Cfp Module 1 Part 4 - Test Questions

Front 1

Describe the functions of agents and brokers related to their Authority to bind insurer

Back 1

Agents:
The insurer is legally liable for the acts of one of its agents who is performing his or her duties, even if the agent makes fraudulent statements unknown to or unauthorized by the insurer.
If an agent accepts a premium and tells a person the desired insurance is in place (bond), the insurer must pay any claims.

Brokers:
Does not have the power to bind the insurer to a risk

Front 2

Describe the functions of agents and brokers related to their relationship to the insured

Back 2

Agents:
Not a representative for the insured

Brokers:
A representative of the insured

Front 3

Describe the functions of agents and brokers related to their Relationship to insurer

Back 3

Agents:
First and foremost, the representative of the insurance company

Brokers:
Not an agent of the insurer; thus, cannot bind the insurer to a risk

Front 4

Alex Young, an agent for Secure Insurance Company, was terminated from his position.

A week after he was terminated, Alex wrote an insurance policy for Jeff MacGregor.
Under what circumstances would Secure Insurance Company be
obligated to uphold the contract?

Back 4

If Secure Insurance Company did not notify Alex’s former clients of the termination, Alex may have apparent authority to bind Secure.

If Secure Insurance Company allows Alex to keep rate books, business cards, or receipt books, Alex may have apparent authority to bind Secure.

Front 5

Under what circumstances might a principal not be liable for acts of an agent?

Back 5

- If the agent does not have express authority, implied authority, or apparent authority to bind the principal

- The principal (insurer) would not be obligated after alerting the insured that it is not ratifying the acts of the agent
- This would be evidenced by not issuing the proposed insurance policy and by returning any premium checks received

- However, if, prior to such action, the insured filed a claim, the insurer (principal) might well have to pay that claim

Front 6

New World Insurance Company has a policy prohibiting agents from writing life insurance policies for applicants over 45 years of age.

Joyce Jefferson, an agent for New World, was unaware of this policy and inadvertently wrote a life insurance policy for Art Caldwell, age 46.

New World Insurance Company accepted Art’s premium.

If Art dies, will New World Insurance Company be required to provide benefits? Why?

Back 6

Yes.

Joyce did not have express authority to write a life insurance policy for any applicant over age 45; however, New World ratified Joyce’s act (apparent/ostensible authority) by accepting Art’s premium.

Front 7

Recently, officials at L&H Insurance Company discovered that Frank Cortez, a broker for L&H, solicited a health insurance policy for Joan Martin, even though he knew that she had a health condition that would normally cause her to be rejected for coverage. Frank did not inform L&H of Joan’s health, so the policy was issued and Joan’s premium was accepted.

What is L&H Insurance Company’s obligation in this situation?

Back 7

No liability; knowledge of a broker is not imputed to the insurance company, as the broker is the agent for the insured, not the insurer; knowledge, actions, and assertions of brokers acting within their authority remain with them and do not extend to insurers.

Front 8

Differentiate between notice of loss and proof of loss.

Back 8

- Notice of loss: This is the first step in the claim process; it must be given immediately or as soon as is practicable.

- Proof of loss: Within a specified time after giving notice, the insured must file proof of the loss, which is a sworn statement stating that a loss has occurred, the amount of the claim, and the circumstances surrounding the loss.

Front 9

Briefly outline and explain the stages of the loss adjustment process.

Back 9

1) Notice
First step: contact insurer and tell them of the loss

2) Investigation
Insurer determines if there was a loss covered by policy

3) Proof of loss
Sworn statement by insured that states that a loss has occurred and that enumerates the amount of the loss

4) Payment or Denial
Insurer pays or denies the claim

Front 10

Seven provisions frequently contained in insurance policies that deal with the insured’s duties relating to loss settlement.

Back 10

a. Notice of loss
b. Protect damaged property
c. Inventory
d. Evidence
e. Written proof of loss
f. Assistance and cooperation
g. Appraisal

Front 11

Insured’s duties relating to loss settlement:

Notice of loss

Back 11

The insured is required to give immediate notice of a loss to allow insurer to investigate.

Front 12

Insured’s duties relating to loss settlement:

Protect damaged property

Back 12

The insured is to protect property from
further damage.

Front 13

Insured’s duties relating to loss settlement:

Inventory

Back 13

The insured is required to construct an inventory of damaged property, including quantity, description, actual cash value, and amount of loss; receipts, bills, and related information are to be attached.

Front 14

Insured’s duties relating to loss settlement:

Evidence

Back 14

The insured may be required to show the damaged property to the insurer.

Front 15

Insured’s duties relating to loss settlement:

Written proof of loss

Back 15

The insured is to provide written information as to the time and cause of the loss, the interest of the insured and others in the property, other insurance coverage, all encumbrances on property, etc.

Front 16

Insured’s duties relating to loss settlement:

Assistance and cooperation

Back 16

The insured may have to attend hearings/trials, present evidence, supply medical reports, submit to physical examination, etc.

