Regulation of Accounting Exam 2

Risks

Chance that you may suffer a loss

Threats to those items (life, health, property, income, savings, investments, reputations, and so on) that a party wants to protect.

Examples: Health insurance; Homeowners/Renters insurance; Auto insurance

Perils

Cause of loss or harm to others

Dangers that a party might pose to others and against which that party must protect itself.

Examples: Legal defense, compensation for those injured

Insurance

A transfer of the risk of economic loss from the insured to the insurance company

Insurer

Accepts the risk of loss in return for a premium (the consideration paid for a policy) and agrees to indemnify, or compensate, the insured against the loss specified in the contract

Insured

The party (or parties) protected by the insurance contract

Policy

The contract of insurance

Beneficiary

A third party to whom payment of compensation is sometimes provided by the contract

Insurable interest

A person or business applying for insurance must have an insurable interest in the subject matter of the policy to be insured

life insurance

For ___________________ , the insurable interest must exist at the time the insurance is purchased

property insurance

For _______________________ , the insurable interest must exist at the time of loss.

Duty to investigate

___________________________the claim to determine all the facts and to decide in an appropriate manner if the client is entitled to payment

Duty to pay

____________________________the insured directly if the insured’s property must be replaced or repaired or to pay any claim by a third party based on a liability clause

Duty to defend

_________________the client if the case is disputed by a third party

Straight life insurance

Requires the payment of premiums throughout the life of the insured and pays the beneficiary the face value of the policy upon the insured’s death.

Also known as ordinary life insurance or whole life insurance.

Universal life insurance

Allows the policy owner flexibility in choosing and changing terms of the policy.

Within certain guidelines, the policy owner can modify the face value of the policy as well as the premiums in response to changing needs and circumstances in the policy owner’s life.

Term Insurance

Issued for a particular period, usually 10 or 20 years.

Least expensive kind of life insurance because term policies have no cash or loan value

Many life insurance policies contain clauses that exempt the insurance company from liability in certain situations.

Policies often do not cover the insured when riding in an airplane, violating the law, or working in certain dangerous occupations.

Most policies provide that beneficiaries can recover for a death caused by suicide if the suicide occurs more than two years after the policy was taken out.

Life insurance policies usually include an exemption from liability in times of war.

Exemptions from Risk:

Deductible

An amount of any loss that is to be paid by the insured.

The bigger the ____________ , the lower is the premium charged for the same coverage

Coinsurance

An insurance policy provision under which the insurer and the insured share costs, after the deductible is met, according to a specific formula

Fire insurance.

A contract in which the ________________ company promises to pay the insured if some real or personal property is damaged or destroyed by fire.

Ocean marine insurance

Covers ships at sea

Inland marine insurance

Covers goods that are moved by land carriers such as rail, truck, and airplane.

Homeowner’s policy

Gives protection for all types of losses and liabilities related to home ownership.

Will cover any damage that occurs to both the outside and the inside of the house

Real property

Land and anything attached to the land.

When real property is owned by more than one party, each party is called a tenant.

A homestead is the family home and the land on which the house is located, including land adjacent to the dwelling.

Renter’s insurance (or tenant’s insurance)

Protects tenants against the damage or loss of personal property, stolen personal property, liability for a visitor’s personal injury, and liability for negligent destruction of the rented premises.

Dwelling insurance

Protects the actual structure (a single-family dwelling, an apartment building, and so on) from damage caused by fire, wind, snow, ice, lightning, and so on

Liability Insurance

When a party’s actions, business, and property imperil others, that party should buy insurance that will provide it with a legal defense team and with the money to reimburse the victims, should the legal defense team fail to successfully defend that party

Medicare

A federally funded health insurance program for people 65 years of age and older

Medicaid

A health care plan for low-income people

Application

An offer made by the applicant to the insurance company

Binder

Will provide temporary insurance coverage until the policy is formally accepted.

Also called binding slip.

Premiums

Insurance contracts require the payment of____________.

Payment is determined by the nature and character of the risk and by how likely the risk is to occur.

Lapse

When the insured stops paying premiums

Estoppel

An insurer may not deny acts, statements, or promises that are relevant and material to the validity of an insurance contract.

Agency (Act for the Benefit of P, under P’s Control)

A legal relationship in which one party (the agent) is allowed to do business or make decisions for someone else (the principal) and is under the control of the principal

Third party

Individual with whom the agent deals for the principal

consensual; fiduciary

An agency relationship is always _______________ because the agent must agree to act for the principal.

The agency relationship is ______________ because the agent and principal trust each other

Fiduciary

A person who has a legal duty to act in the best interest of someone else

Employer–Employee Relationship

The legal principles governing the relationship of principal and agent and of employer and employee are very similar.

The main distinction between the two relationships is that agent–employees have the authority to deal with third parties on behalf of the principal.

Master (Employer)

A person who has the right to control the activities of another person.

Servant (Employee)

A person whose activities are controlled

Independent contractor

A party who agrees to do a job and retains complete control over the methods employed to obtain final completion

Proprietor

A party for which an independent contractor works

liable for all contracts; agent acts within the authority conferred

The principal is ________________ that a general or special agent may enter into with third parties, as long as the ___________________________ by the principal.

Vicarious liability

Based on the principle of respondent superior (let the master, or the superior, respond).

The distinction between master–servant and proprietor–independent contractor relationships is especially critical in determining the nature and the extent of tort liability.

Is the alleged tortfeasor a servant?

Was the servant’s action within the scope of employment?

To apply the doctrine of respondent superior in a tort case, two questions must be answered:

the court must decide whether the alleged tortfeasor is a servant or an independent contractor

To establish the existence of the master–servant relationship, ___________________________________________

employer is negligent

In some jurisdictions, if ___________________ in checking an employee’s qualifications and consequently hires someone who is incompetent, dangerous, or even aggressive, the employer may be held liable should an innocent third party be injured by the actions of the incompetent, dangerous, or aggressive employee.

Nondelegable duty

One that the proprietor cannot delegate, or pass off, to another party. E.g., an airline cannot delegate the responsibility it has for the safety of its passengers by hiring an independent contractor to do its maintenance work.

An employer may also be open to liability when the employer hires an independent contractor to perform a job that the law has not permitted the employer to delegate.

Fiduciary Liability

When an employee breaches his or her fiduciary duty to a third party, the employer may also be liable for any injuries that result from that breach, if that employer had reason to believe that the employee might, in fact, breach that duty

Criminal Liability

The principal or employer ordinarily is not liable for an agent’s or employee’s crimes, unless the principal or employer actually aids or participates in their commission.

Disclosed principal

One whose identity is known by third parties dealing with that principal’s agent.

Undisclosed principal

When an agent does not reveal the existence of an agency relationship but appears to act on his or her own behalf rather than for another

Partially disclosed principal

Exists when the agent, in dealing with third parties, reveals the existence of an agency relationship but does not identify the principal.

Special agent

A person who is authorized to conduct only a particular transaction, conduct a series of related transactions, or perform only a specified act for the principal

Implied authority

The agent’s authority to perform acts that are necessary or customary to carry out expressly authorized duties.

Apparent authority

When a principal, by words or actions, leads a third party to believe that a non-agent is an agent, that principal has clothed that non-agent with apparent authority and has, thus, created an agency by estoppel.

Lingering apparent authority

Created if the principal terminates an agent’s actual authority but fails to give proper notice of that termination to those who are entitled to receive such notice.