Clark 11e TB a Ch49

509

Chapter 49

Insurance

TRUE/FALSE QUESTIONS

A1. The consideration paid to an insurer to obtain an insurance policy is thebinder.

ANSWER: F PAGE: 1008 TYPE: +NAT: AACSB Analytic AICPA Legal

A2. Insurance companies are prohibited from practicing risk management.

ANSWER: F PAGE: 1008 TYPE: =NAT: AACSB Reflective AICPA Critical Thinking

A3. A party must own property to have an insurable interest in it.

ANSWER: F PAGE: 1010 TYPE: NNAT: AACSB Analytic AICPA Legal

A4. A sibling may have an insurable interest in his or her sibling’s life.

ANSWER: T PAGE: 1010 TYPE: =NAT: AACSB Analytic AICPA Legal

A5. A person has an insurable interest in property if he or she would sustaina financial loss from damage to the property.


A6. An insurance application is usually not part of the insurance contract.


510 TEST BANK A—UNIT ELEVEN: SPECIAL TOPICS

A7. State law may mandate that a certain provision be included in an insur-ance policy.

ANSWER: T PAGE: 1013 TYPE: NNAT: AACSB Analytic AICPA Legal

A8. A loss sustained between the time of application and the delivery of aninsurance policy may not be covered


A9. A coinsurance clause provides that two or more people will be covered bythe same life insurance policy.


A10. Arbitration of disputes over insurance claims is often provided for inpolicies.

ANSWER: T PAGE: 1014 TYPE: =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.


A12. Cash surrender value is the amount an insured must pay to cancel apolicy.


A13. Misrepresentation on an insurance application is a ground for cancelingthe policy.


A14. When insurance provides coverage against third party claims, an in-surer has a duty to defend any suit based on such a claim against theinsured.


CHAPTER 49: INSURANCE 511

A15. Because insurance law follows contract law, bad faith tort actionsagainst insurers are not allowed.


A16. An insured’s lack of an insurable interest is an absolute defense againstpayment.


A17. Term life insurance provides life insurance for a specified term with nocash surrender value.

ANSWER: T PAGE: 1018 TYPE: =NAT: AACSB Reflective AICPA Critical Thinking

A18. A fire insurance policy covers losses to the insured as a result of fire andlightning, but not damage from smoke and water.

ANSWER: F PAGE: 1020 TYPE: NNAT: AACSB Reflective AICPA Legal

A19. Automobile liability insurance covers liability for bodily injury but notproperty damage.

ANSWER: F PAGE: 1021 TYPE: NNAT: AACSB Reflective AICPA Critical Thinking

A20. A homeowners’ policy covers an owner’s home but not its contents.

ANSWER: F PAGE: 1021 TYPE: =NAT: AACSB Analytic AICPA Legal

MULTIPLE CHOICE QUESTIONS

A1. Dhani is the beneficiary of a life insurance policy on Elmo’s life obtainedfrom Famed Insurance Company. The insured under this policy is

a. Dhani.b. Elmo.c. Famed.d. the agent or broker through whom the policy was obtained.

ANSWER: B PAGE: 1008 TYPE: NNAT: AACSB Reflective AICPA Legal


A2. Bret obtains a fire insurance policy on his rental house with ContinentalInsurance Company. Like all insurance, this policy is an arrangementfor

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.

ANSWER: D PAGE: 1008 TYPE: NNAT: AACSB Reflective AICPA Legal

A3. Grace applies for a homeowners’ insurance policy on her house withHeroic 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.

ANSWER: B PAGE: 1008 TYPE: NNAT: AACSB Reflective AICPA Legal

A4. International Foods Corporation insures its real and personal property,as well as the lives of its key employees, to protect its financial interestshould some event undermine its security. This is

a. risk management.b. risk pooling.c. risky.d. risqué.

ANSWER: A PAGE: 1008 TYPE: =NAT: AACSB Reflective AICPA Critical Thinking

A5. Chocolate Gourmet Company obtains an insurance policy to protectagainst 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.



A6. Investors Commercial Property Corporation obtains an insurance policythat protects against any losses incurred as a result of existing claimsagainst 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.

ANSWER: D PAGE: 1010 TYPE: =NAT: AACSB Reflective AICPA Critical Thinking

A7. Dale and Ernie are partners who own and operate Cluck’n Hut, a chainof fast food restaurants. Their partnership obtains insurance on theowners’ lives. This is

a. casualty insurance.b. fidelity insurance.c. key-person insurance.d. liability insurance.

ANSWER: C PAGE: 1010 TYPE: =NAT: AACSB Reflective AICPA Critical Thinking

A8. Grover is an accountant with the firm of Hall & Associates, which ob-tains insurance from Interstate Insurance, Inc, on Grover’s life. Groverdies. The proceeds of the policy belong to

a. Grover’s heirs.b. Hall & Associates.c. Interstate Insurance.d. the state.

ANSWER: B PAGE: 1010 TYPE: =NAT: AACSB Reflective AICPA Legal

A9. EZ Rentals Company wants to insure the equipment that it rents to thepublic. To obtain insurance, EZ must have an insurable interest in theproperty

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.



A10. For Diana to obtain an insurance policy on Eden Farm, including itscrops, equipment, and livestock, she must have an insurable interest inthe property that exists

a. at any time.b. at the time a policy is obtained.c. at the time a loss occurs.d. continuously from the time a policy is obtained to the time a loss

occurs.

