Principles*of*Risk*Management*and*Insurance,*10e!(Rejda)!

Chapter!5:!!Fundamental!Legal!Principles!
!
1)##Fundamental#purposes#of#the#principle#of#indemnity#include#which#of#the#following?#
I.#
To#reduce#physical#hazards.#
II.#
To#prevent#the#insured#from#profiting#from#insurance.#
A)##I#only#
B)##II#only#
C)##both#I#and#II#
D)##neither#I#nor#II#
2)##Which#of#the#following#is#a#fundamental#purpose#of#the#principle#of#indemnity?#
A)##to#reduce#moral#hazard#
B)##to#minimize#physical#hazards#
C)##to#settle#property#insurance#losses#on#a#replacement#cost#basis#
D)##to#require#deductibles#in#all#property#insurance#policies#
3)##SamHs#stereo#was#destroyed#by#a#fire.#The#stereo#cost#$1200#when#it#was#purchased,#but#a#similar#new#stereo#
now#costs#$1800.#Assuming#the#stereo#was#50#percent#depreciated,#what#is#the#actual#cash#value#of#SamHs#loss?#
A)##$600#
B)##$900#
C)##$1200#
D)##$1800#
4)##All#of#the#following#are#exceptions#to#the#principle#of#indemnity#EXCEPT#
A)##life#insurance.#
B)##valued#policies.#
C)##replacement#cost#property#insurance.#
D)##actual#cash#value#property#insurance.#
5)##Under#which#of#the#following#rules#is#actual#cash#value#determined#by#taking#into#consideration#all#relevant#
factors#an#expert#would#use#to#determine#the#value#of#the#property?#
A)##the#circumstantial#evidence#rule#
B)##the#broad#evidence#rule#
C)##the#property#indemnity#rule#
D)##the#objective#value#rule#
6)##A#total#loss#under#a#valued#policy#is#settled#on#the#basis#of#the#
A)##market#value#of#the#loss.#
B)##actual#cash#value#of#the#loss.#
C)##replacement#value#of#the#loss.#
D)##amount#of#insurance#covering#the#loss.#
7)##Which#of#the#following#statements#describes#how#losses#will#be#settled#if#a#property#insurance#policy#is#
written#on#a#replacement#cost#basis?#
A)##Losses#are#settled#without#the#applicable#deductible.#
B)##Losses#are#settled#without#a#deduction#for#depreciation.#
C)##The#insurer#must#replace#the#damaged#or#destroyed#property#in#lieu#of#a#cash#settlement.#
D)##The#policy#is#converted#to#a#valued#policy.#
8)##Which#of#the#following#statements#about#the#principle#of#insurable#interest#is#(are)#true?#
I.#
It#makes#it#difficult#to#measure#the#amount#of#an#insuredHs#loss.#
II.#
It#reduces#moral#hazard.#
A)##I#only#
B)##II#only#
C)##both#I#and#II#
D)##neither#I#nor#II#
9)##All#of#the#following#will#support#an#insurable#interest#for#purposes#of#purchasing#property#and#liability#

insuranc e#EXCEPT#
A)##ties#of#blood#and#marriage.#
B)##potential#legal#liability.#
C)##secured#creditors.#
D)##a#contract#right.#
10)##Which#of#the#following#statements#about#an#insurable#interest#in#life#insurance#is#(are)#true?#
I.#
It#is#required#of#any#person#named#as#beneficiary.#
II.#
It#may#result#from#a#pecuniary#(financial)#interest,#even#if#there#is#no#relationship#by#marriage#or#
blood.#
A)##I#only#
B)##II#only#
C)##both#I#and#II#
D)##neither#I#nor#II#
11)##When#must#an#insurable#interest#legally#exist#in#life#insurance?#
A)##only#at#the#time#of#the#insuredHs#death#
B)##only#at#the#inception#of#the#policy#
C)##only#at#the#time#the#beneficiary#is#paid#
D)##both#at#the#time#of#the#insuredHs#death#and#at#the#inception#of#the#policy#
12)##When#must#an#insurable#interest#legally#exist#in#property#insurance?#
A)##only#at#the#time#of#the#loss#
B)##only#at#the#inception#of#the#policy#
C)##only#at#the#time#the#loss#settlement#process#takes#place#
D)##both#at#the#time#of#the#loss#and#at#the#inception#of#the#policy#
13)##SueHs#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.#
14)##All#of#the#following#are#basic#purposes#of#subrogation#EXCEPT#
A)##to#eliminate#adverse#selection.#
B)##to#hold#down#the#cost#of#insurance.#
C)##to#prevent#an#insured#from#collecting#twice#for#the#same#loss.#
D)##to#hold#the#negligent#person#responsible#for#a#loss.#
15)##Which#of#the#following#statements#about#subrogation#is#true?#
A)##It#is#used#primarily#for#losses#paid#under#life#insurance#policies.#
B)##It#allows#the#insurer#to#sue#its#own#insured#who#is#negligent.#
C)##The#insuredHs#right#to#collect#benefits#may#be#forfeited#if#the#insured#interferes#with#the#insurerHs#rights#
after#a#loss.#
D)##The#insurer#is#required#to#exercise#its#subrogation#rights.#
16)##The#principle#of#utmost#good#faith#is#supported#by#all#of#the#following#legal#doctrines#EXCEPT#
A)##representations.#
B)##warranty.#
C)##subrogation.#
D)##concealment.#
17)##What#is#the#legal#significance#of#a#material#concealment#by#an#insurance#applicant?#
A)##The#contract#is#automatically#voided#from#its#inception.#
B)##The#contract#is#voidable#at#the#insurerHs#option.#
C)##Loss#payments#are#reduced#by#the#degree#of#the#concealment.#
D)##The#insurer#is#immediately#entitled#to#a#higher#premium.##
#
18)##What#is#the#legal#significance#of#a#material#misrepresentation#in#an#insurance#application?#

A)##The#contract#is#automatically#voided#from#its#inception.#
B)##The#contract#is#voidable#at#the#insurerHs#option.#
C)##Loss#payments#are#reduced#by#the#degree#of#the#misrepresentation.#
D)##The#insurer#is#immediately#entitled#to#a#higher#premium.#
19)##A#false#statement#made#by#an#applicant#for#insurance#is#an#example#of#a#
A)##concealment.#
B)##breach#of#warranty.#
C)##lack#of#offer#and#acceptance.#
D)##misrepresentation.#
20)##Which#of#the#following#statements#about#an#insurance#warranty#is#(are)#true?#
I.#
It#is#part#of#the#insurance#contract.#
II.#
Statements#made#by#an#insurance#applicant#are#considered#warranties#rather#than#representations.#
A)##I#only#
B)##II#only#
C)##both#I#and#II#
D)##neither#I#nor#II#
21)##David#lives#in#an#apartment#in#a#high-crime#area.#In#order#to#obtain#physical#damage#insurance#on#his#car,#
David#promised#to#park#the#car#in#a#garage#with#24-hour#security.#This#agreement,#which#was#incorporated#
into#the#insurance#contract,#is#an#example#of#a#
A)##representation.#
B)##unilateral#contract.#
C)##contract#of#adhesion.#
D)##warranty.#
22)##Which#of#the#following#statements#about#offer#and#acceptance#for#insurance#contracts#is#true?#
A)##In#property#and#liability#insurance,#agents#typically#do#not#have#the#authority#to#bind#coverage.####
B)##In#life#insurance,#the#agent#can#usually#accept#an#offer#by#immediately#binding#coverage.#
C)##In#property#insurance,#the#offer#and#acceptance#are#usually#in#writing#but#may#be#oral.#
D)##In#life#insurance,#the#offer#is#merely#the#promise#to#pay#the#first#premium.#
23)##Chris#applied#for#life#insurance#and#paid#the#first#premium#on#Monday.#She#was#given#an#insurability#
premium#receipt#which#specified#that#coverage#was#effective#on#the#date#of#the#application#or#the#date#of#the#
medical#exam,#whichever#is#later.#She#took#the#medical#exam#the#following#Thursday.#She#was#found#to#be#in#
perfect#health.#On#which#day#was#her#coverage#effective?#
A)##on#Monday,#when#she#completed#the#application#and#paid#the#first#premium#
B)##on#Wednesday,#two#days#after#completing#the#application#and#paying#the#first#premium#
C)##on#Thursday#when#she#passed#the#medical#exam#
D)##on#Saturday,#two#days#after#passing#the#medical#exam#
24)##Which#of#the#following#statements#about#consideration#in#an#insurance#contract#is#(are)#true?#
I.#
The#insuredHs#total#consideration#is#submission#of#a#completed#application.#
II.#
The#insurerHs#consideration#is#the#promise#to#do#those#things#specified#in#the#policy.#
A)##I#only#
B)##II#only#
C)##both#I#and#II#
D)##neither#I#nor#II#
25)##A#contract#in#which#the#values#exchanged#are#not#equal#because#chance#is#involved#is#called#a(n)#
