EXAM 3 FINA 4352 QUESTIONS AND ANSWERS WITH
COMPLETE SOLUTIONS VERIFIED GRADED A++
Which of these incidents would be best described as a hazard?
A. After a storm, a tree falls on your car.
B. You park your car on a steep incline without setting the parking brake.
C. You own a luxury automobile.
D. Your car hits a light pole after skidding on ice.
B The answer is you park your car on a steep incline without setting the parking brake.
Skidding on ice and hitting a light pole and damage from wind are perils (i.e., the cause
of the loss that is insured against), not hazards. One could argue that owning a luxury
car is a hazard, particularly if the luxury automobile is one highly desired by prospective
thieves, but the mere fact that you own a particular automobile does not increase the
risk of loss. Rather, the best answer is not setting the parking brake, which clearly
increases the probability of the car colliding with another object
Which of the following statements regarding insurance terminology is
CORRECT?
A. Peril is the indifference to loss that creates carelessness and increases the
chance of loss due to the existence of insurance.
B. A hazard is the cause of financial loss.
C. Speculative risk involves the chance of loss or no loss.
,D. Insurance is a device used to manage risk by having a large pool of people
share in the financial losses suffered by members of the pool.
D The answer is insurance is a device used to manage risk by having a large pool of
people share in the financial losses suffered by members of the pool. Pure risk involves
the chance of loss or no loss. A peril is the cause of financial loss. A morale hazard is
the indifference to the loss that creates carelessness and increases the chance of loss
due to the existence of insurance
Ricky, age 32, has a clean driving record. He recently purchased a car for $1,500.
What is the most appropriate risk management technique for handling the
collision exposure of Ricky's car?
A. Avoidance
B. Transfer
C. Retention
D. Diversification
C The answer is retention. With respect to collision coverage for the car, Ricky should
opt to retain the risk. The car is only worth $1,50
What is the type of authority that an insurance company does not expressly give
to agents, but agents normally possess because it is reasonably necessary for
them to carry out their duties?
A. Implied authority
B. Apparent authority
C. Express authority
D. Ultimate authority
,A The answer is implied authority. Express authority is typically in writing. Apparent
authority involves an agent waiving a provision in a contract and the insurance company
knowing about it but doing nothing to prevent the agent from doing so
Which statement is CORRECT regarding the roles of the National Association of
Insurance Commissioners (NAIC) in regulating insurance?
I. Through the NAIC, the 50 state Commissioners exchange information and ideas
and coordinate regulatory activities.
II. The NAIC makes recommendations for legislation and policy.
III. The NAIC has the legal authority to force states to adopt its regulations.
C The answer is I and II. The NAIC makes recommendations for legislation and policy,
but the organization does not have the legal authority to force states to adopt its
regulations.
Jacob negligently strikes Gary's car and causes considerable property damage.
In turn, Gary's insurance company reimburses him for this loss. Which legal
doctrine permits Gary's insurance company to sue Jacob to recoup its losses?
A. The right of subrogation
B. The collateral source rule
C. The rescission rule
D. The right of reformation
A The answer is the right of subrogation. The right of subrogation permits Gary's
insurance company to sue Jacob. Reformation is a right of the insurance company to
amend the contract when the contract fails to express the actual intent of the parties.
This should be compared with rescission, in which the insurance contract is considered
, null and void from its beginning because of fraud or misrepresentation on the part of the
insured.
Which statement correctly describes a contract of indemnity?
A. Contracts of indemnity will reimburse the insured only for a small portion of
the actual amount of the loss.
B. Contracts of indemnity will reimburse the insured for more than the actual
amount of the loss.
C. Contracts of indemnity will not reimburse the insured for any amount.
D. Contracts of indemnity will reimburse the insured only up to the actual amount
of the loss
D The answer is contracts of indemnity will reimburse the insured only up to the actual
amount of the loss. The notable exception to this rule is a life insurance contract which
pays a stated death benefit or face value
Which statement is CORRECT regarding the legal characteristics of insurance
contracts?
I. Insurance contracts are unilateral contracts.
II. Insurance contracts are contracts of adhesion meaning that the policyowner
can only accept or reject the contract and cannot modify its terms.
III. Insurance contracts are aleatory contracts meaning that the outcome is
affected by chance but the dollars collected by the parties must be equal.
B The answer is I and II are correct. Statement III is incorrect. Insurance contracts are
aleatory contracts meaning that the outcome is affected by chance and that the dollars
collected by the parties are usually unequal.
