Exam Sim General Insurance - Practice Exam

Contracts that are prepared by one party and submitted to the other party on a take-it-or-leave-it basis are classified **as**

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a. Aleatory contracts. 

b. Binding contracts. 

c. Contracts of adhesion, 

d. Unilateral contracts

c

In forming an insurance contract, when does acceptance usually occur?

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a. When an insurer's underwriter approves coverage, 

b. When an insurer delivers the policy 

c. When an insurer receives an application 

d. When an insured submits an application

a

What documentation grants express authority to an agent?

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a. Agent's insurance license 

b. Fiduciary contract 

c. State provisions 

d. Agent's contract with the principal

d

Installing deadbolt locks on the doors of a home is an example of which method of handling risk?

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a. Avoidance 

b. Transfer 

c. Self-insurance 

d. Reduction

d

A tornado that destroys property would be an example of which of the following?

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a. A pure risk

b. A loss

c. A physical hazard

d. A peril

d

An insurance company sells an insurance policy over the phone in response to **a** TV ad. Which of the following best describes this act?

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a. Direct response marketing

b. Independent agency marketing

c. Illegal

d. Insurance telemarketing

a

In what way can an agent demonstrate a high standard of ethics?

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a. Recommending qualified retirement plans to each client

b. Putting the client's best interests before their own

c. Making enough commissions to cover personal expenses

d. Setting and meeting monthly production goals

b

Which of the following insurance options would be considered a risk-sharing arrangement?

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a. Reciprocal

b. Stock

c. Mutual

d. Surplus lines

a

Informing an insurance contract, when does acceptance usually occur?

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a. When an insurer’s underwriting approves coverage

b. When an insurer delivers the policy

c. When an insurer receives an app.

d. When an insured submits an app.

a

An insured wants to **transfer** his personal insurance policy to a friend. Under what conditions would this be possible?

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a. The insured will need a written consent of the insurer

b. It is impossible to transfer a policy

c. The insured would have to surrender his policy to the insurer, and his friend could then ask to buy it

d. The insured can transfer the policy to his friend and then notify the insurer of the change

a

Insurance policies issued within the state of New York must meet readability guidelines. Notably these policies must use

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a. At least 12-point type fonts. 

b. 14-point type

c. At least 10-point type fonts

d. Any size font that is considered reasonably readable

c

What is reinsurance?

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a. An agreement between a ceding insurer an assuming insurer

b. An agreement between an originating insurer and a ceding insurer

c. An agreement between a domestic insurer and a foreign insurer

d. An agreement between an insurer and an insured

a

Which of the following best describes the aleatory nature of an insurance contract?

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a. Ambiguities are interpreted in favor of the insured

b. Policies are submitted to the insurer on a take-it-or-leave-it basis

c. Exchange of unequal values

d. Only one of the parties being legally bound by the contract

c

In insurance, an offer is usually made when

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a. The insurer approves the application and receives the initial premium.

b. The agent hands the policy to the policyholder.

c. An applicant submits an app. to the insurer

d. An agent explains a policy to a potential applicant

c

Not all losses are insurable, and there are certain requirements that must be met before a risk is a proper subject for insurance. These requirements include all of the following EXCEPT

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a. The loss must not be catastrophic

b. There must be a sufficient number of homogenous exposure units to make losses reasonably predictable

c. These loss produced by the risk must be definite

d. The loss may be intentional

d

For the purpose of insurance, risk is defined as

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a. An event that increases the amount of loss

b. The uncertainty or chance of loss

c. The certainty of loss.

d. The cause of loss.

b

Adverse selection is a concept best described as

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a. Only offering coverage to good risks.

b. Risks with higher probability of loss seeking insurance more often than other risks.

c. Underwriters slanting the odds in favor of the company

d. Poor choices of applicants to be covered.

b

Which of the following is the basis for a claim against an insurance policy?

