Enterprise Risk Management
Final Test Solutions
Course Introduction
Enterprise Risk Management is a comprehensive course that introduces students to the concepts, frameworks, and practices involved in identifying, assessing, and mitigating risks within organizations. The course covers the evolution of risk management beyond traditional approaches, focusing on a holistic, integrated view that encompasses financial, operational, strategic, and external risks. Students will explore risk governance structures, regulatory expectations, and the role of risk culture in organizational success. Through case studies and real-world applications, learners will develop the analytical and decision-making skills necessary to implement effective risk management strategies that support organizational objectives and resilience.
Recommended Textbook
Introduction to Risk Management and Insurance 9th Edition by Mark S. Dorfman
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23 Chapters
1245 Verified Questions
1245 Flashcards
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Chapter 1: Fundamentals and Terminology
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70 Verified Questions
70 Flashcards
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Sample Questions
Q1) Explain briefly the law of large numbers.
Answer: The law of large numbers is a mathematical rule that explains how insurance companies operate and are able to predict aggregate losses. The law says that the larger the sample size (the more exposures pooled together),the more closely the predicted result will equal the actual result.
Q2) Insurance companies utilize the law of large numbers to reduce the chance of loss for their insureds.
A)True
B)False
Answer: False
Q3) The primary reason the insurance mechanism functions successfully is the:
A)existence of adverse selection
B)ease with which underwriting results can be measured
C)predictability of losses via the law of large numbers
D)existence of many non-industrial nations
Answer: C
Q4) Hazards may increase either the frequency or the severity of losses.
A)True
B)False
Answer: True
Page 3
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Chapter 2: Defining the Insurable Event
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75 Verified Questions
75 Flashcards
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Sample Questions
Q1) FEMA stands for
A)Flood Emergency Management Agency
B)Federal Emergency Management Agency
C)Federal Environmental Management Association
D)Flood and Environmental Management Agency
Answer: B
Q2) All of the following adds to the defense or provides an excuse for the defendant in a legal liability claim except:
A)showing that there was no legal duty to protect the plaintiff
B)showing that the plaintiff assumed the risk
C)showing that the plaintiff had the last clear chance to avoid the accident
D)showing that the defendant did not mean to cause the loss
Answer: D
Q3) What is the difference between compensation for personal injuries and punitive damages?
Answer: Personal injury damages pay for damages to a persons rights,such as a loss of reputation or release of confidential information. Punitive damages are awards made to plaintiffs as a means of punishing defendants for outrageously offensive acts. Punitive damages imply gross negligence or the total disregard for the plaintiff's safety.
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Page 4
Chapter 3: Risk Management
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61 Verified Questions
61 Flashcards
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Sample Questions
Q1) In making your personal risk management decisions,which method would be the most feasible and the most economical for handling chipped windshields on your automobile?
A)Avoid (don't drive)
B)Retain (pay for them yourself)
C)Insure (file a claim under your auto insurance)
D)Expose (remove your windshield from your car)
Answer: B
Q2) Loss prevention is the best risk management tool when the chance of loss is __________________ and the potential loss severity is __________________.
A)high, high
B)high, low
C)low, low
D)low, high
Answer: B
Q3) Book value is the best measure of a direct property loss.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Financial Services Companies
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42 Verified Questions
42 Flashcards
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Sample Questions
Q1) A reciprocal exchange is:
A)a nonprofit corporation
B)unincorporated
C)a mutual insurance company
D)a federal insurance company
Q2) A mutual insurance company might be characterized by all of the following except:
A)Policyholder ownership
B)Non profit operations
C)Taxable dividends to owners
D)Assessable policies
Q3) How do a reciprocal exchange and a mutual insurance company differ?
Q4) Reciprocal exchanges are operated by managers known as notary publics.
A)True
B)False
Q5) What is demutualization? What are some reasons companies want to demutualize?
Q6) Dividends from mutual insurers are not subject to federal income tax.
A)True
B)False
Q7) What are the basic differences between a stock and a mutual insurance company?
