Chapter 1

Question 1

Define Spouse.

Answer 1

Two persons who are married to each other or have lived together in a conjugal relationship outside of marriage for a certain period of time, depending on the province of residence.

A relationship of some permanence – Such as being the joint parents of a child also.

Question 2

Define risk.

Answer 2

The chance of a financial loss to which the object of insurance may be exposed.

This definition highlights the inherent uncertainty in financial transactions.

Question 3

What are the 3 different kinds of risk?

Answer 3

• Personal risk – Injury to one’s health or life
• Property risk – Damage to one’s property
• Liability risk – Lawsuits

These categories help in understanding the various exposures individuals and businesses face.

Question 4

What options are there to deal with risk (4)?

Answer 4

• Avoidance of risk – All chance of financial loss eliminated
• Controlling risk – Taking measures to reduce frequency/severity of loss
• Retention of risk – Assume responsibility for own losses
• Transfer of risk – Transfer responsibility for losses to others (Insurance)

The transfer of risk is the most popular method used in insurance.

Question 5

What are two types of risk?

Answer 5

• Speculative Risk – The chance of financial loss as well as gain (gambling)
• Pure risk – The chance of financial loss only (house fire). This type is insurable

Understanding these types helps in assessing insurability.

Question 6

Define contract.

Answer 6

An agreement between 2 or more persons that creates an obligation to do or not to do a particular thing.

Contracts are fundamental to legal agreements in various fields.

Question 7

What are five components of a contract?

Answer 7

• Agreement
• Consideration
• Legality of object
• Legal capacity
• Genuine intention

Each component is essential for a contract to be enforceable.

Question 8

What’s agreement?

Answer 8

Occurs when there has been a meeting of minds on the terms and subject matter of the contract. An offer is made and unconditional acceptance to that offer.

Can be achieved written or orally.

Question 9

What is consideration?

Answer 9

Exchange of something of value between parties. Client brings premium, insurer brings coverage.

Consideration is a crucial element that distinguishes contracts from gifts.

Question 10

What’s legality of object?

Answer 10

All contracts must not violate public policy. Insurance not available for illegal properties.

This ensures that contracts are enforceable and ethical.

Question 11

What’s legal capacity?

Answer 11

All parties must be competent. Incompetent parties include:
* Minors – except for necessities of life. Can get relief if requested in reasonable time
* Mental incompetence
* Under influence of drugs/alcohol
* Trade name only – except for individuals, partnerships

Legal capacity ensures that all parties can understand and agree to the contract.

Question 12

What’s genuine intention?

Answer 12

Contract was not formed with fraud, duress, concealment or mistake. A basic level of honesty required to be present.

This protects the integrity of the contract.

Question 13

What are 3 unique elements of an insurance contract?

Answer 13

• Insurable interest
• Utmost good faith
• Indemnity

These elements are specific to insurance contracts and ensure fairness.

Question 14

What’s insurable interest?

Answer 14

Show you would be hurt financially from a loss. Includes owners, mortgagees, bailees, and defendants in lawsuits.

Insurable interest is necessary for a valid insurance contract.

Question 15

What’s utmost good faith?

Answer 15

Complete and total honesty is required by all parties. Client must be truthful when completing application, insurer must draft fair wordings and settle claims, broker must provide client and insurer with professional service.

This principle is fundamental in insurance transactions.

Question 16

What’s indemnity?

Answer 16

Insurance contract must pay client actual amount of loss, no more and no less. Amount will be measured moments before loss.

This principle ensures that the insured is restored to their financial position prior to the loss.

Question 17

What happens when one of the 3 elements is missing?

Answer 17

Contract may be:
* Void – contract never existed
* Voidable – wronged party may void at their discretion

This highlights the importance of the three elements in contract validity.

Question 18

What are binders?

Answer 18

• Oral – must be confirmed in writing immediately
• Written – cover note common method
• Ability to bind provided in agency agreement, when brokers exceed authority E&O losses may result. Can exceed when bind risks with values above the limits allowed in agency agreements

Binders provide temporary coverage until a formal policy is issued.

Question 19

What are insured losses?

Answer 19

Losses must be accidental and occur in the future. Only cover direct loss of a peril (the cause of loss), indirect losses may result but not insured.

Direct loss is when the object of insurance is attacked by a peril insured.

Question 20

How is the amount of loss determined?

