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Life and Health

Addendum: for use with Arkansas Life and Health online courses and study guide, version number 27274en/27276en, per exam content outline updates effective 3/1/2023.

Effective March 1, 2023, Arkansas is adopting PSI’s national outline for the General Knowledge portion of the exam. The course layout, chapter titles, and the Exam Breakdown will be updated to match the new outline. 

The following are content additions to supplement your existing text unless otherwise indicated. The additions below are referenced under new content domains.

LIFE AND HEALTH:

Introduction — Revised exam breakdowns

Arkansas Life Insurance Examination

110 Total Questions (100 scored, 10 pretest)

Arkansas Health Insurance

110 Total Questions (100 scored, 10 pretest)

General Insurance Concepts

Risk

1. Definitions

Risk is the uncertainty or chance of a loss occurring. The two types of risks are pure and speculative, only one of which is insurable.

Hazards are conditions or situations that increase the probability of an insured loss occurring. Hazards are classified as physical hazards, moral hazards, or morale hazards. Conditions such as lifestyle and existing health, or activities such as scuba diving, are hazards and may increase the chance of a loss occurring.

Physical hazards are individual characteristics that increase the chances of the cause of loss. Physical hazards exist because of a physical condition, past medical history, or a condition at birth, such as blindness.

Moral hazards are tendencies towards increased risk. Moral hazards involve evaluating the character and reputation of the proposed insured. Moral hazards refer to those applicants who may lie on an application for insurance, or in the past, have submitted fraudulent claims against an insurer.

Morale hazards are similar to moral hazards, except that they arise from a state of mind that causes indifference to loss, such as carelessness. Actions taken without forethought may cause physical injuries.

Perils are the causes of loss insured against in an insurance policy. Life insurance insures against the financial loss caused by the premature death of the insured.

Loss is defined as the reduction, decrease, or disappearance of value of the person or property insured in a policy, caused by a named peril. Insurance provides a means to transfer loss.

2. Elements of Insurable Risks

Not all risks are insurable. As noted earlier, insurers will insure only pure risks, or those that involve only the chance of loss with no chance of gain. Furthermore, even pure risks must have certain characteristics in order to be insurable. Insurable risks involve the following characteristics:

3. Methods of Handling Risk

Avoidance

One of the methods of dealing with risk is avoidance, which means eliminating exposure to a loss. For example, if a person wanted to avoid the risk of being killed in an airplane crash, he/she might choose never to fly in an airplane. Risk avoidance is effective, but seldom practical.

Retention

Risk retention is the planned assumption of risk by an insured through the use of deductibles, co-payments, or self-insurance. It is also known as self-insurance when the insured accepts the responsibility for the loss before the insurance company pays. The purpose of retention is

Sharing

Sharing is a method of dealing with risk for a group of individual persons or businesses with the same or similar exposure to loss to share the losses that occur within that group. A reciprocal insurance exchange is a formal risk-sharing arrangement.

Reduction

Since we usually cannot avoid risk entirely, we often attempt to lessen the possibility or severity of a loss. Reduction would include actions such as installing smoke detectors in our homes, having an annual physical to detect health problems early, or perhaps making a change in our lifestyles.

Transfer

The most effective way to handle risk is to transfer it so that the loss is borne by another party. Insurance is the most common method of transferring risk from an individual or group to an insurance company. Though the purchasing of insurance will not eliminate the risk of death or illness, it relieves the insured of the financial losses these risks bring.

Authority and Powers of Producers

An agent/producer is an individual licensed to sell, solicit or negotiate insurance contracts on behalf of the principal (insurer). The law of agency defines the relationship between the principal and the agent/producer: the acts of the agent/producer within the scope of authority are deemed to be the acts of the insurer.

In this relationship, it is a given that

The agent is responsible for accurately completing applications for insurance, submitting the application to the insurer for underwriting, and delivering the policy to the policyowner.

The agency contract details the authority an agent has within his/her company. Contractually, only those actions that the agent is authorized to perform can bind the principal (insurer). In reality, an agent's authority is much broader. There are 3 types of agent authority: express, implied, and apparent.

Express authority is the authority a principal intends to grant to an agent by means of the agent’s contract. It is the authority that is written in the contract.

Implied authority is authority that is not expressed or written into the contract, but which the agent is assumed to have in order to transact the business of insurance for the principal. Implied authority is incidental to and derives from express authority since not every single detail of an agent’s authority can be spelled out in the written contract.

Apparent authority (also known as perceived authority) is the appearance or the assumption of authority based on the actions, words, or deeds of the principal or because of circumstances the principal created. For example, if an agent uses insurer's stationery when soliciting coverage, an applicant may believe that the agent is authorized to transact insurance on behalf of the insurer.

Legal Interpretations Affecting Contracts

1. Reasonable Expectations

It is not always practical or necessary to state every direct and indirect provision or coverage offered by an insurance policy. If an agent implies through advertising, sales literature or statements that these provisions exist, an insured could reasonably expect coverage.

2. Indemnity

Indemnity (sometimes referred to as reimbursement) is a provision in an insurance policy that states that in the event of loss, an insured or a beneficiary is permitted to collect only to the extent of the financial loss, and is not allowed to gain financially because of the existence of an insurance contract. The purpose of insurance is to restore, but not let an insured or a beneficiary profit from the loss.

