Insurance Principles and Rules Quiz
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What are the additional rules that govern what risks are considered suitable subjects for insurance?

The risk of loss must be definite as to time and place and difficult to counterfeit or falsify. The risk must be unexpected. The risk must be large enough to create a financial hardship for the individual involved. The loss must be calculable. The cost of the insurance must be affordable to the insured.

Give an example of a risk that is definite as to time and place and difficult to counterfeit or falsify.

Death is a good example, as it is a definite event that occurs at a specific time and place, and it is difficult to fake or manipulate.

Why is the risk of a train wreck insurable, while the risk of a suitcase wearing out is not?

The risk of a train wreck is unexpected and potentially financially devastating, whereas the risk of a suitcase wearing out is predictable and relatively insignificant.

Explain why a financially insignificant risk, such as losing a pair of inexpensive sunglasses, is not insurable.

<p>The potential financial loss from losing inexpensive sunglasses is too small to justify the cost of insurance.</p> Signup and view all the answers

What is meant by the statement that the loss must be calculable for a risk to be insurable?

<p>Insurers need to be able to estimate the average cost of losses for a given risk in order to set appropriate premiums.</p> Signup and view all the answers

Provide an example of a risk that involves loss that cannot be assigned a financial value, and therefore is uninsurable.

<p>The risk of emotional distress from a personal loss is not easily quantifiable and therefore cannot be insured.</p> Signup and view all the answers

Why is the cost of insurance affordability important for an insurable risk?

<p>The cost of insurance needs to be affordable to individuals so that they can afford to purchase coverage for significant risks.</p> Signup and view all the answers

What is the main purpose of these additional rules regarding insurable risks?

<p>These rules help to ensure that insurance is used effectively to manage significant and unexpected risks, while preventing fraud and maintaining affordability.</p> Signup and view all the answers

Why is an insurance contract considered a conditional contract?

<p>An insurance contract is considered a conditional contract because it contains a number of conditions that both parties must comply with.</p> Signup and view all the answers

Explain why an insurance contract is a contract of indemnity.

<p>An insurance contract is a contract of indemnity because when a loss occurs, the insured is restored to the approximate financial condition they occupied before the loss occurred, no better or no worse.</p> Signup and view all the answers

Why is Susan not covered by the insurance policy?

<p>Susan is not covered by the insurance policy because she did not pay the premium, which means there is no consideration involved.</p> Signup and view all the answers

Why is George’s application for insurance not a contract?

<p>George's application for insurance isn't a contract because JAG Insurance didn't accept his offer, so there's no agreement.</p> Signup and view all the answers

What part of an insurance policy defines the coverage under the policy?

<p>The insuring agreement describes what is covered and the perils the policy insures against.</p> Signup and view all the answers

What part of an insurance policy explains the obligations of both the insurer and the insured?

<p>The conditions list the rights and duties of both the insured and the insurer under the policy.</p> Signup and view all the answers

Where in the policy would the insured find the information about the property covered, the amount of coverage, and the effective dates?

<p>The Declarations part of the policy lists the insured, the covered property or risk, the effective dates, and the amount of coverage.</p> Signup and view all the answers

What are endorsements, and how are they used in insurance policies?

<p>Endorsements are documents attached to the policy that change the policy in some way.</p> Signup and view all the answers

Identify the two main formats for insurance policies as described in the provided text.

<p>The two main formats for insurance policies are the policy jacket (skeleton policy) and a format that includes a declarations page, coverage form, general conditions form, and causes of loss form.</p> Signup and view all the answers

What is the purpose of a policy jacket or skeleton policy?

<p>A policy jacket or skeleton policy contains the general conditions and declarations of the insurance policy.</p> Signup and view all the answers

What information is typically included in a policy form or coverage form?

<p>A policy form or coverage form typically includes the insuring agreements, exclusions, definitions, and additional coverages.</p> Signup and view all the answers

What is the role of endorsements in an insurance policy?

<p>Endorsements are added to a policy to modify or change the original coverage, such as broadening, restricting, or changing the name of an insured.</p> Signup and view all the answers

What is an example of a legal purpose that would make an insurance contract valid?

<p>A legal purpose for an insurance contract could be protecting against financial loss due to property damage or personal injury.</p> Signup and view all the answers

Which element of a valid contract is missing when someone deliberately sets fire to their own property to collect insurance?

<p>The missing element is legal purpose. A contract that involves illegal activity is not valid.</p> Signup and view all the answers

Why is it important that both parties to an insurance contract are competent?

<p>Both parties must be competent to understand the terms and conditions of the contract. This ensures that the agreement is freely entered into and not based on any form of coercion or misrepresentation.</p> Signup and view all the answers

Describe the concept of consideration in the context of an insurance contract.

<p>Consideration refers to the exchange of value between the parties. The insured pays premiums, and the insurer promises to provide coverage in case of a covered loss.</p> Signup and view all the answers

What risk management method is exemplified by an insurance company that prohibits coverage with extremely high premiums?

<p>Avoidance</p> Signup and view all the answers

What principle states that there must be an adequate spread of risk for insurance to be effective?

