Ch19 Exam Prep Insurance

Business Law with UCC Applications, 15e (Sukys)

Chapter 19 Insurance

1) Insurance transfers the risk of economic loss—for a fee—from the insurance company to the insured.

Difficulty: 2 Medium

Topic: Risk Assessment and Peril Management

Learning Objective: 19-01 Define and explain the purpose of insurance.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

2) Johnny pays $600 for six months of automobile insurance. Johnny's payment is called the automobile risk assessment.

Difficulty: 2 Medium

Topic: Risk Assessment and Peril Management

Learning Objective: 19-01 Define and explain the purpose of insurance.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

3) An insurance policy is a bilateral contract and consideration arises from the premiums paid by the insured and the promise of the insurer to pay money to the beneficiary if a certain event happens.

Difficulty: 2 Medium

Topic: Risk Assessment and Peril Management

Learning Objective: 19-01 Define and explain the purpose of insurance.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

4) Ted, one of the partners in a two-man consulting partnership with Sam, is told by his insurance company that he does not have an insurable interest on the life of his partner, Sam. Generally, the insurance company is correct to deny Ted.

Difficulty: 3 Hard

Topic: Risk Assessment and Peril Management

Learning Objective: 19-03 Make clear the importance of insurable interest.

Bloom's: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

5) Indemnification means that an insurance company can 'step into the shoes' of the insured and sue any party whom the insured could have sued.

Difficulty: 2 Medium

Topic: Risk Assessment and Peril Management

Learning Objective: 19-03 Make clear the importance of insurable interest.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

6) Carl takes out insurance on his life and names a friend, Roy, who happens to be a homeless veteran, as beneficiary of his policy. Roy cannot collect the life insurance when Carl dies because Roy has no insurable interest on Carl's life.

Difficulty: 2 Medium

Topic: Types of Insurance

Learning Objective: 19-04 Differentiate among the different types of life insurance.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

7) The cash surrender value of a straight life insurance policy equals the face value of the policy at a stated age (usually ninety-five or hundred years), less 10% handling and service charges.

Difficulty: 2 Medium

Topic: Types of Insurance

Learning Objective: 19-04 Differentiate among the different types of life insurance.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

8) During inflationary times, when bank interest rates are low, insurance policies are usually poor sources for loans at low interest rates.

Difficulty: 2 Medium

Topic: Types of Insurance

Learning Objective: 19-04 Differentiate among the different types of life insurance.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

9) In a decreasing term insurance, the premium stays constant from year to year, but the amount of protection (death benefit) decreases over the years.

Difficulty: 2 Medium

Topic: Types of Insurance

Learning Objective: 19-04 Differentiate among the different types of life insurance.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

10) Rosie takes out a general life insurance policy naming Margarita as beneficiary, but Rosie sadly commits suicide three years later. Although the policy is silent, the insurance company claims Margarita, the beneficiary, may not collect the insurance because Rosie committed suicide.

Difficulty: 3 Hard

Topic: Types of Insurance

Learning Objective: 19-04 Differentiate among the different types of life insurance.

Bloom's: Apply

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

11) Tia is severely injured in an auto accident and dies 45 days later from these injuries. Her beneficiaries may not collect under a double indemnity provision because it is beyond 30 days of the accident.

Difficulty: 3 Hard

Topic: Types of Insurance

Learning Objective: 19-04 Differentiate among the different types of life insurance.

Bloom's: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

12) Jose is permanently disabled after a car accident. Jose will be excused from paying premiums under the guaranteed insurability option.

Difficulty: 2 Medium

Topic: Types of Insurance

Learning Objective: 19-04 Differentiate among the different types of life insurance.

Bloom's: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

13) Inland marine insurance covers goods that are moved by land carriers such as rail, truck, and airplane.

Difficulty: 2 Medium

Topic: Types of Insurance

Learning Objective: 19-04 Differentiate among the different types of life insurance.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

14) Property insurance premiums remain consistent, regardless of the amount of the deductible.

