - ANSWERcharacteristics of the premises that may cause a peril to occur define moral hazard - ANSWERcharacteristics of the applicant that may cause a peril to occur when are independent adjusters contacted by insurers to adjust claims? - ANSWERwhen staff adjusters are too busy and when special skills are required what 3 things do brokers have to the duty to provide their clients with? - ANSWER1) provide with the correct info and not conceal anything 2) tell insurers the truth about the risks they submit 3) ensure client's receive the right coverage a subjective characteristic of an applicant that could cause a peril to occur...? - ANSWERa moral hazard Chapter 5 - Property Insurance Policies Common Characteristics - ANSWER