Texas All-Lines Adjuster Pre-Licensing Exam Questions and Complete Solutions Graded A+, Exams of Law

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Texas All-Lines Adjuster Pre-Licensing Exam Questions and Complete Solutions Graded A+ Denning [Date] [Course title]

Chapter 1 - Answer: insurance - Answer: financial took that protects individual and organizations from unforeseen and extraordinary financial losses by transferring risk to another party insured - Answer: individual or organization that pays premiums in exchange for protection insurer - Answer: company, group, or government agency offering financial protection how does insurance work? - Answer: insured pays premium insurer promises to pay for specific losses if they occur insurer's promise gives peace of mind to insured principle of indemnity - Answer: when a loss occurs, an individual should be restored to the approximate financial condition he was in before the loss, no more and no less Q1: How can insurance companies afford to pay for an individual's catastrophic loss? - Answer: Q1: The purpose of the principle of indemnity: - Answer: prevents an insured from profiting from a loss Q1: Which of the following best defines premium? - Answer: the fee paid by the insured in exchange for the insurance policy Q1: What best describes insurance? - Answer: an economic device used to protect against the risk of unforeseen and extraordinary financial loss Q1: Mark incurred $8000 damage to his car in an accident. He received $8000 from his insurance company and $4000 from the other driver. By receiving profit from his loss, Mark could be in violation of: - Answer: the principle of indemnity

he should be in the same financial condition. no better, no worse indemnification may include payment for: - Answer: repairs to property reimbursement for additional living expenses rental cars, hotels costs directly associated with a loss, as allowed under the policy legal contract/insurance policy is: - Answer: contract to provide financial protection for a fee legally binding because it meets the 4 requirements of a legal contract What are the 4 requirements of a legal contract? - Answer: agreement (offer and acceptance) consideration competent parties legal purpose agreement - Answer: mutual consent between offeror and offeree acceptance criteria - Answer: offeree communicates to the offeror his intent to enter into contract must be unconditional - the offeree accepts the terms proposed by the offeror

original offeree is the only person who can legally accept the offer An offer may be terminated by: - Answer: revocation by offeror rejection by offeree time lapse termination by operation of law -either party dies or becomes disabled -performance of contract becomes illegal after the offer -subject matter is destroyed offer rejection - Answer: explicit rejection proposal of new offer counteroffer consideration - Answer: all parties bring something of value competent parties - Answer: 18 years old, sober, and sane legal purpose - Answer: no contracts for money laundering Q2: An offeree may legally reject a contract offer by any of the following means EXCEPT: - Answer: asking for clarification or additional information

Q2: If covered by an insurance policy, an insured may be indemnified for all of the following except: - Answer: home remodels Q2: Which of the following is NOT a requirement for a legally binding contract? - Answer: it must be a notarized document Q2: Which of the following refers to being restored to the financial condition you were in before a loss? - Answer: indemnification Q2: A legally binding contract is where the risk of financial loss is transferred in exchange for premiums is called: - Answer: an insurance policy 1-A: The purpose of the principle of indemnity is: - Answer: to prevent and insured from making a profit on a loss 1-A: Which of the following best defines premium? - Answer: the fee paid by the insured in exchange for an insurance policy 1-A: What is a reserve, in insurance terms? - Answer: a pool of collected premiums that the insurer sets aside to pay claims 1-A: Which of the following refers to being restored to the financial condition you were in before a loss?

• Answer: indemnification six special characteristics of insurance contracts - Answer: personal adhesion utmost good faith aleatory

unilateral conditional personal contract - Answer: protects policyholder from financial losses does not protect property from becoming damaged coverage follows the person, not the property contract of adhesion - Answer: the insurer is responsible for the terms of the contract the insured has no say in the wording courts favor the insured in the event of ambiguity doctrine of reasonable expectations the contract should be interpreted as a reasonable person would interpret it contract in good faith - Answer: applicant are expected to be completely honest about the risk to the insurer the insurer must rely on applicant not to conceal or misrepresent pertinent facts contracts are aleatory - Answer: depending on an unknown future event neither party can know future losses insurer only has to pay if and when covered losses occur

policyholders could pay more in premiums that they ever get for claims, or insurer could pay more in claims than it receives contracts are unilateral - Answer: the insurer has an obligation to pay for covered losses the insured has no obligation (he can stop paying premiums) contracts are conditional - Answer: the insurer only has to perform if it certain conditions are met (such as a covered loss) the insured must fulfill all conditions listed in the policy Q1: Bill purchased a policy from ABC insurance. Several months later, he filed a claim which was denied. While reviewing his policy, he found several ambiguities in the policy and decided to challenge the insurer's decision. When the dispute went to trial, the court ruled in Bill's favor. This is because insurance policies are: - Answer: contracts of adhesion Q1: Which of the following is true? A) kevins auto insurance policy now covers Bill, who bought Kevin's truck B) when kevin sold his truck to bill, he lost his auto insurance coverage C) kevins insurance policy covers him for losses to his new car, even though he sold his truck, which was previously covered under his policy to Bill D) kevins auto insurance policy protects his car from damage - Answer: C Q1: Matt offers to lend Shawn his truck so he can pick up some stones for his landscaping project. Matt tells Shawn "dont worry, my truck is insured." What is Matt really saying? - Answer: Matt's financial interest in the truck is protected, should a covered loss occur.

