INS 401 -Insurance Operations and Risk

Question 1

Morale hazard is most closely associated with:

(1 mark)

a) carelessness or indifference because insurance exists

b) fraudulent concealment

c) a named peril

d) a mortgage interest

Answer: a)

Explanation: Morale hazard involves a careless or indifferent attitude toward loss because the person knows insurance may respond.

Question 2

The principle of indemnity is intended to:

(1 mark)

a) restore the insured financially to approximately the pre-loss position

b) allow the insured to profit from a loss

c) guarantee replacement without limits

d) remove all deductibles

Answer: a)

Explanation: Indemnity aims to compensate for an insured loss without placing the insured in a better financial position than before the loss.

Question 3

Insurable interest means that the insured:

(1 mark)

a) has a legitimate financial interest in the subject matter of insurance

b) must own every item covered by a policy

c) must have suffered a previous loss

d) must be a licensed insurance broker

Answer: a)

Explanation: An insurable interest exists when the person would suffer a recognized loss if the insured subject matter were damaged or destroyed.

Question 4

Consideration in an insurance contract is:

(1 mark)

a) the exchange of something of value between the parties

b) the insurer's claim investigation

c) the policy's exclusion section

d) the amount of depreciation

Answer: a)

Explanation: Consideration is an essential contract element. The insured provides the premium or promise to pay it, while the insurer provides its promise of coverage.

Question 5

An endorsement is used to:

(1 mark)

a) change, add or remove terms or coverage under an existing policy

b) replace the insurer's licence

c) calculate depreciation

d) prove that a claim is fraudulent

Answer: a)

Explanation: An endorsement formally modifies the policy after issuance by adding, removing or changing coverage or conditions.

Question 6

A deductible is the:

(1 mark)

a) portion of a covered loss borne by the insured before the insurer pays

b) maximum amount the insurer can pay

c) amount of unearned premium

d) amount of the policy's aggregate limit

Answer: a)

Explanation: A deductible is the amount the insured must absorb on a covered loss before the insurer's payment begins, subject to the policy wording.

Question 7

The aggregate limit on a liability policy is:

(1 mark)

a) the maximum total amount payable for covered claims during the policy period

b) the amount payable for one accident only

c) the deductible for all claims

d) the insured's annual premium

Answer: a)

Explanation: An aggregate limit caps the insurer's total payments for covered claims during the policy term, subject to the policy provisions.

Question 8

A policy limit is:

(1 mark)

a) the maximum amount the insurer will pay for a covered loss or coverage

b) the minimum premium charged

c) the insured's total annual income

d) the amount of depreciation

Answer: a)

Explanation: The policy limit establishes the maximum amount available under the applicable coverage, subject to its terms and conditions.

Question 9

Underinsurance may result in a co-insurance penalty when:

(1 mark)

a) the required percentage of the property's value has not been insured

b) the insured has no deductible

c) the insurer changes its address

d) a claim is reported promptly

Answer: a)

Explanation: A co-insurance clause encourages adequate insurance. If the required percentage is not carried, a partial loss may be reduced proportionately.

Question 10

Replacement cost coverage generally differs from actual cash value because replacement cost:

(1 mark)

a) does not deduct depreciation when its policy conditions are satisfied

b) always pays more than the policy limit

c) covers intentional losses

d) eliminates every exclusion

Answer: a)

Explanation: Replacement cost is intended to fund replacement with property of like kind and quality without depreciation, subject to the policy's requirements and limits.

Question 11

Actual cash value is commonly determined by considering:

(1 mark)

a) replacement cost less depreciation, subject to applicable policy wording

b) the insured's sentimental value only

c) the original purchase price in every case

d) the policy premium

Answer: a)

Explanation: Actual cash value commonly reflects replacement cost less depreciation, although the precise valuation method depends on the policy.

Question 12

An underwriter primarily evaluates a risk to:

(1 mark)

a) decide whether and on what terms the insurer should accept it

b) settle claims after every loss

c) collect municipal taxes

d) issue driver's licences

Answer: a)

Explanation: Underwriting assesses the characteristics of a risk so the insurer can decide acceptance, pricing, limits, deductibles and conditions.