3. Utmost Good Faith

The principle of utmost good faith implies that there will be no fraud, misrepresentation or concealment between the parties. As it pertains to insurance policies, both the insurer and insured must be able to rely on the other for relevant information. The insured is expected to provide accurate information on the application for insurance, and the insurer must clearly and truthfully describe policy features and benefits, and must not conceal or mislead the insured.

4. Fraud

Fraud is the intentional misrepresentation or intentional concealment of a material fact used to induce another party to make or refrain from making a contract, or to deceive or cheat a party. Fraud is grounds for voiding an insurance contract.

Federal Laws and Regulations

Prohibited Persons in Insurance Waiver (18 USC Sections 1033 and 1034)

It is considered unlawful insurance fraud for any person engaged in the business of insurance to willfully, and with the intent to deceive, make any oral or written statement that are either false or omit material facts. This includes information and statements made on an application for insurance, renewal of a policy, claims for payment or benefits, premiums paid, and financial condition of an insurer.

Anyone engaged in the business of insurance whose activities affect interstate commerce, and who knowingly makes false material statements may be fined, imprisoned for up to 10 years or both. If the activity jeopardized the security of the accompanied insurer, the punishment can be up to 15 years.

Anyone acting as an officer, director, agent or other insurance employee who is convicted of embezzling funds faces the aforementioned fines and imprisonment. However, if the embezzlement was in an amount less than $5,000, prison time may be reduced to 1 year.

Federal law makes it illegal for any individual convicted of a crime involving dishonesty, breach of trust or a violation of the Violent Crime Control and Law Enforcement Act of 1994 to work in the business of insurance affecting interstate commerce without receiving a letter of written consent from an insurance regulatory official — a 1033 waiver. The consent of the official must specify that it is granted for the purpose of 18 U.S.C. 1033. Anyone convicted of a felony involving dishonesty or breach of trust, who also engages in the business of insurance, will be fined, imprisoned for up to 5 years or both.

Section 1034, Civil Penalties and Injunctions for Violations of Section 1033, states that the Attorney General may bring a civil action in the appropriate U.S. district court against any person who engages in conduct that is in violation of Section 1033 of not more than $50,000 for each violation, or the amount of compensation the person received as a result of the prohibited conduct, whichever is greater.

National Do Not Call List

In 2003, the Federal Trade Commission (FTC) and the Federal Communications Commission (FCC) worked together to create the National Do Not Call Registry, allowing consumers to include their telephone numbers on the list to which solicitation calls cannot be made by telemarketers. Insurance companies need to comply with this regulation when making solicitation phone calls.

To comply with the telemarketing sales rules, telemarketers must not do any of the following:

Some exceptions to the Do Not Call Registry include the following calls:

To keep in compliance with the Do Not Call rules, organizations must consult the registry every 31 days. Any phone numbers on the registry must be dropped from the organization's call lists.

CAN-SPAM Act

CAN-SPAM legislation was established to set the rules for commercial e-mail, and to give recipients the right to reject commercial messages. CAN-SPAM covers all commercial electronic messages, including business-to-business messages, the purpose of which is the commercial advertisement or promotion of a product or service.

CAN-SPAM requires that any commercial email must contain an opt-out mechanism; all opt-out requests must be honored within 10 business days. To be in compliance with this legislation, the entity that sends out e-mails must do the following:

Each violation of the above provisions is subject to fines of up to $16,000. On top of that is a penalty of $250 per each noncompliant e-mail, with a cap of $2 million dollars.

LIFE ONLY:

Life Insurance Basics

Determining Amount of Personal Life Insurance

Individuals seeking to buy life insurance may need assistance trying to establish how much coverage is appropriate, based on their ability to pay the premium, serve their needs, and protect their survivors. Insurance companies have developed 2 basic approaches to help producers and buyers to determine the needed amount of protection: human life value approach and needs approach.

1. Human Life Value Approach

The human life value approach (HLVA) gives the insured an estimate of what would be lost to the family in the event of the premature death of the insured. It calculates an individual’s life value by looking at the insured’s wages, inflation, the number of years to retirement, and the time value of money.

2. Needs Approach

The needs approach is based on the predicted needs of a family after the premature death of the insured. Some of the factors considered by the needs approach are income, the amount of debt (including mortgage), investments, and other ongoing expenses.

Planning for Income Needs

Besides taking care of immediate expenses after the death of the insured, the family may need to plan for an income source long term, so the needs approach to life insurance will factor in the following concerns:

Business Uses of Life Insurance

1. Executive Bonuses

Executive bonus is an arrangement where the employer offers to give the employee a wage increase in the amount of the premium on a new life insurance policy on the employee. The employee owns the policy and, therefore, has full rights to the policy. Since the employer treated the premium payment as a bonus, that amount is tax deductible to the employer and income taxable to the employee. It is assumed that if the employee were not willing to accept these conditions, the employer would not provide the benefit. Executive bonus plans are not subject to plan limits established by the IRS for qualified plans, so it is considered a nonqualified benefit plan.

Annuities

Uses of Annuities

The principal use of an annuity is to provide income for retirement; however, an annuity may be used for any accumulation of cash or simply to liquidate an estate. Because of the various uses of annuities, agents should always assess how well a recommended product will meet the applicant's needs and resources — the suitability of a product.