Q1: Which of the following statements is NOT true about an insurance policy? - Answer: an insurance contract requires the utmost good faith of both the insurer and the insured Q1: What is the primary distinguishing characteristic of a contract of adhesion? - Answer: there is an unequal balance of power in the creation of the contract 4 essential parts of an insurance contract: - Answer: Declaration & Definitions Insuring Agreement Conditions Exclusions Endorsements declarations page - Answer: first page of the policy, the general overview: names both of the parties (insured and insurer) policy number location and description of insured item value of insured item dates of the policy (beginning and end) amount and limit of coverage deductible premium definition page - Answer: not essential, but common defines terms used to write policy including: collision, decay, like kind and quality

includes important language for adjusters to know insuring agreement - Answer: summarizes: what is covered which causes of loss are covered any services provided any exclusions to coverage that maximum limit of policy coverage in dollars conditions - Answer: the insurer specifies any limits or qualifications the policyholder must meet ex: requiring security guards for a jewelry store how to file a proof of loss how to protect the property after a loss exclusions - Answer: common exclusions: earthquakes flooding war nuclear hazards intentional acts endordsements - Answer: additions to the policy that can: -add or reduce coverage

-change policy provisions -change the premium price after the policy period ends synonyms: rider addendum attachment certificate of insurance - Answer: includes basic details of the insurance policy constitutes proof of coverage often required for drivers in an insurance policy, where might one find the make and model of the covered vehicle? - Answer: declarations 1-B: In which section of the policy might you find the following statement? "property address: 246 Rosemead Drive" - Answer: declarations 1-B: Janelle wants to change her coverage for personal property in her Homeowners policy from AV to Replacement Cost. She visits her local insurance agent and asks him to make this change to her policy while keeping all the other details the same. Which section of her policy would the agent use to make this change? - Answer: endorsements 1-B: Which of the following best describes a contract in which only one party makes a promise to perform? - Answer: unilateral 1-B: Charlottes son just turned 16 and go this driver's license. She wants him to be covered, so she adds him to her auto insurance policy. Where would this addition be found in Charlotte's policy? - Answer: endorsememts

1-B:Which of the following statements is NOT true about an insurance policy? - Answer: the concept of utmost good faith only applies to the insured 1-B: Josephine's gas station suffered severe sun damage when one of the fuel tanks caught fire and exploded. After completing his inspection, the adjuster determines that Josephine's claim is not covered because she did not have the automatic shut-offs for the fuel tanks. If this safety measure in fact was required in order for coverage to apply, where might Josephine find it in the policy? - Answer: conditions types of insurers - Answer: insurance companies other private groups government entities government insurers - Answer: non-profit mandatory benefits prescribed by law designed to meet needs of general public government has monopoly (Medicare, Medicaid, FEMA, etc) private insurers - Answer: sell insurance based on consumer preferences

offer a wide variety of insurance products typically exist to generate a profit or benefit a group insured party voluntarily participates stock insurance companies - Answer: always for profit publicly-traded stockholders provide capital and participate in profits or losses "non-participating" insurers: no dividends go to policyholders (aflac, allstate, geico, etc) mutual insurance companies - Answer: owned by policyholders policyholders elect board of directors "participating" insurers: policyholders participate in dividends (nationwide, state farm, etc) re-insurer - Answer: an insurer that provides insurance for other insurers the insurer buys insurance to reduce exposure to loss the re-insurer pays a percentage of the insurer's losses, or any losses over a certain amount

reciprocal insurer - Answer: a group of people or organizations that insure each other unincorporated non-profit operated by an attorney-in-fact members pay into individual accounts cost of claims shared by whole group fraternal benefit societies - Answer: non profit, mutual aid organizations engage in charitable activities provide some type of insurance to members used to fund altruistic activities must be assessable by law members may pay the difference in claims Frank purchases an auto policy from publicly-traded XYZ Insurance. He pays regular monthly premiums, and also purchases stock in XYZ and receive dividends when the company turns on a profit. Which type of company has Frank purchased insurance? - Answer: stock insurer