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Chapter 5: Insurance Occupations
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57 Verified Questions
57 Flashcards
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Sample Questions
Q1) The independent agency system:
A)is doomed because agent's commissions are too high relative to direct writers
B)means the agent rather than the insurance company "owns" the business
C)is not a good career path for most college graduates because the system is doomed to extinction
D)is growing rapidly to the point of eliminating the direct writers
Q2) Which of the following is not a duty of an insurance agent?
A)duty to make a profit in the long run for the insurance agency and the insurer
B)carefully handling all money and keeping proper records
C)carefully conveying all relevant information
D)duty not to enrich himself by self dealing at the principal's expense
Q3) What is the difference between an agent and a broker?
Q4) What is the relationship between the underwriter and the actuary? How do they interact?
Q5) The MIB is most helpful to which of the following professionals?
A)life insurance agent
B)life insurance underwriter
C)property insurance agent
D)secret defenders of the galaxy
Q6) What are the steps in the loss adjustment process?
Page 7
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Chapter 6: the Insurance Market: the Economic Problem
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43 Verified Questions
43 Flashcards
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Sample Questions
Q1) The text suggests that insurance consumers should:
A)inform themselves about the company, policy, etc. to protect their own self interest
B)rely on government regulation to protect their interest, since insurance companies and policies cannot be understood by the public
C)rely on attorneys and the lawsuit process to protect themselves
D)rely on self regulation of insurance companies and the insurer's goodwill to protect their interest
Q2) Comparison shopping for insurance is generally not worthwhile since very little price variation is found in either life or property insurance.
A)True
B)False
Q3) When the consumer purchases insurance,several key decisions are made.What are these key decisions?
Q4) Prior to September 11,2001,property insurance policies:
A)covered terrorism
B)excluded terrorism from coverage
C)covered war
D)were very expensive
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8
Chapter 7: Insurance Regulation
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62 Verified Questions
62 Flashcards
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Sample Questions
Q1) Explain what a guarantee fund is.How are guarantee funds financed?
Q2) Insurance regulations require legal reserves and surplus because
A)assets have to equal liabilities plus owners' equity
B)reserves are long term obligations and must be met with long term assets
C)they provide a cushion against bad underwriting and investment results
D)insurers must pre-fund all agent's commissions and underwriting expenses
Q3) The Optional Federal Charter would require insurers to:
A)dismantle their state regulatory systems
B)submit to federal insurance regulation
C)phase out state regulation over a ten year period
D)none of the above
Q4) The right of the states to regulate insurance was first established by the:
A)SEUA decision
B)Paul v. Virginia decision
C)National Association of Insurance Commissioners Act
D)McCarran Ferguson Act
Q5) Life insurance companies have a debtor/creditor relationship with their living insureds that is similar to a fiduciary relationship.
A)True
B)False
Page 9
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Chapter 8: Insurance Contracts
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62 Verified Questions
62 Flashcards
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Sample Questions
Q1) There is no subrogation in life insurance.
A)True
B)False
Q2) The ____________ clause in an insurance policy says that when the insurer indemnifies the insured for a loss,it takes over the insured's right to collect payment from any negligent third party that may have caused the loss.
A)indemnity
B)proof of loss
C)adhesion
D)subrogation
Q3) When entering into a legally enforceable insurance contract consideration must exist. Explain what consideration is and the form it takes in insurance contracts.
Q4) The principle of utmost good faith
A)holds the insurer to a higher standard of honesty
B)does not apply in life insurance
C)holds the insured to a higher standard of honesty
D)requires the insurer and insured to enter the contract with utmost good faith
Q5) Explain the principle of indemnity. How does one measure indemnity?
Q6) Explain the principle of subrogation. Provide a mathematical example of its use.
Page 10
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Chapter 9: Basic Property and Liability Insurance Contracts
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49 Verified Questions
49 Flashcards
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Sample Questions
Q1) Describe the purposes of deductibles.
Q2) To determine if a loss is covered by a property insurance contract,you should look at all of the following except:
A)all applicable exclusions
B)the subrogation clause
C)what property is covered
D)the dollar limitations for recovery
Q3) Which of the following is not a reason for using deductibles in property insurance?
