Chapter 51 Insurance. All Answers

N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N A question new to this edition of the Test Bank. + A question modified from the previous edition of the Test Bank. = A question inc ...

N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N A question new to this edition of the Test Bank. + A question modified from the previous edition of the Test Bank. = A question included in the previous edition of the Test Bank. TRUE/FALSE QUESTIONS A1. The consideration paid to an insurer to obtain an insurance policy is the premium. T PAGE: 1000 TYPE: + NAT: AACSB Analytic AICPA Legal A2. Insurance companies are prohibited from prac¬ticing risk management. F PAGE: 1000 TYPE: = NAT: AACSB Reflective AICPA Critical Thinking A3. A party who would sustain a financial loss from the destruction of property has an insurable interest in it. T PAGE: 1001 TYPE: + NAT: AACSB Analytic AICPA Legal A4. A sibling may have an insurable interest in his or her sibling’s life. T PAGE: 1001 TYPE: = NAT: AACSB Analytic AICPA Legal A5. The existence of an insurable interest is a primary concern when determining liability under an insurance policy. T PAGE: 1002 TYPE: N NAT: AACSB Analytic AICPA Legal A6. An insurance application is part of the insurance contract. T PAGE: 1002 TYPE: + NAT: AACSB Analytic AICPA Legal A7. A loss sustained between the time of application and the delivery of an insurance policy may not be covered T PAGE: 1002 TYPE: = NAT: AACSB Analytic AICPA Legal A8. Liability insurance protects against liability imposed on the insured as a result of injuries to the person or property of another. T PAGE: 1003 TYPE: N NAT: AACSB Analytic AICPA Legal A9. A coinsurance clause provides that two or more people will receive payment on a claim under the same insurance policy. F PAGE: 1004 TYPE: + NAT: AACSB Reflective AICPA Critical Thinking A10. State law may mandate that an incontestability clause be included in an insur¬ance policy. T PAGE: 1004 TYPE: N NAT: AACSB Reflective AICPA Critical Thinking A11. Under an antilapse clause, an insurance policy will lapse only if no pre-mium is paid on the date due. F PAGE: 1005 TYPE: = NAT: AACSB Reflective AICPA Critical Thinking A12. Cash surrender value is the amount an insured must pay to cancel a policy. F PAGE: 1005 TYPE: = NAT: AACSB Analytic AICPA Legal A13. An insured who has policies with several companies covering the same insurable interest has multiple insurance coverage. T PAGE: 1005 TYPE: N NAT: AACSB Analytic AICPA Legal A14. The insured can cancel a policy at any time. T PAGE: 1006 TYPE: N NAT: AACSB Analytic AICPA Legal A15. Because insurance law follows contract law, bad faith tort actions against insurers are not allowed. F PAGE: 1008 TYPE: = NAT: AACSB Analytic AICPA Legal A16. An insured’s lack of an insurable interest is an absolute defense against payment. T PAGE: 1008 TYPE: = NAT: AACSB Analytic AICPA Legal A17. Term insurance provides life insurance with an accumulated cash surrender value that can be used as collateral for a loan. F PAGE: 1009 TYPE: + NAT: AACSB Reflective AICPA Critical Thinking A18. A fire insurance policy covers losses to the insured as a re¬sult of fire and lightning, but not damage from smoke and water. F PAGE: 1010 TYPE: = NAT: AACSB Reflective AICPA Legal A19. Automobile liability insurance covers liability for bodily injury and property damage. T PAGE: 1013 TYPE: + NAT: AACSB Reflective AICPA Critical Thinking A20. A business may procure coverage for product liability under a comprehensive general liability policy. T PAGE: 1014 TYPE: N NAT: AACSB Analytic AICPA Legal MULTIPLE CHOICE QUESTIONS A1. Bret obtains a fire insurance policy on his rental house with Continental Insurance Company. Like all insurance, this policy is an arrangement for a. avoiding the assumption of responsibility. b. predicting a potential loss based on unknown factors. c. shifting the imposition of liability. d. transferring and allocating risk. D PAGE: 1000 TYPE: = NAT: AACSB Reflective AICPA Legal A2. International Foods Corporation insures its real and personal property, as well as the lives of its key employees, to protect its financial interest