Cindy holds a policy from Sine Nomine Insurance. This is not a publicly traded company, and Cindy can participate in the election of the board, receiving dividends if the company does well. Sine Nomine Insurance could be best described as: - Answer: mutual insurance company Xavier owns a small insurance company. Recently, his company won a bid to insure a new housing development in Ohama, NE. His company can handle any claims that arise, but if a series of tornadoes were to tear through the area and destroy the entire development, Xavier's company would suffer financially. Which type of insurer could help Xavier's company protect itself the most from this potential loss? - Answer: re-insurer When an insurer buys insurance to reduce its exposure to loss, this is called: - Answer: re-insurance Which of the following is NOT a characteristic of social insurance programs? - Answer: social insurance programs are for-profit programs Captive insurers - Answer: created by businesses in order to retain risks exists to provide insurance only for their "parent" company all profits belong to the parent company permitted in some states Risk Retention Groups - Answer: owned by their members provide commercial liability insurance requirements members must involved in similar business endeavors need not be licensed in multiple states

examples United Educators (UE) Alliance of Non-profits for Insurance Domestic Insurer - Answer: located in particular state, abides by that state's laws Foreign Insurer - Answer: obeys a state's or U.S. laws but can be located elsewhere Alien Insurer - Answer: obeys laws of another country altogether government insurers vs. private insurers - Answer: government: mandatory, run by government, suited to needs of general public private: offer insurance products based on customer preferences stock insurers vs mutual insurers - Answer: stock: publicly traded; stockholder participate in dividends (non-participating) mutual: no stockholders; policyholders participate in dividends (participating) a captive insurance company - Answer: exists solely to provide insurance for its parent company an insurer that adheres to the laws of a state but is located outside of that state is called a - Answer: foreign insurer a risk retention group can provide all of the following kinds of insurance, EXCEPT - Answer: workers compensation

SureTrust insurance was founded and operates in Texas. In Texas, SureTrust is considered: - Answer: a domestic insurer A reciprocal insurer is: - Answer: an unreciprocated organization of subscribers that operates through an attorney-in-fact to provide insurance benefits for its members (a group of people that insure each other) two meanings of risk - Answer: the potential for financial loss; being exposed or open to damage an insured item speculative risk - Answer: undertaken with no certainty of either gain or loss made unknowingly, by conscious choice cannot be insured pure risk - Answer: risk with no chance of gain can only result in either loss or no loss can be insured exposure - Answer: the extent to which a person, item, or organization is open to damage or loss (insurers consider this when deciding whether or not to insure it) how is exposure evaluated? - Answer: dollars or units determining factor in issuing a policy and setting a premium

hazard - Answer: a condition increasing the likelihood or severity of a loss hazard vs exposure - Answer: exposure is the possibility of a loss hazards are things that increase that possibility more hazards = higher exposure peril - Answer: the actual cause of loss or damage ex. lightning fire flood vandalism policies can be: named peril - lists each peril that is covered all peril (open peril) - covers all perils except those specifically excluded loss - Answer: 1. reduction in value of an insured item

2. financial loss due to an occurrence or accident
3. for insurers: the amount paid out in a claim settlement Joe's driveway has a very steep grade with several sharp turns, and it gets very muddy during rains. To an insurance company, Joe's driveway might be considered: - Answer: a hazard

During a summer storm, a bolt of lightning hits Mrs. Jones house, damaging a large portion of the roof. In this case, the insurer would call the lightning bolt a: - Answer: peril Sarah is driving carelessly through the streets when she hits a puddle and loses control of her car. She crashes into a telephone pole and the car is completely wrecked. To her insurer, Sarahs car is now considered a: - Answer: loss Which of the following statements about a speculative risk is TRUE? - Answer: a speculative risk involves a conscious choice Which is considered a speculative risk? - Answer: buying a lottery ticket insurable risk - Answer: an item, person, or organization that has been insured not everything is insurable 6 qualifications of insurable risk - Answer: adequate premiums definable risk unexpected losses sustainable losses exclusions law of large numbers adequate premiums - Answer: insurer must be able to cover claims with premium income

potential losses cannot be too much for the insurer to pay insurer must be able to cover claims and expenses if the premiums must be set too high, the risk is not insurable ex. hurricane coverage is excluded from policies in Texas definable risk - Answer: 1. the insurer can define the exact conditions under which the item is covered by the policy

