Chapter 5 Study Questions

Objective 1
What are the terms of binding authority?
a) The classes of risk and the limits of insurance that the brokerage is permitted to bind
b) The risks that the brokerage cannot bind.
c) The reporting requirements, including the timeframe within which the insurer expects the
broker to forward notice of binding.
d) All of the above
e) None of them

Binding authority agreement is

a) An agreement between a managing agent and a cover holder. Under this agreement,
the managing agent delegates its authority to enter into a contract of insurance to be
underwritten by the members of a syndicate managed by it to the cover holder in
accordance with the terms of the agreement.
b) The document sets out the terms of the insurance contract between the policyholder and
the managing agent.
c) The contract between the insurer and the insured, known as the policyholder, which
determines the claims which the insurer is legally required to pay.
d) A document issued by an insurance company/broker that is used to verify the existence of
insurance coverage under specific conditions granted to listed individuals.
List the terms of binding authority 5 Marks.
The terms of binding authority include:
-

the classes of risk and the limits of insurance that the brokerage is permitted to bind;
the risk that the brokerage cannot bind;
the reporting requirements, including time frame within which the insurer expects the
broker to forward the notice of binding.

Objective 2
Title binder is:
a)
b)
c)
d)

The thing that is being insured

A time after which a cause of action ceases
An integral part of risk management
A temporary, providing short term cover, bridging the period in time between
the brokers request to the insurer for a policy and the actual issuance of the
policy documents.

There are two forms of document used to record interim or temporary cover:
a)
b)
c)
d)

Personal and commercial

Premium and beneficial
A cover note and a binder
Application and prescription

A binder is :
a)
b)
c)
d)

A permanent record of coverage

Issued by the insurer
Issued by the broker
A request by the insured to make a change to the policy

Binder content includes:

a)
b)
c)
d)

The name of the insured

The location and type of risk that is being insured
Exact coverage details
All of the above

A binder expiry date is:

a)
b)
c)
d)

30 days
until replaced by policy document
Expire on a regular business day
All of the above

Briefly explain what a binder is and list 5 of the binder contents youll see on an insurance
binder 5 marks
A binder is a temporary insurance, providing short-term cover, bridging the period in time
between the brokers request to the insurer for a policy and the actual issuance of the policy
document.
the name of the insured

the time and date that the coverage takes effect and expires
the location and type of risk that is being insured
the mailing address of the insured
the loss payees or mortgagees and their mailing addresses

Objective 3
In the binder format which of the following is not part of the binder contents?
a)
b)
c)
d)

Payment plan charges

Details of deductibles
Premium charged for the binder
Loss payees or mortgagees

Objective 4
A deductible is
a)
b)
c)
d)

The amount of a loss that the insured must pay

The permanent record of coverage
The request by the insured to make change to the policy
(d)The bonus given as a reward to customers with high volume orders

What does a binder need to include?

a)
b)
c)
d)

The mailing address of the insured

Time and date the coverage expires
Name of the insurer writing the risk
All of the above

The insuring agreement is

a) That portion of the insurance policy in which the insurer promises to make payment
to or on behalf of the insured.
b) The insured's guarantee that the facts are as stated in reference to aninsurance risk or that
specified conditions will be fulfilled to keep the contracteffective.
c) This document contains all of the basic information that defines the policy, including the
name of the insured, the amount of coverage and the name, description and location of
the item or items being covered.
d) The amount of expenses that must be paid out of pocket before an insurer will pay any
expenses.
Define significance of deductibles 5 marks

Deductible is the amount you have to pay out- of pocket for expenses before the insurance
company will cover the remaining cost.
Large deductibles can be a method of reducing premiums. Insurance will usually offer lower
premiums for higher deductibles.
Clients choose that kind of a policy deductible, where they are comfortable in self insuring. The
deductible is applied on each and every loss incurred. Advise the client of the possible options to
increase or decrease the deductible, and request his instructions.
Liability deductible considerations can advise your client if:
1. The deductible apply for each claim or to each occurrence
2. How is deductible applied
3. An important part of the coverage given by liability policy is defence costs.

Objective 5
What is not a warning sign of potential fraud while issuing a policy?
a) A client asks you to bind cover on a new risk without adequate information or
investigation.
b) A new applicant is in a hurry to get the cover bound.
c) A new applicant checking up with previous insurer regarding his/her old policies.
d) The client wants you to backdate a policy.

Which of the following is not true statement:

a)
b)
c)
d)
e)

Wording must be consistent with the general rules set out by legislation.
Wording is a contract between broker and insured before policy being issued.
Policy wording differ from insurer to insurer and province to province.
If there is any clause in the policy that limits the amount an insured may recover,
Wording must be in bold characters.

Describe steps you would follow to ensure that policy documents are accurate ,and describe
the information you would include in a covering letter to your client 10 marks this was
a 5 mark question, but the answer is worth at least 10 marks
Insurance is based on the accuracy of the information provided by the insured to the insurance
company. In the case of incorrect information provided in the documents, the chances of reported
claims are reduced. When agents/brokers are talking to the client about their coverage needs,
they are also identifying which insurer and what wording will best serve the client's needs. To be
effective, brokers and agents have to become familiar with the policy wording used by each of
the insurer they represent
The brokers/agents must know all parts of the policy and be able to put them down in order :
a)
b)
c)
d)
e)
f)

-declaration
-insuring agreement
-conditions
-warranties
-signature clause
-deductibles

Answer continued next page..