should some event undermine its security. This is a. risk management. b. risk pooling. c. risky. d. risqué. A PAGE: 1000 TYPE: = NAT: AACSB Reflective AICPA Critical Thinking A3. Dhani is the beneficiary of a life insurance policy on Elmo’s life obtained from Famous Insurance Company. The insurer of this policy is a. Dhani. b. Elmo. c. Famous. d. the agent or broker through whom the policy was obtained. C PAGE: 1000 TYPE: + NAT: AACSB Reflective AICPA Legal A4. Grover is an executive accountant with the firm of Hall & Associates, which ob¬tains insurance from Interstate Insurance, Inc, on Grover’s life. Grover dies. The proceeds of the policy belong to a. Grover’s heirs. b. Hall & Associates. c. Interstate Insurance. d. the state. B PAGE: 1001 TYPE: = NAT: AACSB Reflective AICPA Legal A5. EZ Rentals Company wants to insure the equipment that it rents to the public. To obtain insurance, EZ must have an insurable inter¬est in the equipment a. at any time. b. at the time a loss occurs. c. at the time a policy is obtained. d. continuously from the time a policy is obtained to the time a loss occurs. B PAGE: 1001 TYPE: = NAT: AACSB Reflective AICPA Legal A6. Chocolate Gourmet Company obtains an insurance policy to pro¬tect against losses incurred by the firm as a result of being held liable for per¬sonal injuries or property damage sustained by others. This is a. casualty insurance. b. fire insurance. c. life insurance. d. title insurance. A PAGE: 1002 TYPE: = NAT: AACSB Reflective AICPA Critical Thinking A7. Shingle & Tile Roofing Contractor, LLC, obtains an insurance policy against liability for injuries or losses sustained by employees during the course of their employment. The policy covers claims not covered by workers’ compensation insurance. This is a. casualty insurance. b. fidelity or guaranty insurance. c. key-person life insurance. d. employer’s liability insurance. D PAGE: 1002 TYPE: N NAT: AACSB Reflective AICPA Critical Thinking A8. Bob applies to City Insurance Company for homeowners’ insurance. City issues a pol¬icy, but later discovers that Bob’s application includes several misstate¬ments. Most likely, these misstatements can a. affect the coverage under the policy but cannot void the policy. b. bind Bob but cannot affect the coverage. c. not bind Bob or affect the policy. d. void the policy. D PAGE: 1002 TYPE: = NAT: AACSB Reflective AICPA Legal A9. Grace applies for a homeowners’ insurance policy on her house with Heroic Insurance Company through Ian, a broker. In this transaction, Ian is a. an agent for both parties. b. Grace’s agent, and not Heroic’s agent. c. Heroic’s agent, and not Grace’s agent. d. not an agent. B PAGE: 1003 TYPE: = NAT: AACSB Reflective AICPA Legal A10. Investors Commercial Property Corporation obtains an insur¬ance policy that protects against any losses incurred as a result of existing claims against or liens on certain property at the time of its purchase. This is a. casualty insurance. b. fire insurance. c. life insurance. d. title insurance. D PAGE: 1003 TYPE: = NAT: AACSB Reflective AICPA Critical Thinking A11. Ginny obtains a health insurance policy for her family from Hope Insurance Company. The policy includes an incontestability clause. Under such a clause, after a policy has been in force for two or three years a. Ginny cannot contest Hope’s insurable interest. b. Ginny cannot contest Hope’s refusal to pay a claim under the policy. c. Hope cannot contest Ginny’s eligibility for continued coverage. d. Hope cannot contest Ginny’s statements in the application. D PAGE: 1004 TYPE: = NAT: AACSB Reflective AICPA Legal A12. Rolling Transport & Storage Corporation wants to insure its warehouse to obtain the maximum possible recovery for the lowest possible pre¬mium. To obtain the maximum recovery under a coinsurance clause, the percentage of the value of the property that should be insured is a. 80 percent. b. 90 percent. c. 100 percent. d. 120 percent. A PAGE: 1004 TYPE: = NAT: AACSB Reflective AICPA Critical Thinking A13. Boyce obtains from Capital Insurance Company a policy that provides that if the parties cannot agree on the amount of a loss covered by the policy, an estimate of