Deck 23: Managing Risk

Question 1

Wrongful acts or omissions for which an injured party can take legal action against the wrongdoer for monetary damages are called statutory liability.

Answer 1

False

Question 2

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.

Answer 2

True

Question 3

Loss prevention is choosing not to engage in hazardous activities.

Answer 3

False

Question 4

Only pure risk is insurable.

Question 5

Actual cash value (ACV) refers to the depreciated value of a property.

Question 6

Risk financing focuses on making funds available for losses that cannot be eliminated by risk control.

Question 7

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.

Question 8

Market risk is uncertainty associated with a situation where only loss or no loss can occur.

Question 9

The idea behind an indemnification clause is to shift the responsibility to the party with the most control over the risk exposure.

Question 10

Risk retention entails financing all or part of a loss from a company's cash flows.

Question 11

Market risk is the possibility of losses associated with the assets and earnings potential of a firm.

Question 12

Real property risks include damage to buildings.

Question 13

Risk is the "possibility of suffering harm or pain."

Question 14

Self-insurance simply means having no insurance.

Question 15

Crisis planning is a form of risk transfer.

Question 16

Self-insurance requires designating part of a firm's insurance proceeds to provide life insurance on key employees.

Question 17

The nature of business risk can be observed from two perspectives: asset risk and pure risk.

Question 18

Because the small business owner needs to rely heavily on an insurance agent for advice, risk management and insurance management are synonymous.

Question 19

A lease on a real property structure will relieve the lessee of being responsible for any damage or loss to the leased premises.

Question 20

A consulting firm that typically does not have clients visit its business location would have minimal premises liability exposure.

Question 21

One risk that small businesses normally cover is loss due to the disability of a partner or other key employees of the company.

Question 22

Claims that arise from employee lawsuits alleging wrongful terminations, sexual harassment, or discrimination in the workplace range from $50,000 to $150,000, with annual insurance premiums ranging from $12,500 to $17,500.

Question 23

Business interruption insurance provides coverage for loss of income following the interruption of business operations.

Question 24

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 _____ risk.

A) credit
B) pure
C) business
D) market

Question 25

_____ is the cost to replace personal property and rebuild real property at today's prices.

A) Property loss
B) A peril
C) The replacement value of property
D) The actual cash value (ACV)

Question 26

Small businesses are particularly vulnerable to employee fraud because of weak financial controls.

Question 27

As a rule, only _____ risk is insurable.

A) business
B) market
C) pure
D) credit

Question 28

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 _____ risk.

A) disaster
B) pure
C) business
D) market

Question 29

Quentin is getting quotes for insurance on his building. His agent recommends he purchase enough to cover the _____ value, even though this amount is more than Quentin paid for it.

A) replacement
B) actual cash
C) conisurance
D) minimum

Question 30

Risk is

A) a chance all entrepreneurs take.
B) a probability that adverse conditions will result.
C) the possibility of suffering harm or loss.
D) usually avoidable.

Question 31

Which of the following terms 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

Question 32

The pure risks that any business faces can be categorized as

A) property, liability, and physical.
B) property, liability, and personnel.
C) market, property, and personnel.
D) property, liability, and market.

Question 33

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

Question 34

A property insurance policy is used by a business owner to insure buildings and personal property owned, but not leased, by the business.

Question 35

Funds transfer fraud provides coverage primarily against employee dishonesty.

Question 36

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.

Question 37

When purchasing property insurance, a business owner can use the named-peril approach, which provides the broadest protection available.

Question 38

Property insurance that covers all direct damage to property except damage caused by perils specifically excluded is called commercial general liability (CGL) insurance.

Question 39

Perry's business is not in the safest neighborhood. He is concerned about robbery and vandalism, two types of _____ risk.

A) business
B) market
C) pure
D) uninsurable

Question 40

A preferred provider organization (PPO) is less expensive than that of health maintenance organization (HMO) and is more limiting in choices of medical care providers.

Question 41

A carton of eggs broke onto the floor in the dairy section at a grocery store, 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) operations
C) professional
D) product

Question 42

Philip leases retail space in a building owned by Roger. The lease agreement contains a(n) _____ clause excusing Roger from responsibility for any financial consequences of Philip's actions.

A) premises liability
B) indemnification
C) operations liability
D) Lessor's release of action

Question 43

Damage to a building by flooding is an example of a

A) benign neglect loss.
B) direct loss.
C) tort-based liability claim.
D) depreciated cash value loss.

Question 44

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

Question 45

Which type of risk directly affects the employee but indirectly impacts the business?

A) Liability
B) Personnel
C) Property
D) Pure

Question 46

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) _____ defect

A) marketing
B) manufacturing
C) design
D) engineering

Question 47

A "prudent person" is also known as

A) a tort.
B) the reasonable standard.
C) indemnification.
D) a personnel risk.

Question 48

Which of the following actions is part of the second step of a risk management program?

A) Identify and understand risks.
B) Evaluate the potential severity of risks.
C) Select methods to manage risks.
D) Implement the decision.

Question 49

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 a(n) _____ loss that _____ be covered by insurance.