Difficulty: 2 Medium

Topic: Types of Insurance

Learning Objective: 19-05 Explain how insurable interest differs with life insurance and property insurance.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

15) Before David's premium is received, David's house suffers $5,000 of water damage due to the fire department fighting a fire at his house. David may recover for this loss under his fire insurance policy.

Difficulty: 3 Hard

Topic: Types of Insurance

Learning Objective: 19-07 Describe coverage given by fire, marine, homeowner's, renter's, and flood insurance.

Bloom's: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

16) Under bodily injury liability automobile insurance, the insurer is liable for damages up to $50,000 per incident.

Difficulty: 2 Medium

Topic: Types of Insurance

Learning Objective: 19-08 Differentiate among the principal kinds of automobile insurance.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

17) If Viva, who is 38, has low income, she automatically qualifies for Medicare, a federally funded health insurance program.

Difficulty: 2 Medium

Topic: Types of Insurance

Learning Objective: 19-09 Describe the benefits included in health insurance policies.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

18) To avoid risk while waiting for an insurance policy to be formally accepted, an insured may choose to have the insurer issue a 'lapse policy' to provide interim coverage.

Difficulty: 2 Medium

Topic: The Insurance Policy

Learning Objective: 19-10 List the steps in applying for, obtaining, and maintaining an insurance policy.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

19) Sagan forgets to list in his health insurance application that he broke his arm at age five. If discovered, he would be automatically be denied coverage based on fraudulent concealment.

Difficulty: 3 Hard

Topic: Cancellation of Insurance by Insurer

Learning Objective: 19-10 List the steps in applying for, obtaining, and maintaining an insurance policy.

Bloom's: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

20) When the insurance company gives up one of its rights to help the insured, the company has made a warranty.

Difficulty: 2 Medium

Topic: Cancellation of Insurance by Insurer

Learning Objective: 19-10 List the steps in applying for, obtaining, and maintaining an insurance policy.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

21) The ________ accepts the risk of loss in return for a premium.

A) insured

B) insurer

C) beneficiary

D) benefactor

Difficulty: 2 Medium

Topic: Risk Assessment and Peril Management

Learning Objective: 19-01 Define and explain the purpose of insurance.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

22) Kaycee obtains fire insurance on an empty warehouse. Later, Kaycee manufactures and stores fireworks in the building. A lightning strike in a thunderstorm explodes the fireworks and destroys the building. The fire insurance policy is:

A) valid, since the building was empty when the policy was obtained.

B) void, since a material change in risk occurred.

C) voidable if the lightning was not foreseeable.

D) valid, since there are negligible liabilities which applies to storing fireworks.

Difficulty: 3 Hard

Topic: Risk Assessment and Peril Management

Learning Objective: 19-02 Identify the contractual elements of an insurance agreement.

Bloom's: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

23) Faith owes $50,000 to Investment Lenders, Inc., a partnership of Cindy and Ryan. She is also a partner with Tom in a business venture. What insurable interests exist in this situation?

A) Faith has an insurable interest in the lives of Cindy and Ryan.

B) Investment Lenders, Inc. has an insurable interest in Tom, but does not have an insurable interest in Faith.

C) Only Tom and Faith have insurable interests.

D) Tom and Faith have insurable interests in each other's lives and Investment Lenders, Inc. has an insurable interest in Faith.

Difficulty: 3 Hard

Topic: Risk Assessment and Peril Management

Learning Objective: 19-03 Make clear the importance of insurable interest.

Bloom's: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

24) What type of insurance policy 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?

A) Limited-payment life insurance

B) Universal life insurance

C) Straight life insurance

D) Term life insurance

Difficulty: 3 Hard

Topic: Types of Insurance

Learning Objective: 19-04 Differentiate among the different types of life insurance.

Bloom's: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

25) Universal life insurance allows the policy owner to modify the:

A) face value of the policy and the premiums.

B) face value of the policy, but not the premiums.