A)##contract#of#adhesion.#
B)##unilateral#contract.#
C)##conditional#contract.#
D)##aleatory#contract.#
26)##Why#are#insurance#contracts#said#to#be#contracts#of#adhesion?#
A)##The#values#exchanged#are#not#equal.#
B)##One#party#writes#the#contract,#and#the#other#party#must#accept#the#contract#as#written.#
C)##Only#one#party#makes#a#legally#enforceable#promise.#

D)##Conditions#are#placed#on#the#insurerHs#promise#to#perform.#
27)##Why#does#the#insured#get#the#benefit#of#the#doubt#if#an#insurance#policy#contains#any#ambiguities#or#
uncertainties?#
A)##because#insurance#contracts#are#aleatory#
B)##because#insurance#contracts#are#unilateral#
C)##because#insurance#contracts#are#conditional#
D)##because#insurance#contracts#are#contracts#of#adhesion#
28)##Why#can#an#insurer#refuse#to#pay#a#claim#if#an#insured#fails#to#abide#by#the#policy#provisions?#
A)##because#insurance#contracts#are#aleatory#
B)##because#insurance#contracts#are#unilateral#
C)##because#insurance#contracts#are#conditional#
D)##because#insurance#contracts#are#contracts#of#adhesion#
29)##Which#of#the#following#types#of#insurance#policies#can#usually#be#assigned#without#the#insurerHs#consent?#
I.#
Life#insurance#
II.#
Property#insurance#
A)##I#only#
B)##II#only#
C)##both#I#and#II#
D)##neither#I#nor#II#
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#insurerHs#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.#
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#insurerHs#consent.#
C)##The#insurer#can#sue#the#insured#for#failure#to#pay#any#premiums.#
D)##The#policy#is#interpreted#in#the#insuredHs#favor#if#the#policy#contains#any#ambiguities#or#uncertainties.#
32)##All#of#the#following#statements#about#the#rules#governing#agency#relationships#are#true#EXCEPT#
A)##An#agent#must#be#authorized#to#act#on#behalf#of#a#principal.#
B)##An#agency#agreement#may#grant#certain#powers#to#the#agent#as#well#as#denying#the#agent#other#powers.#
C)##The#principal#is#responsible#for#the#acts#of#agents#only#if#the#acts#are#criminal.#
D)##Knowledge#of#the#agent#is#presumed#to#be#knowledge#of#the#principal#with#respect#to#matters#within#
the#scope#of#the#agency#relationship.#
33)##The#voluntary#relinquishment#of#a#legal#right#is#called#
A)##subrogation.#
B)##adhesion.#
C)##estoppel.#
D)##waiver.#
34)##Frank#would#like#to#change#jobs.#He#asked#his#companyHs#employee#benefits#director#if#his#group#health#
coverage#could#be#converted#to#individual#coverage#if#he#quit#his#job.#The#benefits#director#said,#_Yes,#you#
can#convert#to#an#individual#policy,#and#the#coverage#is#identical#to#your#group#coverage._#Frank#quit#his#job#
and#converted#to#an#individual#policy.#Six#months#later#he#filed#a#medical#claim.#He#was#dismayed#to#learn#
that#the#conversion#policy#was#very#limited#compared#to#the#coverage#he#had#as#an#employee.#What#legal#
doctrine#will#allow#Frank#to#bring#a#successful#legal#action#against#his#former#employer#because#he#was#
financially#harmed#due#to#his#reasonable#reliance#upon#a#representation#of#fact?#
A)##adhesion#
B)##concealment#
C)##estoppel#
D)##subrogation#

35)##Janice#purchased#a#living#room#set#for#$1,000#and#insured#this#furniture#on#an#actual#cash#value#basis.#Two#
years#later#the#living#room#set#was#destroyed#by#a#covered#peril.#At#the#time#of#loss,#the#property#had#
depreciated#in#value#by#25#percent.#The#replacement#cost#of#the#furniture#at#the#time#of#loss#was#$1,200.#
Assuming#no#deductible,#how#much#will#Janice#receive#from#her#insurer?#
A)##$900#
B)##$950#
C)##$1,000#
D)##$1,200#
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.#
37)##MelodyHs#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#
38)##When#Ben#applied#for#life#insurance,#he#was#asked#on#the#application#if#he#smoked#or#used#tobacco#products.#
