Chapter 2

Question 1

1. An assignment must be:

Select one:

a. notarized.
b. approved by the state insurance commissioner.
c. agreed to in writing by the insurer.
d. agreed to prior to a property loss.

Answer 1

An assignment is an agreement to transfer coverage or benefits under a policy. The assignment must be written and agreed to by all parties.

The correct answer is: agreed to in writing by the insurer.

Question 2

2. A deductible:

Select one:

a. reduces moral hazards
b. increases the cost of insurance

Answer 2

The deductible reduces both moral and morale hazards.

The correct answer is: reduces moral hazards

Question 3

If there is duplicate property insurance, the parties will utilize which provision?

Select one:

a. coinsurance
b. pro rata

Answer 3

Remember that the coinsurance clause deals with cheapskates. So, the “other insurance clause” will pay on a pro rata basis in a property policy.

The correct answer is: pro rata

Question 4

A written document providing evidence that coverage is in effect and which summarizes the coverage is known as:

Select one:

a. a certificate of insurance
b. an application

Answer 4

The correct answer is: a certificate of insurance

Question 5

The cause of the loss is:

Select one:

a. peril
b. risk

Answer 5

The correct answer is: peril

Question 6

The limit of liability is the maximum amount that:

Select one:

a. can be charged for a deductible.
b. the insured can collect for any one loss.
c. can be charged for a policy premium.
d. the insurer will pay for all losses in a particular state in a given year.

Answer 6

The correct answer is: the insured can collect for any one loss.

Question 7

Which is a hazard?

Select one:

a. a flood
b. a fire
c. a slippery road
d. a collision

Answer 7

A hazard increases the likelihood of a peril occurring - the slippery road does that. The others are all perils which actually cause the loss.

The correct answer is: a slippery road

Question 8

A shopping mall with only one exit is a?

Select one:

a. physical hazard
b. morale hazard
c. moral hazard
d. None of the above

Answer 8

The correct answer is: physical hazard

Question 9

Complete the coinsurance formula: (Did carry/divided by what????) X Loss = Amount of recovery.

Select one:

a. Requested coverage
b. Actual cash value
c. Replacement cost
d. Required coverage

Answer 9

The correct answer is: Required coverage

Question 10

Molly has been driving a car which has tires that are severely worn and should be replaced. The tires are an example of a:

Select one:

a. catastrophe
b. loss
c. peril
d. hazard

Answer 10

The worn tires are hazards because they increase the likelihood that a peril will occur. The worn tires are merely hazards because they have not yet resulted in a loss - the cause of a loss is a peril but we don’t yet have a loss.

The correct answer is: hazard

Question 11

One who can lose financially in the event of a loss has:

Select one:

a. an insurable interest
b. a moral hazard

Answer 11

The correct answer is: an insurable interest

Question 12

T has insured his $400,000 home for $250,000 under a replacement cost policy. In the event of a total loss, he will recover:

Select one:

a. $250,000
b. $400,000

Answer 12

Don’t show this question to your boss! This is the way we will answer this on the exam. I know that some policies have super fine print which will obligate the Insurer to replace the structure regardless of the cost. But not so with the typical policy - it will only pay for replacement costs up to the policy’s limit of liability.

The correct answer is: $250,000

Question 13

Under the Other Insurance Clause, if the Insured is covered by two policies, what will happen if a loss occurs?

Select one:

a. Each policy will pay a part of the loss.
b. Each policy must pay in full.

Answer 13

The correct answer is: Each policy will pay a part of the loss.

Question 14

The deductible:

Select one:

a. Is always $100 under property and casualty policies.
b. specifies the amount of the claim that won’t be paid by the policy.

Answer 14

The correct answer is: specifies the amount of the claim that won’t be paid by the policy.

Question 15

Which CANNOT be an Insurer’s reason for cancellation?

Select one:

a. substantial increase in the risk
b. misrepresentation
c. nonpayment of premiums
d. claims filed

Answer 15

Although an Insurer may nonrenew at will, the Insurer may only cancel a policy mid-term for one of these reasons:

1. Nonpayment of premium
2. Concealment or misrepresentation
3. Substantial increase in the risk, and (in some states)
4. Financial impairment of the Insurer.

Be sure that you note the difference between cancellation (mid-term) and nonrenewal (at the end of the policy term).

The correct answer is: claims filed

Question 16

The proportionate distribution of the amount to be paid by insurance companies insuring the same loss is covered by:

Select one:

a. other insurance/pro rata
b. risk
c. coinsurance
d. deductible

Answer 16

All policies contain an Other Insurance Clause to warn the insured that any claim will be prorated among multiple companies if the insured has more than one policy. This prevents the insured from “coming out ahead” and thus “upholds the principle of indemnification.”

The correct answer is: other insurance/pro rata

Question 17

Property ownership represents:

Select one:

a. a peril.
b. an insurable interest.

Answer 17

The correct answer is: an insurable interest.

Question 18

The minimum property deductible for Commercial Property Forms is usually:

Select one:

a. $0
b. $100
c. $250
d. $1,000

Answer 18

The key here is to focus on the “deductible” part of the question. Some companies are demanding a minimum of a $500 deductible, but most have a minimum $250 deductible.

The correct answer is: $250

Question 19

A’s homeowner policy is valid for one year. During the year, A sold the home to B. A’s lender is willing to allow A to transfer the homeowner policy to B. A must first obtain written permission from:

Select one:

a. the lender.
b. the insurer.

Answer 19

Assignment of a policy requires written consent of all three parties; the Insurer, the old Insured (the assignor), and the new policy owner (the assignee).

The correct answer is: the insurer.

Question 20

The Other Insurance Clause:

Select one:

a. allows coverage for catastrophic losses.
b. allows more than one person to be insured under the policy.
c. upholds the principle of indemnity.
d. prohibits other insurance on the same property.

Answer 20

The “Other Insurance Clause” prohibits stacking by the Insured who might try to collect in full under multiple policies. This prevents the Insured from coming out ahead. So, we can then say that the “Other Insurance Clause” upholds the principle of indemnity by preventing the double
recovery.

The correct answer is: upholds the principle of indemnity.

Question 21

An insurer’s discontinuation of a policy after expiration is:

Select one:

a. cancellation
b. nonrenewal

Answer 21

Termination at the end of the term (usually a year) is nonrenewal. Termination during the term is cancellation. Cancellation is a big deal if done by the Insurer - must have a reason and give prior written notice.

The correct answer is: nonrenewal

Question 22

An Insurer may cancel a property policy due to:

Select one:

a. claims filed
b. failure to provide notice of a claim
c. failure to make adequate repairs
d. fraudulent property valuation

Answer 22

The correct answer is: fraudulent property valuation

Question 23

Faulty wiring is an example of a:

Select one:

a. uninsurable hazard
b. physical hazard
c. moral hazard
d. morale hazard

Answer 23

A hazard is any factor that increases the likelihood of a peril occurring. A physical hazard is one that can be seen and touched. Thus, faulty wiring is an example of a physical hazard.

The correct answer is: physical hazard

Question 24

A clogged exhaust vent on the kitchen’s deep-fat fryer in a fried chicken restaurant is a?

Select one:

a. physical hazard
b. morale hazard
c. moral hazard
d. None of the above

Answer 24

The correct answer is: physical hazard

Question 25

Tim owes Visa $800 on a credit card bill. Visa purchased a fire insurance policy covering Tim’s home. If Tim’s home is destroyed by fire, how much will Visa be able to collect from the Insurer?

Select one:

a. $0
b. $800

Answer 25

Visa has no insurable interest because Visa doesn’t have a lien on a debtor’s assets. Credit card companies are “unsecured creditors,” meaning they have no lien on any specific asset and thus have no insurable interest.

The correct answer is: $0

Question 26

The amount an insured may recover under an airplane policy is restricted by the:

Select one:

a. subrogation provision
b. limit of liability

Answer 26

I know that we don’t cover airplane policies, but the theory is the same. Under any policy, the amount the Insured may recover is restricted by the Limit of Liability stated in the policy’s declarations.

The correct answer is: limit of liability

Question 27

A deductible does each of the following EXCEPT:
Select one:
a. lowers the quantity of claims
b. lowers the premium cost
c. increases the cost of insurance
d. improves the availability of insurance

Answer 27

The addition of a deductible will lower the cost of the premium. Watch out for a question which asks about removing or lowering a deductible - that would increase the premium. The deductible lowers the number of claims by eliminating small claims, lowers the premium, and improves the availability of insurance by making it more profitable and efficient for Insurers to provide policies. The deductible does not increase the cost of the policy; the deductible lowers the cost of the policy.

The correct answer is: increases the cost of insurance

Question 28

The earthquake deductible is:

Select one:

a. percentage
b. a flat dollar amount
c. $250
d. $500

Answer 28

The typical earthquake deductible varies from 5%-25% in California, 5% in the rest of the U.S.

The correct answer is: percentage

Question 29

The limit of liability is the most the policy will pay:

Select one:

a. per Insured
b. per loss

Answer 29

The correct answer is: per loss

Question 30

A loose handrail on a staircase is a:

Select one:

a. peril
b. hazard

Answer 30

The correct answer is: hazard

Question 31

The maximum the insured can collect under the policy is the:

Select one:

a. limit of liability
b. coinsurance

Answer 31

The correct answer is: limit of liability

Question 32

A lender financing a boat purchase may require the insured to name the lender as an insured party. The lender has:

Select one:

a. a right of subrogation
b. an insurable interest

Answer 32

The correct answer is: an insurable interest

Question 33

If your client complains that your premiums are too high, suggest:

Select one:

a. raising the deductible.
b. lowering the deductible.

Answer 33

Raising the deductible lowers the premium. Watch out, the question might ask about lowering the deductible which raises the premium.

The correct answer is: raising the deductible.

Question 34

Mary has an agreement stating that if she wrecks her car, the insurer will make the payments to Mary’s banker. This is:

Select one:

a. coinsurance
b. an assignment

Answer 34

The correct answer is: an assignment

Question 35

A document outlining the coverage with evidence that coverage is in effect is known as a/an?

Select one:

a. certificate of insurance
b. endorsement

Answer 35

The correct answer is: certificate of insurance

Question 36

The deductible does each of these EXCEPT:

Select one:

a. indemnify the insured.
b. lower premium costs.
c. reduce loss costs.
d. excludes payment for small claims.

Answer 36

The deductible does not make the Insured whole, thus it does not indemnify the insured. Another way of saying this is that the deductible does not uphold the principle of indemnification.

The correct answer is: indemnify the insured.

Question 37

The deductible:

Select one:

a. increases the Insurer’s administrative expenses.
b. decreases the insurer’s losses.

Answer 37

The correct answer is: decreases the insurer’s losses.

Question 38

To have an insurable interest, one must:

Select one:

a. have insurance.
b. have a monetary interest in the property.

Answer 38

The correct answer is: have a monetary interest in the property.

Question 39

Josephine wants to insure her home. Her fear is that a fire will damage her stained glass window (which she just purchased for $17,000). The value of the home is $100,000 and the policy has an 80% coinsurance requirement. Josephine should purchase a minimum of how much insurance so that the window will be fully insured?

Select one:

a. $17,000
b. $20,000
c. $80,000
d. $100,000

Answer 39

Under the coinsurance requirement, Josephine must insure the home to 80% of the home’s value to be fully insured on a partial loss. Thus, $80,000 coverage is required to fully cover a $17,000 loss.

The correct answer is: $80,000

Question 40

Increasing the deductible:

Select one:

a. raises the premium
b. lowers the premium

Answer 40

The correct answer is: lowers the premium

Question 41

Which component of the policy requires the insured to assume a stated amount of the loss?

Select one:

a. Deductible
b. Risk

Answer 41

The correct answer is: Deductible

Question 42

Which CANNOT have an insurable interest?

Select one:

a. lienholder
b. tenant
c. insured
d. insurer

Answer 42

The correct answer is: insurer

Question 43

The portion of the claim not covered by the policy is specified in the?

Select one:

a. deductible
b. limit of liability

Answer 43

The correct answer is: deductible

Question 44

The policy specifies the amount of the loss the insured must pay for through the:

Select one:

a. limit of liability
b. deductible

Answer 44

The correct answer is: deductible

Question 45

Q sold a building but did not cancel the policy. The building was later destroyed by a covered peril. Q will not collect under the policy

Select one:

a. the coinsurance clause.
b. lack of insurable interest.

Answer 45

The correct answer is: lack of insurable interest.

Question 46

A careless employee routinely leaves the rear door to the store unlocked. This is a?

Select one:

a. physical hazard
b. morale hazard
c. moral hazard
d. None of the above

Answer 46

Carelessness is a morale hazard. Intentional acts are moral hazards.

