Chapter 23—Managing Risk in the Small Business
TRUE/FALSE
1. Risk is the possibility of suffering harm or pain.
2. Market risk is uncertainty associated with a situation where only loss or no loss can occur.
3. Business risk is the possibility of losses associated with the assets and earnings potential of a company,
including the firm’s reputation.
4. Business risks can be classified into two broad categories—asset risk and pure risk.
5. Pure risk refers to a situation where only loss or no loss can occur—there is no potential gain.
6. Real property risks include damage to buildings.
7. A lease on a real property structure will relieve the lessee of any damage or loss to the leased premises.
8. ACV refers to the depreciated value of a property.
9. Wrongful acts or omissions for which an injured party can take legal action against the wrongdoer to
seek monetary damages are called contractual liability.
10. Indemnification clauses should be reviewed by an insurance agent or broker to limit liabilities to a
small business.
11. A consulting firm that typically does not have clients visit its business location would have minimal
premises liability exposure.
12. Since the small business owner needs to rely heavily on an insurance agent for advice, risk
management and insurance management are synonymous.
13. Loss prevention is defined as lessening the frequency, severity, or unpredictability of losses.
14. Monitoring social media is a form of risk transfer.
15. Risk financing is the action of making funds available to cover losses that could not be eliminated by
risk control.
16. Self-insurance requires designating part of a firm’s insurance proceeds to provide life insurance on key
employees.
17. 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.
18. Specific and aggregate stop loss limits would be the best insurance plans of small businesses which
have at least 80 employees.
19. 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.
20. 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.
21. The company’s ability to absorb losses will determine what smaller potential losses will be insured.
22. For the most part, the dollar value of employment practice claims ranges from $100,000 to $250,000,
with insurance premiums ranging from $12,500 to $17,500.
23. A property insurance policy is used by a business owner to insure buildings and personal
property owned but not leased by the business.
24. Flood insurance can be purchased for only real property.
25. Property insurance that covers all direct damage to property except damage caused by perils
specifically excluded is called CGL.
26. Business interruption insurance pays for lost income following the interruption of business operations.
27. Small businesses are particularly vulnerable to employee fraud because of weak financial controls.
28. A small company can protect itself against the death of important personnel by carrying CGL
insurance.
29. One risk that small businesses normally cover is loss due to the disability of a partner or other key
employee of the company.
MULTIPLE CHOICE
1. 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.
2. 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.
3. 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 ______________, developed strategies, and
committed resources to her business.
a.
secured financing
b.
purchased inventory
c.
identified the investment opportunity
d.
performed market research
4. 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.
5. 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
6. 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.
7. As a general rule, only ______ is insurable.
a.
business risk
b.
market risk
c.
pure risk
d.
risk
8. 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
9. 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
10. 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
11. 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
c.
coinsurance value
d.
minimum value
12. Damage to a building by fire 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.
13. 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
14. Richard must carry workers’ compensation insurance to fulfill his ________________ obligation.
a.
professional liability
b.
tort liability
c.
contractual liability
d.
statutory liability
15. 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.
16. 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
17. A “prudent person” is also known as:
a.
a tort.
b.
the reasonable standard.
c.
indemnification.
d.
a personnel risk.
18. 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.
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.
19. Compensatory damages include ________ damages.
a.
economic
b.
breach
c.
tort
d.
punitive
20. 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.
21. 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
22. 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.
b.
noneconomic since the customer has medical bills.
c.
punitive due to the leak.
d.
compensatory to cover the cost of repairing the leak.
23. 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
24. 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
25. 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.
26. Which risk type directly affects the employee but indirectly impact the business?
a.
Liability
b.
Personnel
c.
Property
d.
Pure
27. 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.
28. 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.
29. Which action is part of the second step of a risk management program analysis?
a.
Classification of risks
b.
Deciding on an action
c.
Determining risk control methods
d.
Systematic risk analysis
30. 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.
31. 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.
32. Driving as safely as possible is an example of loss
a.
avoidance.
b.
control.
c.
prevention.
d.
reduction.
33. 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.
34. 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?
35. 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.
36. Typically, the dollar values for employee lawsuits have start at
a.
$50,000
b.
$100,000
c.
$150,000
d.
The amount differs from the above values.
37. 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.