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Indicate whether the statement is true or false.
1. ACV refers to the depreciated value of a property.
a. True
b. False
2. Funds transfer fraud provides coverage primarily against employee dishonesty.
a. True
b. False
3. Indemnification clauses should be reviewed by an insurance agent or broker to limit liabilities to a small business.
a. True
b. False
4. Risk financing is the action of making funds available to cover losses that could not be eliminated by risk control.
a. True
b. False
5. Real property risks include damage to buildings.
a. True
b. False
6. Business risks can be classified into two broad categories—asset risk and pure risk.
a. True
b. False
7. Business interruption insurance pays for lost income following the interruption of business operations.
a. True
b. False
8. Property insurance that covers all direct damage to property except damage caused by perils specifically excluded is
called CGL.
a. True
b. False
9. A consulting firm that typically does not have clients visit its business location would have minimal premises liability
exposure.
a. True
b. False
10. The company’s ability to absorb losses will determine what smaller potential losses will be insured.
a. True
b. False
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11. Small businesses are particularly vulnerable to employee fraud because of weak financial controls.
a. True
b. False
12. Partially self-funded insurance programs that limit the self-insured portion of an employee’s medical coverage to a
specific amount is commonly referred to as an aggregate stop loss limit.
a. True
b. False
13. A lease on a real property structure will relieve the lessee of any damage or loss to the leased premises.
a. True
b. False
14. Flood insurance can be purchased for only real property.
a. True
b. False
15. Market risk is uncertainty associated with a situation where only loss or no loss can occur.
a. True
b. False
16. Monitoring social media is a form of risk transfer.
a. True
b. False
17. For the most part, the dollar value of employment practice claims ranges from $50,000 to $150,000, with insurance
premiums ranging from $12,500 to $17,500.
a. True
b. False
18. Wrongful acts or omissions for which an injured party can take legal action against the wrongdoer to seek monetary
damages are called statutory liability.
a. True
b. False
19. Self-insurance requires designating part of a firm’s insurance proceeds to provide life insurance on key employees.
a. True
b. False
20. An insurance agent should provide information in designing an insurance plan; the small business owner will only
need to determine the price the company can afford.
a. True
b. False
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21. Loss reduction is defined as preventing losses from ever happening.
a. True
b. False
22. Since the small business owner needs to rely heavily on an insurance agent for advice, risk management and insurance
management are synonymous.
a. True
b. False
23. Risk is the possibility of suffering harm or pain.
a. True
b. False
24. Market risk is the possibility of losses associated with the assets and earnings potential of a company, including the
firm’s reputation.
a. True
b. False
25. One risk that small businesses normally cover is loss due to the disability of a partner or other key employee of the
company.
a. True
b. False
26. Pure risk refers to a situation where only loss or no loss can occur—there is no potential gain.
a. True
b. False
27. A property insurance policy is used by a business owner to insure buildings and personal
property owned but not leased by the business.
a. True
b. False
28. Specific and aggregate stop loss limits would be the best insurance plans of small businesses which have at least 80
employees.
a. True
b. False
29. Securing insurance coverage for all major potential losses would involve making certain that insurance covers the full
replacement value of the firm’s real and personal property.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
30. A unique, attractive feature of a BOP is that both real and personal property are valued on
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a. an appraised cash value basis.
b. a market-adjusted depreciated value basis.
c. a replacement-cost basis.
d. a proximal-to-value basis.
31. Business interruption insurance covers
a. debts to suppliers.
b. shoplifting.
c. lost income.
d. defective products.