<p>Reduction</p> Signup and view all the answers

According to risk management principles, what method is utilized when a company decides not to manufacture a new drug due to serious side effects?

<p>Avoidance</p> Signup and view all the answers

If Donna cancels her health insurance policy because she has always been in good health, what risk management method is she using?

<p>Retention</p> Signup and view all the answers

In the case of a fire destroying Mr. Reed’s home, what is the peril involved?

<p>Fire</p> Signup and view all the answers

What hazard was presented when Veronica forgot to lock her front door?

<p>Unlocked door</p> Signup and view all the answers

What does it mean to have a large number of examples to develop a statistic in the insurance context?

<p>Increased reliability</p> Signup and view all the answers

What is a key feature of risk management that involves assessing potential side effects of drugs?

<p>Risk assessment</p> Signup and view all the answers

What is the basic agreement in an insurance contract?

<p>An insurance contract is an agreement wherein an insurance company pays for an insured's losses in exchange for a premium.</p> Signup and view all the answers

Which two parties must be involved in a valid insurance contract?

<p>The two parties involved must be competent individuals or entities under the law.</p> Signup and view all the answers

What constitutes a legal purpose in an insurance contract?

<p>A legal purpose means the contract cannot be for activities that are illegal or against public policy.</p> Signup and view all the answers

Define offer and acceptance in the context of an insurance contract.

<p>Offer and acceptance refer to one party making a proposal and the other agreeing to it, forming the basis of their agreement.</p> Signup and view all the answers

Why is consideration important in an insurance contract?

<p>Consideration is important because it involves something of value exchanged between the parties, making the contract legally binding.</p> Signup and view all the answers

What are some examples of individuals considered incompetent to enter into an insurance contract?

<p>Individuals such as minors, those who are insane, or persons under the influence of alcohol or drugs are considered incompetent.</p> Signup and view all the answers

How does the status of a contract change if it is against public policy?

<p>If a contract is against public policy, it is considered unenforceable and invalid by law.</p> Signup and view all the answers

Can an insurance contract be oral, and under what conditions?

<p>Yes, an insurance contract can be oral, but it is usually written in the form of an insurance policy for clarity and enforceability.</p> Signup and view all the answers

Why is an insurance contract considered personal?

<p>An insurance contract is considered personal because it insures a person rather than property.</p> Signup and view all the answers

What does it mean for an insurance contract to be aleatory?

<p>An insurance contract is aleatory because it is contingent on an uncertain event, such as a potential loss.</p> Signup and view all the answers

What characteristic of an insurance policy makes it an adhesion contract?

<p>An insurance policy is an adhesion contract because one party, the insurer, has more power than the other party, the insured.</p> Signup and view all the answers

What should you expect to find in the declarations section of an insurance policy?

<p>The declarations section typically includes vital information about the insured, the coverage amount, and the policy period.</p> Signup and view all the answers

What is the purpose of the definitions section in an insurance policy?

<p>The definitions section provides specific meanings for terms used in the policy to avoid confusion.</p> Signup and view all the answers

What are exclusions in an insurance policy?

<p>Exclusions are specific conditions or circumstances under which coverage is not provided.</p> Signup and view all the answers

What do conditions refer to in an insurance policy?

<p>Conditions refer to the obligations and duties that the insurer and the insured must fulfill for coverage to apply.</p> Signup and view all the answers

What is meant by insuring agreements in an insurance policy?

<p>Insuring agreements outline the specific risks or losses that the insurance policy covers.</p> Signup and view all the answers

Flashcards

Definite Risk

A risk must be definite with regard to when and where it occurs to be considered insurable. For example, death is a definite loss due to its timing and location.

Unexpected Risk

A risk must be unexpected to be considered insurable; if the outcome is predictable, it's not a risk, but a certainty.

Financial Hardship

Insurance is meant to cover significant losses. Financial hardship must result from the risk event for it to be insurable.

Calculable Loss

An insurable risk must be able to have a financial value assigned to it. Risks without a calculable cost of loss are not eligible for insurance.

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Affordable Insurance

The cost of insurance premiums should be affordable to the insured. If the cost is unreasonable, the insurance may not be practical for the individual.

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Risk Avoidance

A risk management technique where an organization chooses not to take on a risk, often by not engaging in an activity that could expose them to the risk.

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Risk Control

A risk management technique used to reduce the likelihood or severity of a potential loss. This often involves implementing controls, such as installing security systems or training employees.

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Risk Retention

A risk management technique where an organization accepts the risk and assumes responsibility for the potential loss. It's typically used for low-frequency, low-severity risks.

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Peril

The specific event that causes a loss, such as fire, theft, or a natural disaster.

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Hazard

A condition that increases the likelihood or severity of a loss. Hazards can be physical, moral, or morale.

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Risk Transfer

A risk management technique where an organization transfers the risk to another party, typically through insurance.

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Risk

A situation where there is a possibility of loss or harm. It's a potential source of future uncertainty.

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Spread of Risk

A risk management principle that states insurance should be spread across a wide range of risks to reduce the impact of any single event.

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Insurance contract

A legal agreement between two parties where one party agrees to pay for potential losses in exchange for premiums.