C) premiums, but not the face value of the policy.

D) face value of the policy and obtain refunds of premiums already paid.

Difficulty: 3 Hard

Topic: Types of Insurance

Learning Objective: 19-04 Differentiate among the different types of life insurance.

Bloom's: Apply

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

26) ________ insurance offers protection alone, and is the least expensive kind of life insurance.

A) Straight life

B) Universal life

C) Limited-payment life

D) Term

Difficulty: 1 Easy

Topic: Types of Insurance

Learning Objective: 19-04 Differentiate among the different types of life insurance.

Bloom's: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

27) Bill has a $500,000 life insurance policy naming his minor children as beneficiaries. Bill is shot and killed while breaking into his neighbor's home. Will Bill's children likely be able to collect the life insurance proceeds?

A) No, policies often do not cover the insured when he/she violates the law.

B) Yes, as it would not be against public policy for beneficiaries to receive insurance proceeds in such a case.

C) Yes, but not entirely. They will be given an allowance for necessaries with the balance going to others.

D) No, all the proceeds will go to a state administrated crime victims' fund.

Difficulty: 3 Hard

Topic: Types of Insurance

Learning Objective: 19-04 Differentiate among the different types of life insurance.

Bloom's: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

28) If an insured purchases a guaranteed insurability provision on a life insurance policy, the:

A) insured is allowed to pay an extra initial premium in exchange for an assured option to buy more insurance at certain specified times later with no questions asked.

B) insurer is allowed to excuse the insured from paying premiums if the insured becomes disabled.

C) insured has to pay an extra $25 in exchange for a guarantee of coverage by the insurance, should the insured become disabled.

D) insurer has to pay double the amount of the policy to the beneficiary if the insured dies from accidental causes.

Difficulty: 2 Medium

Topic: Types of Insurance

Learning Objective: 19-04 Differentiate among the different types of life insurance.

Bloom's: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

29) A(n) ________ is an amount of any loss that is to be paid by the insured and can be a specified dollar amount, a percentage of the claim amount, or a specified amount of time that must elapse before benefits are paid.

A) loan value

B) deductible

C) annuity

D) cash surrender value

Difficulty: 2 Medium

Topic: Types of Insurance

Learning Objective: 19-05 Explain how insurable interest differs with life insurance and property insurance.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

30) Which of the following is true of coinsurance?

A) It is rarely found in property insurance policies.

B) It allows the insured to pay an extra premium initially in exchange for a guaranteed option to buy more insurance at certain specified times later.

C) It excuses the insured from paying premiums if he or she becomes disabled.

D) It is a provision under which the insurer and the insured share costs, after the deductible is met, according to a specific formula.

Difficulty: 2 Medium

Topic: Types of Insurance

Learning Objective: 19-06 Explain the coinsurance clause in most property insurance policies.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

31) A protection that insures property that cannot be covered by specific insurance because the property is constantly changing in either value or location is referred to as a(n):

A) floater policy.

B) collision insurance.

C) annuity.

D) coinsurance.

Difficulty: 2 Medium

Topic: Types of Insurance

Learning Objective: 19-07 Describe coverage given by fire, marine, homeowner's, renter's, and flood insurance.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

32) Lucia had a homeowner's insurance policy on her house. While she was away on vacation, her porch got burned to the ground. After the fire, her house was burglarized and goods worth thousands of dollars were stolen from it. When Lucia arrived home, she called the police. While a police officer was interviewing her in her dining room, a chandelier fell on him and knocked him unconscious. Which losses will Lucia's homeowner's policy cover?

A) The losses due to theft and the injuries sustained by the officer, but not the losses incurred by the fire.

B) The losses due to fire and the injuries sustained by the officer, but not the losses incurred by theft.

C) The losses incurred due to fire and theft, but not the injuries suffered by the police officer while on her property.

D) The losses incurred due to fire and theft as well as the injuries suffered by the police officer while on her property.

