Chapter 4 - Insurance Transactions

1. The insured's policy is nearing the expiration date. The insurance company doesn't want to continue the insured's coverage, so it sends the insured a notice that the policy will not continue beyond the expiration date of the policy. This is considered which of the following?

Flat cancellation

Nonrenewal

Pro rata cancellation

Unearned renewal

B is correct. Nonrenewal occurs when the insured or the insurer decides to not continue coverage for another policy period after the current policy period expires. Flat cancellation means to cancel a policy on its effective date. Pro rata cancellation means to cancel a policy midterm so that a refund is made of unearned premium.

Explanation

B is correct. Nonrenewal occurs when the insured or the insurer decides to not continue coverage for another policy period after the current policy period expires. Flat cancellation means to cancel a policy on its effective date. Pro rata cancellation means to cancel a policy midterm so that a refund is made of unearned premium.

2. An agreement between the insured and the insurer that certain conditions will be met is which of the following?

Misrepresentation

Warranty

Estoppel

Certificate of insurance

B is correct. A warranty becomes part of the policy. If it is breached, the insurer can void the policy.

Explanation

B is correct. A warranty becomes part of the policy. If it is breached, the insurer can void the policy.

3. Which of the following statements concerning binders is correct?

They guarantee that a policy will be issued.

They can be issued by insurance companies, but not agents.

They show an intent to consider issuing insurance, but do not include any commitment to provide coverage.

C is correct. An agent or an insurance company can issue a binder. A binder does not guarantee that a policy will be issued; it only guarantees temporary coverage. If the company decides to not issue the policy, coverage under the binder may be cancelled by a formal cancellation notice; however, if no formal cancellation is made, coverage remains in effect until the binder expires. If a policy is issued, coverage under the binder ceases as of the effective date of the policy.

Explanation

C is correct. An agent or an insurance company can issue a binder. A binder does not guarantee that a policy will be issued; it only guarantees temporary coverage. If the company decides to not issue the policy, coverage under the binder may be cancelled by a formal cancellation notice; however, if no formal cancellation is made, coverage remains in effect until the binder expires. If a policy is issued, coverage under the binder ceases as of the effective date of the policy.

4. What rating method makes modifications to manual rates to reflect the unique characteristics of each risk?

Judgment

Merit

Certification

Manual

B is correct. Experience rating, retrospective rating, and schedule rating are all types of merit rating.

Explanation

B is correct. Experience rating, retrospective rating, and schedule rating are all types of merit rating.

5. Judgment rating is based on which of the following?

An evaluation of the characteristics of the individual risk

Manual rates developed from statistical data

Calculation and evaluation of the insured's past loss experience

Loss information reported by other states

A is correct. This is the oldest form of rating. The premium is determined by considering the individual risk. No books or tables are used; premiums are established through careful judgment.

Explanation

A is correct. This is the oldest form of rating. The premium is determined by considering the individual risk. No books or tables are used; premiums are established through careful judgment.

6. Which one of these statements about the Fair Credit Reporting Act is not correct?

Prenotification is required for both regular and investigative reports.

Postnotification is required when insurance coverage is denied because of adverse information in a credit report.

An agent who obtains information from a reporting agency under false pretenses can be sent to jail and fined.

Consumers have the right to challenge information in investigative reports and to have incorrect information removed.

A is correct. The question asks for the statement that is not correct. Prenotification is required for investigative reports, but not regular reports. The other choices are provisions contained in the Fair Credit Reporting Act.

Explanation

A is correct. The question asks for the statement that is not correct. Prenotification is required for investigative reports, but not regular reports. The other choices are provisions contained in the Fair Credit Reporting Act.

7. When an insured decides to cancel an insurance policy prior to the expiration date, the unearned premium is returned on what basis?

Flat basis

Pro rata basis

Short rate basis

Negotiated basis

C is correct. This means that the insurer can keep an allowance for expenses. When the insurance company cancels, unearned premium is returned on a pro rata basis, which means that the company retains only the earned premium.

Explanation

C is correct. This means that the insurer can keep an allowance for expenses. When the insurance company cancels, unearned premium is returned on a pro rata basis, which means that the company retains only the earned premium.

8. To void a policy, misrepresentation or concealment must be which of the following?

Concern material facts.

Be intentional.

Both A and B are correct.

Neither A nor B are correct.

A is correct. Misrepresentation is a written or verbal misstatement of a material fact. It can be either intentional or unintentional.

Explanation

A is correct. Misrepresentation is a written or verbal misstatement of a material fact. It can be either intentional or unintentional.