Insurance Law and Policy Textbook Exam
Questions
Course Introduction
Insurance Law and Policy provides an in-depth exploration of the legal principles and regulatory frameworks that govern insurance contracts and the insurance industry. The course examines key topics such as the formation and interpretation of insurance policies, the duties and obligations of insurers and insureds, claims procedures, and the role of government regulation. Students will analyze different types of insurance, including life, health, property, and liability insurance, while considering emerging issues such as technological advancements and social policy implications. Through case studies and statutory interpretation, the course prepares students to navigate the complexities of insurance law in both national and international contexts.
Recommended Textbook
Introduction to Risk Management and Insurance 9th Edition by Mark S. Dorfman
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Chapter 1: Fundamentals and Terminology
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Q1) Objective risk is defined as:
A)risk with two possible outcomes
B)risk with three possible outcomes
C)an individual's perception of risk
D)none of the above
Answer: D
Q2) If a person installs an automatic sprinkler system to prevent serious fire damage,this action can be considered "insurance" as defined in the text
A)True
B)False
Answer: False
Q3) The law of large numbers states that as the number of exposure units increases:
A)accuracy of predictions should improve
B)the chance of loss declines
C)objective risk increases
D)the number of perils increases
Answer: A
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Chapter 2: Defining the Insurable Event
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Q1) What is adverse selection? Explain why insurers are concerned about adverse selection.
Answer: Adverse selection occurs when insurance coverage is purchased and all relevant information is not disclosed,(asymmetric information)causing rates to be inadequate.Insurers are concerned about it because it causes subsidization. Applicants would apply for coverage if the rates were low relative to the exposure causing future premium increases and discouraging good insureds to stay.
Q2) One reason insurable losses must be definite is to allow measurability of the losses
A)True
B)False
Answer: True
Q3) If assumption of the risk is established it means the defendant usually must pay for damages.
A)True
B)False
Answer: False
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Chapter 3: Risk Management
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Q1) What are the three basic methods of dealing with risk in the risk management process?
Answer: The only three alternatives to risk are to 1)avoid,2)retain,or 3)transfer. All other methods are extensions or combinations of these three. Self insurance is retention. Loss control (prevention and/or reduction)on the other hand is used to reduce the frequency and/or severity of losses regardless of whether the exposure has been retained or transferred.This decision is usually subject to a cost benefit analysis.
Q2) If you were the risk manager of the World Trade Center buildings,what loss prevention or reduction technique could you have implemented before the 9/11/01 tragedy that might have made a significant difference in the number of lives lost?
A)Guards on the roof of each building
B)Evacuation procedures that required everyone to leave after any sign of loss
C)Stronger exterior building materials
D)Better background screening of all who were allowed to work in the building
Answer: B
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Chapter 4: Financial Services Companies
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Q1) Which of the following statements about stock insurance companies is true?
A)stockholders provide operating capital and receive dividends
B)they are nonprofit organizations
C)the insureds own the company
D)they are more likely to provide lower cost insurance than mutuals
Q2) A perpetual mutual:
A)requires a very large initial premium
B)is owned by stockholders who supply the capital
C)distribute all investment earnings to its policyholders in the form of a dividend
D)requires only assessments from each policy holder after the end of each year to cover losses
Q3) Which of the following statements is false?
A)factory mutuals insure only highly protected risks
B)a stock insurance company is a profit making venture in both life and property insurance
C)dividends are paid to stockholders of stock companies
D)in stock companies, non insured stockholders bear none of the risk of loss
Q4) Lloyd's of London is not an insurance company. What is it and how does it provide insurance?
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Chapter 5: Insurance Occupations
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Q1) The first step in the underwriting process is:
A)the desk underwriter review
B)the agent's field appraisal
C)the general agent's confidential report
D)the inspection report from Equifax or similar investigator
Q2) Which of the following pieces of information would be the LEAST useful to a property insurance underwriter?
A)age of the property owner
B)age of the property
C)use of the property
D)what the surrounding properties are like
Q3) Which of the following statements about insurance brokers is (are)true?
A)They legally represent the insurance company
B)They have the legal power to bind the insurance company and can provide coverage for their insureds immediately
C)They have the right to approach a variety of insurers when searching for a particular product or coverage
D)Both a and b are true
Q4) What is the difference between an agent and a broker?