Difficulty: 3 Hard

Topic: Types of Insurance

Learning Objective: 19-07 Describe coverage given by fire, marine, homeowner's, renter's, and flood insurance.

Bloom's: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

33) ________ coverage permits a driver to buy optional coverage, such as personal injury insurance, that would allow him or her to receive payment without bothering to determine fault.

A) Comprehensive

B) Add-on

C) Threshold

D) Collision

Difficulty: 2 Medium

Topic: Types of Insurance

Learning Objective: 19-08 Differentiate among the principal kinds of automobile insurance.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

34) The insurance company's liability under comprehensive coverage is limited to the ________ of the vehicle at the time of the loss.

A) actual cash value

B) outstanding loan value

C) replacement value

D) stated value

Difficulty: 2 Medium

Topic: Types of Insurance

Learning Objective: 19-08 Differentiate among the principal kinds of automobile insurance.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

35) Peter lost control of his car and drove it though his neighbor Clyde's fence. If Clyde were to bring a claim against Peter for the damage to the fence, what type of insurance would Peter need to cover the damage?

A) Homeowner's insurance

B) Property damage liability insurance

C) Collision insurance

D) No-fault insurance

Difficulty: 3 Hard

Topic: Types of Insurance

Learning Objective: 19-08 Differentiate among the principal kinds of automobile insurance.

Bloom's: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

36) An uninsured motorist drove through a red light and hit the passenger side of David's car. David, the driver, suffered a concussion, and the passenger, Jayne, broke her right arm and leg. David's car sustained extensive damages that would cost $2,000 to repair. If David has uninsured-motorist insurance, the coverage will:

A) protect David, but not Jayne.

B) protect David and Jayne and reimburse David for the $2,000 in damages to his car.

C) protect David and Jayne, but not cover any of the damages to David's car.

D) cover any injuries sustained by the uninsured motorist, to prevent the motorist from suing David.

Difficulty: 3 Hard

Topic: Types of Insurance

Learning Objective: 19-08 Differentiate among the principal kinds of automobile insurance.

Bloom's: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

37) Stanley falls into the low-income group. Which of the following health care plans can Stanley opt for?

A) Medicaid

B) Long-term care insurance

C) Medicare

D) Mediclaim

Difficulty: 2 Medium

Topic: Types of Insurance

Learning Objective: 19-09 Describe the benefits included in health insurance policies.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

38) A(n) ________ will provide temporary insurance coverage until the policy is formally accepted.

A) premium

B) adhesion contract

C) warranty

D) binder

Difficulty: 2 Medium

Topic: The Insurance Policy

Learning Objective: 19-10 List the steps in applying for, obtaining, and maintaining an insurance policy.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

39) Joe had made an agreement with Auto Insurance Co. not to use his van for commercial business purposes when he purchased auto insurance. Joe had an accident while delivering pizzas for Bigger Pizza, Inc. For which type of violation will Joe not be covered under his insurance?

A) Fraudulent concealment

B) Misrepresentation

C) Concealment

D) Breach of warranty

Difficulty: 3 Hard

Topic: Cancellation of Insurance by Insurer

Learning Objective: 19-10 List the steps in applying for, obtaining, and maintaining an insurance policy.

Bloom's: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

40) In most states, an innocent misrepresentation by the insured would make the policy:

A) voidable by the insurer.

B) voidable by the beneficiary.

C) enforceable, since there was no intentional misconduct.

D) enforceable to a reasonable amount as determined by the court.

Difficulty: 2 Medium

Topic: The Insurance Policy

Learning Objective: 19-10 List the steps in applying for, obtaining, and maintaining an insurance policy.

Bloom's: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

41) While Leah and Grant were lawfully married, Leah had purchased a $500,000 life insurance policy on Grant's life, naming herself as the beneficiary. Subsequently they got divorced and Grant died a year later. Grant leaves two surviving children, Tom and Cindy. Who is likely to receive the proceeds of the $500,000 life insurance policy?

