Indirect Loss – Answer- A secondary loss that follows from a direct loss to insured
property from a covered peril.
Ex. Hotel expenses incurred by the insured while a fire-damaged home is repaired is an
indirect loss that follows the direct loss of the home.
Exclusive Agency System – Answer- An insurance distribution system in which
producers (agents) represent a single company.
Ex. In the exclusive agency system, insurers use independent contractors (exclusive
agents) that represent only one insurance company or, in some cases, a group of
insurance companies under similar management.
Five basic elements of a valid contract – Answer- 1. Offer
- Acceptance
- Consideration
- Competent parties
- Legal purpose
Ex. An applicant makes an insurance offer that results in a contract (policy) only if the
offeree (insurer) accepts the offer (application). The applicant’s consideration is the
signed application and payment of the first premium.
Peril and Hazard – Answer- Two related general insurance terms, the first of which is the
cause of a loss and the second being any condition that increases the risk or severity of
a loss.
- A peril is the event that is insured against and includes fire, explosion, windstorm,
theft, death. - Hazards are classified into three categories:
moral hazard (e.g. excessive drinking, bad credit)
morale hazard (driving recklessly)
physical hazard (slippery floors, unsanitary conditions, unguarded premises)
Mutual Insurance Company – Answer- A form of insurance company owned by
policyowners. - While structured in many ways like a corporation, a mutual insurance company does
not issue stock and is owned by policyowners, whose evidence of ownership is the
policy. Mutual companies may distribute policy dividends (non-taxable).
Stock Insurance Company – Answer- A form of insurance company owned by
stockholders who may or may not also be policyowners. - Like all forms of corporations, stock insurance companies may be privately held or
publicly traded and may distribute stock dividends (taxable).
Law of Large Numbers – Answer- An actuarial principle that is the basis for predicting
the odds of a loss occurring in a certain population in any given year. - The law of large numbers does not predict who will suffer a loss, only the odds of a
loss. The larger the number of units independently exposed to a certain type of loss, the
greater the probability that actual loss experience will equal predicted loss experience.
Lloyd’s Association – Answer- An association of individuals and companies that provide
insurance to customers with complex, unique, and very large risks. - Lloyd’s Associations in the United States are not related to Lloyd’s of London. Based
mostly in Texas, they are groups of insurers that mainly write fire insurance and auto
physical damage insurance. Lloyd’s associations play a relatively small role in the U.S.
insurance market.
Errors & Omissions (E&O) Insurance – Answer- A type of insurance coverage,
purchased by insurance producers, that covers losses resulting from the producer
rendering (or not rendering) professional service. - The purchase of E&O insurance does not excuse a producer from the duty to act
exclusively in the client’s best interest. It covers losses that occur despite the producer’s
best intentions (e.g., a producer simply forgets to process a customer’s change of
beneficiary request, resulting in a claim paid to the unintended beneficiary). This
coverage includes a large deductible.
Contract of Adhesion – Answer- A type of contract (including insurance contracts) in
which one party (the offeror) drafts the terms that must be accepted as-is by the offeree. - Because applicants for insurance have no input in the drafting of the insurance
contract’s language, courts generally interpret any ambiguities in a way that favors the
policyowner, not the insurer.
Rescission – Answer- An insurer’s act of declaring that an insurance policy was never in
effect. An insurance company that rescinds a policy states that it provides no coverage
for a claim. - Rescission usually occurs when the applicant knew of a potential claim and
intentionally concealed it from the insurer, or an important document attached to an
application contains information that is materially false, so that if the insurer knew the
truth, the insurer would not agree to insure the risk.
Social Security Insurance (OASDI) – Answer- A federal insurance program that provides
disability, death, and retirement benefits to covered workers and their qualifying
beneficiaries. - Social Security benefits are available to covered workers, who earn rights to these
benefits by paying a payroll tax.
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