32. Pain, suffering, mental anguish and loss of physical abilities are included in which type of damages in a tort case?
a. non economic
b. compensatory
c. economic
d. punitive
33. Doug’s BOP on his fishing guide business excludes property losses due to the wakes of other fishing boats. This
example illustrated the ____ approach to property insurance.
a. foreseen risk
b. insurance-to-value
c. all-risk
d. named-peril
34. As a general rule, only ______ is insurable.
a. business risk
b. market risk
c. pure risk
d. risk
35. Identifying in an insurance policy the specific perils covered is a(n) __________ approach.
a. no-risk
b. named-peril
c. coinsurance
d. all-risk
36. Harold’s ownership of a moving van for use in his business represents which form of risk?
a. Uninsurable risk
b. Pure risk
c. Market risk
d. Insurable risk
37. Quentin is getting quotes for insurance on his building. His agent recommends he purchase enough to cover the
___________________ even though this amount is more than Quentin paid for it.
a. replacement value
b. actual cash value
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c. conisurance value
d. minimum value
38. Compensatory damages include ________ damages.
a. economic
b. breach
c. tort
d. punitive
39. The cost to replace or replicate property at today’s prices is described by________.
a. real property
b. personal property
c. replacement value of property
d. actual cash value
40. Which insurance coverage is required by law in most states?
a. Workers’ compensation
b. Product liability insurance
c. Key executive coverage
d. Employee bonding
41. Philip leases retail space in a building owned by Roger. The lease agreement contains a(n) _____________ excusing
Roger from responsibility for any financial consequences of Philip’s actions.
a. premises liability clause
b. indemnification clause
c. operations liability clause
d. lessor’s release of action clause
42. A coinsurance provision requires that a property be insured for at least ____ percent of its value.
a. 60
b. 70
c. 80
d. 90
43. The striking dock workers on the west coast refused to unload the ships carrying merchandise for retail stores. These
stores suffered loss of revenue during the Christmas season, their highest earnings period of the year. This revenue
reduction is ________________ that ___________ covered by insurance.
a. a direct loss, can be
b. indirect loss, can be
c. direct loss, cannot be
d. indirect loss, cannot be
44. Assume a contract exists between Mr. Jones, a college professor, and his student, Mr. Smith. Jones provides a
syllabus, instruction, tutoring, and assessments of learning but Smith fails the class. Which of the following elements is
absent in this case?
a. Existence of a legal duty between the parties.
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b. Failure to provide the appropriate standard of care.
c. Presence of injury or damages.
d. Evidence that the negligent act is the proximate cause of the loss.
45. Richard must carry workers’ compensation insurance to fulfill his ________________ obligation.
a. professional liability
b. tort liability
c. contractual liability
d. statutory liability
46. Concern about the employees is considered in which principle of a sound insurance program?
a. What kinds of risk can be covered by insurance?
b. What types of coverage should be purchased?
c. How much coverage is adequate?
d. All of the above will concern employees.
47. Commercial general liability insurance covers
a. business interruption expenses.
b. injury to customers.
c. injury to employees.
d. profession liability.
48. Barney places his new extension ladder on a slippery surface when he leans it against the wall. He climbs up; the
ladder slips out from under him and he falls. Which type of product liability may exist in this situation?
a. Manufacturing since ladder may not have been intended for this use.
b. Design since the ladder may not have been made to specifications
c. Marketing if the manufacturer did not provide instructions on how to use the ladder.
d. There is no liability. The users assumes all risk in using any type of ladder.
49. Concern about the replacement value is considered in which principle of a sound insurance program?
a. Identify business risks that can be insured.
b. Secure insurance coverage for all major potential losses.
c. Consider the feasibility and affordability of insuring smaller potential losses.
d. Review and evaluate.
50. Which term describes land and anything physically attached to the land, such as buildings?
a. Real property
b. Personal property
c. Replacement value of property
d. Actual cash value
51. A managed-care network providing health insurance that is more expensive than an HMO but offers a broader choice
of medical providers is called a
a. key-person organization.
b. package policy.
c. personal maintenance organization.
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d. preferred provider organization.
52. A policy for small businesses that do not qualify for a BOP that combines property insurance and commercial general
liability insurance is called a
a. personal policy.
b. package policy.
c. health policy.
d. business owner’s policy.
53. Driving as safely as possible is an example of loss
a. avoidance.
b. control.
c. prevention.
d. reduction.