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Chapter 6: the Insurance Market: the Economic Problem
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Q1) The text suggests that insurance consumers should:
A)inform themselves about the company, policy, etc. to protect their own self interest
B)rely on government regulation to protect their interest, since insurance companies and policies cannot be understood by the public
C)rely on attorneys and the lawsuit process to protect themselves
D)rely on self regulation of insurance companies and the insurer's goodwill to protect their interest
Q2) All of the following are rights of insurance consumers except:
A)the right to accurate information
B)the right to have complaints heard
C)the right to affordable prices
D)the right to product development and improvement
Q3) CLU stands for:
A)Chartered Life Underwriter
B)Casualty Life Underwriter
C)Claims Litigation Underwriter
D)Chartered Legal Underwriter
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Chapter 7: Insurance Regulation
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Q1) Under the Optional Federal Charter,and insurer that becomes federally-regulated will then be subject to:
A)no state guaranty fund participation
B)more restrictive rate regulation
C)regular Sherman Act restrictions
D)FDIC participation and protection
Q2) The South-Eastern Underwriters Association Case:
A)preceded the Paul V. Virginia case
B)upheld the precedent set in Paul v. Virginia
C)reversed the Paul v. Virginia decision
D)none of the above
Q3) Unrestrained price competition does not work in the insurance market because prices have to be determined long before final costs are known.
A)True
B)False
Q4) The Appleton Rule applies to all insurance companies doing business in Wisconsin. A)True
B)False
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Chapter 8: Insurance Contracts
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Q1) The principle of utmost good faith
A)holds the insurer to a higher standard of honesty
B)does not apply in life insurance
C)holds the insured to a higher standard of honesty
D)requires the insurer and insured to enter the contract with utmost good faith
Q2) Which of the following does not support the principal of indemnity?
A)actual cash value
B)contract of adhesion
C)insurable interest
D)subrogation
Q3) Dana loans her brother,Marcus,$500,000 with which to start a movie production company. The business assets are shown in the loan agreement as collateral for the loan. Dana can insure Marcus' life because:
A)The principle of insurable interest exists in this situation
B)The principle of utmost good faith exists in this situation
C)She and Marcus are brother and sister
D)This is a trick question; she cannot insure his life, but she can insure the business assets
Q4) Explain the principle of subrogation. Provide a mathematical example of its use.
Q5) Explain the principle of indemnity. How does one measure indemnity?
Page 10
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Chapter 9: Basic Property and Liability Insurance Contracts
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Q1) Property insurance policies are standardized for all the following reasons except:
A)to improve the accuracy of insurance rates
B)to help reduce costs to consumers
C)to eliminate competition between insurers
D)to reduce litigation over policy meaning
Q2) The appraisal procedure can only be invoked by the insured.
A)True
B)False
Q3) If there were a $22,000 loss and a $700 straight deductible,the insurer would pay
A)$700
B)$21,300
C)$22,000
D)$0
Q4) The appraisal procedure is used only when the amount of the loss,not the cause of the loss,is in dispute.
A)True
B)False
Q5) Explain the purpose of the declaration page found in insurance contracts.
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Chapter 10: Homeowners Insurance
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Q1) You have an HO policy with the following limits:
A=$50,000 (dwelling)B=$5,000 (other structures)C=$25,000 (personal property).
A tornado strikes your property. You lose your house,which is worth $40,000 at the time of the loss. You also lose an unattached shed worth $8,000,and personal property worth $30,000.You will collect:
A)$78,000
B)$70,000
C)$58,000
D)None of the above
Q2) Explain why there is a coinsurance clause applied to the building structures. How does it work?
Q3) Ira is a homeowner covered by an HO-2 policy. He lives with his wife and three children,ages 14,16,and 19. Who in the household is not covered for personal liability by the HO policy?
A)Both the 16 and 19-year old children
B)Any of the children
C)The 19-year-old child
D)All of the persons listed are covered
Q4) Explain the concept of concurrent causation as it applies to collapse.
Q5) What is meant by "Medical Payments to others?" Why does the coverage exist?
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Chapter 11: the Personal Auto Policy
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Q1) What is the difference between Collision and Other Than Collision coverages? Why does the PAP list certain perils in Other Than Collision when they can be caused by collision? What happens if the cause of loss is not listed?
Q2) When you have an auto accident that is your fault,your PAP's Liability coverage will pay for all of the following except:
A)Bodily injuries of your family members riding with you
B)Bodily injuries of non family members who are passengers in your car at the time of the accident
C)Bodily injuries of your best friend who is a passenger in your car at the time of the accident (moderate)
D)The cost to repair or replace property belonging to others that you damaged in the accident
Q3) When you borrow someone's car and wreck it,you have the option of letting your automobile insurance pay on a primary basis for the accident.
A)True
B)False
Q4) Explain the purpose of Uninsured Motorist coverage.
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Chapter 12: Professional Financial Planning
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Q1) Sound financial planning requires a trade off between
A)risk and return alternatives
B)gratification and savings
C)investment and saving alternatives
D)fees and returns
Q2) A terminally ill insured may be able to withdraw life insurance death benefits on tax-free basis while still alive.
