Insurance General Insurance 2 — Questions and Answers
Question 1: What is the primary purpose of an insurance deductible?
- To punish policyholders for filing claims
- To reduce the insurer's administrative burden
- To share risk between the insured and insurer and deter small claims (Correct answer)
- To increase the insurer's profit margin
Correct answer: To share risk between the insured and insurer and deter small claims
A deductible is the amount the insured pays out-of-pocket before insurance coverage kicks in, which discourages minor claims and shares risk.
Question 2: Which term describes the maximum amount an insurer will pay for a covered loss during a policy period?
- Deductible
- Policy limit (Correct answer)
- Premium
- Coinsurance
Correct answer: Policy limit
The policy limit is the cap on the insurer's liability for covered losses during the policy period.
Question 3: An insured misrepresents information on an insurance application. What is the likely consequence?
- A small fine from the insurer
- Policy rescission or denial of claims (Correct answer)
- A higher deductible on future claims
- No consequence if the claim is unrelated
Correct answer: Policy rescission or denial of claims
Material misrepresentation on an application can void the policy, as insurance contracts require utmost good faith and accurate disclosure.
Question 4: What does 'occurrence-based' coverage mean in a liability policy?
- Coverage applies when the claim is filed, regardless of when the incident occurred
- Coverage applies based on when the premium was last paid
- Coverage applies when the injurious event occurred during the policy period, regardless of when the claim is filed (Correct answer)
- Coverage applies only within 30 days of the occurrence
Correct answer: Coverage applies when the injurious event occurred during the policy period, regardless of when the claim is filed
Occurrence-based policies cover events that happen during the policy period even if the claim is filed after the policy expires.
Question 5: Which of the following best describes 'moral hazard' in insurance?
- The risk that a natural disaster will cause widespread losses
- The tendency of insured parties to take greater risks because they are covered (Correct answer)
- The insurer's failure to pay valid claims
- Fraud committed by insurance agents
Correct answer: The tendency of insured parties to take greater risks because they are covered
Moral hazard refers to the behavioral change where insured individuals may act less carefully because they know losses will be covered.
Question 6: What is 'subrogation' in insurance?
- The process of renewing a policy at a lower premium
- The insurer's right to pursue a third party that caused an insurance loss (Correct answer)
- The division of a claim between two insurers
- The cancellation of a policy mid-term
Correct answer: The insurer's right to pursue a third party that caused an insurance loss
Subrogation allows the insurer, after paying a claim, to step into the insured's shoes and recover costs from the responsible third party.
Question 7: A 'claims-made' liability policy differs from an 'occurrence' policy in that it:
- Only covers bodily injury, not property damage
- Covers claims filed during the policy period, regardless of when the event occurred (Correct answer)
- Requires the insured to pay all legal fees upfront
- Automatically renews without premium changes
Correct answer: Covers claims filed during the policy period, regardless of when the event occurred
Claims-made policies provide coverage when the claim is made (reported) during the active policy period, which may or may not be the same year as the triggering event.
Insurance General Insurance 2
What is the primary purpose of an insurance deductible?