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a. Misrepresentation

b. Loss

c. Material change

d. Hazard

b

The authority granted to an agent through the agent's contract is referred to as

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a. Absolute authority.

b. Express authority.

c. Apparent authority.

d. Implied authority.

b

An applicant knowingly fails to communicate information that would help an underwriter make a sound decision regarding coverage. This is an example of

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a. Concealment

b. Waiver

c. Fraud

d. Breach of warranty.

a

In case of a loss, the indemnity provision in insurance policies

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a. Pays the insured as much as 95% of the loss.

b. Restores an insured person to the same financial state as before the loss

c. Allows the insured to collect 20% more than the actual loss.

d. Pays the insured a percentage of the loss above and beyond the loss

b

An insurance company receives an application with some information missing and issues the policy anyway. What is this called?

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a. Aleatory

b. Waiver

c. Estoopel

d. Subrogation

b

A situation in which a person can only lose or have no change represents

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a. Speculative risk

b. Adverse selection

c. Hazard

d. Pure risk

d

Which of the following is NOT the consideration in policy?

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a. The premium amount paid at the time of application

b. The promise to pay covered losses

c. The application given to a prospective insured

d. Something of value exchanged between parties

c

Peril is most easily defined as

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a. The cause of loss insured against

b. An unhealthy attitude abt safety

c. The chance of a loss occurring.

d. Something that increases the chance of loss.

a

The risk of loss may be classified **as**

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a. Named risk and un-named risk

b. High risk and low risk

c. Pure risk and speculative risk.

d. Certain risk and uncertain risk.

c

What is the major difference between a stock company and a mutual company?

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a. Ownership

b. Amount of benefits

c. Number of producers

d. Types of policies issued

a

An insurance contract requires that both the insured and the insurer meet certain conditions in order for the contract to be enforceable What contract characteristic does this describe?

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a. Contingent

b. Aleatory

c. Unilateral

d. Conditional

d

All of the following are examples of risk retention EXCEPT

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a. Copayments

b. Self-insurance.

c. Premiums

d. Deductibles

c

With respect to the business of insurance, a hazard is

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a. Any condition or exposure that increases the possibility of loss.

b. The risk taken when performing something dangerous.

c. The tendency of poorer risks to seek insurance more often than better risks.

d. The basic reason for an insured to purchase insurance.

a

What insurance concept is associated with the names Weiss and Fitch?

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a. Index used by stock companies

b. Guides describing company financial integrity

c. Policy dividends

d. Types of mutual companies

b

Events in which a person has both the chance of winning or losing are classified as

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a. Speculative risk.

b. Insurable.

c. Pure risk.

d. Retained risk.

a

When doing business in this state, an insurance company that is formed under the laws of another state is known as which type of insurer?

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a. Alien

b. Nonadmitted

c. Foreign

d. Domestic

c

Which of the following is NOT a characteristic of an insurable risk?

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a. The loss must be measurable.

b. The loss exposure must be large.

c. The loss must be catastrophic.

d. The loss must be due to chance.

c

Which of the following is NOT a goal of risk retention?

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a. To fund losses that cannot be insured

b. To minimize the insured's level of liability in the event of loss

c. To reduce expenses and improve cash flow

d. To increase control of claim reserving and claims settlements

b

In insurance policies, contract ambiguities are automatically ruled in the favor of the insured. What privilege does the insurer have in order to balance this?

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a. The right to raise premiums as a result of court rulings

b. The right to determine the wording of a policy

c. The right to refute the rulings

d. The right to revoke the policy

b

A participating insurance policy may do which of the following?

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a. Pay dividends to the policyowner

b. Provide group coverage

c. Pay dividends to the stockholder

d. Require 80% participation

a

Pertaining to insurance, which of the following is an example of a producer's fiduciary responsibility?

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a. Promptly forwarding premiums to the insurance company

b. Helping insureds to file claims

c. Performing reviews of insured’s coverage

d. Offering additional coverage to insureds

a

An insurer neglects to pay a legitimate claim that is covered under the terms of the policy. Which of the following insurance principles has the insurer violated?

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a. Adhesion

b. Consideration

c. Good faith

d. Representation

b

Because an agent is using stationery with the logo of an insurance company, applicants for insurance assume that the agent is authorized to transact on behalf of that insurer. What type of agent authority does this describe?