1. Lump-Sum Settlements

Annuities may serve as an ideal financial vehicle for someone who comes into a large lump sum of money, such as inheritance, lottery, award of damages from a lawsuit, proceeds from a sale of a business, or a lump-sum distribution from a qualified pension plan. In this case, a person may purchase a single premium immediate annuity, which will convert the lump sum into a series of periodic payments, providing a stream of income for the annuitant.

2. Retirement Income

Since annuities are a popular means to provide retirement income, they are often used to fund qualified retirement plans, which means they meet the IRS guidelines to receive favorable tax treatment.

3. Long-Term Care

Under the Pension Protection Act of 2006, annuitants are allowed to transfer money from an annuity to pay for long-term care insurance premiums, tax free. In the past, distributions from nonqualified annuities were taxed; however, now, distributions can be used to pay for long-term care premiums and, in many cases, eliminate the taxes on the annuity gains. As a result, many insurers now offer a hybrid annuity with a long-term care feature. These policies provide for income, long-term care, or both.

4. Guaranteed Minimum Withdrawal Benefit (GMWB)

Similar to the Guaranteed Minimum Withdrawal Benefit option, the Guaranteed Living Benefit Rider assures that the annuitant will receive at least the amount of money invested or a certain amount of income, usually up to the annuity purchase amount, regardless of market conditions. For that reason, this rider is generally offered to variable annuity investors where the value of the account depends solely upon the investment returns in the portfolio mutual funds.

Often, this rider can be exercised only after a certain time period (e.g., after 10 years), and there is usually a fee for the rider that can range from .25% to 1% of the contract value annually.

The rider is generally not applicable if the contract is surrendered, and withdrawals are subtracted from the account value on a dollar-for-dollar basis.

Each company's rider functions in a different manner and it is important to understand the features of the product being offered.

HEALTH ONLY:

Individual Accident and Health Insurance Policy Provisions

Uniform Optional Provisions

1. Intoxicants and Narcotics

The insurer is not liable for any claims that result while the insured is intoxicated or under the influence of drugs (unless administered by a physician). Treatment for substance abuse is usually a covered benefit under health insurance policies. This provision simply excludes any injury or sickness that results from the insured’s intoxication.

Disability Income and Related Insurance

Provisions Affecting Income Benefits

1. Cost of Living Adjustment (COLA) Rider

The purchasing power of disability benefits can be eroded by inflation. The cost of living adjustment (COLA) rider will help protect against inflation. Under this rider the insured’s monthly benefit will be increased automatically, once claim payments have begun. Generally, the first increase would be at the end of one year to be followed by annual increases for as long as the insured remains on the claim. Some of these riders provide for compound interest adjustments while others provide simple interest adjustments.

Medical Plans

Cost Containment in Health Care Delivery

With the dramatic rise in the cost of medical care over the past few decades, the concept of managed care has become a necessity for insurance companies. Managed care plans, such as HMOs and PPOs, are designed to control costs by controlling the behavior of the plan participants.

1. Cost-Saving Services

Cost-saving services or case-management provisions provide plans with controlled access of providers, large claim management, preventive care, hospitalization alternatives, second surgical opinions, preadmission testing, catastrophic case management, risk sharing, and providing high quality of care. Insurance companies use the services of case managers for large, ongoing claims through a process of utilization management. The case manager evaluates the appropriateness, necessity, and quality of health care, and may include prospective and concurrent review.

Preventive Care

Managed care plans encourage preventive care and living a healthier lifestyle. Annual physical exams, mammograms, and other procedures used to detect medical problems before symptoms appear can result in a considerable cost savings if a problem is detected early and treated quickly.

Hospital Outpatient Benefits

Because hospital confinement has become so costly, many plans require the patient to take advantage of outpatient services when possible.

Alternatives to Hospital Services

Alternatives to hospital care might include home health care where the patient stays at home and is visited periodically by a health professional. A home health aide that could work in conjunction with a family member may meet daily needs. Terminally ill patients may elect hospice care rather than a hospital stay. Hospice attends to the patient’s daily needs and provides pain relief but attempts no curative procedures. Within cost containment, painkillers and special hospital beds are paid for, but operations or antibiotics are not.

Preauthorization and Second Opinion

Preauthorization is a cost-containment measure requiring that the insured obtain approval from the insurer before getting an expensive surgery, referred to a specialist, or nonemergency healthcare service.

A second opinion is a separate assessment of a patient by a different medical professional who will then affirm or modify the patient's diagnosis and treatment plan.

2. Utilization Management

Utilization management is a system for reviewing the appropriateness and efficient allocation of health care services and resources that are being given or are proposed to be given to an insured. It also covers the review of claims for services that may be covered by a health care provider. There are different types of utilization management reviews: prospective, retrospective, and concurrent review.

Prospective Review

Under the prospective review or precertification process, the physician can submit claim information prior to providing treatment to know in advance if the procedure is covered under the insured’s plan and at what rate it will be paid.

Concurrent Review

Under the concurrent review process, the insurance company will monitor the insured’s hospital stay to make sure that everything is proceeding according to schedule and that the insured will be released from the hospital as planned.

HIPAA (Health Insurance Portability and Accountability Act) Requirements

Legislation that took effect in July 1997 ensures "portability" of group insurance coverage and includes various required benefits that affect small employers, the self-employed, pregnant women, and the mentally ill. HIPAA (Health Insurance Portability and Accountability Act) regulates protection for both group health plans (for employers with 2 or more employees) and for individual insurance policies sold by insurance companies.