54. To evaluate an insurance program, which question should be answered first?
a. How much coverage is adequate?
b. What kinds of risk can be covered by insurance?
c. What types of coverage should be purchased?
d. What pricing is available?
55. Perry’s business is not in the safest neighborhood. He is concerned about robbery and vandalism, two types of:
a. business risk.
b. market risk.
c. pure risk.
d. uninsurable risk.
56. Patrick has a great idea for a new business venture. Even after conducting research he is not certain whether he can
make a go of it. Patrick is concerned about:
a. risk.
b. pure risk.
c. business risk.
d. market risk.
57. Assume that the physical property of a business is valued at $50,000. The company’s commercial property policy
contains a coinsurance clause with a stated percentage of 80 percent. The company insures the property for $30,000 (75
percent of the specified minimum). The company incurs a fire loss of $20,000. How much of the loss will the insurance
company pay for?
a. $0
b. $15,000
c. $20,000
d. $10,000
58. A small business customer slips on a wet floor (due to a slow water leak), falls and breaks an arm. Damages that could
potentially be awarded to the customer might include:
a. economic since the customer has a loss of physical abilities.
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b. noneconomic since the customer has medical bills.
c. punitive due to the leak.
d. compensatory to cover the cost of repairing the leak.
59. Brenda expects there will be uncertainty regarding the outcome of her business decisions. The final result of those
decisions will not be known until she has identified the investment opportunity, developed strategies, and __________ to
her business.
a. secured financing
b. purchased inventory
c. committed resources
d. performed market research
60. Morton is discussing with his insurance agent the possibility that he might lose his building and equipment in the
event of a fire or windstorm. Should that happen, Morton’s company would not be able to earn revenues. These two
people are discussing
a. risk.
b. pure risk.
c. business risk.
d. market risk.
61. A customer’s slip and fall injury would be covered by
a. commercial general liability insurance.
b. surety bonds.
c. business interruption insurance.
d. commercial property coverage.
62. A contractual clause that requires one party to assume the financial consequences of another party’s legal liabilities is
called a
a. worker’s compensation clause.
b. extra clause.
c. indemnification clause.
d. tort.
63. Requiring all servers in a restaurant to know how to properly lift heavy objects is an example of loss
a. avoidance.
b. control.
c. prevention.
d. reduction.
64. A delivery truck owned by Martin’s Lumber backed into a car owned by Bonnie. Bonnie asked Martin’s Lumber to
pay for the repairs to her car. Bonnie is asking for:
a. exemplary damages.
b. non-economic damages.
c. compensatory damages.
d. punitive damages.
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65. A “prudent person” is also known as:
a. a tort.
b. the reasonable standard.
c. indemnification.
d. a personnel risk.
66. Review and evaluate is an important step in the risk management process because
a. conditions change and mistakes may be identified.
b. it is nearly impossible to evaluate risk effectively.
c. of the challenges in identifying small business risks.
d. of the difficulty in selecting effective methods.
67. A defect resulting from failure to convey to the user that hazards are associated with a product or to provide adequate
instructions on safe product use is known as a(n)
a. marketing defect.
b. manufacturing defect.
c. design defect.
d. engineering defect.
68. A carton of eggs broke onto the floor in the dairy section, making the floor slippery. Little Johnny slipped, fell, and
hit his head on the floor, causing a cut and mild concussion. The grocery store incurs _________________ liability for
his injuries.
a. premises
b. operational
c. professional
d. product
69. Disability buyout insurance
a. is common in small firms that are single owner operations.
b. protects the firm from losses due to the death of a key employee.
c. provides money to buy out a partner.
d. replaces revenue lost when a key employee is disabled.
70. For a person to be found guilty of a negligent act, the negligent act must be the ____ cause of the loss in a tort liability
claim.
a. assumed
b. compensatory
c. proximate
d. statutory
71. Crime insurance is most critical for a small business when
a. the business has financial controls.
b. the firm is struggling.
c. the owner has a personal distraction.
d. the owner employs family members.
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72. Damage to a building by flooding is an example of
a. a benign neglect loss.
b. a direct loss.
c. a tort-based liability claim.
d. a depreciated cash value loss.