Answer 20

The least of:
* ACV at the time of loss (RC – Depreciation. Depreciation determined by condition, resale value, normal life expectancy)
* Financial interest of client
* Amount of insurance

This method ensures fair compensation for losses.

Question 21

Why do governments play a role in the insurance industry?

Answer 21

• Financial stability of insurers
• Fair policy construction
• Insurers conduct themselves for the benefit of the public

Government oversight helps maintain trust in the insurance system.

Question 22

What are the federal vs provincial governments’ roles?

Answer 22

• Federal – Monitor financial health of federally licensed insurers
• Provincial – Oversee content of policies, license insurers, brokers, and adjusters, ensure provincially licensed insurers are solvent

This division of responsibilities helps ensure a stable insurance market.

Question 23

What is PACICC?

Answer 23

Protects consumers when insurers become insolvent. Will pay up to $250,000 for unpaid losses, up to 70% of unearned premium to a max of $700.

This organization provides a safety net for policyholders.

Question 24

What are fire policies?

Answer 24

What must be insured under the most basic type of property insurance, 3 perils:
* Fire
* Lightning
* Explosion of natural, coal or manufactured gas

Concussion type explosion is not covered.

Question 25

Define **fire**.

Answer 25

Involves the presence of a visible flame. 2 categories: * Friendly fire – stays where it belongs – fireplace * Hostile fire – escapes the receptacle or starts outside where they belong ## Footnote Losses that flow naturally from a fire are covered, such as water damage or damage caused by firefighters.

Question 26

What are **exclusions** and why do they exist?

Answer 26

Property not insured or perils/losses not insured. ## Footnote Exclusions exist because other forms are available, and some losses are uninsurable.

Question 27

What are the **exclusions of fire policy**?

Answer 27

* Application of heat – resultant fire damage insured * Lightning damage to electrical devices – resultant insured * Other electrical current – resultant insured * Radioactive loss * Acts of violence ## Footnote These exclusions help clarify the limits of coverage.

Question 28

What are **statutory conditions**?

Answer 28

Outlined in provincial insurance acts, describe the rights and responsibilities of parties. ## Footnote These conditions ensure compliance with legal standards.

Question 29

What’s **misrepresentation** and what are **3 ways to misrepresent a risk**?

Answer 29

Someone did not tell the truth, occurs at the time of application. * Falsely describe to insurers prejudice * Misrepresentation of a material fact * Fraudulently omit material fact ## Footnote Insurer can void the contract if misrepresentation is proven.

Question 30

Define **material fact**.

Answer 30

Any piece of information that’s important to the insurance company that might influence their decision as to whether to even issue a policy or the amount of premium to charge. ## Footnote Previous claims and cancellations are examples of material facts.

Question 31

What’s **change of interest**?

Answer 31

Usually only client benefits from policy, but the below can also: * An authorized assignment through the bankruptcy act * Change in title by succession or operation of law or death – parent to child ## Footnote Coverage does not automatically extend to new owners when property is sold.

Question 32

What’s a **material change**?

Answer 32

Changes to the risk that happen during the policy period. When something changes that increases the chance of loss or changes are within control and knowledge. ## Footnote These changes must be reported; if not, losses arising from these changes are not covered.

Question 33

What’s **termination**?

Answer 33

The ways the insurer and client can terminate or cancel the contract. * Insurer: refund pro-rata * 15 days by registered letter (begins day after received at post office) * 5 days notice personally delivered * Client: short rate * Any time, signature required by client and loss payee ## Footnote Understanding termination helps in managing insurance contracts.

Question 34

What are the **requirements after loss**?

Answer 34

Clients must notify quickly and in writing. Clients must deliver proof of loss as soon as possible. ## Footnote Prompt reporting is essential for claims processing.

Question 35

What is **fraud**?

Answer 35

The deliberate intent to deceive in order to secure a profit. Entire loss will be denied when fraud is proven. ## Footnote Fraud undermines the integrity of the insurance system.

Question 36

Who may give **notice and proof of loss**?

Answer 36

Others can, friends, family members. When clients do not wish to make claims, loss payables may do so. ## Footnote This flexibility ensures that claims can be processed even if the client is unavailable.

Question 37

What’s **salvage**?

Answer 37

When losses occur, clients must take reasonable steps to reduce or prevent damage. Costs incurred when attempting to salvage, insurer will share in expenses. ## Footnote Salvage helps minimize overall losses.

Question 38

What’s **entry, control and abandonment**?

Answer 38

After losses, insurers have the right of entry. While investigating losses, insurers do not control property. Abandoning property to insurer is not allowed. ## Footnote These rights protect the interests of both the insurer and the insured.

Question 39

What are **appraisals used for**?

Answer 39

Settle disagreement on the amount of settlement. ## Footnote Appraisals provide an objective assessment of losses.

Question 40

When are **losses payable**?

Answer 40

Losses will be paid within 60 days of receipt of proof of loss. ## Footnote Timely payment is crucial for client satisfaction.

Question 41

What is **replacement**?

Answer 41

Insurers may provide indemnity by repairing or replacing damaged property. Must advise clients within 30 days of proof of loss. Work must begin within 45 days and continue quickly. ## Footnote Replacement ensures that clients are restored to their pre-loss condition.

Question 42

How long does a client have to make a **claim**?

Answer 42

Within one year of the date of loss – 2 years in some provinces. ## Footnote This time limit is crucial for ensuring claims are processed efficiently.

Question 43

What is **notice**?

Answer 43

Clients send info to insurer's head office or chief agency in province. Insurers must send info to client's last known address. ## Footnote Proper notice ensures effective communication between parties.

Question 44

What’s **notice to authorities**?

Answer 44

When losses are caused by criminal activities, client must inform property authorities. ## Footnote This requirement helps in the investigation of criminal acts.

Question 45

What’s **sue and labor**?

Answer 45

Client must take all reasonable steps to recover lost or damaged property. ## Footnote This obligation encourages proactive measures to mitigate losses.

Question 46

What’s **no benefit to bailee**?

Answer 46

Clients' policy cannot be used for the advantage of others who have possession of clients' property. ## Footnote This clause protects the interests of the policyholder.

Question 47

What’s **pair & set / Parts**?

Answer 47

* Pair/set - When loss occurs to one item of a pair or set, the remaining item will still have value. * Part - When loss involves property made of several parts, policy will only insure loss or damaged part. ## Footnote These definitions clarify how losses are assessed in specific situations.

Question 48

What must be shown on the **declaration page**?

Answer 48

* Parties to contract * Policy period – 12:01 AM standard time at address of named insured * Loss payees * Coverage and amounts * Rate and premium * Subject matter ## Footnote The declaration page summarizes key details of the insurance policy.

Question 49

What’s the **removal clause**?

Answer 49

Policies usually restrict coverage to named location, removal clause provides protection when: * Property removed to protect from loss or further loss * Amounts not used at insured location * 7 days or unexpired term of policy, whichever is less ## Footnote This clause ensures coverage during temporary relocations.

Question 50

What’s **limitation of liability**?

Answer 50

Warning on policy must appear: This policy contains a clause which may limit the amount payable. * Deductible clause – the amount client has to absorb – usually occurrence deductible (pays deductible every time there’s a claim) * Co-insurance clause - designed to apply a penalty when client purchases less insurance than required. Applies to partial losses only. Loss is less than 2% or $2,500 – did/should X loss amount ## Footnote These clauses help manage the insurer's risk.

Question 51

What’s **subrogation**?

Answer 51

Right of the insurance company to pursue any responsible party to collect money from them that they’ve had to pay client. ## Footnote Subrogation helps insurers recover losses from third parties.

Question 52

What are the **types of insurers**?

Answer 52

* Private insurers * Proprietary insurers (organized for profit) - incorporated or unincorporated (Lloyds of London) * Non-proprietary insurers – mutuals * Government insurers ## Footnote Understanding the types of insurers helps in choosing the right coverage.

Question 53

How do insurance companies get their product to the **consumer**?

Answer 53

* Independent agency brokerage systems * Direct writing system ## Footnote These distribution methods affect how policies are marketed and sold.

Question 54

Explain the significance when clients receive **policy documents**, even when no premiums have been paid.

Answer 54

When documents are in possession of client, coverage is in effect even when no premiums have been paid because promise to pay premiums is binding. ## Footnote This principle emphasizes the importance of documentation in insurance.

Question 55

Who can make **changes to policies**?

Answer 55

Only authorized persons by the insurer, brokers can't. ## Footnote This restriction ensures that policy changes are properly managed.