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a. Assumed

b. Apparent

c. Express

d. Implied

b

Which of the following produces evaluations of insurers' financial status often used by state departments of insurance?

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a. AM Best

b. NAIC

c. Consumer's guide

d. SEC

a

In insurance transactions, fiduciary responsibility means

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a. Being liable with respect to payment of claims.

b. Commingling premiums with agent's personal funds.

c. Handling insurer funds in a trust capacity.

d. Maintaining a good credit record.

c

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To legally transact insurance in this state, an insurer must obtain which of the following?

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a. Certificate of Authority

b. Power of Attorney

c. Business entity license

d. Certificate of Insurance

a

Which of the following types of agent authority is also called “perceived authority”?

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a. Fiduciary

b. Apparent

c. Express

d. Implied

b

Untrue statements on the application unintentionally made by insureds that, if discovered, would alter the underwriting decision of the insurance company, are called

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a. Common errors.

b. Material misrepresentations.

c. Fraudulent statements.

d. Warranties.

b

Following a career change, an insured is no longer required to perform many physical activities, so he has implemented a program where he walks and jogs for 45 minutes each morning. The insured has also eliminated most fatty foods from his diet. Which method of dealing with risk does this scenario describe?

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a. Transfer

b. Avoidance

c. Retention

d. Reduction

d

When an individual purchases insurance, what risk management technique is he or she practicing?

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a. Retention

b. Transfer

c. Avoidance

d. Sharing

b

All of the following are marketing arrangements used by insurers EXCEPT

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a. Independent Agency System.

b. Reinsurance System.

c. General Agency System.

d. Direct Response Marketing System.

b

If only one party to an insurance contract has made a legally enforceable promise, what kind of contract is it?

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a. Unilateral

b. Adhesion

c. Conditional

d. A legal (but unethical) contract

a

A producer who fails to separate premium monies from his own personal funds is guilty of

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a. Larceny.

b. Embezzlement.

c. Theft

d. Commingling.

d

What is a foreign insurer?

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a. An insurer with licensed agents who are citizens in more than one country

b. An insurer with a home office in another state

c. An insurer with a home office in another country

d. An insurer with licensed agents doing business in other countries

b

The risk management technique that is used to prevent a specific loss by not exposing oneself to that activity is called

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a. Avoidance.

b. Transfer.

c. Reduction.

d. Sharing.

a

Which authority is NOT stated in an agent's contract but is required for the agent to conduct business?

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a. Apparent

b. Assumed

c. Express

d. Implied

d

An individual applies for a life policy. Two years ago he suffered a head injury from an accident, so he cannot remember parts of his past, but is otherwise competent. He has also been hospitalized for drug abuse, but does not remember this when applying for insurance. The insurer issues the policy and learns of his history one year later. What will probably happen?

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a. The insurer will sue the insured for committing fraud.

b. Because the insured is currently not a drug user, his policy will not be affected.

c. The policy will not be affected.

d. The policy will be voided.

c

Which of the following best describes the concept that the insured pays a small amount of premium for a large amount of risk on the part of the insurance company?

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a. Adhesion

b. Subrogation

c. Warranty

d. Aleatory

d

Who might receive dividends from a mutual insurer?

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a. Stockholders

b. Agents

c. Policyholders

d. Subscribers

c

Which statement regarding insurable risks is NOT correct?

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a. An insurable risk must involve a loss that is definite as to cause, time, place and amount.

b. Insureds cannot be randomly selected.

c. Insurance cannot be mandatory.

d. The insurable risk needs to be statistically predictable.

b

Which insurance principle states that if a policy allows for greater compensation than the financial loss incurred, the insured may only receive benefits for the amount lost?

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a. Reasonable expectations

b. Indemnity

c. Stop-loss

d. Consideration

b

A life insurance policy has a legal purpose if both of which of the following elements exist?

