Question 1

Errors and omissions (E&O) liability insurance indemnifies the directors and executive officers of a corporation if they breach any of their __________ duties.

Accepted Answer

Errors and omissions (E&O) liability insurance covers breaches of fiduciary duties, which are duties of trust and good faith that directors and executive officers owe to the corporation and its shareholders.

Question 2

Insurance contracts require that the insured demonstrate they have an insurable interest.

Accepted Answer

The insured must demonstrate they have an insurable interest in the subject of the insurance for the contract to be valid, ensuring they stand to suffer a direct loss from the insured event.

Question 3

An insurable interest is an interest by the insured in the value of what is being insured that arises from a/an __________ or legal relationship.

Accepted Answer

An insurable interest must stem from a financial relationship, meaning the insured would suffer a financial loss if the insured event occurs.

Question 4

The requirement that an insured demonstrate an insurable interest has two policy justifications: to prevent parties from engaging in pure speculative gambling with respect to others' assets or liabilities and to reduce __________.

Accepted Answer

The requirement for an insurable interest aims to reduce moral hazard, which occurs when one party engages in riskier behavior because they are protected from the consequences, typically by insurance.

Question 5

An insurer has both a __________ and a duty to defend any lawsuit alleging claims against the insured that might trigger liability under the policy.

Accepted Answer

An insurer has a contractual right and a duty to defend any lawsuit alleging claims against the insured that might trigger liability under the policy. This obligation is typically outlined in the insurance contract itself, specifying the insurer's responsibilities in the event of a claim.

Question 6

Legal defense is an important aspect of liability insurance because the costs of defending a lawsuit can be __________.

Accepted Answer

The costs of defending a lawsuit can indeed be pricey, expensive, and substantial, making all of the choices correct.

Question 7

Once a loss is paid to the insured, __________ gives the insurer the right to pursue a legal claim against the party who caused the loss to the insured.

Accepted Answer

Subrogation is the process by which an insurance company, after paying a loss to the insured, acquires the insured's right to pursue any claim against a third party responsible for the loss. This allows the insurer to recover the amount paid to the insured from the party that caused the loss.

Question 8

Insurance companies will insure liability that arises from many behaviors except:

Accepted Answer

Insurance companies typically do not cover liabilities arising from criminal acts as they are intentional and illegal activities.

Question 9

The hit motion picture, The Big Short, told the remarkable story of how a few savvy investors were able to profit from the __________ collapse.

Accepted Answer

The Big Short is a film that focuses on the housing market collapse that led to the financial crisis of 2007–2008. It showcases how some investors predicted the crash and profited from it.

Question 10

Subrogation may exist as a contract term in the insurance policy and may allow the insurance company the right to collect from the insured if a claim is paid and the insured obtained payment from the __________ who caused the loss.

Accepted Answer

Subrogation allows an insurance company to collect from a third party that caused the loss after the insurer has paid the claim to the insured. This process helps the insurer recover the amount paid for the claim if the insured also receives payment from the party responsible for the damage.

Question 11

The court in Administrative Committee of the Wal-Mart Stores, Inc. Associates' Health and Welfare Plan v. James A. Shank et al., 500 F.3d 834 (8th Cir. 2007):

Accepted Answer

The 8th Circuit Court reversed the trial court's decision, finding that the subrogation clause in Wal-Mart's employee health care policy was enforceable, allowing Wal-Mart to recover funds from the settlement received by Shank.

Question 12

The goal of the indemnity principle is to reimburse the insured for the losses sustained _________.

Accepted Answer

The indemnity principle in insurance aims to compensate the insured for the actual losses sustained and no more, preventing the insured from profiting from a loss.

Question 13

__________ are individuals trained in mathematics who use statistical models to calculate the probabilities and loss exposure of particular risks.

Accepted Answer

Actuaries are professionals who apply mathematical and statistical methods to assess risk in the insurance and finance industries. They are essential in determining premiums, reserves, and other financial strategies for managing risk.

Question 14

The amount an insured will receive is controlled by the principle of __________.

Accepted Answer

The principle of indemnity ensures that an insured is compensated for a loss, with the aim of restoring them to the financial position they were in before the loss occurred, without allowing for profit from the insurance claim.

Question 15

Insurers often have access to __________ data that allow them to determine the probability of an event occurring.

Accepted Answer

Insurers use historical data to analyze past events and trends, which helps them estimate the likelihood of future events occurring.

Question 16

LAE stands for __________ and represents additional costs associated with the claims, such as legal defense costs.

Accepted Answer

LAE stands for Loss Adjustment Expense, which includes all the costs incurred in the process of investigating, settling, and defending claims, such as legal fees and other related expenses.

Question 17

The insured may take several steps as part of a __________ program to minimize the probabilities of a loss or the loss amount should the event occur.

Accepted Answer

The correct term is "risk management," which involves identifying, assessing, and prioritizing risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability or impact of unfortunate events or to maximize the realization of opportunities. Ponzi schemes and racketeering are illegal activities, and "risk loss" is not a recognized term in this context.

Question 18

The high costs and frequency of litigation will be priced into insurance __________.

Accepted Answer

The high costs and frequency of litigation directly impact insurance premiums because insurers need to cover these costs, leading to higher charges for policyholders.

Question 19

Insurance is largely governed by __________ laws and regulations.

Accepted Answer

Insurance is primarily regulated at the state level in the United States, with each state having its own set of laws and regulatory bodies.

Question 20

Congress decided to largely relinquish regulatory control to the states when it passed the __________ Act.

Accepted Answer

The correct answer is the McCarran-Ferguson Act. This act, passed in 1945, allows states to regulate the insurance industry, effectively giving them primary authority over insurance regulation, rather than the federal government.

Quiz 46: Insurance Law