the value by an impartial third party can be de¬manded. This is a. an antilapse clause. b. an arbitration clause. c. an appraisal clause. d. an incontestability clause. C PAGE: 1005 TYPE: = NAT: AACSB Reflective AICPA Critical Thinking A14. General Allied Company obtains insurance policies with Hy-Rate Insurance, Inc., and Ideal InsurCo against the risk of loss of General’s of¬fice building in a fire. Each policy includes a multiple insurance clause. A fire partially destroys the building. General can collect from Hy-Rate a. all of the loss. b. half of the loss. c. its proportionate share of the loss to the total amount of insurance. d. none of the loss. C PAGE: 1005 TYPE: = NAT: AACSB Reflective AICPA Critical Thinking A15. Dag obtains from Expedient Insurance Company a policy that provides Dag has thirty days after a premium’s due date to pay it before the policy will be canceled. This is a. an antilapse clause. b. an arbitration clause. c. an appraisal clause. d. an incontestability clause. A PAGE: 1005 TYPE: = NAT: AACSB Reflective AICPA Critical Thinking A16. Myles obtains a business liability insurance policy from Nova Insurance Company for Myles’s Hydraulics & Transmission Repair shop. Nova can cancel the policy a. if Myles increases the risk assumed by the Nova. b. if Myles files a claim under the policy. c. if Myles appears as a witness in a case brought against Nova. d. under no circumstances. A PAGE: 1006 TYPE: N NAT: AACSB Reflective AICPA Legal A17. Brassy obtains an insurance policy for her electric guitar collection from Crest Insurance Company. Brassy can cancel the policy a. at any time. b. only at the end of a period for which a premium has been paid. c. only if Brassy no longer has an insurable interest in the collection. d. only on advance written notice. A PAGE: 1006 TYPE: + NAT: AACSB Reflective AICPA Legal A18. Edy obtains a homeowners’ insurance policy with First Source Insurance Company. First Source can cancel the policy a. if Edy appears as a witness in a case against First Source. b. if Edy fails to pay the premiums. c. if Edy makes changes that add to the home’s value. d. under no circumstances. B PAGE: 1006 TYPE: = NAT: AACSB Reflective AICPA Legal A19. Speedy Shipping Corporation applies to TransInsurance Company for a fire insurance pol¬icy on Speedy’s warehouse. On the application, Speedy misrepresents the age of the property to obtain a lower premium. When a fire soon destroys the ware¬house, TransInsurance can a. deny payment, because a fire destroyed Speedy’s warehouse. b. deny payment, because of Speedy’s fraud in the application. c. not deny payment, because a fire destroyed Speedy’s warehouse. d. not deny payment, because the application is not part of the policy. B PAGE: 1008 TYPE: = NAT: AACSB Reflective AICPA Legal A20. Lila obtains a life insurance policy with no cash surrender value and names her son Maurice as the beneficiary. This is a. casualty insurance. b. decreasing-term life insurance. c. health insurance. d. term life insurance. D PAGE: 1009 TYPE: = NAT: AACSB Reflective AICPA Critical Thinking ESSAY QUESTIONS A1. Ace Investments, Inc., is the mortgagee for a warehouse owned by Best Storage, Inc. Ace obtains an insurance policy from Complete Insurance Corporation (CIC) to cover the warehouse. Best also obtains a policy from CIC to cover the warehouse. Later, Best sells the warehouse to Delta Company but keeps the policy. Delta also obtains a pol¬icy from CIC to cover the warehouse. Ace agrees to act as Delta’s mortga¬gee. A fire to¬tally destroys the warehouse. Who can recover for the loss? A2. Tira obtains two fire insurance policies on her house. Each is an open policy with a pro rata clause. Tira’s policy with Unity Insurance Company is for a maximum amount of $100,000. Her policy with Verity Insurance Company is for a maximum amount of $50,000. Each policy includes a pro rata clause. Due to defective electrical wiring, Tira’s house catches fire and burns completely. The value the house at the time of the loss is $120,000. Tira files a proof of loss with each insurer. What is an open policy? What is a pro rata clause? What is the liability of Unity and Verity for this event?