COMPLETE SOLUTIONS VERIFIED GRADED A++
Which of these incidents would be best described as a hazard?
A. After a storm, a tree falls on your car.
B. You park your car on a steep incline without setting the parking brake.
C. You own a luxury automobile.
D. Your car hits a light pole after skidding on ice.
B The answer is you park your car on a steep incline without setting the parking brake.
Skidding on ice and hitting a light pole and damage from wind are perils (i.e., the cause
of the loss that is insured against), not hazards. One could argue that owning a luxury
car is a hazard, particularly if the luxury automobile is one highly desired by prospective
thieves, but the mere fact that you own a particular automobile does not increase the
risk of loss. Rather, the best answer is not setting the parking brake, which clearly
increases the probability of the car colliding with another object
Which of the following statements regarding insurance terminology is
CORRECT?
A. Peril is the indifference to loss that creates carelessness and increases the
chance of loss due to the existence of insurance.
B. A hazard is the cause of financial loss.
C. Speculative risk involves the chance of loss or no loss.
,D. Insurance is a device used to manage risk by having a large pool of people
share in the financial losses suffered by members of the pool.
D The answer is insurance is a device used to manage risk by having a large pool of
people share in the financial losses suffered by members of the pool. Pure risk involves
the chance of loss or no loss. A peril is the cause of financial loss. A morale hazard is
the indifference to the loss that creates carelessness and increases the chance of loss
due to the existence of insurance
Ricky, age 32, has a clean driving record. He recently purchased a car for $1,500.
What is the most appropriate risk management technique for handling the
collision exposure of Ricky's car?
A. Avoidance
B. Transfer
C. Retention
D. Diversification
C The answer is retention. With respect to collision coverage for the car, Ricky should
opt to retain the risk. The car is only worth $1,50
What is the type of authority that an insurance company does not expressly give
to agents, but agents normally possess because it is reasonably necessary for
them to carry out their duties?
A. Implied authority
B. Apparent authority
C. Express authority
D. Ultimate authority
,A The answer is implied authority. Express authority is typically in writing. Apparent
authority involves an agent waiving a provision in a contract and the insurance company
knowing about it but doing nothing to prevent the agent from doing so
Which statement is CORRECT regarding the roles of the National Association of
Insurance Commissioners (NAIC) in regulating insurance?
I. Through the NAIC, the 50 state Commissioners exchange information and ideas
and coordinate regulatory activities.
II. The NAIC makes recommendations for legislation and policy.
III. The NAIC has the legal authority to force states to adopt its regulations.
C The answer is I and II. The NAIC makes recommendations for legislation and policy,
but the organization does not have the legal authority to force states to adopt its
regulations.
Jacob negligently strikes Gary's car and causes considerable property damage.
In turn, Gary's insurance company reimburses him for this loss. Which legal
doctrine permits Gary's insurance company to sue Jacob to recoup its losses?
A. The right of subrogation
B. The collateral source rule
C. The rescission rule
D. The right of reformation
A The answer is the right of subrogation. The right of subrogation permits Gary's
insurance company to sue Jacob. Reformation is a right of the insurance company to
amend the contract when the contract fails to express the actual intent of the parties.
This should be compared with rescission, in which the insurance contract is considered
, null and void from its beginning because of fraud or misrepresentation on the part of the
insured.
Which statement correctly describes a contract of indemnity?
A. Contracts of indemnity will reimburse the insured only for a small portion of
the actual amount of the loss.
B. Contracts of indemnity will reimburse the insured for more than the actual
amount of the loss.
C. Contracts of indemnity will not reimburse the insured for any amount.
D. Contracts of indemnity will reimburse the insured only up to the actual amount
of the loss
D The answer is contracts of indemnity will reimburse the insured only up to the actual
amount of the loss. The notable exception to this rule is a life insurance contract which
pays a stated death benefit or face value
Which statement is CORRECT regarding the legal characteristics of insurance
contracts?
I. Insurance contracts are unilateral contracts.
II. Insurance contracts are contracts of adhesion meaning that the policyowner
can only accept or reject the contract and cannot modify its terms.
III. Insurance contracts are aleatory contracts meaning that the outcome is
affected by chance but the dollars collected by the parties must be equal.
B The answer is I and II are correct. Statement III is incorrect. Insurance contracts are
aleatory contracts meaning that the outcome is affected by chance and that the dollars
collected by the parties are usually unequal.