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Conditional Contract

The insured must follow specific rules and conditions set by the insurer in the contract.

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Contract of Indemnity

The insurer aims to return the insured to their financial position before the loss occurred, neither better nor worse off.

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Personal Contract

An insurance contract focuses on protecting an individual, not a specific item.

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Declarations

A written document that lists the main details of the insurance policy, such as insured parties, property covered, and coverage amount.

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Aleatory Contract

The payout from an insurance policy is dependent on an unpredictable event like an accident or a natural disaster.

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Insuring Agreements

Sections in an insurance policy that detail what events or risks are covered.

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Contract of Adhesion

The insurance company has the power to create the contract's terms and conditions, leaving the insured with little room for negotiation.

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Definitions

Statements in the insurance policy that clarify the meaning of specific terms used.

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Exclusions

Sections in the insurance policy that specify exclusions to coverage. These specify what or who is NOT covered.

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Insuring Agreements

A section in an insurance policy that details the specific coverage being provided.

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Definitions

A section in an insurance policy that defines key terms and concepts used throughout the document.

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Endorsements

Changes or additions to the original policy that add extra coverage or modify existing terms.

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Exclusions

A section in an insurance policy that lists specific situations not covered by the policy.

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Conditions

A section in an insurance policy that outlines specific duties and responsibilities of both the insured and the insurer.

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Declarations

This section in an insurance policy includes details specific to the insured and their coverage, like the policyholder's name and address, the policy's effective dates, and the covered property.

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Policy Jacket

A general outline of a policy that includes key conditions and insured information.

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Coverage Form

A document containing specific coverage details, including insuring agreements, exclusions, definitions, and additional coverages.

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Declarations Page

A section of an insurance policy that lists the insured's information, policy details, and coverage limits.

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General Conditions Form

A part of the policy that outlines general rules and conditions applicable to the insured.

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Causes of Loss Form

A section outlining the specific perils or events that are covered by the insurance policy.

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Consideration

The exchange of something of value for a promise, both parties in a contract benefit.

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Legal Purpose

An insurance policy must have a legal and valid purpose for its creation.

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Insurance Policy

A written document that outlines the terms and conditions of an insurance contract.

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Competent Parties

Individuals who have the legal capacity to enter into a contract. Typically, this excludes minors, those found legally insane, and those under the influence of drugs or alcohol.

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Offer and Acceptance (Agreement)

One party (the insurer) proposes coverage, and the other party (the insured) agrees to the terms.

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Characteristics of a Valid Contract

The most important characteristics of an insurance contract, including competent parties, legal purpose, offer and acceptance, and consideration.

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Invalid Contract

A contract that is not legally binding, often due to a lack of one or more of the essential characteristics.

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Study Notes

Insurable Risks

  • Risks must be definite in time and place, difficult to counterfeit, and unexpected.
  • Death is a prime example of a definite loss.
  • A train wreck is insurable, but a suitcase wearing out is not.
  • Risks must be significant enough to cause financial hardship.
  • Loss must be calculable to be insurable.
  • The cost of insurance needs to be affordable.

Risk Management Methods

  • Avoidance: Deciding not to pursue a potentially risky activity. Example: Benson Pharmaceutical Company deciding not to manufacture a drug with serious side effects.
  • Reduction: Minimizing the likelihood or severity of a risk. Example: installing a security system in a building.
  • Control: Controlling a risk by acting to prevent it. Example: Keeping the front door locked to prevent theft.
  • Transfer: Shifting the risk to another party. Example: Purchasing insurance.
  • Retention: Accepting the risk and the financial consequences. Example: Donna cancelling her health insurance because she feels healthy.

Elements of a Valid Insurance Contract

  • Competent parties: Parties must be legally able to enter into a contract. Minors and those under the influence of drugs/alcohol typically aren't considered competent.
  • Legal purpose: Contract must be for a legal reason, not offensive to public interest.
  • Offer and acceptance (agreement): One party makes an offer, the other accepts; a crucial element.
  • Consideration: Something of value exchanged between the parties (e.g., payment of premiums for coverage).

Insurance Policy Components

  • Declarations: Describes the insured, covered property, effective dates, and coverage amount.
  • Insuring agreements: Describes covered perils and what the policy covers.
  • Conditions: Specifies the rights and duties of the insured and insurer.
  • Exclusions: Lists what is not covered under the policy.
  • Definitions: Clarifies meaning of terms.
  • Endorsements: Changes to policy, attached as additional documents.

Insurance Policy Types

  • Conditional contract: Both parties must adhere to stipulated conditions.
  • Contract of indemnity: Insured is restored to the pre-loss financial state.
  • Personal contract: Insures a person, not property.
  • Aleatory contract: Based on an uncertain event (loss).
  • Adhesion contract: One party (insurer) holds more power.

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Related Documents

Property & Casualty Insurance License Exam Manual PDF

Description

Test your understanding of the additional rules governing insurable risks. This quiz covers concepts like calculable losses, insurability of certain risks, and the nature of insurance contracts. Explore examples to deepen your knowledge in the field of insurance.

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