HIPAA includes the following protection for coverage:

Eligibility

HIPAA has regulations regarding eligibility for employer-sponsored group health plans. These plans cannot establish eligibility rules for enrollment under the plan that discriminate based on any health factor relating to an eligible individual or the individual's dependents. A health factor includes any of the following:

Employer-sponsored group health plans may apply waiting periods prior to enrollment as long as they are applied uniformly to all participants.

To be eligible under HIPAA regulations to convert health insurance coverage from a group plan to an individual policy, an individual must meet the following criteria:

Such HIPAA-eligible individuals are guaranteed the right to purchase individual coverage.

Guaranteed Issue

If the new employee meets the requirements, the employer must offer coverage on a guaranteed issue basis.

Renewability

At the plan sponsor's option, the issuer offering group health coverage must renew or continue in force the current coverage. However, the group health coverage may be discontinued or nonrenewed because of nonpayment of premium, fraud, violation of participation or contribution rules, discontinuation of that particular coverage, or movement outside the service area or association membership cessation.

Federal Tax Considerations for Accident and Health Insurance

Consumer Driven Health Plans

1. Health Reimbursement Account (HRAs)

Health Reimbursement Accounts (HRAs) consist of funds set aside by employers to reimburse employees for qualified medical expenses, such as deductibles or coinsurance amounts. Employers qualify for preferential tax treatment of funds placed in an HRA in the same way that they qualify for tax advantages by funding an insurance plan. Employers can deduct the cost of a health reimbursement account as a business expense.

The following are key characteristics of HRAs:

In Health Reimbursement Accounts (HRAs), the employer's contribution is tax deductible in the year in which the reimbursement is made to the employee. The employee is not taxed on receipt of the benefit. Benefits must be paid solely to the employee for medical care expenses for the employee, the employee's spouse or dependents. If funds are distributed for other than medical care expenses, the benefit is considered to be taxable income to the employee.

Arkansas Statutes, Rules, and Regulations Pertinent to Health Only

A. Policy Provisions

1. Policy Requirements — section expanded as follows:

An individual health benefit plan must be renewable at the option of the insured, except for:

If an insurer elects to discontinue offering a particular health benefit plan, it must provide notice of discontinuation to all affected insureds at least 90 calendar days prior to the date the health benefit plan will be discontinued by the carrier. Insurers must offer the insureds the option to purchase other health benefit plans on a guaranteed issue basis. The decision to discontinue cannot be on the basis of any health-related factor of an insured.

If an insurer elects to nonrenew all of its health benefit plans, the insurer is required to provide advance notice of its decision to the Commissioner and all affected insureds at least 180 calendar days prior to nonrenewal.

An insurer that elects not to renew a health benefit plan will be prohibited from writing new business in the individual market in this state for a period of 5 years from the date of discontinuation.

An insurer is not prohibited from modifying coverage at the time of coverage renewal, as long as the modification is consistent with state law and is made on a uniform basis among all insureds covered under a similar policy.

B. Medicare Supplement

2. Provisions — section expanded as follows:

Medicare supplement policies or certificates in force in Arkansas may not contain benefits that duplicate benefits provided by Medicare.

Medicare supplement policy or certificate may not exclude or limit benefits for losses incurred more than 6 months from the effective date of coverage because it involved a pre-existing condition. The policy cannot define a pre-existing condition more restrictively than a condition for which medical advice was given or treatment was recommended by or received from a physician within 6 months before the effective date of coverage.

The Commissioner may issue reasonable regulations to establish specific standards for policy provisions of Medicare supplement policies. These standards will be in addition to and in accordance with applicable laws of Arkansas. No requirement of Arkansas law relating to minimum required policy benefits, other than the minimum standards provided below, apply to Medicare supplement policies and certificates. The standards may cover, but not be limited to:

The Commissioner will issue reasonable regulations to establish minimum standards for benefits, claims payment, marketing practices, compensation arrangements, and reporting practices for Medicare supplement policies.

The Commissioner may issue reasonable regulations necessary to conform Medicare supplement policies to the requirements of federal law, including, but not limited to:

The Commissioner may issue reasonable regulations that specify prohibited policy provisions not otherwise specifically authorized by statute, which, in the opinion of the Commissioner, are unjust, unfair, or unfairly discriminatory to any person insured or proposed to be insured under a Medicare supplement policy or certificate.

D. Group and Blanket Health

2. Provisions — section expanded as follows:

Group accident and health insurance policies issued in Arkansas must contain the following required provisions:

Continuation of Coverage — Every group accident and health insurance policy, other than accident only or specified disease policies, must contain a provision that any certificate holder, member or spouse whose coverage under a policy would end due to the termination of employment, group membership or change in marital status may continue coverage under the policy for themselves and any eligible dependent.

Continuation of coverage may only be made available to individuals who have been continuously insured for 3 months prior to termination or change in marital status. An individual who wishes to continue coverage must request continuation in writing no later than 10 days after the terminating event and pay the required premium on a monthly basis and in advance.

Coverage must end at the earliest of

Upon termination of continued coverage, an insurer must be offered a conversion policy.

Continued coverage does not need to include benefits for dental care, vision services, or prescription drug expenses. Coverage may not be continued for individuals eligible for Medicare or full coverage under another group health insurance policy.

Conversion of Coverage — Every group accident and health insurance policy issued in this state, other than coverage limited to expenses from accidents or specified diseases, must provide insureds under a terminated policy the option to convert their group policy to an individual plan. An individual must apply for conversion no later than 30 days after termination of group coverage.