Difficulty: 3 Hard

Topic: Risk Assessment and Peril Management

Learning Objective: 19-03 Make clear the importance of insurable interest.

Bloom's: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

42) Titan Insurance Co. pays the damages for Anna's car. The damages were a result of an accident caused by Earl, who was drunk while driving. Discuss Titan's legal rights in this situation.

Difficulty: 3 Hard

Topic: Risk Assessment and Peril Management

Learning Objective: 19-03 Make clear the importance of insurable interest.

Bloom's: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

43) At 18, Jackson purchased a straight life insurance policy with a face value of $20,000. At a later time, he borrows a loan value against the cash surrender value of the policy. However, Jackson dies unexpectedly while the loan is still outstanding. Discuss the case.

Difficulty: 3 Hard

Topic: Types of Insurance

Learning Objective: 19-04 Differentiate among the different types of life insurance.

Bloom's: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

44) Grant, a construction worker, purchased a double indemnity option from his life insurance company. Several years later, Grant was seriously injured in a construction accident. Four months after the accident, Grant died as a result of the bodily injuries he sustained in that accident. When Grant's wife, the beneficiary, attempted to collect double the amount of the policy, the insurer informed her that she was only entitled to the original amount of coverage. Analyze the case.

Difficulty: 3 Hard

Topic: Types of Insurance

Learning Objective: 19-04 Differentiate among the different types of life insurance.

Bloom's: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

45) Taft takes out an insurance policy on his wife, Kathryn, when he learns that she is to be stationed in another country that is at war. She gets killed while on duty in the war zone. Can Taft collect on the life insurance policy? Explain.

Difficulty: 3 Hard

Topic: Types of Insurance

Learning Objective: 19-04 Differentiate among the different types of life insurance.

Bloom's: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

46) Juanita's grandfather loans valuable artwork to the Art Museum on the condition that the same will go to Juanita if the museum closes. She wants to purchase property insurance on the art work because she feels that it would be a great loss if any mishap occurs. Discuss the legal implications of this situation.

Difficulty: 3 Hard

Topic: Types of Insurance

Learning Objective: 19-05 Explain how insurable interest differs with life insurance and property insurance.

Bloom's: Evaluate

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

47) Malone purchased a painting by Van Gogh and took out a $1 million insurance policy on it. He later sold the painting, but continued to make payments on the policy. When the painting was destroyed by vandals, Malone tried to collect $1 million from the insurance company. Evaluate the situation.

Difficulty: 3 Hard

Topic: Types of Insurance

Learning Objective: 19-05 Explain how insurable interest differs with life insurance and property insurance.

Bloom's: Evaluate

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

48) Logan's building has a replacement cost of $500,000 and his fire insurance policy has an 80% coinsurance clause. Logan has $200,000 of insurance on the building which is completely destroyed by fire. Discuss how much Logan will collect from the fire insurance policy.

Difficulty: 3 Hard

Topic: Types of Insurance

Learning Objective: 19-07 Describe coverage given by fire, marine, homeowner's, renter's, and flood insurance.

Bloom's: Evaluate

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

49) Melinda hits a hole in the road while driving down the highway. Her car's axle breaks, resulting in $2,500 of damages. Discuss if Melinda has coverage under any form of auto insurance.

Difficulty: 3 Hard

Topic: Types of Insurance

Learning Objective: 19-08 Differentiate among the principal kinds of automobile insurance.

Bloom's: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

50) Lane mails a $600 check for his $50,000 home policy with Surround Insurance Co. two months late. Surround cashes the check. Two weeks later, the house is destroyed by fire. When Lane attempts to collect the $50,000 in policy proceeds, Surround asserts that the policy had lapsed and offers to refund the $600 payment. Discuss the legal rights and obligations of Lane and Surround Insurance Co.

Difficulty: 3 Hard

Topic: The Insurance Policy

Learning Objective: 19-10 List the steps in applying for, obtaining, and maintaining an insurance policy.

Bloom's: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation