51
Insurance
N.B.:TYPEindicatesthataquestionisnew,modified,orunchanged,as
follows.
N
+
=
AquestionnewtothiseditionoftheTestBank.
AquestionmodifiedfromthepreviouseditionoftheTestBank.
Aquestioninclude ChapterdinthepreviouseditionoftheTestBank.
TRUE/FALSE QUESTIONS
B1.
Insuranceisclassifiedaccordingtotheamountofthepaymentonaclaim.
ANSWER: F
NAT:AACSBReflective
B2.
N
PAGE:
1001
AICPALegal
TYPE:
N
Apersoncaninsureanythinginwhichheorshehasaninsurableinterest.
ANSWER: T
NAT:AACSBAnalytic
B4.
1000
TYPE:
AICPACriticalThinking
A business firm may have an insurable interest in the life of any of its
employees,exceptakeyemployee.
ANSWER: F
NAT:AACSBAnalytic
B3.
PAGE:
PAGE:
1001
AICPALegal
TYPE:
=
Aninsurableinterestinpropertymustexistwhenapolicyispurchased.
121
2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
122TESTBANKBUNITTEN:PROPERTYANDITSPROTECTION
ANSWER: F
NAT:AACSBAnalytic
PAGE:
1001
AICPALegal
TYPE:
=
2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
CHAPTER51:INSURANCE123
B5.
Credit insurancepaystoadebtorthebalanceofadebtonhisorherdisability,
death,insolvency,orbankruptcy.
ANSWER: F
NAT:AACSBReflective
B6.
PAGE:
1002
AICPALegal
TYPE:
=
PAGE:
1002
AICPALegal
TYPE:
=
TYPE:
N
Abrokerisanagentoftheinsurancecompany.
ANSWER: F
NAT:AACSBAnalytic
B9.
N
Insurancecoverageisnevereffectiveuntilaformalwrittenpolicyisissued.
ANSWER: F
NAT:AACSBAnalytic
B8.
1002
TYPE:
AICPACriticalThinking
Misstatementsormisrepresentationsinanapplicationforinsurancecan
voidapolicy.
ANSWER: T
NAT:AACSBAnalytic
B7.
PAGE:
PAGE:
1003
AICPALegal
Underacoinsurance clause,ahomeownerwhoinsuresahomefor80percent
ofitsvaluecanrecoveronly80percentofthecostfordamagetoit.
ANSWER: F
NAT:AACSBReflective
PAGE:
1004
TYPE:
AICPACriticalThinking
=
B10. Anincontestability clauseprohibitsaninsuredfromenteringacontestduringthe
termofapolicy.
ANSWER: F
NAT:AACSBAnalytic
PAGE:
1004
AICPALegal
TYPE:
N
B11. Apro rataclauseinafireinsurancepolicyrequiresthatanylossbeshared
proportionatelybyallinsurerscoveringthesamerisk.
ANSWER:
T
PAGE:
1005
TYPE:
N
2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
124TESTBANKBUNITTEN:PROPERTYANDITSPROTECTION
NAT:AACSBReflective
AICPACriticalThinking
B12. Ifaprovisioninaninsurancepolicyisambiguous, theprovisionwill be
interpretedagainsttheinsurancecompany.
ANSWER: T
NAT:AACSBAnalytic
PAGE:
1005
AICPALegal
TYPE:
=
B13. Thewordsusedinaninsurancecontractaregivenspecialmeaning.
ANSWER: F
NAT:AACSBReflective
PAGE:
1005
TYPE:
AICPACriticalThinking
N
B14. Aninsurancecompanymaycancelaninsuredspolicyiftheinsured ap
pearsasawitnessinacaseagainstthecompany.
ANSWER: F
NAT:AACSBAnalytic
PAGE:
1006
AICPALegal
TYPE:
=
B15. An incorrect statement as to the age of the insured provides an insurance
companywithanexcusetoavoidpaymentontheinsuredsdeath.
ANSWER: F
NAT:AACSBAnalytic
PAGE:
1008
AICPALegal
TYPE:
N
B16. Aninsurerhasadutytoavoidpayingaclaimevenifitmeansactinginbad
faith.
ANSWER: F
NAT:AACSBAnalytic
PAGE:
1008
AICPALegal
TYPE:
+
B17. Indefenseagainstpayment,aninsurancecompanycanraiseanyofthede
fensesthatwouldbevalidinanordinaryactiononacontract.
