FOI - Chapter 2

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Questions and Answers

What is an example of personal risk?

Loss of owned property due to theft

Health deterioration due to a chronic illness (correct)

Legal responsibility for a friend's injury

Injury resulting from a car accident

What is the main goal of risk transfer in insurance?

To manage and mitigate financial consequences of potential loss (correct)

To avoid dealing with any financial loss altogether

To share risks with other parties

To eliminate all financial risks

Which method of dealing with risk involves taking financial responsibility for potential losses?

Transfer of risk

Retention of risk (correct)

Avoidance of risk

Control of risk

Which type of risk is considered uninsurable?

Speculative risk involving potential financial gain Signup and view all the answers

What is a common way to mitigate risk without eliminating it?

Implementing preventive measures like alarms Signup and view all the answers

Which of the following is NOT a recommended strategy for dealing with risk?

Complete avoidance of all risks Signup and view all the answers

Why is automobile insurance mandatory in Canada?

Due to the high potential for financial loss from accidents Signup and view all the answers

Which definition best describes property risk?

Financial loss due to property damage or loss Signup and view all the answers

What is true regarding the legal capacity of a trade name?

A trade name does not have legal status to contract. Signup and view all the answers

Which of the following best defines 'Genuine Intention' in the context of contracts?

All parties involved sincerely intend to enter the agreement. Signup and view all the answers

In a contract, which of the following acts can be grounds for voiding the agreement?

Not disclosing significant information beforehand. Signup and view all the answers

What must be demonstrated to establish insurable interest?

A financial benefit if the property is destroyed. Signup and view all the answers

Which of the following is not a factor affecting genuine intention in a contract?

Market Analysis Signup and view all the answers

What type of risk is insurable?

Pure risk Signup and view all the answers

What is required for an agreement within a contract?

An unconditional acceptance of terms Signup and view all the answers

What does consideration represent in a contract?

An exchange of something of value Signup and view all the answers

Which party has the legal capacity to contract?

Adults with full mental faculties Signup and view all the answers

Which of these contracts is unenforceable?

A contract involving illegally acquired property Signup and view all the answers

What must be established for a contract made by a person under the influence of alcohol to be deemed valid?

They were deliberately intoxicated without consent Signup and view all the answers

What happens if a minor enters into a contract?

They can void the contract within a reasonable time frame Signup and view all the answers

What denotes the legality of object in a contract?

The object of the contract must have legal purpose Signup and view all the answers

Which statement best describes 'legal entities' in the context of contracts?

They can legally enter contracts like natural persons Signup and view all the answers

What is an example of a speculative risk?

Investing in a startup company Signup and view all the answers

Who are mortgagees in the context of business partnerships?

Financial institutions providing loans Signup and view all the answers

What is a key responsibility of bailees regarding customers' property?

To be legally responsible for certain losses Signup and view all the answers

What is the responsibility of a brokerage if it exceeds its binding authority and a loss occurs?

The brokerage must pay for the amount of loss. Signup and view all the answers

Which document typically outlines the extent of a broker's binding authority?

Rate Manual Signup and view all the answers

What happens if a party lacks an insurable interest in an insurance contract?

The contract is considered void Signup and view all the answers

What does 'indemnity' in insurance contracts ensure?

Payment only for amounts sufficient to cover losses Signup and view all the answers

What is required for changes to be made to long-term insurance contracts?

Agreement from both parties Signup and view all the answers

What happens when changes to an insurance contract include broadening coverage?

An additional premium may be charged. Signup and view all the answers

What is the consequence if essential elements of a contract are not present?

The contract becomes void or voidable Signup and view all the answers

What is true regarding insurance binders?

Oral binders require immediate written confirmation Signup and view all the answers

What are endorsements or riders used for in insurance contracts?

To acknowledge changes in the terms of a contract Signup and view all the answers

What type of contract is an insurance binder considered to be?

A contract of insurance Signup and view all the answers

What is a floater in the context of insurance?

Coverage for mobile property often away from the insured’s premises. Signup and view all the answers

In the context of utmost good faith, who holds the responsibility to provide truthful information?

Only the insured is responsible Signup and view all the answers

When might separate policies be required for additional coverage?

When endorsements, riders, or floaters do not cover specific needs. Signup and view all the answers

What indicates that an insurance contract can be terminated?

There is a basis for termination stated in the contract. Signup and view all the answers

What action could indicate a lack of good faith from the insurer?

Delaying the handling of claims Signup and view all the answers

What kind of document serves as the basis for an insurance contract until formal policy details are issued?

Cover note or binder Signup and view all the answers

Study Notes

Categories of Risk

Insurance is a tool for managing risk, offering financial compensation for losses.
Personal Risk pertains to losses affecting health or life.
Property Risk relates to damage or loss of owned property.
Liability Risk involves financial responsibility for injuries or damages to others.

Strategies for Dealing with Risk

Avoidance of Risk: Eliminates financial loss by avoiding risk entirely; impractical in many cases.
Controlling of Risk: Involves actions to reduce frequency/severity of losses, e.g., alarms; does not fully eliminate financial loss.
Retention of Risk: Self-insurance by entities (like corporations) for financial responsibility; deductibles make insureds share the risk.
Transfer of Risk: Gaining insurance to transfer financial risk; mandatory automobile insurance in Canada due to high potential losses.

Speculative vs. Pure Risk

Speculative Risk involves potential for both loss and gain; insurers do not cover speculative risks (e.g. gambling).
Pure Risk presents a chance of loss only; only insurable risk category.

Understanding Insurance Contracts

Contracts in insurance are legally enforceable agreements between parties.

Five Elements of Contracts

Agreement: Involves an offer and unconditional acceptance; can be oral or written.
Consideration: An exchange of value between parties; failure to fulfill consideration voids the agreement.
Legality of Object: Contracts must have a lawful purpose; illegal contracts are unenforceable.
Legal Capacity: Parties must have the legal capacity to contract; protection exists for minors and incompetent individuals.
Genuine Intention: Parties must intend to enter the contract without fraud, duress, misrepresentation, or mistake.

Three Essential Elements of Insurance Contracts

Insurable Interest: Insured must face financial loss if a covered event occurs; necessary for enforceability.
Utmost Good Faith: Complete honesty is required from both insurer and insured; misleading information can void the contract.
Indemnity: Insurance contracts are designed to indemnify for losses; payment must be equal to the loss.

Contract Validity

Contracts without all essential elements may be void (not applicable in law) or voidable (valid unless one party chooses to void it).

Insurance Binders

Binders act as temporary insurance contracts; oral confirmations must be documented quickly to avoid disputes.
Brokers have authority to bind insurers under certain conditions; exceeding this could lead to liability for losses.

Changes and Termination of Insurance Contracts

Insurance contracts must specify termination conditions; mutual agreement is necessary for changes.
Contractual changes must be documented and may result in additional premiums.

Specific Terms

Floater: Coverage for property away from the designated location; applicable for mobile assets.
Endorsements/Riders: Additional coverage specifics; can be used to amend policies without creating entirely new contracts.

Questions and Reflection

Students are encouraged to engage by formulating important terms, confusing concepts, and questions to deepen understanding.

Studying That Suits You

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Description

Explore important terms related to insurance contracts as discussed in Chapter 2. This quiz will cover aspects of dealing with risk, including personal, property, and liability risks. Test your knowledge of the foundational concepts in managing risks and financial compensation.