Question 13

An underwriter may respond to an undesirable risk by:

(1 mark)

a) rejecting it, increasing the rate, or changing terms such as the deductible

b) automatically accepting it at the lowest rate

c) ignoring material information

d) guaranteeing a claim payment

Answer: a)

Explanation: Underwriting decisions can include declining a risk or accepting it subject to appropriate pricing, deductibles, limits or conditions.

Question 14

A broker acting for a client should primarily:

(1 mark)

a) identify the client's insurance needs and recommend appropriate coverage

b) always choose the lowest premium

c) always choose the highest deductible

d) sell only one insurer's product

Answer: a)

Explanation: The broker's professional duty includes understanding the client's needs and helping arrange appropriate insurance rather than simply selecting the cheapest option.

Question 15

Errors and omissions insurance for an insurance broker is designed primarily to cover:

(1 mark)

a) claims arising from professional errors, omissions or negligence in providing services

b) damage to the broker's office building only

c) employee medical expenses

d) automobile physical damage

Answer: a)

Explanation: Errors and omissions insurance provides professional liability protection when a client alleges that the broker's professional service caused financial harm.

Question 16

A restaurant's electrical contractor completed wiring work. Two days later a fire caused by a faulty connection damaged the building. Which CGL coverage is most directly relevant?

(1 mark)

a) Premises and operations liability

b) Products liability

c) Completed operations liability

d) Personal injury liability

Answer: c)

Explanation: Completed operations liability addresses bodily injury or property damage arising from completed work after the work has been finished.

Question 17

A customer slips on a wet floor in a store while shopping. The relevant CGL exposure is primarily:

(1 mark)

a) completed operations

b) premises and operations liability

c) professional liability

d) automobile liability

Answer: b)

Explanation: A customer injured on the business premises during normal operations presents a premises and operations liability exposure.

Question 18

A customer claims a product sold by a manufacturer caused bodily injury after use. The relevant CGL exposure is:

(1 mark)

a) products liability

b) premises liability only

c) employee dishonesty

d) business interruption

Answer: a)

Explanation: Products liability addresses third-party injury or property damage arising from products supplied by the insured.

Question 19

A business cannot operate for several weeks after an insured fire. Business interruption insurance is intended primarily to:

(1 mark)

a) restore income that would have been earned had the loss not occurred

b) replace the owner's personal automobile

c) pay every employee's severance permanently

d) remove all policy exclusions

Answer: a)

Explanation: Business interruption coverage protects against the loss of income and certain continuing expenses resulting from an insured interruption.

Question 20

A business needs funds to rent temporary premises and equipment so it can resume operations quickly after an insured loss. The relevant coverage is:

(1 mark)

a) Extra Expense

b) Mortgage insurance

c) Ocean marine

d) Personal accident

Answer: a)

Explanation: Extra Expense coverage is intended to pay necessary additional costs incurred to reduce or avoid an interruption of business operations.

Question 21

Robbery is distinguished from ordinary theft because robbery involves:

(1 mark)

a) force or threat of force against a person

b) only unexplained disappearance

c) only employee dishonesty

d) only damage to buildings

Answer: a)

Explanation: Robbery involves taking property through actual or threatened force against a person, distinguishing it from ordinary theft.

Question 22

Burglary generally involves:

(1 mark)

a) unlawful entry into premises with intent to commit a crime

b) a voluntary payment of a debt

c) a collision between vehicles

d) a lawful customer transaction

Answer: a)

Explanation: Burglary is associated with unlawful entry into premises with the intent to commit a crime, subject to the applicable policy definition.

Question 23

A person who receives another person's property for a fee and has custody of it is commonly called a:

(1 mark)

a) bailee for hire

b) mortgagee

c) loss payee

d) underwriter

Answer: a)

Explanation: A bailee for hire takes temporary custody of property belonging to another for compensation and owes duties regarding its care.

Question 24

A bailee for hire's liability may arise under:

(1 mark)

a) both tort and contract law

b) only criminal law

c) only tax law

d) only employment law

Answer: a)

Explanation: A bailee's duties may arise from the custody agreement and from the general law of negligence, so both contract and tort principles can apply.