A)True
B)False
Q3) Which of the following statements is false concerning the taxation of life insurance?
A)beneficiaries receive death benefits free from any federal taxation
B)the value of the life insurance death benefit is always included in the insured's estate
C)if a non insured/owner dies, the value included in the decedent's estate is approximately the cash value of the insurance contract
D)interest earned on settlement proceeds is taxable
Q4) What are the main financial planning problems encountered in the "early adult" years?
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Chapter 13: Life Insurance Policies
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Q1) A disadvantage of using a whole life policy for saving is:
A)earnings outside the policy can be greater
B)federal income tax must be paid on the yearly cash value increases
C)creditor protection is available if bankruptcy occurs
D)since premiums must be paid to keep the policy in force, there is the semi compulsory nature of saving
Q2) The accumulation of a reserve consisting of excess payments above the mortality cost in the early years of a policy is necessary for the:
A)deferred annuity plan
B)minimum reserve standard
C)level premium plan
D)yearly renewable term plan
Q3) A term insurance policy that includes a conversion privilege gives the insured the right to:
A)renew the policy for another time period of the same length
B)exchange the term policy for a permanent plan of insurance
C)increase or decrease the death benefit
D)include the nonforfeiture provision in the policy
Q4) In general,what are the uses for term life insurance? Provide examples.
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Chapter 14: Standard Life Insurance Contract Provisions
And Options
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Q1) What is the purpose of the reinstatement provision? What are the requirements for reinstatement?
Q2) Mike is dying of AIDS and knows it,but does not tell his agent when applying for life insurance.The contract is issued and Mike dies three years later,at which time the insurer learns of Mikes condition. In this case the insurer must:
A)pay the face of the policy to the beneficiary
B)return all premiums plus interest
C)return all premiums without interest
D)pay the beneficiary, but the insurer can then subrogate against the insured's estate
Q3) The waiver of premium option can result in the savings value of a life insurance policy increasing,even if no premiums are currently being paid. A)True
B)False
Q4) Only whole life insurance policies have a grace period. A)True
B)False
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Chapter 15: Annuities
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Q1) Insurers have greater administrative charges for flexible-premium deferred annuities (FPDAs)than they do for single-premium deferred annuities (SPDAs)because:
A)they do not have minimum required deposits for FPDAs
B)there is considerably more adverse selection among persons purchasing FPDAs
C)FPDA purchasers have much greater flexibility in making premium payments
D)This is a trick question; insurers do not impose higher administrative charges on FPDAs versus SPDAs
Q2) Ron Liven is a retiree receiving a monthly annuity payment. This year his annuity payment is $4,000 per month. Last year,it was $3,700 per month,and the year before it was $3,500. Ron does NOT know what his payment will be NEXT year. What type of annuity does he have?
A)fixed incremental increase
B)installment refund
C)cash refund
D)variable annuity
Q3) A pure annuity has the greatest monthly benefits per $1,000 of premium payment.
A)True
B)False
Q4) Explain how an annuity,10 years certain would work.
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Chapter 16: Medical Expense and Disability Insurance
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Q1) All of the following are individually-purchased health insurance products except:
A)Medicaid insurance
B)Long-term care insurance
C)Basic medical insurance
D)Major medical insurance
Q2) Which of these health insurers normally rewards its doctors through profit sharing?
A)Traditional Health Insurers
B)Blue Cross/Blue Shield Organizations
C)Health Maintenance Organizations
D)Preferred Provider Organizations
Q3) Distinguish between cost shifting and cost containment in health care.
Q4) The purpose of long term care insurance is to:
A)pay supplemental Medicare benefits when 60 days of coverage has been exceeded
B)pay for housekeeping services for elderly disabled retirees on Medicare or Medicaid
C)pay for short stays in a hospital for the purpose of rehabilitation
D)pay for services in a long tem care facility such as custodial care, skilled nursing care, intermediate care, or hospice care
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Chapter 17: Advanced Topics in Risk Management
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Q1) To finance some uninsurable exposures,risk managers go to the "ART" market. What does ART stand for?
A)alternative risk management team
B)alternative risk transfer
C)actuarial risk transfer
D)actuarial risk types
Q2) Which of the following would be least important in making the retention/transfer decision?
A)tax implications
B)social and ethical concerns
C)historical management policy
D)financial ability to pay losses
Q3) Explain what is meant by financial risk management?
Q4) All of the following tasks are performed by a risk management information system (RMIS)except:
A)track frequency, severity and final outcome of losses
B)provide statistical data to spot trends
C)provide insurance policy data and loss history
D)provide an instantaneous picture of the company's balance sheet
Q5) What is a RMIS? How does a RMIS help the risk manager?
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Chapter 18: Commercial Property Insurance
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Q1) Which of the following factors would not be considered in a class rating scheme for property insurance?
A)community fire fighting capability
B)use of the structure
C)external surrounding exposures
D)age of the named insured
Q2) Which of the following is an example of intangible property?
A)custom-designed accounting software
B)leased shopping center space that your business occupies
C)custom-made cabinetry in a retail space
D)a limited edition automobile
Q3) Which of the following factors would generally not be considered in a class rating scheme?
A)community fire fighting capability
B)use of the structure
C)external surrounding exposures
D)the existence of sidewalks around the building
Q4) Ocean marine policies are typically "specified perils" contracts.
A)True
B)False
Page 20
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Chapter 19: Commercial Liability Insurance
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Q1) The Americans with Disabilities Act (ADA)requires employers to do which of the following?
A)Hire a minimum number of disabled persons
B)Discriminate in favor of disabled persons
C)Actively seek out disabled persons as potential employees
D)Make reasonable accommodations for disabled employees or qualified job applicants
Q2) Indhar suffers minor injuries when Monica negligently crashes her car into his. Monica is also slightly injured in the accident. Both of them have automobile liability policies in force. Under the no-fault liability system:
A)Indhar will be compensated by Monica's automobile liability insurer
B)Indhar will be compensated by his liability insurer, which will also compensate Monica
C)Indhar and Monica will each collect from the Federal Emergency Management Agency.
D)Each will collect from their own auto insurance policy
Q3) Explain the idea behind implementing a pure no-fault law that applies to automobile insurance.
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Chapter 20: Bonding,Crime Insurance and Reinsurance
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Q1) The surety is bound to perform,and pay on behalf of the obligee,if the obligee fails to perform as promised.
A)True
B)False
Q2) In reinsurance,the primary insurer is also known as the:
A)retrocessionaire
B)first layer reinsurer
C)ceding company
D)excess reinsurer
Q3) ET Insurance Company cedes to MJ Insurance Company $60,000 of a $100,000 exposure on an excess of loss basis. A loss occurs for $60,000.
A)MJ pays $36,000; ET pays $24,000
B)MJ pays $20,000; ET pays $40,000
C)MJ pays $40,000, ET pays $20,000
D)MJ pays $30,000; ET pays $30,000
Q4) What is the difference between pro-rata reinsurance and excess of loss reinsurance?
Q5) What is the difference between the crimes of theft,robbery and burglary?
Q6) Explain the need for surety bonding. How does it work?
Page 22
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Chapter 21: Employee Benefits
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Q1) Carlos and Mary are married,and covered under Carlos' group health plan provided by his employer. Carlos dies. How long can Mary continue her health coverage,according to COBRA provisions?
A)0 months
B)18 months
C)24 months
D)36 months
Q2) The Family and Medical Leave Act
A)applies to employers having 15 or more employees
B)gives employees the right to have paid leave for the birth of a child
C)gives employees the right to have unpaid leave to care for a foster child
D)does not require employees to give employers medical evidence of the illness that requires their leave
Q3) The face amount of group term life insurance is typically not selectable by the individual employee and therefore can be based on salary.
A)True
B)False
Q4) Explain how employees are taxed on group life insurance supplied as an employee benefit.
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Chapter 22: Social Security
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Q1) Suppose that Social Security measures a quarter of coverage earned as $900. Mario works during the June and July only and earns $9,000 of covered wages. How many quarters of coverage does he receive for that year?
A)1
B)4
C)10
D)up to 10, depending upon whether or not he is self-employed
Q2) The private insurance system and the Social Security system are both "fully-funded."
A)True
B)False
Q3) The 2006 report from the trustees of Social Security indicates that:
A)Social Security will be bankrupt by the year 2040
B)With no changes to the program, all benefits will be fully-funded through the year 2040
C)Baby Boomers are specifically responsible for bankrupting the system
D)With no changes to the program, all benefits will be fully-funded through the year 2047
Q4) Describe the characteristics of a government insurance program.
Q5) What are the requirements for receiving Social Security disability benefits?
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Chapter 23: Unemployment and Workers Compensation Insurance
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Q1) From the employer's stand point,workers' compensation insurance may be seen as a substitute for other types of liability insurance.
A)True
B)False
Q2) Worker's compensation is likely to cover all the following except:
A)100 percent of lost wages during disability
B)medical expenses
C)rehabilitation expenses
D)reasonable funeral expenses
Q3) Each of the following describes a condition under which an employee is injured on the job. Under which of these would the employer not have to provide workers' compensation benefits to the injured employee?
A)employee falls asleep on the job
B)employee is distracted by a fellow employee
C)employee was late for work
D)employee had several beers before work
Q4) All workers' compensation claims are reviewed by special courts.
A)True
B)False
25
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