PSI - Exams Insurance and Risk Management Questions and Answers — Questions and Answers
Question 1: A client trips over a painter's toolbox left in a hallway and breaks their arm. Which type of insurance policy is designed to cover the client's medical expenses and related damages?
- Workers' Compensation Insurance
- General Liability Insurance (Correct answer)
- Errors and Omissions Insurance
- Builder's Risk Insurance
Correct answer: General Liability Insurance
General Liability Insurance protects a business against claims of bodily injury or property damage to third parties (such as clients) caused by the business's operations. Workers' Compensation covers employee injuries, Errors and Omissions covers professional mistakes, and Builder's Risk covers damage to the structure during construction.
Question 2: A general contractor for a new home construction project hires a licensed and insured electrical subcontractor to perform all wiring work. This decision is an example of which risk management strategy?
- Risk Avoidance
- Risk Mitigation
- Risk Transference (Correct answer)
- Risk Acceptance
Correct answer: Risk Transference
Risk transference is a strategy that shifts potential financial liability from one party to another. By hiring a qualified and insured subcontractor, the general contractor transfers the financial risk associated with the electrical work to that subcontractor and their insurance provider.
Question 3: Which of the following situations would typically be covered under a mandatory workers' compensation insurance policy?
- An employee's personal vehicle is stolen from the company parking lot.
- A client sues the company for a faulty product installation.
- An employee develops carpal tunnel syndrome from repetitive data entry tasks. (Correct answer)
- A salaried manager is laid off due to company downsizing.
Correct answer: An employee develops carpal tunnel syndrome from repetitive data entry tasks.
Workers' compensation insurance provides benefits for employees who suffer work-related injuries or illnesses. Carpal tunnel syndrome developed due to job duties is a classic example of a covered occupational illness. The other options relate to property theft, third-party liability, or unemployment, which are not covered by workers' comp.
Question 4: A real estate agent mistakenly informs a buyer that a property is zoned for commercial use, but it is actually zoned residential. After the sale, the buyer discovers the error and sues the agent for financial losses. Which type of insurance is specifically designed to protect the agent in this situation?
- Fidelity Bond
- General Liability Insurance
- Commercial Property Insurance
- Errors and Omissions (E&O) Insurance (Correct answer)
Correct answer: Errors and Omissions (E&O) Insurance
Errors and Omissions (E&O) insurance, also known as professional liability insurance, protects professionals against claims of negligence, misrepresentation, or mistakes in the professional services they provide. This scenario involves a professional error in providing information, which is the core coverage of an E&O policy.
Question 5: What is the primary purpose of a Certificate of Insurance (COI) when requested by a client before a contractor begins work?
- To serve as the complete insurance policy contract between the contractor and insurer.
- To bill the client for a portion of the contractor's insurance premium.
- To provide verifiable proof that the contractor has active insurance coverage with specific limits. (Correct answer)
- To transfer all legal liability for the project from the contractor to the client.
Correct answer: To provide verifiable proof that the contractor has active insurance coverage with specific limits.
A Certificate of Insurance (COI) is a document that serves as proof of insurance coverage at a specific point in time. It summarizes the types of coverage, policy limits, and effective dates, giving the client assurance that the contractor is adequately insured before starting the project.
Question 6: Which statement BEST describes the fundamental difference between a surety bond and a typical insurance policy?
- A surety bond is a two-party agreement, while an insurance policy involves three parties.
- A surety bond guarantees performance or compliance, while an insurance policy protects against financial loss. (Correct answer)
- Insurance policies require the policyholder to repay any claims paid out by the insurer.
- Surety bonds are designed to protect the policyholder, while insurance protects a third party.
Correct answer: A surety bond guarantees performance or compliance, while an insurance policy protects against financial loss.
A surety bond is a three-party agreement that guarantees the principal will fulfill an obligation to the obligee. If the principal fails, the surety pays the claim but expects to be reimbursed by the principal. An insurance policy is a two-party agreement where the insurer assumes the financial risk of the insured in exchange for premiums and does not expect reimbursement for covered losses.
PSI - Exams Insurance and Risk Management Questions and Answers
A client trips over a painter's toolbox left in a hallway and breaks their arm.
Which type of insurance policy is designed to cover the client's medical expenses and related damages?