A converted policy must provide coverage equal to or greater than the minimum standards established by the Commissioner and contain the statement "the benefits in this policy do not necessarily equal or match those benefits provided in your previous group policy." The initial premium for a conversion policy for the first year and subsequent renewal premiums are determined by individually underwritten standard risks for the age and class of risk and the type and amount of insurance provided.

Converted policies are prohibited from excluding coverage for pregnancy or other illness or injury on the grounds of a pre-existing condition which either exceeds or equals the waiting period of the original group plan.

Individuals eligible for Medicare or other group health coverage are not eligible for conversion.

F. Health Maintenance Organizations — section expanded as follows:

The powers of a health maintenance organization (HMO) include, but are not limited to:

HMOs must file a notice with the Commissioner when exercising powers. If the Commissioner does not disapprove the HMO's actions within 60 days of filing, the exercise of power is approved.

HMOs that have been in operation for at least 2 years may offer an annual open enrollment period of at least 1 month.

In order to maintain financial stability, prevent adverse selection by prospective enrollees, and avoid unreasonably high charges, an HMO may impose underwriting restrictions, upon approval by the Commissioner. The Commissioner must approve or deny an application for underwriting restrictions within 60 days. HMOs providing services on a group contract basis may limit open enrollment to all members of the group.

HMOs must provide to all enrollees evidence of coverage that must contain a statement of the following information:

• The health care services and the insurance or other benefits to which the enrollee is entitled under the contract;
• Any exclusions or limitations on the services, kinds of services, benefits or kinds of benefits to be provided, including any deductible or copayment feature and requirements for referrals prior to authorizations and second opinions;
• Where and how enrollees can get information about services;
• The total amount of payment and copayment, if any, for health care services and the indemnity or service benefits, if any, that the enrollee is obligated to pay with respect to individual contracts; and

A description of the HMO's method for 

• Due to chance — A loss that is outside the insured’s control.
• Definite and measurable — A loss that is specific as to the cause, time, place and amount. An insurer must be able to determine how much the benefit will be and when it becomes payable.
• Statistically predictable — Insurers must be able to estimate the average frequency and severity of future losses and set appropriate premium rates. (In life and health insurance, the use of mortality tables and morbidity tables allows the insurer to project losses based on statistics.)
• Not catastrophic — Insurers need to be reasonably certain their losses will not exceed specific limits. That is why insurance policies usually exclude coverage for loss caused by war or nuclear events: There is no statistical data that allows for the development of rates that would be necessary to cover losses from events of this nature.
• Randomly selected and large loss exposure — There must be a sufficiently large pool of the insured that represents a random selection of risks in terms of age, gender, occupation, health and economic status, and geographic location.

• To reduce expenses and improve cash flow;
• To increase control of claim reserving and claims settlements; and
• To fund for losses that cannot be insured.

• An agent represents the insurer, not the insured;
• Any knowledge of the agent is presumed to be knowledge of the insurer;
• If the agent is working within the conditions of his/her contract, the insurer is fully responsible; and
• When the insured submits payment to the agent, it is the same as submitting a payment to the insurer.

• Coverage L - Personal Liability;
• Coverage M - Medical Payments to Others; and
• Additional Coverages.

• Claims expenses;
• First aid to others; and
• Damage to property of others.

• Jewelry;
• Furs;
• Cameras;
• Musical instruments;
• Silverware;
• Golfer's equipment;
• Fine arts (including porcelains and glassware);
• Postage stamps; and
• Rare and current coins.

• 25% of the amount of insurance for that class of property; or
• $10,000.

• Wear and tear;
• Insects or vermin;
• War;
• Nuclear hazard;
• If fine arts are covered – breakage caused by fire or lightning, windstorm, earthquake or flood, explosions, and malicious damage or theft; or
• If postage stamps are covered – fading, creasing, denting or scratching, transfer of colors, and disappearance.

• The Coverage C limits no longer apply for the property scheduled on this endorsement;
• Insured locations: eligible property is covered worldwide;
• Fine arts and antiques can be covered on other than ACV basis;
• The special limits of liability no longer apply to items or classes of property scheduled; and
• No deductible will apply to a covered property loss.

• Section I – Covered Autos;
• Section II – Liability Coverage;
• Section III – Trailer Interchange Coverage;
• Section IV – Physical Damage Coverage;
• Section V – Motor Carrier Conditions; and
• Section VI – Definitions.

• Nuclear hazard;
• War or military action; and
• Wear and tear, freezing, mechanical breakdown, or road damage to tires.

• The actual cash value;
• The cost to repair or replace with like kind and quality; or
• The limit of insurance shown in the Declarations.

• $200 for gold, money, platinum, and silver;
• $1,500 for letters of credit, manuscripts, passports, and securities;
• $1,500 for watercraft and their equipment, furnishings, outboard engines, and trailers;
• $1,500 for trailers not used for watercraft or farming operations;
• $2,500 for business property on the insured location;
• $500 for business property away from the insured location;

• In the event of loss by theft:
• $2,500 for furs, jewelry, precious and semiprecious stones, and watches
• $2,500 for goldware, silverware, platinumware, and pewterware
• $3,000 for firearms and related equipment;
• $1,500 for electronic apparatus and accessories in or on a motor vehicle only if equipped to be operated by power from the vehicle's electrical system and other power sources;
• $1,500 for electronic apparatus and accessories used primarily for farming or business operations while off of the insured location and not in or on a motor vehicle.