ANSWER: T
NAT:AACSBAnalytic
PAGE:
1008
AICPALegal
TYPE:
+
2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
CHAPTER51:INSURANCE125
B18. Underalifeinsurancepolicy,intheabsenceofcontractualexclusion,any
causeofdeathisoneoftheinsurersrisks.
ANSWER: T
NAT:AACSBReflective
PAGE:
1009
TYPE:
AICPACriticalThinking
N
2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
126TESTBANKBUNITTEN:PROPERTYANDITSPROTECTION
B19. Afireinsurancepolicyisassignablewithouttheinsurersconsentbecause
thepolicyrunswiththeinsuredproperty.
ANSWER: F
NAT:AACSBReflective
PAGE:
1012
TYPE:
AICPACriticalThinking
=
B20. Comprehensivegeneralliabilityinsurancecanencompassasmanyrisksas
theinsureragreestocover.
ANSWER: T
NAT:AACSBAnalytic
PAGE:
1014
AICPALegal
TYPE:
N
MULTIPLE CHOICE QUESTIONS
B1.
RenoisthebeneficiaryofalifeinsurancepolicyonSulaslifeobtainedfrom
ThicketInsuranceCompany.Theinsuredofthispolicyis
a.
b.
c.
d.
Reno.
Sula.
Thicket.
theagentorbrokerthroughwhomthepolicywasobtained.
ANSWER: B
NAT:AACSBReflective
B2.
PAGE:
1000
AICPALegal
TYPE:
+
FetaisapartnerinthegamedesignfirmGR8Games,Inc.,whichob tains
keypersonlifeinsuranceonFetaintheamountof$1millionfromHalo
InsuranceCompany.FetaquitsGR8GamestojoinIcyApplications,Inc.
Fetadies.Undertheprincipleofinsurableinterest,Halomustpaythe$1
millionto
a.
b.
c.
d.
FetasspouseJo.
GR8Games.
IcyApplications.
noone.
ANSWER:
B
PAGE:
1001
TYPE:
+
2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
CHAPTER51:INSURANCE127
NAT:AACSBReflective
AICPALegal
2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
128TESTBANKBUNITTEN:PROPERTYANDITSPROTECTION
B3.
InfiniteSalesCorporationobtainsaninsurancepolicythatprotectsInfinite
Sales in the event of the death or disability of Jacqueline, Infinites
executivesalesmanager.Thisis
a.
b.
c.
d.
casualtyinsurance.
fidelityorguarantyinsurance.
keypersonlifeinsurance.
termlifeinsurance.
ANSWER: B
NAT:AACSBReflective
B4.
1001
TYPE:
AICPACriticalThinking
N
BethobtainsalifeinsurancepolicyfromConsumersInsuranceCompany,
naming her spouse Don as the beneficiary. Beth and Don are di vorced.
There is no provision in the policy about divorce. On Beths death,
Consumersmust
a.
b.
c.
d.
notpaybecauseDonandBethweredivorced.
notpaybecauseDonhadnoinsurableinterestonBethsdeath.
payDon.
payBethsestate.
ANSWER: C
NAT:AACSBReflective
B5.
PAGE:
PAGE:
1001
AICPALegal
TYPE:
=
Erteappliesfor, and obtains, casualtyinsurance coverage fromFriendly
InsuranceCompanyforhisbusiness,GolfClub,Inc.Theeffectivedateof
thepolicyisthedate
a.
b.
c.
d.
Ertesubmitstheapplication.
FriendlyInsuranceacceptsthefirstpremium.
FriendlyInsuranceissuesthepolicy.
theapplicationspecifiesastheeffectivedate.
ANSWER: D
NAT:AACSBReflective
PAGE:
1002
AICPALegal
TYPE:
=
2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
CHAPTER51:INSURANCE129
B6.
Mena applies for a homeowners insurance policy on her house with
Neighbors Insurance Company through Obie, an agent who works for
Neighbors.Inthistransaction,Obieis
a.
b.
c.
d.
anagentforbothparties.
Menasagent,andnotNeighborssagent.
Neighborssagent,andnotMenasagent.
notanagent.
ANSWER: C
NAT:AACSBReflective
B7.
1003
AICPALegal
TYPE:
=
Felicity Cookware Company makes and sells kitchen products. To cover
injuriestoconsumersiftheproductsprovedefective,Felicityshouldobtain
a.
b.
c.
d.
groupinsurance.
healthinsurance.
liabilityinsurance.
lifeinsurance.
ANSWER: C
NAT:AACSBReflective
B8.
PAGE:
PAGE:
1003
TYPE:
AICPACriticalThinking
=
Mila,whocaptainsacommercialfishingboat,obtainsapolicyfromNorth
Coast Insurance Company, which agrees to $500,000 pay to Milas
beneficiaryonMilasdeath.Thisis
a.
b.
c.
d.
floaterinsurance.
lifeinsurance.
majormedicalinsurance.
marineinsurance.
ANSWER: B
NAT:AACSBReflective
PAGE:
1003
TYPE:
AICPACriticalThinking
=
2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
130TESTBANKBUNITTEN:PROPERTYANDITSPROTECTION
B9.
DonaldappliesforalifeinsurancepolicywithEquityInsuranceCompany
through Fletch, an agent who works for Equity. Donald pays the initial
premium.Fletchwritesabinder,which
a.
b.
c.
d.
acknowledgestheapplicationandpromisestoconsiderit.
atteststothetruthofeachstatementintheapplication
evidencesreceiptofthepaymentoftheinitialpremium.
indicatesthatapolicyispendingandstatesitsessentialterms.
ANSWER: D
NAT:AACSBReflective
PAGE:
1003
AICPALegal
TYPE:
=
B10. RegularBusiness,Inc.(RBI),obtainsafireinsurancepolicyfromStatistical
InsuranceCompanyona$400,000warehouse.Thepolicyincludesan80
percent coinsurance clause.RBIinsuresthepropertyfor$320,000.Inafire,
thewarehousesuffers$200,000indamage.RBIcanrecover
a.
b.
c.
d.
$400,000.
$320,000.
$200,000.
$80,000.
ANSWER: C
NAT:AACSBReflective
PAGE:
1004
TYPE:
AICPACriticalThinking
=
B11. PegobtainsfromQTInsuranceCompanyapolicythatprovidesthataf terit
hasbeeninforceforacertaintime,QTcannotquestionstate mentsmadein
theapplication.Thisis
a.
b.
c.
d.
anantilapseclause.
anarbitrationclause.
anappraisalclause.
anincontestabilityclause.
ANSWER: D
NAT:AACSBReflective
PAGE:
1004
TYPE:
AICPACriticalThinking
=
2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
CHAPTER51:INSURANCE131
B12. CathyobtainsfromDependInsuranceCompanyapolicythatpro videsifa
disputearisesbetweenthepartiesconcerningthesettle mentofaclaim,the
dispute must be submitted to an impartial third party, not a court, for
resolution.Thisis
a.
b.
c.
d.
anantilapseclause.
anarbitrationclause.
anappraisalclause.
anincontestabilityclause.
ANSWER: B
NAT:AACSBReflective
PAGE:
1005
TYPE:
AICPACriticalThinking
=
B13. IsabelobtainsafireinsurancepolicyonherhomefromJusticeInsurance
Company.Thehomeislostinafire,butthepartiesdisputetheamountof
Justicesliabilityunderanambiguousclauseinthepolicy.Acourtwould
mostlikely
a.
b.
c.
d.
interprettheclauseagainstIsabel.
interprettheclauseagainstJustice.
rewritetheclauseandapplyitasrewritten.
striketheclausefromthepolicy.
ANSWER: B
NAT:AACSBReflective
PAGE:
1005
AICPALegal
TYPE:
=
B14. Haya obtains an insurance policy from Inviolable Insurance Corporation
(IIC).IICmaycancel,orrefusetorenew,thepolicybecauseof
a.
b.
c.
d.
HayasappearanceasawitnessagainstIIC.
Hayasgender.
Hayasnationalorigin.
noneofthechoices.
ANSWER: D
NAT:AACSBReflective
PAGE:
1006
AICPALegal
TYPE:
+
2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
132TESTBANKBUNITTEN:PROPERTYANDITSPROTECTION
B15. TrustworthyInsurance,Inc.,hasavalidreasontocancelapolicyissuedto
USASalesCompany.Inmoststates,Trustworthycouldcancelthepolicyon
a.
b.
c.
d.
advanceoralnotice.
oralorwrittennotice,advanceorcontemporaneous.
withoutnotice.
advancewrittennotice.
ANSWER: D
NAT:AACSBReflective
PAGE:
1006
AICPALegal
TYPE:
+
B16. Kelsy obtains a business liability insurance policy from Luminous
Insurance Company for Kelsys Framing & Art Supplies store.When an
eventoccursthatgivesrisetoaclaim,eachpartyhasadutyto
a.
b.
c.
d.
cooperateinaninvestigationtodeterminethefacts.
fileasuitagainsttheothersothatacourtcansettletheclaim.
findathirdpartyonwhomtoimposeliability.
payanyoutstandingpremiumorrefundanyunearnedamount.