Front 17

Insured’s duties relating to loss settlement:

Appraisal

Back 17

Either party may request that a controversy be settled by appraisal when the insured and insurer cannot agree on the ACV or the amount of the loss.

Front 18

Insured’s duties relating to loss settlement for life insurance policies

Back 18

Proof of loss and settlement options

Front 19

Explain three options of the insurer in settling claims.

Back 19

a. Replacement:
The insurer may repair or replace damaged property with that of like kind and quality (rather than pay the ACV of the loss).

b. Abandonment and salvage:
The insured surrenders ownership of the lost or damaged property to the insurance company to claim a total loss; the property is taken over by the insurer (salvage) to reduce its loss.

c. Pair or set:
Gives the insurer the right to repair or replace any part, to restore the pair or set to the value before the loss, or to pay the difference between the ACV of the property before and after the loss.

Front 20

Last year, Tom Jones purchased a warehouse for $700,000. Its current replacement cost is $1 million. The building is covered for fire-related perils by XYZ Insurance Company to a policy limit of $500,000, with an 80% coinsurance provision and a $2,000 straight deductible. Last week, a fire broke out in the building, causing $400,000 of covered damage.

What amount of coverage should Tom have on the building for
this loss to be fully covered?

Back 20

$800,000,

80% of $1,000,000

Front 21

Last year, Tom Jones purchased a warehouse for $700,000. Its current replacement cost is $1 million. The building is covered for fire-related perils by XYZ Insurance Company to a policy limit of $500,000, with an 80% coinsurance provision and a $2,000 straight deductible. Last week, a fire broke out in the building, causing $400,000 of covered damage.

Calculate the amount that XYZ Insurance Company will apportion for this loss.

Back 21

$248,000

(($500,000/$800,000)X$400,000) - $2,000

Front 22

Bill Jacobs owns a small office building with a current replacement cost of $520,000. The building is covered by Safe Insurance Company for fire-related perils to a policy limit of $400,000, with coinsurance of 80% and a $2,000 straight deductible.

A fire breaks out in the building, causing $70,500 of covered damage.

What amount will Safe Insurance Company apportion for this loss?

Back 22

$65,788

(($400,000/$410,000) X $70,500) - $2,000

Front 23

General Agents

Back 23

Independent businesspeople empowered by the life insurance company they represent to sell insurance in specified territories and to appoint agents

Front 24

Independent agents

Back 24

Generally represent several property and liability companies doing business under the American Agency System; can place business with any company they represent

Front 25

Captive agents

Back 25

Represent only one company or a group of companies under common ownership; prohibited by contract from representing other insurers if insurance can be placed with captive agent’s company

Front 26

Career agents

Back 26

Usually work with a general agent or agency manager and associate themselves with one primary company; usually maintain license agreements with other companies in order to meet client needs

Front 27

Producing general agents

Back 27

Like general agents, except:
-usually sell insurance personally

-do not have designated territories

-usually do not hire and train agents

-may represent more than one life company

Front 28

Brokers

Back 28

Find the best coverage possible for clients by working with many insurers and act as the agent of the insurance buyer

Front 29

Surplus-line or excess-line brokers or agents

Back 29

Handle any type of insurance that cannot be purchased within the state (coverage must be placed with a company not licensed to do business in that state)

The individual may not be able to obtain coverage from an admitted (in-state) insurer because loss is too great or the required amount of insurance is too large; surplus-line agent or broker can place business with unadmitted insurer if
necessary coverage cannot be obtained within the state from an
admitted insurer at a reasonable price

Front 30

Solicitors

Back 30

- Find insurance prospects and then handle business through an independent agent, broker, company branch, or service office

- Generally cannot bind insurer or issue policies

Front 31

What factors should be considered in selecting an agent?

Back 31

- competence and inclination to service

- experience, training, education, and specialization

- reputation

Front 32

Penny Whistle has been a life insurance agent with the Eire International Insurance Company for seven years.

Penny is a CLU and is studying to become a CFP ® certificant.

She regularly receives new clients through referrals and recommendations from her current clients.

Recently, Penny drove 100 miles to personally deliver a claim check to a distraught widow.

Would you do business with Penny, and why?

Back 32

Yes.

- Because she has seven years of experience, during which time she has received recommendations from her clients, indicating that she has a good reputation.

-Penny's CLU designation and her current studies for the CFP® certification indicate her commitment to ongoing education and training.

Her recent trip to deliver a claim check shows her dedication and inclination to service.

Front 33

What factors may be checked in deciding if an insurance company is strong enough to warrant a client’s business?

Back 33

- the company’s rating with various rating companies

- the NAIC Watchlist

Front 34

You are evaluating the Sonoma Insurance Company for a client.