A) direct; can
B) indirect; can
C) direct; cannot
D) indirect; cannot

Question 50

A contractual clause that requires one party to assume the financial consequences of another party's legal liabilities is called a(n)

A) worker's compensation clause.
B) extra clause.
C) indemnification clause.
D) tort.

Question 51

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 because the customer has a loss of physical abilities.
B) noneconomic because the customer has medical bills.
C) punitive due to the leak.
D) compensatory to cover the cost of repairing the leak.

Question 52

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.

Question 53

A discrimination lawsuit against an employer by a prior employee is an example of _____ tort liability.

A) completed operations
B) operations
C) premises
D) employment practices

Question 54

Pain and suffering, mental anguish, and loss of physical abilities are included in which type of damages in a tort case?

A) Noneconomic
B) Compensatory
C) Economic
D) Punitive

Question 55

Compensatory damages include _____ damages.

A) economic
B) breach
C) tort
D) punitive

Question 56

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 _____ damages.

A) exemplary
B) noneconomic
C) compensatory
D) punitive

Question 57

All of the following would be considered a personnel risk EXCEPT

A) poor health.
B) insufficient retirement income.
C) premature death.
D) employee theft.

Question 58

Review and evaluation 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) it is difficult to select effective methods.

Question 59

Richard must carry workers' compensation insurance to fulfill his _____ liability obligation.

A) professional
B) tort
C) contractual
D) statutory

Question 60

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

Question 61

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.

Question 62

Business interruption insurance covers

A) debts to suppliers.
B) shoplifting.
C) lost income.
D) defective products.

Question 63

Which of the following benefits is NOT covered by workers' compensation insurance?

A) Wages for a replacement employee
B) Rehabilitation expenses
C) Death benefits for employees' family
D) Loss of wages

Question 64

A coinsurance clause requires a business owner to insure the company's building and personal property for at least _____ percent of what it would cost to replace the building and the personal property.

A) 60
B) 70
C) 80
D) 90

Question 65

Self-insurance requires

A) purchasing a high-deductible policy.
B) implementing risk control methods.
C) owning stock in an insurance company.
D) earmarking earnings for a contingency fund against possible future losses.

Question 66

Which of the following is one of the basic principles that should be followed in evaluating an insurance program?

A) Consider the feasibility and affordability of insuring smaller potential losses.
B) Secure insurance coverage for all major potential losses.
C) Consider the various insurance policies that may be appropriate for your business.
D) All of these are correct.

Question 67

A managed-care network providing health insurance that is more expensive than that of a health maintenance organization (HMO) but offers a broader choice of medical providers is called a

A) key-person organization.
B) package policy.
C) personal maintenance organization.
D) preferred provider organization (PPO).

Question 68

Because he is afraid of being in a car accident, Harold never drives. Instead, he always takes the bus or subway. Harold is practicing loss

A) avoidance.
B) control.
C) prevention.
D) reduction.

Question 69

Crime insurance is most critical for a small business when the

A) business has weak financial controls.
B) firm is struggling.
C) owner has a personal distraction.
D) owner employs family members.

Question 70

Identifying in an insurance policy the specific perils covered is a(n) _____ approach.

A) no-risk
B) named-peril
C) coinsurance
D) all-risk

Question 71

Which of the following statements about health insurance is true?

A) Group health insurance policies typically do not cover outpatient services and preventive care.
B) A health maintenance organization (HMO) is generally more expensive than a preferred provider organization (PPO).
C) Employees with health insurance typically must pay a co-pay for office visits to the doctor and for prescriptions drugs.
D) With a health maintenance organization (HMO), employees must stay with a network of providers or face higher out-of-pocket expenses in the event of a claim.

Question 72

A policy to protect businesses against the broad range of loss exposures arising from their use of the Internet and their holding of confidential information is called a _____ policy.

A) social media liability
B) cyber liability
C) employment practices
D) business owner's

Question 73

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

Question 74

Whether a potential loss is "small" or "large" depends on the

A) size of the insurance deductible.
B) strength of a company's financial position.
C) dependability of a company's cash flows.
D) level of risk retention the company can handle.

Question 75

Typically, insurance premiums to cover employee lawsuits alleging wrongful termination start at

A) $2,500.
B) $7,500.
C) $15,000.
D) $500.

Question 76

Commercial general liability insurance covers

A) business interruption expenses.
B) injury to customers.
C) automobile liability
D) profession liability.

Question 77

When considering the feasibility and affordability of insuring small potential losses, which company program will impact this decision?

A) Actual cash value (ACV)
B) FICA
C) Self-insurance
D) Workers' compensation

Question 78

Doug's property insurance on his fishing guide business excludes property losses due to the wakes of other fishing boats. This example illustrates the _____ approach to property insurance.

A) foreseen risk
B) insurance-to-value
C) all-risk
D) named-peril

Question 79

A customer's slip-and-fall injury would be covered by

A) commercial general liability (CGL) insurance.
B) surety bonds.
C) business interruption insurance.
D) commercial property coverage.

Question 80

Business interruption insurance is

A) required as part of a property insurance policy.
B) may be part of an umbrella liability policy.
C) not recognized as important by many small business owners.
D) part of a commercial general liability (CGL) insurance policy.