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a. Underwriting and reciprocity

b. Offer and counteroffer

c. Policyowners and named beneficiaries

d. Insurable interest and consent

d

The reduction, decrease, or disappearance of value of the person or property insured in a policy by a peril insured against is known as

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a. Hazard.

b. Risk

c. Loss

d. Exposure.

c

All of the following actions by a person could be described as risk avoidance EXCEPT

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a. Investing in the stock market.

b. Refusing to scuba dive.

c. Never flying in an airplane.

d. Not driving after being in an accident.

a

When an insured makes truthful statements on the application for insurance and pays the required premium, it is known as which of the following?

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a. Consideration

b. Legal purpose

c. Contract of adhesion

d. Acceptance

a

Which of the following statements is an accurate comparison between private and government insurers?

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a. Private insurers provide insurance in areas where the government will not.

b. Private insurers may be authorized to transact insurance by state insurance departments.

c. Insurance provided by the government is called federal insurance.

d. Private insurers offer fewer lines of insurance than government insurers.

b

The requirement that agents not commingle insurance monies with their own funds is known as

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a. Premium accountability.

b. Express authority.

c. Accepted accounting principal.

d. Fiduciary responsibility.

d

Which of the following is an example of a producer's fiduciary duty?

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a. An obligation to state every known fact about the policy the producer is selling.

b. A duty to base all transactions upon the principle of Utmost Good Faith.

c. The obligation to tell the truth to the best of one's knowledge

d. The trust that a client places in the producer in regard to handling premiums.

d

When both parties to a contract must perform certain duties and follow rules of conduct to make the contract enforceable, the contract is

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a. Conditional.

b. Aleatory.

c. Personal.

d. Unilateral.

a

An insured pays a $100 premium every month for his insurance coverage, yet the insurer promises to pay $10,000 for a covered loss. What characteristic of an insurance contract does this describe?

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a. Good health

b. Adhesion

c. Conditional

d. Aleatory

d

In insurance policies, the insured is not legally bound to any particular action in the insurance contract, but the insurer is legally obligated to pay losses covered by the policy. What contract element does this describe?

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a. Conditional

b. Unilateral

c. Unidirectional

d. Aleatory

b

An insured purchased an insurance policy 5 years ago. Last year, she received a dividend check from the insurance company that was not taxable. This year, she did not receive a check from the insurer. From what type of insurer did the insured purchase the policy?

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a. Mutual

b. Reciprocal

c. Nonprofit service organization

d. Stock

a

The causes of loss insured against in an insurance policy are known as

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a. Perils

b. Losses

c. Risks

d. Hazards

a

Events or conditions that increase the chances of an insured loss occurring are referred to as

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a. Hazards.

b. Exposures.

c. Risks.

d. Perils.

a

When would a misrepresentation on the insurance application be considered fraud?

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a. Any misrepresentation is considered fraud.

b. If it is intentional and material

c. Never: statements by the applicant are only representations.

d. When the application is incomplete

b

Which of the following is another term for an authorized insurer?

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a. Licensed

b. Legal

c. Admitted

d. Certified

c

For the reported losses of an insured group to become more likely to equal the statistical probability of loss for that particular class, the insured group must become

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a. Older.

b. More active.

c. Larger.

d. Smaller

c

When transacting business in this state an insurer formed under the laws of another country is known as a/an

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a. Alien insurer.

b. Domestic insurer.

c. Foreign insurer.

d. Admitted insurer.

a

An individual was involved in a head-on collision while driving home one day. His injuries were not serious, and he recovered. However, he decided that in order to never be involved in another accident, he would not drive or ride in a car ever again. Which method of risk management does this describe?

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a. Avoidance

b. Reduction

c. Sharing

d. Retention

a

What method do insurers use to protect themselves against catastrophic losses?

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a. Indemnity

b. Pro rata liability

c. Risk management

d. Reinsurance

d

Which of the following best describes rescission?

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a. An insurer cancels a policy after it has been issued and refunds all paid premiums.

b. An insurer cancels a policy after an insured files a suspicious claim.

c. An insured agrees to cancel a policy for the return of the most recent premium paid.

d. An insured allows a policy to lapse.

a

What is a definition of a unilateral contract?

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a. One author: the company wrote the contract; the insured must accept it as written.

b. If one party makes a condition, the other party can counteroffer.

c. One-sided: only one party makes an enforceable promise.

d. Two or more parties go into a contract understanding there may be an unequal exchange of value.

c

Representations are written or oral statements made by the applicant that are

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a. Found to be false after further investigation.

b. Immaterial to the actual acceptability of the insurance contract.

c. Considered true to the best of the applicant's knowledge.

d. Guaranteed to be true.

c

An insurance company is domiciled in Montana and transacts insurance in Wyoming. Which term best describes the insurer’s classification in Wyoming?

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a. Domestic

b. Unauthorized

c. Foreign

d. Alien

c

Which of the following is a statement that is guaranteed to be true, and if untrue, may breach an insurance contract?

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a. Indemnity

b. Representation

c. Warranty

d. Concealment

c

After issuing a policy, an insurance company discovers that the policyholder concealed information on the application. The insurance company wants to cancel the policy and give back the money the policyholder has paid. This is an example of

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a. Contestability.

b. Renewal.

c. Rescission.

d. Refund.

c

Units with the same or similar exposure to loss are referred to as

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a. Catastrophic loss exposure.

b. Insurable risks.

c. Law of large numbers.

d. Homogeneous.

d

Which of the following factors is NOT considered by an underwriter when determining the premium rates for an individual seeking insurance?

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a. Race

b. Age

c. Medical history

d. Sex

a

An insurance producer who by contract is bound to write insurance for only one company is classified as a/an

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a. Solicitor.

b. Broker.

c. Independent producer.

d. Captive agent.

d

Which of the following best describes an insurance company that has been formed under the laws of this state?

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a. Alien

b. Foreign

c. Domestic

d. Sovereign

c

Insurance policies are not drawn up through negotiations, and an insured has little to say about its provisions. What contract characteristic does this describe?

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a. Personal

b. Adhesion

c. Unilateral

d. Conditional

b

What term best describes the act of withholding material information that would be crucial to an underwriting decision?

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a. Leading

b. Breach of warranty

c. Concealment

d. Withholding

c

Which of the following insurers are owned by stockholders?

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a. Reciprocal

b. Fraternal

c. Stock

d. Mutual

c

Courts will interpret any ambiguity in an insurance contract

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a. In favor of the insurer.

b. Through arbitration.

c. Based on the prudent person rule.

d. In favor of the insured.

d

Which law is the foundation of the statistical prediction of loss upon which rates for insurance are calculated?

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a. Law of masses

b. Law of averages

c. Law of group evaluation

d. Law of large numbers

d

Which of the following is the most common way to transfer risk?

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a. Increase control of claims

b. Lessen the possibility of loss

c. Name a beneficiary

d. Purchase insurance

d

Which of the following must an insurer obtain in order to transact insurance within a given state?

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a. Producer's certificate

b. Business entity license

c. Insurer's license

d. Certificate of authority

d

What is a material misrepresentation?

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a. Any misstatement made by an applicant for insurance

b. Any misstatement by the producer

c. Concealment

d. A statement by the applicant that, upon discovery, would affect the underwriting decision of the insurance company

d

The insurer must be able to rely on the statements in the application, and the insured must be able to rely on the insurer to pay valid claims. In the forming of an insurance contract, this is referred to as

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a. Reasonable expectations.

b. A warranty.

c. Implied warranty.

d. Utmost good faith.

d

An insurer that holds a Certificate of Authority in the state in which it transacts business is considered a/an

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a. Certified insurer.

b. Self-insurer.

c. Authorized insurer.

d. Local insurer.

c

If an insurer meets the state's financial requirements and is approved to transact business in the state, it is considered to be

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a. Qualified.

b. Approved.

c. Authorized.

d. Certified.

c

The proposed insured makes the premium payment on a new insurance policy. If the insured should die, the insurer will pay the death benefit to the beneficiary if the policy is approved. This is an example of what kind of contract?

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a. Adhesion

b. Personal

c. Unilateral

d. Conditional

d

ABC insurance company receives an incomplete application and issues the policy anyway. Six months later ABC realizes the missing information. What term is used that prevents ABC from forcing the policyowner to answer further questions?

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a. Unilateral

b. Consideration

c. Estoppel

d. Adhesion

c