Sonoma has a B+ rating from A.M. Best, a BBB+ rating from Standard & Poor’s, and an A– rating from Fitch. The company has been in business for 20 years and has $300 million in assets. Sonoma recently was moved to the “Company Action Level” as a result of low RBC numbers, and three of the NAIC’s twelve ratios are outside the usual ranges.

Would you recommend that your client buy a policy from Sonoma Insurance Company, and why?

Back 34

No.

- The company is weak financially, as shown by poor overall financial and RBC ratios.

- The ratings from the rating agencies identify that Sonoma has marginal financial soundness.

- The company has not been in business for very long, and it doesn’t have a particularly large amount of assets for an insurance company.

Front 35

Explain the reasons for regulating the insurance business.

Back 35

- To maintain competition (antitrust)

- To prevent abuse of consumers

- To correct or prevent market failures

Front 36

Which approaches does the government use to control the insurance business?

Back 36

- Antitrust law (including the attempts to maintain competition through the Sherman Act) and prohibitions against agreements for or acts of boycott, coercion, or intimidation

- Regulation to apply specific performance standards to firms within the industry; two types of action are used—restricting entry and controlling prices

Front 37

Briefly discuss the three economic theories for regulating the insurance industry.

Back 37

a. Market failure:
Based on the view that the purpose of regulation is to correct market failures.

b. Public choice:
Views the regulation as part of the system that serves to reallocate wealth among competing groups.

Regulation will tend to favor relatively small, well-organized groups with a high per capita stake in the regulation

c. Capture:
Regulators generally come from within the industry being regulated and/or leave the regulatory agency for a position in the industry.
This results in the regulation of an industry being more for the benefit of the industry than for consumers. This theory, however, does not hold up when evaluating the insurance industry.

Front 38

Briefly discuss the two rationales for regulating the insurance industry.

Back 38

a. Vested in the public interest:
Individuals purchase insurance to protect themselves against financial loss at a later time; it is important to the public welfare that an insurer promising to indemnify insureds for future losses fulfills its promises.

b. Destructive competition:
Too much competition cannot be allowed in the insurance industry because companies may under- reserve for future losses and subsequently fail

Front 39

Explain the role of the legislative branch in regulating insurance.

Back 39

- Each state enacts laws governing the conduct of the insurance industry within its boundaries.

- Laws spell out requirements to be met by persons wanting to organize an insurance company within a state.

- Laws set forth standards of solvency to be enforced.

- Laws provide for regulation of rates and investments.

- Laws provide for licensing of agents.

Front 40

Explain the role of the courts in regulating insurance.

Back 40

- Render decisions on the meaning of policy terms

- Rule on the constitutionality of state insurance laws and the actions of those administering the law

Front 41

Explain the role of a state’s commissioner of insurance in regulating insurance.

Back 41

- Is the central figure in the regulation of the insurance industry in each state

- Makes rulings that have the binding force of law

- Exercises judicial power in interpreting and enforcing the state’s insurance code

Front 42

Explain the role of the NAIC in regulating insurance.

Back 42

The National Association of Insurance Commissioners has no legal power, but through it the 50 state commissioners exchange information and ideas and coordinate regulatory activities.

In addition, it has established an accreditation program to standardize certain aspects of state regulation of the insurance industry.

Front 43

In general, what areas of insurance company operations are regulated by a state’s insurance commissioner?

Back 43

- examination of companies
- rates
- guarantee funds
- involuntary markets
- competence of agents
- unfair practices
- company insolvencies
- policy forms
- access to insurance
- social pricing
- investments
- licensing of companies
- reserves

Front 44

What is the role of an insurance commissioner in regulating insurer solvency ?

Back 44

- to avoid insurer insolvencies through rehabilitation or merger

- if an insolvency occurs, to institute necessary proceedings to have insurer’s assets taken over by an official liquidator

Front 45

What is the role of an insurance commissioner in regulating licensing of insurers?

Back 45

Has power to license insurance companies

Front 46

What is the role of an insurance commissioner in regulating insurance policy forms?

Back 46

Approves policy forms to ensure that the insurance-buying public will not be mistreated as a result of unfair provisions

Front 47

What is the role of an insurance commissioner in regulating twisting?

Back 47

To stop the indiscriminate inducing of a policyholder to lapse or cancel a policy of one insurer and to replace it with a policy of another insurer

Front 48

What is the role of an insurance commissioner in regulating rebating?

Back 48

To stop the giving of or offering to give any portion of the premium or any other consideration to an insurance buyer as an inducement to purchase insurance

Front 49

List five examples of government agencies or laws resulting in indirect federal regulation of the way insurance companies do business.

Back 49

a. Internal Revenue Code

b. the SEC

c. pension regulation, including ERISA, PBGC, DOL, and the IRS

d. COBRA and the Family Medical Leave Act of 1993

e. the Civil Rights Act of 1964, the Age Discrimination in Employment Act, and the Americans With Disabilities Act

f. The Health Insurance Portability and Accountability Act (HIPAA)