2. the item itself is definable (it can be precisely described) house, car, etc. not a riverbed
3. the item has precise value (house, car, etc.) unexpected losses - Answer: the loss must be: unforeseeable unexpected reasonably unpreventable completely random in nature substantial loss - Answer: the loss must cause substantial economic hardship exclusions - Answer: the insurer must include coverage for large-scale disasters and catastrophic events insurers have to charge adequate premiums

some losses are impossible to insure because they would require such large premiums ex. war earthquakes floods law of large numbers - Answer: a large number of similar risks must be insured spreads the risk across more policies helps the insurer predict losses more accurately "similar risks" can mean: cars houses, lives, businesses, etc adverse selection - Answer: when someone decides to buy insurance because he knows he will probably have to file a claim, typically because of information about the risk that the insurer is unaware of or unable to discriminate against which of the following statements best describes the Law of Large Numbers? - Answer: the larger the number of units insured, the more accurately the insurer can predict the number of claims from that group which of the following best describes the insurance concept of "exposure"? - Answer: the possibility of damage or loss Sally's home burns to the ground after a lightning strike. Sally has homeowners policy that covers lightning damage. The insurance company now views Sally's house as: - Answer: a loss

Which of the following is NOT a qualification of an insurable risk? - Answer: must have a guaranteed protection from damage Stanley lives in a rough neighborhood with a high crime rate. When he inherits a very valuable painting by Picasso, he tries to buy an insurance policy on the painting, but has trouble finding an insurance company that will sell him a policy. Why might this be? - Answer: the exposure to loss is too great, based on where Stanley lives risk mangement - Answer: having a plan for how to deal with possible future losses four risk management techniques - Answer: risk avoidance risk reduction risk transference risk retention risk avoidance - Answer: eliminates risk by not taking an action that involves risk risk reduction - Answer: taking measures to reduce risk involved in an action also called risk mitigation risk transference - Answer: management of severe risks by transferring the risk to another party most common example: insurance risk retention - Answer: acknowledging the risks and preparing to handle unexpected losses that may occur

Severity vs frequency - Answer: high severity + high frequency = avoid high severity + low frequency = transfer (insurance) low severity + high frequency = reduce low severity + low frequency = retain first name insured - Answer: first person or organization listed on the declarations page policy period - Answer: The dates during which the policy is in effect binder - Answer: temporary coverage for an insurance applicant until the policy is issued gives the insurer time to underwrite policies thoroughly provides needed coverage to applicants in the meantime blanket coverage - Answer: "blankets" more than one property, type of property, or coverage under a single limit specific limits - Answer: limits that apply to one specific type of property representation - Answer: a statement of fact misrepresentation - Answer: a false, distorted, or deceitful statement of fact or opinion, even if made unintentionally warranty - Answer: promise or guarantee that certain conditions will be met warranties are found on the conditions page

if a policyholder breaks a warranty, the insurer can deny coverage concealment - Answer: deliberately withholding irrelevant information concealment vs. misrepresentation - Answer: concealment is hiding the truth misrepresentation is stating something is untrue waiver - Answer: voluntary surrender of a right, claim, or privilege express waiver: in writing, signed implied waiver: assumed based on actions estoppel - Answer: legal principle that prevents an insurer from denying coverage, based on the insurer's practices the insurer loses its right to refuse coverage if: -it has previously allowed an action without restriction -it has made misleading statements or practices that the insured has come to believe when an applicant for a homeowners insurance policy lists the address, size, and description of his home, he is providing: - Answer: representations when an insurance policy does not accurately express the true agreement between the insurer and the policyholder, and then the insurer denies a claim based on this inaccurate information, a court of law may reverse that action and correct the policy. this is known as: - Answer: reformation 4 types of hazards - Answer: moral

morale physical legal moral hazard - Answer: results in the policyholder's deliberate decision involves reckless behavior because of the financial security offered by insurance is a type of "behavioral hazard" morale hazard - Answer: takes place when insured acts differently because of the comfort that insurance protection provides is another form of behavioral hazard moral vs. morale - Answer: moral hazards involve deliberate, immoral behavior morale hazards involve indifference and carelessness physical hazard - Answer: a physical condition that increases the chance of a loss types of physical hazard: environmental: potholes material: asbestos in an old house operational: poorly maintained engine occupational: working in a coal mine

legal hazard - Answer: increased chance of loss due to legal action fraud - Answer: deceiving an insurer to profit from a insurance policy categorized as "hard" or "soft" usually involves misrepresentation or concealment hard fraud - Answer: deliberately planning or faking a loss soft "opportunistic" fraud - Answer: exaggerating a claim to inflate the indemnity proximate cause - Answer: when there is an unbroken chain of events between an occurrence and a loss, then that occurrence is the proximate cause of the loss occurrence - Answer: event, incident, or condition that causes damage damages are covered if: - Answer: if caused by a covered peril if their proximate cause was a covered peril direct loss - Answer: physical harm to tangible property indirect loss - Answer: an economic loss that results from a direct loss added expenses or lost income because of physical damage direct vs indirect loss - Answer: if a fire destroys a bakery's fleet of delivery trucks: