Insurance Fundamentals Flashcards

Ben purchased fire insurance on his antique desk. While the desk was being moved, it was damaged. As "damage in transit" was not an insured peril, Ben set fire to the damaged desk. The desk was completely destroyed and Ben collected the insured value of the desk from his fire insurer. This scenario illustrates:

Answer: moral hazard

Moral hazard occurs when an individual's behavior changes after obtaining insurance, leading to an increased likelihood or severity of loss. In this scenario, Ben intentionally set fire to his damaged desk to collect insurance, demonstrating a deliberate act to profit from the insurance policy, which is a classic example of moral hazard.

Which statement is true with regard to risk and insurance? I. Most speculative risk can be insured. II. Insurance is a form of risk transfer.

Answer: II only

Speculative risks, which involve both the chance of gain and loss (like gambling or investing), are generally uninsurable because they do not meet the criteria of pure risk. Insurance is fundamentally a mechanism for risk transfer, where the financial burden of potential losses is shifted from the insured to the insurer in exchange for a premium. Therefore, only statement II is true.

The probability of drawing an "ace" from a thoroughly shuffled deck of playing cards is one-thirteenth. This type of probability is known as:

Answer: objective probability

Objective probability is a type of probability that can be determined through mathematical calculation or empirical observation, meaning it is measurable and not based on personal opinion. In this scenario, the probability of drawing an ace (4 aces out of 52 cards) is a fixed and calculable fraction (1/13), making it an objective measure. Subjective probability, in contrast, relies on individual judgment.

When an earthquake occurred in California, a studio was filming a number of movies. In addition to the physical damage the studio sustained, the studio was forced to delay or cancel release of some films. The profits lost because of delay or cancellation illustrated:

Answer: consequential loss

A direct loss refers to the immediate physical damage to property, such as the studio building itself. A consequential loss, also known as an indirect loss, is a financial loss that arises as a result of a direct loss but is not the direct physical damage. The lost profits from delayed or canceled films are a direct consequence of the physical damage to the studio, illustrating a consequential loss.

Beth was late for work. As she drove around a curve, she hit a patch of oil that had been spilled on the road. She slid across the road and hit a guard rail. Beth was not hurt; however, her car was severely damaged. The presence of oil on the road is best described as a:

Answer: physical hazard

A physical hazard is a tangible condition that increases the likelihood or severity of a loss. The oil spilled on the road is a concrete, physical element that made the driving conditions more dangerous and directly increased the chance of Beth losing control of her car and causing damage. This physical condition directly contributed to the incident.

Which of the following is NOT an identified type of insurance?

Answer: Education

Property, Automobile, and Health are all widely recognized and distinct categories of insurance designed to cover specific types of risks. While financial products exist for saving towards education, 'Education insurance' is not a standard, identified type of insurance policy in the same way that property or health insurance are. It is not a general classification within the insurance industry.

Homeowner's Insurance covers all EXCEPT?

Answer: Party coverage

Homeowner's insurance policies typically provide coverage for perils like theft, vandalism, and damage from natural disasters such as hurricanes, as well as liability for incidents on the property. 'Party coverage' is not a standard or specific type of coverage listed in homeowner's policies. While liability might apply if someone is injured at a party, 'party coverage' itself is not a distinct policy feature.

It is better to need and not have insurance !

Answer: FALSE

The statement 'It is better to need and not have insurance!' is false. The fundamental purpose of insurance is to provide financial protection against unforeseen events and losses. If a person experiences a loss and does not have the necessary insurance, they would be solely responsible for the financial consequences, which can be devastating. It is always better to have insurance when a need arises.

To drive a vehicle in the state of Virginia, you MUST have of which of the following types of insurance?

Answer: Liability

In most U.S. states, including Virginia, liability insurance is the minimum required coverage for operating a vehicle. This coverage protects you financially if you are at fault for an accident, covering damages and injuries to other people or their property. Comprehensive and collision coverages protect your own vehicle, and uninsured motorist coverage protects you from drivers without insurance, but these are typically optional.

For automobile insurance...you pay all EXCEPT which of the following

Answer: State inspection cost

When you have automobile insurance, you are responsible for paying the regular premium for coverage and a deductible, which is the out-of-pocket amount you pay before insurance covers a claim. State inspection costs, however, are a separate, mandatory vehicle maintenance expense imposed by the state and are not part of the payments made for your insurance policy. Therefore, you do not pay state inspection costs to your insurer.

Your finance history (credit report) can impact the rate or amount you pay for automobile insurance?

Answer: TRUE

TRUE. Insurance companies frequently use an individual's credit history, as reflected in their credit report, as a factor in determining automobile insurance rates. Statistical data suggests a correlation between creditworthiness and the likelihood of filing claims. A favorable credit history can often lead to lower premiums, while a poor credit history may result in higher rates due to perceived higher risk.