Review of Insurance Concepts

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Questions and Answers

What is the primary difference between binding authority and a conditional binder?

Conditional binders are permanent coverage options.

Binding authority allows agents to approve coverage instantly. (correct)

Binding authority requires underwriting approval.

Conditional binders provide instant coverage.

Which of the following is NOT a requirement for a legally enforceable contract?

Mutual funds (correct)

Legal purpose and form

Offer and acceptance

Consideration

Which principle underlines the indemnity doctrine in insurance?

Encourages exaggeration of losses for claims.

Requires full replacement of property regardless of loss.

Restores insured parties to their pre-loss financial condition. (correct)

Allows insured parties to profit from losses.

What does an open perils policy cover?

All perils except those specifically excluded. Signup and view all the answers

What is the formula to calculate Actual Cash Value (ACV)?

ACV = Replacement Cost - Depreciation Signup and view all the answers

Which of the following correctly describes an insurance contract's declaration?

The statement detailing the facts of the insurance agreement. Signup and view all the answers

What typically characterizes personal insurance coverage?

Coverage that restores individuals rather than property. Signup and view all the answers

What type of receipt provides temporary coverage pending underwriting approval?

Conditional receipt Signup and view all the answers

What does a coinsurance clause require in a homeowner's policy?

Coverage for at least a specific dollar amount to be paid in full. Signup and view all the answers

Which of the following accurately describes legal liability?

A plaintiff must demonstrate negligence, a loss, and proximate cause. Signup and view all the answers

What are the three types of compensable damages?

Special, general, and punitive. Signup and view all the answers

In litigation, who bears the burden of proof?

The plaintiff must prove negligence as the burden of proof. Signup and view all the answers

What differentiates statutory law from common law?

Statutory law arises from legislation, while common law derives from judicial decisions. Signup and view all the answers

What is an attractive nuisance?

An artificial condition that leads to liability for injuries to children. Signup and view all the answers

Which of the following reflects a source of liability for automobile ownership?

Product liability for defective car parts. Signup and view all the answers

How is insurer solvency monitored?

By ensuring the company can cover operational expenses with sufficient income. Signup and view all the answers

What characterizes a hard market in insurance?

Limited supply and increased demand Signup and view all the answers

What does the combined ratio measure?

Market and operational profit Signup and view all the answers

What is the main reason for an insurance company to engage in cash flow underwriting?

To write a large amount of policies, potentially at lower prices Signup and view all the answers

Why is insurance primarily regulated at the state level rather than federally?

The federal government opted out of managing it under certain court cases Signup and view all the answers

What is one of the primary purposes of the NAIC?

To develop model laws and consumer protection Signup and view all the answers

How are unpaid claims handled for an insolvent insurance company?

By the state insurance commissioner and guaranty fund Signup and view all the answers

What differentiates Generally Accepted Accounting Principles (GAAP) from Statutory Accounting Principles (SAP)?

GAAP is used for public companies and is more comprehensive Signup and view all the answers

What defines twisting in insurance practices?

Changing insurance by misleading facts Signup and view all the answers

Study Notes

Review of Insurance Concepts

Agency and Waiver/Estoppel: Agency is the relationship between an insurance agent and the policyholder. Waiver occurs when the agent or company accepts a risk, potentially obligating them to pay, even if a policy isn't formally binding. Estoppel prevents a party from taking a contrary position.
Binding vs. Conditional Binding: Binding authority grants immediate coverage, while conditional binding offers temporary coverage subject to underwriting approval.
Legally Enforceable Contracts: Key elements are offer, acceptance, consideration (e.g., payment), and competent parties. Legally valid contracts also require clear legal purpose and form.
Insurance Contract Characteristics: Good faith (honest information), indemnity (restoring the insured to their pre-loss position), fundamental principles, and important reasons. Note, personal property insurance and loss of property is covered.
Doctrine of Indemnity: This principle aims to restore the insured to their pre-loss financial position, not to profit from the loss. Provisions that violate this tenet exist.
Insurance Policy Parts (Declarations/Insuring Agreement/Exclusions/ Conditions/Endorsements/Riders): Policy Declarations state facts, Insuring Agreements outline coverage, Exclusions contain exclusions, Conditions detail requirements, Endorsements modify, Riders add additional coverage.
Open vs. Named Perils: Open perils cover losses resulting from any event, except excluded perils. Named perils policies cover only losses from explicitly listed events.
Personal Insurance Contract Modification: Specific steps must be followed to appropriately modify a personal insurance contract.
Property Valuation: Property is valued at the time of a loss, valued at ACV (Actual Cash Value).
Deductibles: Deductibles are the amounts policyholders themselves must pay before the insurance company covers the claim. The 'straight deductible' requires a fixed amount.
Coinsurance Clause: Requires policyholders to carry a minimum amount of insurance to avoid shared loss when a loss occurs if the amount is less than the required minimum.
Hard/Soft Markets: Hard markets have limited supply of insurance products and higher prices. Conversely, soft markets have abundance of supply and lower prices.

Insurance Policy and Property Valuation

Combined Ratio: Calculated by dividing combined losses and expenses by premiums to assess insurers' operational and market profitability.
Underwriting Motives: Insurers may choose to reduce profits to increase insurance sales.
State vs. Interstate Regulation: Insurance is largely regulated at the state level in the United States, but interstate transactions are also addressed.

Insolvency and Legal Liability

Insolvent Insurance Company Management: State governments usually assume oversight of an insolvent insurance company.
Accounting Compliance: Insurers must comply with Generally Accepted Accounting Principles (GAAP).
Prior Approval vs. File/Use Regulation: Prior approval requires prior authorization before an insurance company begins filing or using a claim. In contrast, file/use regulations allow claims to be filed and used before formal approval.
Twisting and Rebating Practices: These practices involve misleading the consumer to influence a purchase or change to an insurance plan, and are considered unethical and illegal.

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Description

This quiz focuses on key concepts in insurance, including agency relationships, binding authority, and essential elements of legally enforceable contracts. Additionally, it covers characteristics of insurance contracts and the doctrine of indemnity, providing a comprehensive examination of important insurance principles.