73. Mistakes that an employee makes in assembling a product for a customer could be a(n)
a. employee liability.
b. operations liability.
c. premises liability.
d. product liability.
74. Typically, insurance premiums to cover employee lawsuits start at
a. $2,500.
b. $7,500.
c. $15,000.
d. The amount differs from the above values.
75. Self-insurance requires
a. an analysis for stop loss limits.
b. implementing risk control methods.
c. owning stock in an insurance company.
d. saving money to cover possible future losses.
76. Which risk type directly affects the employee but indirectly impact the business?
a. Liability
b. Personnnel
c. Property
d. Pure
77. Business interruption insurance is
a. included in a PPO policy.
b. may be part of an umbrella liability policy.
c. not recognized as important by small business owners.
d. part of a CGL no fault coverage plan.
78. Which action is part of the second step of a risk management program analysis?
a. Identify and understand risks.
b. Evaluate the potential severity of risks.
c. Select method to manage risks.
d. Implement the decision.
79. When considering the feasibility and affordability of insuring small potential losses, which company program will
impact this decision?
a. ACV
b. FICA
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c. Self-insurance
d. Workers’ compensation
80. Pure risk is
a. a chance all entrepreneurs take.
b. a condition in which there is a possibility that an adverse deviation from a desired outcome will occur.
c. a probability that adverse conditions will result.
d. the uncertainty associated with a situation where only loss or no loss can occur.
81. Risk is
a. a chance all entrepreneurs take.
b. a probability that adverse conditions will result.
c. a possibility of suffering harm or loss.
d. usually avoidable.
Match the term with its definition. Some terms may not be used.
a. Business interruption insurance
b. Business owner’s policy
c. Commercial general liability insurance
d. Disability insurance
e. Funds transfer fraud
f. Key-person life insurance
g. Package policy
h. Personnel risks
i. Proximate cause
j. Reasonable standard
k. Workers’ compensation insurance
82. A negligent act that is the clear cause of damages sustained
83. Coverage for general liability loss exposure
84. A policy for small businesses that do not qualify for a BOP that combines property insurance, commercial general
lability insurance, and crime insurance
85. The criminal transfer of funds from a bank account
86. The typical standard of care, based on what a reasonable or prudent person would have done under similar
circumstances
87. A business version of a homeowner’s policy designed to meet the property and general liability insurance needs of
some small business owners
88. Risks that directly affect individual employees but may have an indirect impact on a business as well
89. Coverage that provides benefits to a firm upon the death of key personnel
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90. Coverage that reimburses a business for the loss of anticipated income following the interruption of business
operations
91. Coverage that provides benefits to employees injured at work
Match the term with its definition. Some terms may not be used.
a. Actual cash value
b. Aggregate stop loss limit
c. Direct loss
d. Disability buyout insurance
e. Disability insurance
f. Indirect loss
g. Loss avoidance
h. Loss prevention
i. Loss reduction
j. Replacement value of property
k. Specific stop loss limit
92. A loss in which physical damage to property reduces its value to the property owner
93. Lessening the frequency, severity, or unpredictability of potential losses
94. A loss arising from an inability to carry on normal operations due to a direct loss of property
95. An insurance term that refers to the depreciated value of property
96. Keeping a loss from happening
97. A firm’s per-employee limit on self-funding for medical claims
98. A comprehensive limit on annual expenses should a number of employees reach the firm’s per-employee limit on self-
funding for medical claims
99. Choosing not to engage in hazardous activities
100. The cost of replacing personal property and rebuilding real property at today’s prices
101. Insurance that provides a healthy partner the cash to buy out a partner who becomes ill
Match the term with its definition. Some terms may not be used.
a. Automobile insurance
b. Coinsurance clause
c. Crime insurance
d. Design defect
e. Manufacturing defect
f. Marketing defect
g. Noneconomic damages
h. Partially self-funded program
i. Proximate cause
j. Punitive damages
k. Workers’ compensation legislation