Question 25

A person entering premises for a purpose connected with the occupier's business is generally an:

(1 mark)

a) invitee

b) trespasser

c) tortfeasor

d) mortgagee

Answer: a)

Explanation: An invitee enters for a purpose connected with the occupier's business or activity and is owed an appropriate duty of care.

Question 26

A person who enters premises without permission and without a legal right to be there is generally a:

(1 mark)

a) trespasser

b) invitee

c) loss payee

d) bailee

Answer: a)

Explanation: A trespasser has no permission or legal right to enter the premises, although occupier duties can still apply depending on the circumstances and law.

Question 27

A mortgagee's protection under a standard mortgage clause is important because:

(1 mark)

a) the mortgagee's interest is treated separately from the insured's in specified circumstances

b) the mortgagee becomes the owner of the insurer

c) the mortgagee sets the premium

d) the mortgagee eliminates all exclusions

Answer: a)

Explanation: A standard mortgage clause can protect the mortgagee's separate interest even when certain acts or breaches by the insured might otherwise affect recovery.

Question 28

A material change is best described as:

(1 mark)

a) a change that substantially increases or changes the insured risk

b) any change in the insured's telephone number

c) a routine premium payment

d) a claim settlement

Answer: a)

Explanation: A material change is one that substantially changes the nature or degree of the risk and therefore may need to be reported to the insurer.

Question 29

A policy document used to confirm temporary insurance coverage before the formal policy is issued is a:

(1 mark)

a) binder

b) endorsement

c) rider

d) schedule of depreciation

Answer: a)

Explanation: A binder is evidence of temporary insurance coverage pending issuance of the formal policy documentation.

Question 30

The insurer's right to investigate and settle a liability claim is commonly referred to as:

(1 mark)

a) the insurer's duty or right to defend and control the defence, subject to the policy

b) the insured's right to set the premium

c) a co-insurance clause

d) a mortgage clause

Answer: a)

Explanation: Liability policies commonly give the insurer important rights and duties concerning investigation, defence and settlement of covered claims.

Question 31

Supplementary payments under many liability policies are generally provided:

(1 mark)

a) in addition to the stated liability limit for specified expenses, subject to policy wording

b) only when the insured has no coverage

c) instead of all liability coverage

d) only for property owned by the insured

Answer: a)

Explanation: Supplementary payments can cover specified defence-related and other expenses in addition to the liability limit, depending on the policy wording.

Question 32

A self-insured retention under an umbrella policy is:

(1 mark)

a) the amount the insured must bear before the umbrella responds in the circumstances specified

b) the insurer's maximum aggregate limit

c) the annual premium

d) the policy's replacement cost

Answer: a)

Explanation: A self-insured retention is an amount the insured retains before the umbrella insurer's coverage responds, subject to the policy terms.

Question 33

PACICC primarily exists to:

(1 mark)

a) provide protection to eligible policyholders when a member property and casualty insurer becomes insolvent

b) set every insurer's premium rates

c) license all insurance brokers

d) inspect every commercial building

Answer: a)

Explanation: PACICC provides a consumer protection mechanism for eligible claims when a member property and casualty insurer becomes insolvent.

Question 34

Lloyd's of London is best described as:

(1 mark)

a) an insurance marketplace rather than a single insurance company

b) a government insurance regulator

c) a Canadian provincial insurer

d) a bank

Answer: a)

Explanation: Lloyd's is an insurance marketplace where underwriting members and syndicates conduct insurance business; it is not itself a single insurer in the conventional sense.

Question 35

Statutory conditions in property insurance generally:

(1 mark)

a) set legally prescribed duties and obligations of the parties

b) list every premium available in the market

c) replace the policy declaration page

d) eliminate the need to report losses

Answer: a)

Explanation: Statutory conditions establish legally prescribed obligations, such as duties following loss and requirements concerning changes in risk.

Question 36

When an insurer cancels a policy, the refund is generally calculated on a:

(1 mark)

a) pro rata basis, subject to applicable law

b) short-rate basis in every case

c) penalty-only basis

d) replacement-cost basis

Answer: a)

Explanation: When cancellation is initiated by the insurer, the premium refund is generally calculated pro rata, subject to the applicable legislation and policy terms.