• Grain and grain in stacks;
• Hay, straw, and fodder;
• Farm products, materials, and supplies;
• Livestock (excluding livestock in transit or at a stockyard);
• Bees, worms, fish, or other animals (except for the Basic or Broad Covered Causes of Loss);
• Poultry while in the open or in any building designated for poultry under the Declarations (excluding turkeys, unless specified);
• Computers related to farm management;
• Miscellaneous equipment; and
• Portable buildings and structures.

• Hay, straw, or fodder in the open — $10,000 per stack;
• Miscellaneous farm equipment — not more than $3,000 per item;
• Poultry — market value; and
• Livestock not specifically insured is limited to the least of ACV — 120% of the amount obtained by dividing the limit of insurance on the class and type of animal by the number of head of that kind of animal owned at the time of loss, or $2,000 (each horse, mule, or head of cattle 1 year of age at the time of loss will be counted as 1/2 head).

• Farm buildings or structures;
• Silos;
• Portable buildings and structures;
• Fences (other than field and pasture fences), corrals, pens, chutes, and feed racks;
• Outdoor radio and television equipment, antennas, masts, and towers;
• Improvements and betterments; and
• Building materials and supplies.

• $100,000 for bodily injury per accident;
• $100,000 per employee for disease; and
• $500,000 policy limit for disease (for all disease claims within the policy term).

• Injury arises from employment by the insured;
• Occurs in a state or territory listed in 3.A. of the information page;
• Occurs during the policy period; and
• If suit is brought in the USA or its territories, possessions, or Canada.

• Liability assumed under a contract;
• Punitive or exemplary damages;
• Employees knowingly employed in violation of law;
• Injury intentionally caused by the insured;
• Injuries that occur outside the United States, its possessions, or Canada (injuries to a resident temporarily outside these areas are covered);
• Damages caused by the employment practices or policies of the insured, including defamation, harassment, humiliation, discrimination, or termination of any employee;
• Employees who are subject to federal workers compensation or employers liability laws (although coverage is usually available by endorsement);
• Fines or penalties imposed because of a violation of state or federal laws; and
• Damages payable under the Migrant and Seasonal Agricultural Worker Protection Act or similar laws.

• Notify the insurer at once;
• Provide immediate medical care required by the law;
• Provide the names and addresses of the injured worker and any witnesses;
• Promptly send any notices or other legal papers;
• Cooperate with the insurer; and
• Do not make any voluntary payments or assume any obligations.

• Pay workers the wages owed when due. Workers must receive itemized, written statements of earnings each pay period.
• If they own property used to house migrant workers, ensure that worker housing complies with federal and state safety and health standards. A written statement of the terms and conditions of occupancy must be posted at the housing site where it can be seen or be given to the workers.
• Assure that vehicles used by a farm labor contractor, agricultural employer, or agricultural association to transport workers are properly insured, are operated by licensed drivers, and meet federal and state safety standards.

Introduction

F. Exam Breakdown – revised exam breakdown

Arkansas Personal Lines Insurance

105 Total Questions (95 scored, 10 pretest)

General Insurance Concepts

Risk

1. Elements of Insurable Risks

Not all risks are insurable. As noted earlier, insurers will insure only pure risks, or those that involve only the chance of loss with no chance of gain. Furthermore, even pure risks must have certain characteristics in order to be insurable. Insurable risks involve the following characteristics:

• Due to chance — A loss that is outside the insured’s control.
• Definite and measurable — A loss that is specific as to the cause, time, place and amount. An insurer must be able to determine how much the benefit will be and when it becomes payable.
• Statistically predictable — Insurers must be able to estimate the average frequency and severity of future losses and set appropriate premium rates. (In life and health insurance, the use of mortality tables and morbidity tables allows the insurer to project losses based on statistics.)
• Not catastrophic — Insurers need to be reasonably certain their losses will not exceed specific limits. That is why insurance policies usually exclude coverage for loss caused by war or nuclear events: There is no statistical data that allows for the development of rates that would be necessary to cover losses from events of this nature.
• Randomly selected and large loss exposure — There must be a sufficiently large pool of the insured that represents a random selection of risks in terms of age, gender, occupation, health and economic status, and geographic location.

2. Methods of Handling Risk

Avoidance

One of the methods of dealing with risk is avoidance, which means eliminating exposure to a loss. For example, if a person wanted to avoid the risk of being killed in an airplane crash, he/she might choose never to fly in an airplane. Risk avoidance is effective, but seldom practical.

Retention

Risk retention is the planned assumption of risk by an insured through the use of deductibles, co-payments, or self-insurance. It is also known as self-insurance when the insured accepts the responsibility for the loss before the insurance company pays. The purpose of retention is

• To reduce expenses and improve cash flow;
• To increase control of claim reserving and claims settlements; and
• To fund for losses that cannot be insured.

Sharing

Sharing is a method of dealing with risk for a group of individual persons or businesses with the same or similar exposure to loss to share the losses that occur within that group. A reciprocal insurance exchange is a formal risk-sharing arrangement.

Reduction

Since we usually cannot avoid risk entirely, we often attempt to lessen the possibility or severity of a loss. Reduction would include actions such as installing smoke detectors in our homes, having an annual physical to detect health problems early, or perhaps making a change in our lifestyles.

