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1.Insurance authors have traditionally defined risk as

(a)any situation in which the probability of loss is one.

(b)any situation in which the probability of loss is zero.

(c)uncertainty concerning the occurrence of loss.

(d)the probability of a loss occurring.

Answer:C

42.Tyndal Products Company produces cereal. The company has entered into contracts to deliver one million boxes of cereal during the next 18 months. The company is concerned that the prices of two ingredients, corn and wheat, may increase over the next 18 months. The company used grain futures contracts to hedge the price risk associated with these commodities. Tyndals use of hedging illustrates which risk management technique?

(a)noninsurance transfer

(b)risk avoidance

(c)risk retention

(d)risk assumption

Answer:A

35.Parker Department Stores has been hurt in recent months by a large increase in shoplifting losses. Parkers risk manager concluded that while the frequency of shoplifting losses was high, the severity is still relatively low. What is (are) the appropriate risk management technique(s) to apply to this problem?

(a)retention

(b)loss control and retention

(c)transfer through insurance

(d)avoidance

Answer:B

41.Bev lives in the suburbs and works downtown. She drives to work, and her most direct route to work would require her to pass through an area where carjackings and drive-by-shootings are common. Bev does not drive through this area. Instead, she uses a route which adds 10 minutes to her commute. Which risk management technique is Bev using with respect to the risk of injury while driving through the dangerous area?

(a)noninsurance transfer

(b)avoidance

(c)passive retention

(d)loss reduction

Answer:B

26.A group of farmers agreed that if any farmer suffered a property loss, the loss would be spread over the entire group. In this way, each farmer is responsible for the average loss of the group rather than the actual loss that the farmer sustained. Which characteristic of insurance is embodied in this agreement?

(a)pooling of losses

(b)fortuitous losses

(c)risk avoidance

(d)indemnification

Answer:A

13.Sues office building was damaged by a fire caused by a careless tenant. After paying Sue for her loss, the insurance company sued the tenant to recover its loss. This suit is based on the principle of

(a)warranty.

(b)insurable interest.

(c)utmost good faith.

(d)subrogation.

Answer:D

30.What is the practical effect of an insurance policy being a conditional contract?

(a)The insurer can refuse to pay claims unless the insured has complied with all policy conditions.

(b)The insured can assign the policy only with the insurers consent.

(c)The insurer can sue the insured for failure to pay any premiums.

(d)The insured gets the benefit of the doubt if a policy contains any ambiguities or uncertainties.

Answer:A

31.What is the practical effect of an insurance policy being a contract of adhesion?

(a)The insurer can refuse to pay claims unless the insured has complied with all policy provisions.

(b)The insured can assign the policy only with the insurers consent.

(c)The insurer can sue the insured for failure to pay any premiums.

(d)The policy is interpreted in the insureds favor if the policy contains any ambiguities or uncertainties.

Answer:D

36.Jacob sold his house to Shelia for $140,000 in cash. Jacob threw in insurance on the house as part of the deal and did not bother telling the insurer that there was a new owner. Four months after Shelia purchased the home, a windstorm damaged the roof. Which of the following legal characteristics of insurance contracts could the insurer use to legally deny payment for the damage to the roof?

(a)Insurance contracts are unilateral contracts.

(b)Insurance contacts are contracts of adhesion.

(c)Insurance contracts are aleatory contracts.

(d)Insurance contracts are personal contracts.

Answer:D

37.Melodys car was damaged when another driver ran a stop sign and hit her car. Melody decided to collect from her own insurer and to let her insurer recoup the loss payment from the driver who hit her. What fundamental legal principle is illustrated in this scenario?

(a)the principle of utmost good faith

(b)the principle of insurable interest

(c)the principle of subrogation

(d)the principle of reasonable expectations

Answer:C

42.Mark owns a bar. The bar has a back room where Mark has some slot machines. Mark lets some of his patrons play the machines, and Mark keeps any profits. This type of gambling is illegal where Mark lives. Mark wanted to purchase insurance in case his slot machines were confiscated by the police. Such an insurance contract would not be enforceable. Which requirement needed to form a valid insurance contract is missing?

(a)consideration

(b)offer and acceptance

(c)legal purpose

(d)competent parties

Answer:C

43.Kathy entered into an insurance contract with XYZ Insurance Company. When the agent who sold the coverage witnessed Kathy doing something that violated the terms of the contract, he threatened to sue her to make her comply with terms of the contract. Which distinct legal characteristic of insurance contracts states that only the insurers promise to perform is legally enforceable?

(a)contracts of adhesion

(b)unilateral contracts

(c)aleatory contracts

(d)personal contracts

Answer:B

31.ABC Company insured its building on a replacement cost basis for $700,000 under a property insurance policy that included an 80 percent coinsurance clause. The building had a replacement cost of $1 million when it sustained a $40,000 loss. How much will ABC Company receive from its insurer, assuming no deductible applies?

(a)$33,333

(b)$35,000

(c)$36,000

(d)$40,000

Answer:B

22.Lisa has three fire insurance policies on her office building. The policy from company A is for $400,000, and the policies from companies B and C are for $100,000 each. If Lisa has a $360,000 loss, how much of the loss will be covered by each policy if the loss is settled on a pro rata basis by the insurers?

(a)each policy: $120,000

(b)policy A: $160,000; policies B and C: $100,000 each

(c)policy A: $240,000; policies B and C: $60,000 each

(d)policy A: $360,000; policies B and C: nothing

Answer:C

23.Kevin has three liability policies which provide for contribution by equal shares in case other insurance applies to a loss. How much will each policy pay for a $3,000,000 liability judgment if policy A provides $500,000 of coverage, policy B provides $1,000,000 of coverage, and policy C provides $3,000,000 of coverage?

(a)Each policy will pay $500,000, and Kevin must assume the remaining $1,500,000.

(b)Policy A will pay $500,000, policies B and C will each pay $1,000,000, and Kevin must assume the remaining $500,000.

(c)Policy A will pay nothing, policy B will pay $1,000,000, and policy C will pay $2,000,000.

(d)Policy A will pay $500,000, policy B will pay $1,000,000, and policy C will pay $1,500,000.

Answer:D

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