Question 37

When an insured cancels a policy before expiry, the premium refund may generally be calculated on a:

(1 mark)

a) short-rate basis, subject to applicable rules

b) replacement-cost basis

c) claims-made basis

d) co-insurance basis

Answer: a)

Explanation: Short-rate cancellation can allow the insurer to retain an amount for the period of coverage and administrative expense when cancellation is requested by the insured.

Question 38

An insurer choosing to repair or replace damaged property rather than make a cash settlement must:

(1 mark)

a) follow the notice and settlement requirements applicable under the policy and law

b) ignore the insured completely

c) pay twice the policy limit

d) obtain the broker's personal approval

Answer: a)

Explanation: Insurers exercising a repair, rebuild or replacement option must comply with applicable policy wording and statutory requirements, including required notice.

Question 39

A policy's special limit of insurance is intended to:

(1 mark)

a) cap coverage for specified categories of property

b) increase every coverage automatically

c) remove the deductible

d) replace the policy limit

Answer: a)

Explanation: Special limits place a specific maximum on certain categories of property even where the overall personal property limit is higher.

Question 40

Additional Living Expense coverage is designed to pay:

(1 mark)

a) necessary increased living costs when an insured cannot reasonably occupy the dwelling after a covered loss

b) the insured's ordinary mortgage payments only

c) vacation costs unrelated to a loss

d) all improvements to the home

Answer: a)

Explanation: Additional Living Expense coverage addresses necessary increased expenses caused by loss of use of the insured dwelling following a covered loss.

Question 41

Personal liability coverage under a homeowners policy generally responds to:

(1 mark)

a) the insured's legal liability for covered bodily injury or property damage to others

b) damage to the insured's own automobile

c) the insured's investment losses

d) every business loss

Answer: a)

Explanation: Personal liability coverage protects against covered legal liability to third parties arising from personal activities, subject to policy definitions and exclusions.

Question 42

Personal injury liability coverage may respond to:

(1 mark)

a) libel or slander

b) mechanical breakdown

c) windshield damage

d) ordinary wear and tear

Answer: a)

Explanation: Personal injury coverage addresses specified non-physical injuries such as libel, slander and other listed offences.

Question 43

Bodily injury liability generally includes:

(1 mark)

a) physical injury, sickness, disease or death of a third party

b) damage to the insured's own furniture

c) loss of investment income

d) depreciation

Answer: a)

Explanation: Bodily injury liability addresses covered third-party physical injury and its consequences, including sickness, disease or death.

Question 44

The purpose of a claims-made liability policy trigger is generally based on:

(1 mark)

a) when the claim is made, subject to the policy's terms and any required reporting provisions

b) only the date the policyholder bought the property

c) the age of the building

d) the date the premium was refunded

Answer: a)

Explanation: Claims-made coverage generally responds based on when a claim is made during the policy period, subject to its terms, retroactive dates and reporting requirements.

Question 45

An occurrence-based liability policy generally responds based on:

(1 mark)

a) when the covered occurrence takes place, subject to the policy terms

b) when the insured retires

c) when the premium is invested

d) when the building is sold

Answer: a)

Explanation: Occurrence coverage generally attaches when the covered event or occurrence takes place, even if the resulting claim is made later, subject to the policy wording.

Question 46

A loss payee is a party who:

(1 mark)

a) has a recognized interest in insured property and may be entitled to receive claim proceeds as specified

b) sets the insurer's rates

c) licenses brokers

d) writes statutory conditions

Answer: a)

Explanation: A loss payee is a party whose interest in insured property is recognized by the policy and who may receive payment as provided by the policy.

Question 47

A mortgagee differs from a loss payee because a mortgagee:

(1 mark)

a) holds a secured interest in property under a mortgage

b) is always the insurance broker

c) must be the tenant

d) has no financial interest in the property

Answer: a)

Explanation: A mortgagee has a secured financial interest in the insured property and may receive special contractual protection under a mortgage clause.