Before delivering any documents to the insured, brokers/agents have to check them for accuracy
and completeness and prepare an invoice to accompany the documents. In addition to the
documents from the insurer, brokers/agents should include a cover letter. The particulars that are
included in the cover letter will vary depending on the circumstances, however they should
contain the following:
a)
b)
c)
d)
e)
f)
g)

summary of the coverages placed

details of coverage
records of coverages you recommended but that the client declined
reminder of the client's responsibility to review the policy documents for accuracy
reminder to keep the documents in a safe place
note of what action to take and who to contact in the event of claim
expression of your gratitude for the client's business, and a reminder that you are
available to answer question about the coverage in effect, discuss related insurance needs
or concerns and make changes if client required them

Objective 6
What best describes a deductible in a policy?
a)
b)
c)
d)

a)Lower deductibles can be a method of lowering premiums.

Insurers do not have limits on deductibles clients may select.
High deductibles increase the chance of insured to make several claims on small losses.
A deductible is the amount of loss that the insured must pay first in the case of a
claim.

What factors would affect your recommendation of a deductible to your client?

a)
b)
c)
d)

Profession, Credit Score.

Hobbies, Coffee preferences.
Political views, Gender and Age.
Religion, Marital Status.

Briefly explain the insuring agreements, conditions and warranties included in the parts of
a policy 5 marks
a)
b)
c)
d)
e)
f)

Insuring agreements
coverage applicable
term of the policy
the perils: this describes the coverage that is provided
exclusions- these restrict the perils insured
circumstances under which the insured will receive payment of the proceeds for claims

Conditions

If a condition is breached by the insured, the policy may be void or voidable, or a claim arising
out the breach may be denied by the insurer. If the insurer breaches a condition, the insurer may
still be indemnified under the contract even they should not have been
Warranties
Warranties are promises the insured makes as part of the contract that a specified state of affairs
will continue to exist for the duration of the policy. These are obligations which the insured must
fulfill in order to keep a policy in force.

Objective 7
What is the purpose of a deductible?
a)
b)
c)
d)

Creates an economic incentive for insureds to protect their property from damage
The amount of a loss that the insured must pay
Means that the policy is treated as it never existed
A and B

Explain briefly the importance of deductibles as a part of policy 5 marks.

A deductible is the amount of a loss that insured must pay. A deductible creates an economic
incentive for insureds to protect their property from damage.
Larger deductibles can be a method of reducing premiums. Insureds may elect to take care of
small losses themselves and reserve their insurance for major losses. Insurers will usually offer
lower premiums for higher deductibles. If there is a loss frequency history, insurers will often
insist on higher deductibles to improve the loss ratio and to make the risk acceptable. This
reduces the costs of claims, which will in turn reduce the premium costs to the insureds. It also
tends ti make the insured move aware of the need for loss control.

Objective 8

What options does broker has if client disagrees with high premiums:
a)
b)
c)
d)

to offer the client to reduce the amount insured;

to decrease the broker's commission, if the client is important for brokerage;
to recommend higher deductibles to get more reasonable premiums;
none of above.

Why would the policy issuance of insurance be delayed?

a) UW needs more information-risk covered.
b) Broker should give couple weeks to client to think about his decision.
c) UW has a huge line of clients.
d) It is non-standard insurance, broker does not want take this case.
Describe some additional considerations when considering deductibles for liability
coverages 5 marks
You have to consider if the deductible applies to each claim or to each occurrence. It is important
to know how the deductible will be applied. Also, be able to decide if the deductible will apply to
defense costs or just the settlement.

Objective 9
After signing a binder with client ABC for 3 days insurance for property risks, a broker
received the policy from the insurer with the following errors:
1. Insured name was misspelled.
2. The premium is slightly different.
3. The coverage is different from mentioned in original binder.
Your task is to describe the steps you will take to correct the errors and provide your client
with an accurate policy. 10 marks
Answer:
As a broker, you are responsible for ensuring an accurate policy is issued to your client and you
must meticulously check the issued policy for any errors.
After you found the first mistake - misspelling of client's name, you should contact the insurer
and request a correction of policy. Then, confirm in writing to both insurer and insured the
changes that insurer will be making to the policy.
For the second mistake, you should contact an underwriter and discuss with him reasons of this
difference, such as:

a) The computer policy premium may differ slightly from one you calculated, or you made
an error in calculation.
b) Payment plan charges can produce a difference in the deposit premium and the monthly
withdrawals.
c) The insured may have requested an amendment to the coverage, resulting in a change in
premium.
d) The insurer found that the risk was not as it was described in the application, resulting in
re-rating of the risk.
e) There has been a global rate change since the original quote.
Once you have determined the reason for the difference in premium, you must explain every
detail to insured, so they can make an informed decision whether or not to continue with the
policy.
For the third mistake, you should contact the insurer and clarify causes of the difference in
coverage, such as:
a) The insurer's standard policy wording may have changed.
b) The insurer may have discovered that the risk being covered is not as it was
described in the application.
After clarifying all details with insurer, you have to provide all details to insured, so
they will be notified about any new exclusions or changes in coverage.

Objective 10
What is not usually included in a cover letter:
a) a reminder to keep the documents in a safe;
b) a reminder of the client's responsibility to review the policy documents for
accuracy;
c) a note of what action to take and who to contact in the event of a claim;
d) a reminder about loss prevention and loss reduction measures.

Which information is not included as part of a Cover Letter?

a) The effective and expiry date
b) The coverage provided
c) Policy terms, conditions, and deductibles applicable
d) Loss payees
Describe five parts of a typical Cover Letter (5 Mark)
1. A summary of the coverage placed

2. Detail of coverage and any special restrictive clauses, exclusions, warranties,

limitation, and deductibles
3. Details of any coverage the client requested but you were unable to obtain
4. A record of coverage you recommended but the client declined
5. A reminder of the clients responsibility to review the policy documents for
accuracy