AFSB 151 - Chapter 8 Review Questions with 100% correct answers.docx, Exams of Biology

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AFSB 151 -

Chapter 8

Review

Questions

with 100%

correct

answers

Describe the circumstances under which commercial and fidelity bond claims both tend to originate. - answer Commercial bond and fidelity bond claims usually originate from relatively static circumstances. Explain the effect that future events and behavior have on the extent of the surety's liability in a commercial bond claim. - answer In a commercial bond claim, future events and behavior have little, if any, effect on the extent of the surety's liability. Identify the issues that might be affected by the insured's notice of a fidelity loss and the fidelity insurer's prompt investigation. - answer The insured's prompt notice of a fidelity loss and the fidelity insurer's prompt investigation may be important to issues of liability, cause of loss, and minimization of damages by the insured. Describe a fidelity insurer's preferred approach to beginning an investigation. - answer The preferred approach to beginning

an investigation is to require the insured to file the proof of loss first. Claims personnel should never confront an insured without an executed proof of loss in hand. Identify the four basic goals of the fidelity and surety claims process. - answer The four basic goals of the fidelity and surety claims process are determining the surety's obligations, gathering information, evaluating remedies, and complying with statutes and regulations. Identify the initial determinations a surety company must make during the claims process. - answer - The existence of its obligations to the obligee on the bond.

• The extent of its obligation.
• The time limits for meeting its obligations.
• Any limitations on obligations.
• Preliminary determination of how to recover from the principal, including how to minimize and recover losses and expenses.

Explain how claims personnel use the information they gather during the claims process. - answer The information claims personnel gather during the claims process enables them to determine whether the principal has complied with the terms of the bond or policy and the underlying contracts or obligations referred to in the bond or laws governing the bond. Identify the party to whom the right of idemnification applies in a fidelity and surety claim - answer In fidelity and surety claim, the right of indemnification applies to suretyship and is extended to the surety by law or contract. Identify examples of available options for surety and fidelity claims resolution. - answer

• Remedy any default of the principal (applies to suretyship only, not to fidelity)
• Assist the principal in avoiding a default (applies to suretyship only, not to fidelity)
• Indemnify the obligee form loss covered by the obligation in the case of default (applies to suretyship only, not to fidelity)

• Settle by full payment claims not disputed by the principal, employee, or surety
• Settle by compromise payment claims for which coverage or liability is contested or the amount claimed is in dispute
• Recover its losses from the principal, indemnitor(s), employee, and those parties against whom it has a claim through subrogation to the rights of obligees, claimants, or insureds it has paid
• Deny payment on grounds that no obligation exists Identify the purpose of the legal-research process. - answer - The circumstances from which the claim arose
• The coverage (period, limit of liability, limitations, exclusions)
• The facts relating to rights and remedies
• The laws bearing on the claims resolution and enforcement of salvage rights and remedies Describe the vouching-in procedure. - answer The vouching-in procedure permits principals

and indemnitors to respond before the surety must pay and seeks indemnification. Explain why surety claims personnel should be involved during the vouching-in procedure. - answer The involvement of claims personnel is crucial, and they should keep in close touch with the principal and the principal's attorney. If they fail to do so, they may discover these problems:

• A principal, without their knowledge, has asserted defenses based neither on law nor on fact and has used them to attempt a compromise settlement.
• A principal or its attorney has failed to assert, in the surety's behalf, defenses available to the surety but not to the principal (for example, a contractual or statutory limitation on time to file suit when that time is shorter for the surety than for the principal)
• A suit has gone to trail and resulted in a substantial judgment against the surety.
• The principal could have settled the claim before trial, but the principal could not fund the settlement.

• The principal cannot appeal or satisfy the judgment without the surety's financial assistance.
• The principal's attorney expects the surety to pay a substantial bill for fees and expenses because the principal cannot afford them. Explain the actions that cause a default on a contract. - answer Default depends on the actions of parties other than the surety; the principal's admitting it, an obligee's terminating the right to proceed with a contract, or a claimant's obtaining an uncollectible judgment. Identify the basic options available to the surety when a default occurs. - answer A claim evaluation considers the various options available to the surety company. These are the basic options available:
• To finance the principal so that it can complete the projects with its forces and subcontractors
• To arrange completion of the projects by other contractors

• To permit obligees to complete the project with contractors selected jointly by the obligees and the surety
• To disclaim or deny any obligation to one or more obligees based on facts known to the surety Describe the most important right the surety acquires by subrogation. - answer The most important right the company acquires by subrogation is the right of an obligee to use the contract consideration, or money, to complete the project. This money also can be used to pay laborers, suppliers, and subcontractors who have legal or equitable liens on the project or the contract funds. Compare a gross case loss reserve and a net case loss reserve. - answer A gross case loss reserve is the sum of loss payments made to date on the claim plus estimated future loss payment. A net case loss reserve is the estimated gross loss, minus the amount of the contract consideration unpaid by the obligee to the principal at the time of default.

Explain the effect of reinsurance on a surety's reserves and how sureties report these effects internally and to reinsurers. - answer State insurance laws and regulations permit primary sureties to take credit for the renisurer's share of the reserves that a primary surety establishes. Thus, when a surety establishes reserves, it determines a reinsurance recoverable reserve and notes in the records that reinsurance reserves have reduced post reserves. At the same time, the surety advises each reinsurer involved that the reserve has been established, disclosing the amount of the gross reserve and the reinsurer's share of the reserve. Explain how surety claims personnel handle billing to and payments from reinsurers. - answer Primary sureties may reduce losses and expenses paid by an account receivable as soon as they bill the reinsurer for its share of loss and expense. The surety should, therefore, determine the reinsureance recoverable for losses and expenses paid and should regularly bill each reinsurer.

Describe the responsibility of surety claims personnel for salvage recovery when reinsurance applies to the loss. - answer When the primary surety makes a salvage recovery of losses and expenses on which it has made reinsurance recoveries, the reinsurers are entitled to their shares of loss recoveries. The surety should promptly determine reinsurers' shares of recoveries and distribute them. Identify the rights of cosureties on a bond. - answer Each cosurety on a bond has a right to investigate, negotiate, and resolve claims against it and to seek recovery of its losses and expenses. Describe the purpose of a controlling cosurety. - answer Rather than having two or more companies investigate, negotiate, and resolve the same claim and seek recovery of the same losses and expenses, cosureties often agree among themselves that one will be solely responsible for those activities.

Explain how reserves, reinsurance, and payments are handled on a cosurety bond. - answer When a claim is pending on a cosurety bond, the accounting rules relating to reinsurance do not apply. Each cosurety is responsible only for its share of the loss and its expenses. Therefore, a cosurety does not establish a reserve for the total estimated loss covered by the cosurety bond and does not take credit for the other cosureties' share of the reserve. its reserve is its cosurety share, and it will pay its share of the loss directly to the obligee or claimant. In some circumstances, the controlling cosurety may pay the full amount of the loss and expenses it incurs while acting as controlling cosurety and request reimbursement from its cosureties.