Transfer

The most effective way to handle risk is to transfer it so that the loss is borne by another party. Insurance is the most common method of transferring risk from an individual or group to an insurance company. Though the purchasing of insurance will not eliminate the risk of death or illness, it relieves the insured of the financial losses these risks bring.

Authority and Powers of Producers

An agent/producer is an individual licensed to sell, solicit or negotiate insurance contracts on behalf of the principal (insurer). The law of agency defines the relationship between the principal and the agent/producer: the acts of the agent/producer within the scope of authority are deemed to be the acts of the insurer.

In this relationship, it is a given that

• An agent represents the insurer, not the insured;
• Any knowledge of the agent is presumed to be knowledge of the insurer;
• If the agent is working within the conditions of his/her contract, the insurer is fully responsible; and
• When the insured submits payment to the agent, it is the same as submitting a payment to the insurer.

The agent is responsible for accurately completing applications for insurance, submitting the application to the insurer for underwriting, and delivering the policy to the policyowner.

The agency contract details the authority an agent has within his/her company. Contractually, only those actions that the agent is authorized to perform can bind the principal (insurer). In reality, an agent's authority is much broader. There are 3 types of agent authority: express, implied, and apparent.

Express authority is the authority a principal intends to grant to an agent by means of the agent’s contract. It is the authority that is written in the contract.

Implied authority is authority that is not expressed or written into the contract, but which the agent is assumed to have in order to transact the business of insurance for the principal. Implied authority is incidental to and derives from express authority since not every single detail of an agent’s authority can be spelled out in the written contract.

Apparent authority (also known as perceived authority) is the appearance or the assumption of authority based on the actions, words, or deeds of the principal or because of circumstances the principal created. For example, if an agent uses insurer's stationery when soliciting coverage, an applicant may believe that the agent is authorized to transact insurance on behalf of the insurer.

Legal Interpretations Affecting Contracts

1. Reasonable Expectations

It is not always practical or necessary to state every direct and indirect provision or coverage offered by an insurance policy. If an agent implies through advertising, sales literature or statements that these provisions exist, an insured could reasonably expect coverage.

2. Indemnity

Indemnity (sometimes referred to as reimbursement) is a provision in an insurance policy that states that in the event of loss, an insured or a beneficiary is permitted to collect only to the extent of the financial loss, and is not allowed to gain financially because of the existence of an insurance contract. The purpose of insurance is to restore, but not let an insured or a beneficiary profit from the loss.

3. Utmost Good Faith

The principle of utmost good faith implies that there will be no fraud, misrepresentation or concealment between the parties. As it pertains to insurance policies, both the insurer and insured must be able to rely on the other for relevant information. The insured is expected to provide accurate information on the application for insurance, and the insurer must clearly and truthfully describe policy features and benefits, and must not conceal or mislead the insured.

4. Fraud

Fraud is the intentional misrepresentation or intentional concealment of a material fact used to induce another party to make or refrain from making a contract, or to deceive or cheat a party. Fraud is grounds for voiding an insurance contract.

Federal Laws and Regulations

Prohibited Persons in Insurance Waiver (18 USC Sections 1033 and 1034)

It is considered unlawful insurance fraud for any person engaged in the business of insurance to willfully, and with the intent to deceive, make any oral or written statement that are either false or omit material facts. This includes information and statements made on an application for insurance, renewal of a policy, claims for payment or benefits, premiums paid, and financial condition of an insurer.

Anyone engaged in the business of insurance whose activities affect interstate commerce, and who knowingly makes false material statements may be fined, imprisoned for up to 10 years or both. If the activity jeopardized the security of the accompanied insurer, the punishment can be up to 15 years.

Anyone acting as an officer, director, agent or other insurance employee who is convicted of embezzling funds faces the aforementioned fines and imprisonment. However, if the embezzlement was in an amount less than $5,000, prison time may be reduced to 1 year.

Federal law makes it illegal for any individual convicted of a crime involving dishonesty, breach of trust or a violation of the Violent Crime Control and Law Enforcement Act of 1994 to work in the business of insurance affecting interstate commerce without receiving a letter of written consent from an insurance regulatory official — a 1033 waiver. The consent of the official must specify that it is granted for the purpose of 18 U.S.C. 1033. Anyone convicted of a felony involving dishonesty or breach of trust, who also engages in the business of insurance, will be fined, imprisoned for up to 5 years or both.

Section 1034, Civil Penalties and Injunctions for Violations of Section 1033, states that the Attorney General may bring a civil action in the appropriate U.S. district court against any person who engages in conduct that is in violation of Section 1033 of not more than $50,000 for each violation, or the amount of compensation the person received as a result of the prohibited conduct, whichever is greater.

Property and Casualty Insurance Basics

Principles and Concepts

1. Torts

A tort is a wrongful act or the violation of someone's rights that leads to legal liability. Tortfeasor is a person who commits a tort. Torts are classified as intentional or unintentional (referred to as negligence).

An intentional tort is any deliberate act that causes harm to another person regardless of whether the offending party intended to injure the aggrieved party. For purpose of this definition, breach of contract is not considered an intentional tort.

An unintentional tort is the result of acting without proper care. This is generally referred to as negligence.