ANSWER: A
NAT:AACSBReflective
PAGE:
1007
AICPALegal
TYPE:
=
B17. Shelleyobtainsalifeinsurancepolicywithnocashsurrendervalueorcash
value,andnameshersonThadasthebeneficiary.Thisis
a.
b.
c.
d.
limitedpaymentlifeinsurance.
terminsurance.
universalinsurance.
wholelifeinsurance.
ANSWER: B
NAT:AACSBReflective
PAGE:
1009
TYPE:
AICPACriticalThinking
+
2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
CHAPTER51:INSURANCE133
B18. FredmisstateshisageinapplyingforalifeinsurancepolicywithGamma
InsuranceCompany.Duetothiserror,Gammacan
a.
b.
c.
d.
adjusttheamountofthepremiumorthebenefits.
cancelthepolicy.
filecriminalchargesagainstFredforfraud.
misstatetheamountpayabletothepolicysbeneficiary.
ANSWER: A
NAT:AACSBReflective
PAGE:
1009
AICPALegal
TYPE:
=
B19. TrinapaysapremiumtoUnityInsuranceCorporationforfireinsurance
against the loss of her Viewpoint Office Building. After Trina sells the
buildingtoWade,itburnsdown.Underthepolicy,Unitymustpay
a.
b.
c.
d.
neitherTrinanorWade.
TrinaandWade.
Trinaonly.
Wadeonly.
ANSWER: A
NAT:AACSBReflective
PAGE:
1012
AICPALegal
TYPE:
=
B20. Doctors Medical Associates obtains an insurance policy that protects its
membersagainstnegligenceclaimsbytheirpatients.Thisis
a.
b.
c.
d.
casualtyinsurance.
fidelityorguarantyinsurance.
malpracticeinsurance.
workerscompensationinsurance.
ANSWER: C
NAT:AACSBReflective
PAGE:
1014
TYPE:
AICPACriticalThinking
+
ESSAY QUESTIONS
2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
134TESTBANKBUNITTEN:PROPERTYANDITSPROTECTION
B1.
Patty,whoisdivorced,ownsahouse.Shehasnoreasonableexpectationof
benefitfromthelifeofQuinn,herexspouse,butsheappliesforinsur ance
onhislifeanyway.Shealsoobtainsafireinsurancepolicyonthehouse,
which she later sells. Five years later, Quinn dies and the house is
destroyedinafire.CanPattyobtainpaymentoneitherthedeathofQuinn
orthelossofthehouse?Explain.
ANSWER: PattycannotobtainpaymentonthedeathofQuinnorforthe
lossofthehouse.Toobtaininsurance,onemusthaveasufficientlysub
stantialinterestinwhateveristobeinsured.Onehasaninsurableinter est
inpropertyifonewouldsufferape cuniarylossfromitsdestruction.This
interestin property mustexist when the loss occurs.Toobtaininsuranceon
anotherslife,onemusthaveareasonableexpectationofbenefitfromthe
continuedlifeoftheother.Thebenefitmaybefoundedonarelation ship,
butexspousealoneisnotsucharelationship.Aninter estinsomeones
lifemustexistwhen the policy is obtained.
PAGE:
1001
NAT:AACSBReflective
B2.
TYPE: =
AICPADecisionModeling
Computer Electronics Corporation (CEC) discovers a defect in its newly
developed,recentlymarketedharddrives.CECdecidestorecalltheprod uct
andreplaceitwithanother.CECsinsurancepolicywithDeltaBusiness
InsuranceCompanywillcoveranyharmtocustomersthatoc cursbefore
thedrives are returned. Is it likely that thepolicy will alsopay forthe
recallandreplacement?Ifso,whattypeofpolicydoesCEChave?
ANSWER: It is likely that CECs policy will pay for the recall and
replacement, as well as any harm to a customer that oc curs before the
drives are returned. But to obtain such coverage, CEC, or any other
insured,generallyhastopayahigherpremium.Coverageunderageneral
comprehensiveliabilitypolicyoraspecificproductliabilitypolicymayalso
include expenses involved in recalling and replacing a product that has
provedtobedefective.
PAGE:
1014
NAT:AACSBReflective
TYPE: =
AICPADecisionModeling
2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.