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Mark CPCU 500 Ch. 7 Exam/40 Questions and Answers/Distinction Graded
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Mark CPCU 500 Ch. 7 Exam/40 Questionsand Answers/Distinction Graded
Principle of indemnity - -The principle that insurance policies should provide
a benefit no greater than the loss suffered by an insured.
-Contract of idemnity - -A contract in which the insurer agrees, in the event
of a covered loss, to pay an amount directly related to the amount of the
loss.
-Collateral source rule - -A legal doctrine that provides that the damages
owed to a victim should not be reduced because the victim is entitled to
recover money from other sources, such as an insurance policy.
-Contract of adhesion - -Any contract in which one party must either accept
the agreement as written by the other party or reject it.
-Reasonable expectations doctrine - -A legal doctrine that provides for an
ambiguous insurance policy clause to be interpreted in the way that an
insured would reasonably expect.
-Consideration - -Something of value or bargained for and exchanged by the
parties to a contract.
-Conditional contract - -A contract that one or more parties must perform
only under certain conditions.
-1-1. List the distinguishing characteristics of an insurance policy. - -The
distinguishing characteristics of insurance policies are these:
- Indemnity
- Utmost good faith
- Fortuitous losses
- Contract of adhesion
- Exchange of unequal amounts
- Conditional
- Nontransferable
, -1-2. Identify reasons that an insurance policy might not fully indemnify an
insured after a covered loss. - -An insurance policy might not fully indemnify
an insured after a covered loss because most insurance policies contain a
dollar limit, a deductible, or other provisions or limitations on the amount to
be paid. Furthermore, insurance policies do not always indemnify the insured
for the inconvenience, time, and other nonfinancial expenses involved in
recovering from an insured loss.
-1-3. Explain the distinction between a contract of indemnity and a value
policy. - -A contract of indemnity compensates the insured only for the value
of the loss.
In a valued insurance policy, the insurer agrees to pay a pre-established
dollar amount in the event of an insured total loss, which may overindemnify
or underindemnify the insured.
-1-4. Identify two policy characteristics that help an insurer reduce or avoid
moral hazards associated with indemnification. - -Despite the fact that some
policies do not adhere to the principle of indennity, in order to reduce or
avoid moral hazards, insurance policies should not do either of these:
- Overindemnify the insured -- can reduce moral hazard by clearly defining
the extent of a covered loss in the policy provisions and by carefully setting
policy limits
- Indemnify insureds more than once per loss -- policies can include clauses
called "other insurance provisions" that limit multiple sources of recovery
-1-5. Identify two reasons an insurance policy might be vulnerable to
misrepresentation or opportunism and how the concept of utmost good faith
helps prevent occurrences of such abuses. - -An insurance policy is generally
more vulnerable to abuses such as misrepresentation or opportunism than
other contracts, for two reasons:
- Information asymmetry -- when one party to a contract has information
important to the contract that the other party does not
- Costly verification -- the more difficult or more costly it is to verify
information provided by the insured, the less likely it is that the insurer will
expend the resources to verify information, and the information asymmetry
will remain
These situations could affect underwriting decisions and lead to adverse
selection. The concept of utmost good faith obligates all parties to act with
complete honesty and to disclose all relevant facts and therefore helps
prevent these situations.
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