A)they reduce the morale hazard
B)they eliminate payment for frequent small losses
C)they allow consumers to customize contracts based on financial considerations
D)to split large losses in excess of the policy limits equitably between the insured and the insurer
Q4) After Hurricane Andrew,many insurers began using:
A)complete hurricane exclusions
B)percentage deductibles
C)high dollar straight deductibles
D)franchise deductibles
Q5) What are some of the reasons exclusions are found in insurance contracts?
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Chapter 10: Homeowners Insurance
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51 Verified Questions
51 Flashcards
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Sample Questions
Q1) The replacement cost of a home covered under the HO-2 policy is $100,000.Assume the home is insured for $50,000 and a $10,000 loss occurs (replacement cost). Also assume depreciation is set at 10% and a $500 deductible applies. How much will the insured recover if the damage is repaired?
A)$9,000
B)$8,500
C)$5,937
D)$6,250
Q2) Why is there a "special limits of liability" section in the personal property section of the HO-2 contract?
Q3) All the following are provisions in the HO-2 contract that can decrease amounts payable by the insurance company except:
A)deductibles
B)coinsurance/replacement cost provisions
C)special limits on certain types of property
D)mortgage clause
Q4) Intentional torts are usually not covered by liability insurance policies.
A)True
B)False
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Chapter 11: the Personal Auto Policy
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68 Verified Questions
68 Flashcards
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Sample Questions
Q1) The PAP coverage that pays the largest claims,and is possibly the most important coverage is:
A)Other than Collision
B)Medical Payments
C)Liability
D)Collision
Q2) Explain the purpose of Uninsured Motorist coverage.
Q3) Uninsured Motorist coverage usually provides property damage coverage to the insured for damages to his auto caused by an insured motorist.
A)True
B)False
Q4) Which one of the following is false concerning the PAP?
A)a pedestrian struck by an automobile can collect under his Medical Payments coverage
B)defense, settlement, and supplementary payments are in excess of the stated limits of liability in the PAP
C)Other Than Collision coverage will pay for theft of the automobile
D)Medical Payments coverage will not pay for the insured's injuries if the accident is the insured's fault
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Chapter 12: Professional Financial Planning
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48 Verified Questions
48 Flashcards
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Sample Questions
Q1) The federal estate tax will take a greater percentage of a large estate as well as a larger number of dollars.
A)True
B)False
Q2) With respect to a trust fund,what is the role of the trustee?
A)provide the initial funding for the trust
B)receive the benefits of the trust
C)provide management of the trust's property
D)determine the beneficiary of the trust
Q3) Purchasing life insurance on the homemaker
A)makes no sense because the homemaker generates no income
B)should not be done because of the moral hazard it creates in the working spouse
C)makes sense in many cases due to the cost of service replacement and it would help the family maintain a "normal" life style
D)is very necessary when the homemaker has no minor children
Q4) The early adult years are mainly characterized by pre-retirement planning.
A)True
B)False
Q5) Explain what a will is.What happens when a person dies without a valid will?
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Chapter 13: Life Insurance Policies
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55 Verified Questions
55 Flashcards
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Sample Questions
Q1) Whole life insurance policy sales have declined in recent years. Which of the following is NOT a reason for this decline?
A)term life insurance is typically a better choice for most consumers
B)term life insurance policies offer very competitive rates and attractive prices
C)variable life policies have gained popularity
D)inflation in the late 1970's and early 1980's
Q2) Your best friend discovers you just took an introductory insurance course. He asks you what type of life insurance policy he should buy,given that he is 28 years old. Which type of life insurance should you recommend?
A)Term life
B)Whole life
C)Universal life
D)Cannot be determined from the given information
Q3) In a limited payment policy only a portion of the face amount is paid if death occurs in the early years.
A)True
B)False
Q4) In general,what are the uses for term life insurance? Provide examples.
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15
Chapter 14: Standard Life Insurance Contract Provisions
And Options
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60 Verified Questions
60 Flashcards
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Sample Questions
Q1) The entire-contract provision makes the application for life insurance a part of the contract itself if attached.
A)True
B)False
Q2) The double indemnity option makes good sense for most families since the cost is low,and the option doubles the face amount of insurance for most causes of death other than accident.
A)True
B)False
Q3) Life insurance policies do not contain deductible provisions.
A)True
B)False
Q4) An insured must pay the specified interest rate to borrow his own "savings" when a loan is made on a whole life policy.
A)True B)False
Q5) The typical grace period found in a life insurance policy is 60 days. A)True B)False
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Chapter 15: Annuities
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39 Verified Questions
39 Flashcards
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Sample Questions
Q1) Which of the following does not influence how an insurer calculates monthly annuity benefits?
A)age
B)health status of insured annuitant
C)sex
D)amount of the premium the annuitant has paid
Q2) A variable annuity is usually paid for on a deferred basis.
A)True
B)False
Q3) A joint-and-one-half survivor annuity covers two people,but the annuity payments are cut in half at the death of the first annuitant.
A)True
B)False
Q4) The period during which the insured is making annuity payments to the insurer is the:
A)retirement period
B)deferral period
C)accumulation period
D)liquidation period
Q5) Explain briefly how annuity distributions are taxed.
Page 17
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Chapter 16: Medical Expense and Disability Insurance
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54 Verified Questions
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Sample Questions
Q1) The strictest definition of "disability" used in disability insurance products is the:
A)inability to engage in any occupation
B)inability to make the same income earned before the onset of the disability
C)inability to earn non wage income
D)inability to engage in one's regular occupation
Q2) The purpose of long term care insurance is to:
A)pay supplemental Medicare benefits when 60 days of coverage has been exceeded B)pay for housekeeping services for elderly disabled retirees on Medicare or Medicaid
C)pay for short stays in a hospital for the purpose of rehabilitation
D)pay for services in a long tem care facility such as custodial care, skilled nursing care, intermediate care, or hospice care
Q3) Major medical insurance usually requires the insured to pay a percentage of all losses after a deductible up to an out-of-pocket limit.
A)True
B)False
Q4) Distinguish between a guaranteed renewable and a noncancellable health insurance contract.
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Chapter 17: Advanced Topics in Risk Management
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Sample Questions
Q1) The most useful purpose of a risk management information system (RMIS)is to:
A)catalogue insurance policies
B)record, track, and analyze losses
C)maintain payroll and personnel records
D)calculate capital budgeting decisions
Q2) Explain what is meant by financial risk management?
Q3) What are the main considerations in determining the proper mix of retention and transfer in handling potential loss exposures?
Q4) One of the major problems associated with an RMIS is that if the data are inaccurate,any resulting analysis can be misleading.
A)True
B)False
Q5) All of the following are considered a financial risk handled by financial risk management except:
A)currency risk
B)liquidity risk
C)product marketability risk
D)commodity price risk
Q6) What is a RMIS? How does a RMIS help the risk manager?
Page 19
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Chapter 18: Commercial Property Insurance
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61 Verified Questions
61 Flashcards
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Sample Questions
Q1) What is the difference between a general average and a particular average in ocean marine insurance?
Q2) If the Bartow Publishing House sends a shipment of textbooks to the university bookstore via a common carrier,it needs:
A)no inland marine insurance because the trucking company already has this coverage
B)inland marine insurance because a shipper cannot recover from a common carrier
C)liability insurance to sue the common carrier for the carrier's legal liability
D)inland marine insurance even though it can collect a liability claim from the carrier, because such collection could be slow and potentially expensive.
Q3) "Loss of use" coverage will not provide payment for:
A)extra expenses incurred to stay in operation after an insured loss occurs
B)payment for a direct loss caused by fire at a described premises
C)lost profits after an insured loss due to the interruption of business
D)coverage for any continuing fixed expenses due to the loss of cash flow
Q4) More inland than ocean marine insurance has been sold in recent years.
A)True
B)False
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Chapter 19: Commercial Liability Insurance
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Sample Questions
Q1) All the following are possible remedies for the products liability problem except:
A)a federal uninsured consumer fund for making claims payments
B)a limit on "pain and suffering" damage claims
C)an end to contingency fees for lawyers
D)an end to state of the art evidence to show improvements
Q2) Which of the following types of legal liability coverage is most likely to have a "long tail" problem,and thus be insured under a claims-made contract?
A)water craft liability
B)auto liability
C)contractual liability
D)products liability
Q3) Which of these is not a criticism of the current tort system?
A)fraud is reduced by using our current tort system
B)recovery under the tort system is often slow
C)much of the money that changes hands does not go to the injured party
D)negligence is difficult to determine in many cases
Q4) Explain the idea behind implementing a pure no-fault law that applies to automobile insurance.
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Chapter 20: Bonding,Crime Insurance and Reinsurance
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Sample Questions
Q1) Explain the need for surety bonding. How does it work?
Q2) When a reinsurer cedes coverage to another reinsurer,it is called retrocession.
A)True
B)False
Q3) Pro-rata reinsurance coverage may be either facultative or treaty.
A)True
B)False
Q4) Professional reinsurance companies
A)engage only in reinsurance transactions
B)make up only a small part of the reinsurance market
C)are located only in the United States
D)also act as primary insurers
Q5) Rusty is arrested in Manhattan. He calls Saul's Bonding company to post the $25,000 bond required for his release from jail. In this situation,Saul's Bonding is the:
A)Principal
B)Obligee
C)Surety
D)Insurer
Q6) What is the difference between the crimes of theft,robbery and burglary?
Page 22
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Chapter 21: Employee Benefits
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Sample Questions
Q1) The Family and Medical Leave Act
A)applies to employers having 15 or more employees
B)gives employees the right to have paid leave for the birth of a child
C)gives employees the right to have unpaid leave to care for a foster child
D)does not require employees to give employers medical evidence of the illness that requires their leave
Q2) Explain how employees are taxed on group life insurance supplied as an employee benefit.
Q3) The maximum amount that can be contributed to an IRA is:
A)2% of your salary or $3,000, whichever is less
B)$3,000 in 2004, and $5,000 after 2004
C)$3,000, but that will increase to $5000 in 2008
D)$3,000 in 2004, and then it increases $500 per year through 2010
Q4) Major medical insurance provides first dollar coverage for any in-hospital expenses.
A)True
B)False
Q5) Explain the difference between a PPO and an HMO.
Q6) What are the rules to be considered a qualified plan?
Q7) Why are employers interested in providing employee benefits to their employees?
Page 23
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Chapter 22: Social Security
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Sample Questions
Q1) Medicare has three coverage parts;one part is mandatory,the other two are optional.
A)True
B)False
Q2) Each of the following is a Social Security benefit except:
A)retirement
B)unemployment
C)survivor
D)disability
Q3) Which one of the following is not a characteristic of Social Security?
A)benefits are individually selectable by the covered individual
B)participation is compulsory
C)it can operate on a pay as you go basis with no prefunding
D)legislative activity may change the benefits
Q4) The Social Security black-out period occurs between the time:
A)the insured worker retires and the time retirement benefits begin
B)survivor benefits end and the time retirement benefits begin
C)the insured worker becomes disabled and the time disability benefits begin
D)a disabled worker recovers from disability and the time he/she is able to earn 100% of his/her pre-disability wages
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Chapter 23: Unemployment and Workers Compensation Insurance
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Sample Questions
Q1) Unemployment insurance is both a state and federal program.
A)True
B)False
Q2) The exclusive remedy of worker's compensation law states that the:
A)compensation scheme for a work related injury is the employee's choice
B)employer can sue employees for misconduct after compensation is paid
C)employee can only collect from the worker's compensation system for work related injuries
D)worker must exclusively use the tort system to resolve liability claims against the employer
Q3) Each of the following describes a condition under which an employee is injured on the job. Under which of these would the employer not have to provide workers' compensation benefits to the injured employee?
A)employee falls asleep on the job
B)employee is distracted by a fellow employee
C)employee was late for work
D)employee had several beers before work
Q4) Before worker's compensation laws,what legal defenses did employers use when they were sued by an employee injured at work? Briefly explain each of these defenses.
Page 25
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