Question 48

The purpose of a binder is to:

(1 mark)

a) provide evidence of temporary insurance coverage before the policy is formally issued

b) cancel a policy

c) calculate a claim

d) replace the Insurance Act

Answer: a)

Explanation: A binder confirms temporary coverage and key terms pending issuance of the formal policy documents.

Question 49

A warranty in an insurance contract is generally:

(1 mark)

a) a promise or undertaking requiring compliance according to its wording

b) a voluntary marketing statement

c) a type of deductible

d) a claim form

Answer: a)

Explanation: A warranty is a contractual undertaking. In traditional insurance law it can carry strict consequences if breached, subject to the applicable legislation.

Question 50

A policy exclusion is used to:

(1 mark)

a) remove specified risks, property or circumstances from coverage

b) increase the policy limit automatically

c) guarantee every claim

d) identify the insured's occupation

Answer: a)

Explanation: Exclusions define situations or property for which the insurer does not provide coverage under the particular policy.

Question 51

A named-perils policy covers:

(1 mark)

a) only the perils specifically listed in the policy

b) every possible cause of loss

c) only liability losses

d) only intentional losses

Answer: a)

Explanation: Named-perils coverage responds only to causes of loss specifically identified in the policy, subject to its terms and exclusions.

Question 52

An all-risks or comprehensive property form generally:

(1 mark)

a) covers direct physical loss or damage unless the cause is excluded

b) covers every conceivable loss without exclusions

c) covers only fire

d) covers only theft

Answer: a)

Explanation: Broad or comprehensive property coverage generally starts from coverage for direct physical loss or damage and then removes specified causes through exclusions and conditions.

Question 53

A direct loss is most accurately described as:

(1 mark)

a) physical loss or damage resulting directly from an insured peril

b) loss of future profits only

c) a premium refund

d) a legal opinion

Answer: a)

Explanation: Direct loss refers to physical loss or damage to insured property resulting directly from an insured peril.

Question 54

A consequential loss is:

(1 mark)

a) a financial loss that results indirectly from physical damage, such as lost income

b) a deductible

c) a policy endorsement

d) a mortgage interest

Answer: a)

Explanation: Consequential or indirect loss follows from a physical loss, such as lost business income after an insured fire interrupts operations.

Question 55

The purpose of risk management is to:

(1 mark)

a) identify, assess and treat risks in a systematic way

b) eliminate all uncertainty from life

c) purchase insurance regardless of exposure

d) avoid documenting risks

Answer: a)

Explanation: Risk management is a structured process for identifying exposures, assessing their likelihood and impact, and selecting suitable treatments.

Question 56

Risk avoidance means:

(1 mark)

a) eliminating an activity or exposure that creates the risk

b) accepting every risk

c) transferring every risk to an insurer

d) increasing a deductible

Answer: a)

Explanation: Risk avoidance removes the source of exposure rather than merely reducing or financing its consequences.

Question 57

Risk reduction means:

(1 mark)

a) taking measures to reduce the likelihood or severity of a loss

b) ignoring the exposure

c) guaranteeing no loss

d) transferring ownership of every asset

Answer: a)

Explanation: Risk reduction uses controls and preventive measures to lower either the frequency or severity of losses.

Question 58

Risk retention means:

(1 mark)

a) knowingly keeping some or all of the financial consequences of a risk

b) always purchasing maximum insurance

c) eliminating the exposure

d) transferring the risk to a broker

Answer: a)

Explanation: Risk retention occurs when an individual or organization deliberately or unintentionally keeps the financial consequences of a risk.

Question 59

Risk transfer through insurance occurs when:

(1 mark)

a) an insurer assumes specified financial risks in exchange for premium

b) the insured stops identifying hazards

c) the insured guarantees the insurer's profits

d) a deductible is removed

Answer: a)

Explanation: Insurance transfers specified financial consequences of covered risks to the insurer in exchange for premium.

Question 60

A loss control program is primarily intended to:

(1 mark)

a) prevent losses or reduce their frequency and severity

b) increase claims

c) remove all policy conditions

d) replace underwriting

Answer: a)

Explanation: Loss control focuses on prevention and mitigation, reducing the likelihood of losses or limiting their impact.