Ben#answered#_No._#In#reality,#Ben#smokes#two#packs#of#cigarettes#a#day.#The#policy#was#issued#at#the#
_preferred,#nonsmoker#rate._#If#Ben#dies#6#months#after#the#policy#is#issued,#upon#what#grounds#will#the#
insurer#be#able#to#legally#deny#the#claim?#
A)##warranty#
B)##misrepresentation#
C)##waiver#
D)##concealment#
39)##Robin#plans#to#open#a#bar#in#a#high-crime#area.#She#had#difficulty#obtaining#insurance#for#the#business.#She#
found#an#insurer#willing#to#write#the#coverage,#but#only#if#Robin#agreed#to#have#a#security#alarm#system#in#
operation#at#all#times#when#the#business#is#closed.#RobinHs#promise#to#have#a#security#alarm#system#
operational#as#a#condition#of#having#the#insurance#coverage#in#force#is#a#
A)##binder.#
B)##warranty.#
C)##waiver.#
D)##deductible.#
40)##Dave#is#an#agent#for#Easy#Pay#Insurance.#Easy#Pay#insures#only#the#highest-quality#applicants.#Dave#wanted#
to#earn#more#commissions,#so#he#sold#some#policies#to#applicants#he#knew#were#below-average#risks.#When#
these#policyowners#started#filing#claims,#Easy#Pay#tried#to#deny#the#claims#stating#that#Dave#had#not#acted#
appropriately.#Which#general#rule#of#agency#makes#Easy#Pay#responsible#for#the#claims#of#the#
higher-than-average#risk#policyowners?#
A)##There#is#no#presumption#of#an#agency#relationship.#
B)##Agents#should#be#compensated#based#on#the#quality#of#the#business#they#generate.#
C)##A#principal#is#responsible#for#the#acts#of#its#agents#who#are#acting#within#the#scope#of#their#authority.##
D)##An#agent#must#have#authority#to#represent#the#principal.#
41)##TedHs#insurance#claim#was#denied#by#XYZ#Insurance#Company.#When#Ted#inquired#why#the#claim#was#
denied,#he#was#told#to,#_Read#the#exclusion#on#page#5#of#the#policy._#Ted#read#the#exclusion.#In#his#opinion,#
the#exclusion#was#poorly#worded#and#vague.#If#a#court#of#law#agrees#with#TedHs#assessment#of#the#exclusion,#
Ted#may#still#be#able#to#have#his#claim#paid#by#the#insurer#because#insurance#contracts#are#

A)##personal#contracts.#
B)##unilateral#contracts.#
C)##aleatory#contracts.#
D)##contracts#of#adhesion.#
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#
43)##Which#distinct#legal#characteristic#of#insurance#contracts#states#that#only#the#insurerHs#promise#to#perform#is#
legally#enforceable?#
A)##contracts#of#adhesion#
B)##unilateral#contracts#
C)##aleatory#contracts#
D)##personal#contracts#
44)##Some#courts#have#ruled#that#an#alternative#to#_replacement#cost#less#depreciation_#should#be#used#to#
determine#the#actual#cash#value#of#a#property#loss.#Under#this#alternative,#the#value#of#property#lost#is#
determined#by#the#price#a#willing#buyer#would#pay#a#willing#seller#for#the#property#in#a#free#market.#This#
method#of#determining#actual#cash#value#is#called#the#
A)##broad#evidence#rule#method.#
B)##valued#policy#method.#
C)##fair#market#value#method.#
D)##reconstruction#cost#method.#
45)##Some#states#have#a#law#that#requires#payment#of#the#face#amount#of#insurance#to#the#insured#if#a#total#loss#to#
real#property#occurs#from#a#peril#specified#in#the#law.#These#laws#are#called#
A)##agreed#amount#laws.##
B)##replacement#cost#laws.##
C)##homestead#laws.##
D)##valued#policy#laws.##
46)##The#general#rule#that#ambiguity#in#insurance#contracts#is#construed#against#the#insurer#is#reinforced#by#an#
important#legal#principle.#This#principle#states#the#insured#is#entitled#to#coverage#under#a#policy#that#he#or#
she#would#assume#the#policy#would#provide,#and#exclusions#must#be#conspicuous,#plain,#and#clear.#This#
principle#is#known#as#
A)##the#principle#of#utmost#good#faith.#
B)##the#principle#of#reasonable#expectations#.#
C)##the#principle#of#subrogation.##
D)##the#principle#of#indemnity.##
#