Insurance Principles Flashcards
16 cards from real Claims Adjuster Test practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 16 Insurance Principles flashcards as text
It is the scheduled fee that must be paid for an insurance policy.
Answer: Premium
A premium is the amount of money an individual or company must pay for an insurance policy. It is the scheduled fee paid to the insurance company in exchange for coverage against specified risks.
What is the purpose of premiums?
Answer: Fund the operation of insurance companies and create a pool.
Premiums serve as the primary source of income for insurance companies, covering their operational costs and allowing them to build a collective pool of funds. This pool is then used to pay out claims to policyholders who experience covered losses, spreading the risk among many.
How can insurance providers afford to cover a person's catastrophic loss?
Answer: The insurer collects premiums from all policy holders and uses them to pay out the claims of a few.
Insurance operates on the principle of risk pooling. Many policyholders pay relatively small premiums into a common fund, and this collective fund is then used to cover the significant losses experienced by the few who suffer catastrophic events, making individual losses manageable.
Compensation for damages that is equal to the amount of the damage, neither more nor less.
Answer: Indemnity
Indemnity is a fundamental principle in insurance, meaning that the insured is restored to the same financial position they were in before the loss occurred, without profiting from the loss. The compensation for damages is equal to the actual amount of the damage, neither more nor less.
The following are the four parts of a legal contract, except:
Answer: Endorsement
The four essential parts of a legal contract are typically offer, acceptance, consideration, and legal purpose/competent parties. An endorsement, while a part of an insurance policy, is an amendment or addition to an existing contract, not one of the fundamental elements required to form a contract itself.
It is a mutual intent by the offeror and offeree.
Answer: Agreement
An agreement in a contract is formed by a mutual intent, specifically when there is a clear offer made by one party and an unequivocal acceptance of that offer by the other party. This mutual understanding and consent are essential for the formation of a valid contract.
Which of the following is NOT one of the six special characteristics of insurance contracts?
Answer: None of the above
Insurance contracts possess several special characteristics, including being personal, adhesion, aleatory, unilateral, conditional, and based on utmost good faith. Since options A, B, and C are all valid characteristics of insurance contracts, 'None of the above' is the correct answer, indicating that all listed options *are* special characteristics.
An insurance policy is what kind of a contract?
Answer: Personal contract
An insurance policy is considered a personal contract because it insures the individual policyholder against loss, not the property itself. While it may cover property, the contract is between the insurer and the specific insured, meaning it cannot be freely transferred to another party without the insurer's consent.
What is an adhesion contract?
Answer: The insured must accept the entire contract with all of its terms and conditions
An adhesion contract is one drafted by one party (the insurer) and presented to the other party (the insured) on a 'take-it-or-leave-it' basis. The insured has little to no power to negotiate the terms and must accept the contract as written, including all its conditions.
A responsibility to act in complete honesty and to provide all relevant facts.
Answer: Utmost Good Faith
Utmost Good Faith (Uberrimae Fidei) is a fundamental principle in insurance, requiring both the insurer and the insured to act with complete honesty and disclose all material facts relevant to the contract. This ensures transparency and fairness in the agreement, as insurance relies on accurate information.
A contract in which the values traded may not be equal but are dependent on an unpredictable circumstance.
Answer: Aleatory Contract
An aleatory contract is one where the values exchanged by the parties are unequal and depend on the occurrence of an uncertain event. In insurance, the insured pays a small, certain premium, while the insurer's payout (if any) is a large, uncertain sum contingent on a covered loss occurring.
Insurance companies agree to pay when a claim is made. Only the insurer has committed to taking a certain action; the insured is free to discontinue paying premiums at any time.
Answer: Unilateral Contract
An insurance policy is a unilateral contract because only one party, the insurer, makes a legally enforceable promise to perform (pay claims). The insured is not legally obligated to continue paying premiums, but if they stop, the insurer is no longer bound to its promise.
A type of agreement in which both parties must perform specific responsibilities and comply with guidelines for conduct to make the contract enforceable.
Answer: Conditional Contract
An insurance policy is a conditional contract because the insurer's obligation to pay a claim is contingent upon the insured fulfilling certain conditions. These conditions might include paying premiums, providing timely notice of a loss, and cooperating with the investigation.
It includes definitions for phrases like "collusion," "decay," and "like kind and quality" used in policy writing. includes essential terminology adjusters must be aware of.
Answer: Definitions section
The definitions section of an insurance policy is crucial as it clarifies the meaning of specific terms used throughout the document. This ensures that both the insurer and the insured have a common understanding of key phrases like 'collusion,' 'decay,' or 'like kind and quality,' which are essential for proper interpretation and claims handling.
A legal document that certifies the issuance of an insurance policy and lists the types and cost values of coverage offered.
Answer: Certificate of Insurance
A Certificate of Insurance is a document issued by an insurance company or broker that verifies the existence of an insurance policy. It summarizes the key details of the coverage, including policy limits, types of coverage, and effective dates, often used as proof of insurance.
It outlines losses that the insured does not have coverage with.
Answer: Exclusions section
The exclusions section of an insurance policy clearly lists the specific perils, property, or situations that are *not* covered by the policy. This section is vital for defining the limits of coverage and informing the insured about what losses they do not have protection against.