Question 61

Business continuity planning helps an organization:

(1 mark)

a) continue critical operations after a disruptive event

b) avoid paying employees

c) guarantee every claim is covered

d) replace all insurance

Answer: a)

Explanation: Business continuity planning identifies critical functions and arrangements needed to maintain or restore operations after disruption.

Question 62

The best reason to establish an emergency response plan is to:

(1 mark)

a) reduce confusion and improve the organization's response to a loss event

b) increase the amount of every insurance claim

c) avoid all regulation

d) remove the need for maintenance

Answer: a)

Explanation: Prepared response procedures help people act quickly and consistently, which can reduce damage, downtime and uncertainty.

Question 63

A risk register is commonly used to:

(1 mark)

a) document identified risks, their characteristics and planned responses

b) issue insurance licences

c) replace financial statements

d) calculate depreciation only

Answer: a)

Explanation: A risk register provides a structured record of risks, including their likelihood, impact, owners and planned treatment.

Question 64

The frequency of a risk refers to:

(1 mark)

a) how often losses or events are expected to occur

b) the dollar amount of one loss

c) the policy limit

d) the deductible

Answer: a)

Explanation: Frequency describes how often an event or loss is expected to occur, while severity describes its potential size or impact.

Question 65

Severity of risk refers to:

(1 mark)

a) the potential magnitude of a loss

b) how often an event occurs

c) the policy period

d) the insured's age

Answer: a)

Explanation: Severity measures the potential size or impact of a loss, distinguishing it from frequency.

Question 66

A catastrophic exposure is characterized by:

(1 mark)

a) the potential for a single event to produce very large losses affecting many exposures

b) a guaranteed small loss

c) only one individual's routine expense

d) a deductible

Answer: a)

Explanation: Catastrophic exposures can produce very large aggregate losses from one event, often affecting many insureds or assets at once.

Question 67

Diversification can reduce risk by:

(1 mark)

a) spreading exposure across different assets, activities or locations

b) concentrating all assets in one location

c) eliminating all hazards

d) removing every insurance exclusion

Answer: a)

Explanation: Diversification reduces concentration by spreading exposure, so one event is less likely to affect the entire portfolio or operation.

Question 68

The first step in a practical risk-management process is usually to:

(1 mark)

a) identify the organization's exposures and potential sources of loss

b) buy the most expensive policy

c) file a claim

d) set the deductible

Answer: a)

Explanation: Risk identification comes before assessment and treatment because the organization must understand what exposures exist before deciding how to manage them.

Question 69

A material fact in insurance is information that:

(1 mark)

a) would influence an underwriter's decision about the risk

b) is known only after a claim occurs

c) has no effect on premium or acceptance

d) relates only to the insured's personal preferences

Answer: a)

Explanation: A material fact is information that could influence an insurer's underwriting decision, including whether to accept a risk or on what terms.

Question 70

The principle of utmost good faith requires the parties to an insurance contract to:

(1 mark)

a) disclose material facts and deal honestly with one another

b) guarantee that no loss will ever occur

c) accept every risk offered

d) waive all policy conditions

Answer: a)

Explanation: Utmost good faith requires honest disclosure of material information and fair dealing because the insurer relies heavily on information supplied by the applicant.

Question 71

A peril is best described as:

(1 mark)

a) a cause of loss

b) a condition increasing the chance of loss

c) the amount paid by the insured

d) the policy limit

Answer: a)

Explanation: A peril is the event or cause that produces a loss, such as fire, theft or windstorm.

Question 72

A physical hazard is:

(1 mark)

a) a physical condition that increases the likelihood or severity of loss

b) an intentional false statement

c) the insured's emotional reaction to insurance

d) a type of claim settlement

Answer: a)

Explanation: A physical hazard is a tangible condition that increases the chance or severity of loss, such as defective wiring or poor building construction.

Question 73

Moral hazard generally refers to:

(1 mark)

a) dishonest or fraudulent behaviour that increases the likelihood of loss

b) a building's construction material

c) a natural disaster

d) the policy's deductible

Answer: a)

Explanation: Moral hazard concerns dishonesty or intentional behaviour that increases the likelihood of a loss or claim.