National American University

BUSINESS L 3100

Chapter 36-INSURANCE

TRUE/FALSE

1)Insurance is a contract by which one party for a stipulated consideration promises to pay another party a sum of money on the destruction of, loss of, or injury to something in which the other party has an interest, or to indemnify that party for any loss or liability to which that party is subjected.

 

                                           

 

2. An insurance broker generally is an independent contractor who is not employed by any one insurance company.

 

                                           

 

3. Generally, the terms broker and agent are synonymous because both work directly for the insurer.

 

                                           

 

4. A contract of insurance ordinarily is stated in a writing called a policy.

 

                                           

 

5. A person has to be an owner or lienholder to have an insurable interest in a property.

 

                                           

 

6. A person has an insurable interest in property if destruction of that property would cause a monetary or pecuniary loss to that person.

 

                                           

 

7. To collect on property insurance, an insurable interest in the property must exist at the time that the loss is suffered.

 

                                           

 

8. A person who obtains life insurance generally can only name a beneficiary that has an insurable interest in the life of the insured.

 

                                           

 

9. The fact that a partnership is terminated after a life insurance policy is obtained by one partner on another invalidates the policy.

 

                                           

 

10. Any false statement in an application binds the insured.

 

                                           

11. The formation of a contract of insurance is governed by the general principles applicable to contracts.       

 

12. An insurer may cancel any contract of insurance by the insurer's unilateral act as long as the insurer gives advance written notice.

 

                                           

 

13. When a provision of an endorsement conflicts with a provision of a policy, the endorsement controls.

 

                                           

 

14. A contract of insurance is to be interpreted as it would be understood by a person with technical knowledge of the law or of insurance.

 

                                           

 

15. An ambiguity in an insurance policy is generally interpreted in favor of the insured.

 

                                           

 

16. Exceptions to coverage are generally strictly interpreted against the insurer.

 

                                           

 

17. If an insurer denies liability for a loss, the insured or the beneficiary of the policy has the burden of proving that there was a loss that came within the coverage of the policy.

 

                                           

 

18. An insurer's bad faith refusal to pay a claim generally is considered to be any frivolous or unfounded refusal to comply with the demand of a policyholder to pay according to the policy.

 

                                           

 

19. The insured must comply with a number of time limitations in making a claim.

 

                                           

 

20. Subornation is the right of a party secondarily liable to stand in the place of the creditor after making payment to the creditor and to enforce the creditor’s right against the party primarily liable in order to obtain indemnity from such primary party.

 

                                           

 

21. Commercial General Liability (CGL) policies apply to product liability cases, actions for wrongful termination of employees, sexual harassment cases, damages caused by business advertising or employee dishonesty, and trademark infringement suits.

 

                                           

22. Homeowner's insurance is a combination of the standard fire insurance policy and comprehensive personal liability insurance.

 

                                           

 

23. For the purposes of fire insurance, all fires that cause damage are considered hostile fires.

 

                                           

 

24. A coinsurance clause requires the insured to maintain insurance on the covered property up to a certain amount or a certain percent of the value, generally 80 percent.

 

                                           

 

25. Fire insurance is a personal contract, and in the absence of statutory or contractual authorization, it can be assigned without the consent of the insurer.

 

                                           

 

26. A homeowner's policy commonly provides protection from losses caused by theft.

 

                                           

 

27. The coverage of the Personal Auto Policy (PAP) is limited to claims arising from the “use and operation” of an automobile.

 

                                           

 

28. For the purposes of Personal Auto Policy (PAP) coverage, an insured person “uses” an automobile by unloading groceries from the car while it is parked in the garage.

 

                                           

 

29. Under no-fault insurance, an insurer is obligated to pay an injured person without regard to whose fault caused the harm.

 

                                           

 

30. After the expiration of the incontestability period of a life insurance policy, the insurer must pay the face amount of the policy when the insured dies and cannot claim that in obtaining the policy, the insured had been guilty of misrepresentation, fraud, or any other conduct that would entitle it to avoid the contract of insurance.

 

                                           

MULTIPLE CHOICE

 

1. The person to whom an insurance promise is made is called:
   1. the insured.
   2. the insurer.
   3. the policyholder.
   4. both a. and c.

                                           

 

2. A person who would suffer a direct pecuniary loss if a particular piece of property were destroyed has a(n):
   1. contractual risk.
   2. hazard.
   3. underwriting.
   4. insurable interest.

                                           

 

3. For property insurance, an insurable interest must exist:
   1. at the time the policy is purchased.
   2. at the time of the loss.
   3. both at the time the policy is purchased and at the time the loss is sustained.
   4. for at least thirty (30) days before the loss is sustaine

                                           

 

4. If a man names his wife as beneficiary of his life insurance and the two are thereafter divorced, the insurance policy:
   1. is canceled automatically.
   2. is not affected.
   3. is divided into two policies on the life of each for one-half the amount of the original policy.
   4. becomes the property of the former wife.

                                           

 

5. Armenia purchased life insurance on her life. Regarding the beneficiary:
   1. Armenia must name a person with a pecuniary interest in her life.
   2. Armenia must name a close relative.
   3. Armenia must name a close relative or business associate.
   4. Armenia may name whomever she wishes.

                                           

 

6. An application for insurance:
   1. may be oral.
   2. generally is attached to the policy and becomes a part of the insurance contract.
   3. must be prepared by an attorney.
   4. has no binding effect on the applicant.

                                           

7. An insured person is generally allowed, by policy provision or statute, a grace period of what length of time in which to make the payment of a premium due on a life insurance policy?
   1. 14 to 15 days
   2. 30 to 31 days
   3. 60 to 61 days
   4. 90 days

                                           

 

8. If a provision in an insurance policy is ambiguous:
   1. it is interpreted in favor of the insurer because the insured could have rejected the policy.
   2. it is interpreted against the insurer.
   3. parol evidence is admitted to show what was intended.
   4. the policy is declared void and the insurer is required to return all premiums to the insure   
9. Winona was a person of average intelligence, education, and experience in business. She negotiated for the purchase of insurance and paid the premium. The policy was mailed to her, but before it arrived a loss was suffered. When the policy was read, Winona could not determine whether the loss was covered because the policy was too difficult to understand. The loss is:
   1. not covered unless expressly stated to be covered.
   2. covered because the insurer had an obligation to word the policy in an understandable way.
   3. not covered unless stated to be so in a rider.
   4. covered if included in an express exception to the policy.

                                           

 

10. The effectiveness of an exception to coverage is limited by:
    1. strictly interpreting the exception to coverage against the insurer.
    2. placing on the insurer the burden of proving that the exception applies.
    3. both a. and b.
    4. neither a. nor b., since exceptions to coverage are not generally permissible.

                                           

 

11. What is a correct statement concerning burden of proof?
    1. The insured has the burden of proving that the loss was a covered loss.
    2. The insurer has the burden of proving that the loss was not covered.
    3. Exceptions to coverage are liberally interpreted in favor of the insurer.
    4. Exceptions to coverage are disregarded in life insurance matters.

                                           

 

12. An insurer who wrongfully refuses to defend the insured is liable for:
    1. breach of contract.
    2. insurance fraud.
    3. the tort of wrongful interference with contractual relations.
    4. the tort of malicious prosecution.

                                           

13. Mike Reilly suffered the loss of his home as a result of a chimney fire that was caused by the ignition of soot in the chimney. This fire would be described as:
    1. a friendly fire.
    2. arson by negligence.
    3. a strict liability fire.
    4. a hostile fire.

                                           

 

14. Paul purchased a house and also purchased fire insurance coverage on the house. The policy contained an 80 percent coinsurance clause. Paul maintained coverage in the amount of $150,000 and the value of the house was $250,000. A fire caused a loss of $100,000. Paul will collect:
    1. the full $100,000, because he had coverage for $150,000.
    2. only part of the $100,000 loss, because he failed to maintain coverage at 80 percent of the value of the house.
    3. nothing, because he failed to maintain coverage at 80 percent of the value of the house.

d. 80 percent of $250,000, or $200,000.

                                           

 

15. Insurance designed to protect an insured driver or owner from the claims of others is called:
    1. collision insurance.
    2. financial responsibility insurance.
    3. liability insurance.
    4. comprehensive insurance.

                                           

 

16. What type of insurance is written for a specified number of years and terminates at the end of that period?
    1. term insurance
    2. whole life insurance
    3. endowment insurance
    4. universal insurance

                                           

 

17. Part of every whole life insurance premium covers the cost of insurance. The remainder of the premium is devoted to the investment component of the policy, which builds up over time to its:
    1. reimbursement point.
    2. cash surrender value.
    3. culmination value.
    4. return point.

                                           

 

18. If the insured lives to the end of the policy period of an endowment insurance policy, the policy pays:
    1. nothing.
    2. one-half of the face amount of the policy.
    3. the face amount of the policy.
    4. double the face amount of the policy.

                                           

19. If an insured person tells her current husband that she is going to name him as beneficiary of her life insurance in place of her former husband and dies a year later without having taken any further steps with respect to the change of the policy beneficiary, the insurance company must pay the proceeds of the policy to:
    1. the former husband.
    2. the current husband.
    3. the children by the first marriage.
    4. the children by the second marriage.

                                           

 

20. An incontestability clause ordinarily bars contest of the validity of a life insurance policy by the insurer after the lapse of:
    1. sixty (60) days.
    2. one (1) year.
    3. two (2) years.
    4. ninety (90) days.

                                           

 

CASE

 

1. A professor knew a colleague who was quite ill. The professor applied for life insurance on the colleague's life and named himself as beneficiary. Because of a similarity in the names of the professor and the colleague, an error was made and the policy was issued.

 

The professor also sold his car to a student. When the student drove away, it was clear that the student was an extremely reckless driver. The professor decided not to cancel his property insurance policy that he had maintained on the vehicle that he sold to the student. Shortly thereafter, the colleague died and the student demolished the car. The professor applied for insurance benefits under both policies and each of the insurers resisted payment. Decide both cases.

 

 

 

2. Janice Beadles owns a large cargo vessel that is used primarily for international trade transactions. Janice is quite concerned about her possible liability and financial losses, as she has become aware of more and more collisions between ships at sea. What can you tell her about the different types of insurance that she could obtain that could assist her in the event of an accident?