ANSWER: C PAGE: 1010 TYPE: =NAT: AACSB Reflective AICPA Legal

A11. Bob applies to City Insurance Company for 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.

ANSWER: D PAGE: 1012 TYPE: =NAT: AACSB Reflective AICPA Legal

A12. Ginny obtains a health insurance policy for her family from HopeInsurance Company. The policy includes an incontestability clause.Under such a clause, after a policy has been in force for two or threeyears

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.

ANSWER: D PAGE: 1013 TYPE: NNAT: AACSB Reflective AICPA Legal


A13. Rolling Transport & Storage Corporation wants to insure its warehouseto obtain the maximum possible recovery for the lowest possible pre-mium. To obtain the maximum recovery under a coinsurance clause, thepercentage of the value of the property that should be insured is

a. 80 percent.b. 90 percent.c. 100 percent.d. 120 percent.


A14. Boyce obtains from Capital Insurance Company a policy that providesthat if the parties cannot agree on the amount of a loss covered by thepolicy, 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.


A15. General Allied Company obtains insurance policies with Hy-RateInsurance, 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.



A16. Dag obtains from Excel Insurance Company a policy that provides thatDag has thirty days after a premium’s due date to pay it before the policywill be canceled. This is

a. an antilapse clause.b. an arbitration clause.c. an appraisal clause.d. an incontestability clause.


A17. Kerin obtains a property insurance policy for her art collection fromLawton Insurance Company. Lawton 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 Lawton no longer has an insurable interest in the property.d. only on advance written notice.

ANSWER: A PAGE: 1016 TYPE: NNAT: AACSB Reflective AICPA Legal

A18. Edy obtains a homeowners’ insurance policy with First SourceInsurance Company. First State 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.


A19. Speedy Shipping Corporation applies to TransInsurance Company for afire insurance policy on Speedy’s warehouse. On the application, Speedymisrepresents the age of the property to obtain a lower premium. When afire soon destroys the warehouse, 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.



A20. Lila obtains a life insurance policy with no cash surrender value andnames her son Maurice as the beneficiary. This is

a. casualty insurance.b. decreasing-term life insurance.c. health insurance.d. term life insurance.

ANSWER: D PAGE: 1019 TYPE: =NAT: AACSB Reflective AICPA Critical Thinking

ESSAY QUESTIONS

A1. Ace Investments, Inc., is the mortgagee for a warehouse owned by BestStorage, Inc. Ace obtains an insurance policy from Complete InsuranceCorporation (CIC) to cover the warehouse. Best also obtains a policy fromCIC to cover the warehouse. Later, Best sells the warehouse to DeltaCompany but keeps the policy. Delta also obtains a policy from CIC tocover the warehouse. Ace agrees to act as Delta’s mortgagee. A fire to-tally destroys the warehouse. Who can recover for the loss?

ANSWER: Ace has an insurable interest in the warehouse. To have aninsurable interest, one must be in a position to suffer a loss from its de-struction. A mortgagee can have an insurable interest in the propertythat serves as the security for the mortgage, because the mortgagee cansuffer a loss if the property is destroyed. With an insurable interest,there can be an enforceable insurance contract. Thus, Ace can recoverfor the loss of the warehouse up to the amount of its mortgage. Delta canalso recover for the loss up to the amount of its interest in the ware-house. Because an insured must have an insurable interest in propertyat the time that the loss occurs, Best cannot recover for the loss of thewarehouse, even though it retained the insurance policy after selling theproperty. Best’s insurable interest terminated when it sold the property.

PAGES: 1010–1012 & 1018 TYPE: =NAT: AACSB Reflective AICPA Decision Modeling

A2. Tira obtains two fire insurance policies on her house. Each is an openpolicy with a pro rata clause. Tira’s policy with Unity InsuranceCompany is for a maximum amount of $100,000. Her policy with VerityInsurance Company is for a maximum amount of $50,000. Each policyincludes a pro rata clause. Due to defective electrical wiring, Tira’shouse catches fire and burns completely. The value the house at the timeof the loss is $120,000. Tira files a proof of loss with each insurer. What isan open policy? What is a pro rata clause? What is the liability of Unityand Verity for this event?


ANSWER: Under an open policy, an insurer’s liability is limited to thefair market value of the property at the time of loss or the maximum li-ability stated in the policy, whichever is less. A pro rata clause requiresthat when a loss is subject to multiple insurance coverage, as in thisproblem, any loss is shared proportionately by all insurers. Under anyfire insurance policy, within a specified period an insured must file aproof of loss. This Tira did. Because Tira had two policies covering thesame risk, each insurer’s liability is subject to the terms of each policy’spro rata clause. Thus the insurers share the loss proportionately. Thisproportionate share is determined by the percentage of the total amountof insurance each is responsible for. In this situation, because Tira hasopen value policies, her recovery is limited to the fair market value of theproperty at the time of loss, $120,000. As Tira insured the property withtwo insurers, under the pro rata clauses each must share in the$120,000 loss proportionately to the percentage of the total amount of in-surance that each is responsible for. Because Unity insured up to$100,000 and Verity $50,000, Unity is required to pay Tira $80,000($100,000 – $150,000 x $120,000 = $80,000) and Verity $40,000 ($50,000– $150,000 x $120,000 = $40,000).

PAGES: 1014–1015 & 1020 TYPE: NNAT: AACSB Reflective AICPA Decision Modeling

Clark 11e TB a Ch49

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