Dwelling Policy

1. Personal Liability Supplement

Unlike the homeowners policy, the dwelling policy does not include any coverage for personal liability. The personal liability supplement can be added to the dwelling policy or written as a separate policy. Endorsements can be added for comprehensive personal liability (on- or off-premises liability), or premises-only liability if the dwelling is rented to others. The coverage form includes 3 coverages:

• Coverage L - Personal Liability;
• Coverage M - Medical Payments to Others; and
• Additional Coverages.

The additional coverages include

• Claims expenses;
• First aid to others; and
• Damage to property of others.

Liability insurance does not include a list of perils for Coverage L or Coverage M. Instead, coverage is subject to the definitions, exclusions and conditions present in the policy.

Homeowners Policy

Selected Endorsements

There are numerous endorsements available under the homeowners policy program that broaden the coverage provided under the basic policy forms. The following are optional endorsements available on the homeowners policy. (Some also are available for the dwelling program.)

1. Business Pursuits

Business pursuits is an endorsement that allows an insured to extend the Section II liability coverage to certain business pursuits that occur away from the premises. It covers the activities of the insured, but will not cover the liability of a business owned by an insured.

2. Earthquake

Earth movement (earthquake) is excluded in all property policies, but usually can be purchased separately for an additional premium. The coverage can be purchased to cover the dwelling, other structures, and/or personal property. Rates generally are determined by the type of construction that determines the dwelling's vulnerability to earthquake losses. Frame buildings are less susceptible to severe damage than masonry veneer buildings. Therefore, they have lower rates for this coverage.

Earthquake coverage provided by endorsement in a homeowners form considers one or more earthquake shocks occurring within a 72-hour period as a single earthquake.

The deductible under earthquake coverage is stated as a percentage of loss; however, it cannot be less than a specified minimum dollar amount (for example, $500 in HO '11 ISO form). The deductible applies separately to buildings, other structures, personal property, and loss of use.

Masonry veneer structures are not covered by an endorsement issued for a frame dwelling. A separate endorsement is available for this type of construction.

3. Home Day Care

If the insured operates a home day care business out of the insured residence, the home day care coverage endorsement may be attached to the policy to cover the liability exposure associated with the business. Coverage excludes loss or damage that results from sexual molestation, corporal punishment, physical or mental abuse, or draft and saddle animals – including vehicles used with such animals, motor vehicles, aircraft, or watercraft. The premium is based on the number of children kept in the home.

3. Personal Injury

Personal injury coverage, including injuries that result from false arrest, libel, slander, defamation of character, and invasion of privacy, may be added by endorsement.

4. Personal Property Replacement Cost

Personal property replacement cost endorsement changes the actual cash value settlement on personal property, household appliances, carpeting, awnings and outdoor equipment to a replacement cost basis. Certain types of property will not benefit from this coverage, such as fine arts, antiques, memorabilia, articles that are not in good working order, and items that are stored and have become outdated or obsolete.

There is no requirement that the personal property be insured to 80% of replacement cost at the time of loss. However, some insurers require that the amount of Coverage C be increased to 70% of Coverage A amount when this endorsement is purchased.

5. Watercraft

Watercraft endorsement provides liability protection for bodily injury or property damage caused by the ownership or use of watercraft (excluding when used to carry persons for a fee or when rented to others).

6. Ordinance or Law

The ordinance or law endorsement of a homeowners policy provides for losses for damage to covered property or the building containing covered property to be settled on the basis of any ordinance or law that regulates construction, repair, or demolition of this property. An additional premium will be charged for this endorsement.

7. Scheduled Personal Property

If the insured requires higher limits for certain types of property, the scheduled personal property endorsement may be used to schedule individually described items or classes of items on a blanket basis. This endorsement typically provides open peril or special form coverage on listed items. The endorsement provides for the scheduling of 9 different classes of property:

• Jewelry;
• Furs;
• Cameras;
• Musical instruments;
• Silverware;
• Golfer's equipment;
• Fine arts (including porcelains and glassware);
• Postage stamps; and
• Rare and current coins.

Newly acquired jewelry, furs, cameras, and musical instruments are covered up to the lesser of the following limits:

• 25% of the amount of insurance for that class of property; or
• $10,000.

The new property must be reported within 30 days of acquisition, and the insured may be required to pay the additional premium from that date. For coverage to apply to fine arts, the report of acquisition must be provided within 90 days.

Insured perils: this endorsement insures against direct physical loss to property caused by any of the following perils:

• Wear and tear;
• Insects or vermin;
• War;
• Nuclear hazard;
• If fine arts are covered – breakage caused by fire or lightning, windstorm, earthquake or flood, explosions, and malicious damage or theft; or
• If postage stamps are covered – fading, creasing, denting or scratching, transfer of colors, and disappearance.

The following are additional benefits and features of the scheduled personal property endorsement:

• The Coverage C limits no longer apply for the property scheduled on this endorsement;
• Insured locations: eligible property is covered worldwide;
• Fine arts and antiques can be covered on other than ACV basis;
• The special limits of liability no longer apply to items or classes of property scheduled; and
• No deductible will apply to a covered property loss.

Personal Auto Policy

1. Definitions

Personal injury protection (PIP), also called "no-fault insurance”, covers medical expenses and related costs resulting from an accident, regardless of who caused it. PIP covers both insured policyholders and passengers.

2. Selected Endorsements

Optional endorsements can be used to modify the personal auto policy to fit the needs of individual insureds. Some of the more commonly used endorsements are discussed next.