The correct answer is: morale hazard

Question 47

An insured who cancels a Commercial Property Form will receive a:

Select one:

a. short-rate refund
b. pro rata refund

Answer 47

The Insured is the “little guy” who gets a short-rate refund if the Insured cancels. But, if the pro (the Insurer) cancels, the Insured gets a pro rata (proportional) refund.

The correct answer is: short-rate refund

Question 48

Fire wood stored next to a wood stove is a?

Select one:

a. physical hazard
b. morale hazard
c. moral hazard
d. None of the above

Answer 48

The correct answer is: physical hazard

Question 49

The other insurance clause upholds the principle of:

Select one:

a. risk
b. indemnification

Answer 49

The correct answer is: indemnification

Question 50

The insured cancels a policy half way through its term yet receives less than a 50% refund. This is:

Select one:

a. a short-rate refund
b. fraud

Answer 50

The correct answer is: a short-rate refund

Question 51

A brush fire which spreads to a garage is an example of a:

Select one:

a. risk
b. peril

Answer 51

The correct answer is: peril

Question 52

The limit of liability in a policy refers to the extent of the:

Select one:

a. deductible.
b. insurer’s liability.

Answer 52

The correct answer is: insurer’s liability.

Question 53

Which covers only listed perils?

Select one:

a. Open Perils (All-Risk)
b. Specified (Named) Perils

Answer 53

The correct answer is: Specified (Named) Perils

Question 54

Special covers:

Select one:

a. all risks except those excluded
b. all risks

Answer 54

The correct answer is: all risks except those excluded

Question 55

Payment based on the fact that the Insured owns the property involved is:

Select one:

a. Actual cash value
b. Indemnity
c. Replacement cost
d. Insurable interest

Answer 55

Property ownership is evidence of an insurable interest. One must have an insurable interest to collect under a policy.

The correct answer is: Insurable interest

Question 56

Deductibles:

Select one:

a. eliminate large claims and increase administrative expenses.
b. eliminate small claims and reduce administrative expenses.

Answer 56

The correct answer is: eliminate small claims and reduce administrative expenses.

Question 57

Brenda is no longer covered by her insurance policy. Which of the following methods of policy termination would have resulted in a premium refund to Brenda?

Select one:

a. Cancellation
b. Nonrenewal

Answer 57

The correct answer is: Cancellation

Question 58

Cindy and Hal own a commercial building. Cindy asks the Insurer to increase the coverage but Hal objects. What should the Insurer do?

Select one:

a. Reject the request until both parties agree on the issue.
b. Refer the matter to the state Insurance Commissioner.
c. Comply with the desire of whichever Insured is named first in the policy’s declarations.
d. Comply with the desire of whichever Insured is named last in the policy’s declarations.

Answer 58

The first-named Insured controls the policy.

The correct answer is: Comply with the desire of whichever Insured is named first in the policy’s declarations.

Question 59

Any condition increasing the chance of loss is a:

Select one:

a. hazard
b. risk

Answer 59

The correct answer is: hazard

Question 60

Policy provisions designed to cover property not covered under the policy are known as:

Select one:

a. extensions
b. assignments

Answer 60

An extension may also be called a rider or an endorsement.

The correct answer is: extensions

Question 61

Nonrenewal requires the Insurer to:

Select one:

a. provide 90 days notice to the state insurance department.
b. mail notice to the insured in advance.

Answer 61

The state’s Insurance Department prefers not to hear about such trivial matters.

The correct answer is: mail notice to the insured in advance.

Question 62

Nonrenewal involves:

Select one:

a. termination by either the insurer or insured during the policy term.
b. the insurer’s refusal to continue the coverage at the end of the policy term.

Answer 62

The correct answer is: the insurer’s refusal to continue the coverage at the end of the policy term.

Question 63

A policy may be voided due to each of these EXCEPT:

Select one:

a. failure to pay premiums
b. increase in the hazards
c. fraud
d. failure to file a proof of loss form

Answer 63

An Insurer may cancel a policy due to a substantial increase in the risk. Thus, it could cancel due to an “increase in the hazards.” However, an Insurer has no right to cancel a policy due to a mere failure to file a proof of loss form. The Insurer may refuse to pay that claim but can’t cancel the policy.

The correct answer is: failure to file a proof of loss form

Question 64

Deductibles are used to:

Select one:

a. encourage the insured to be careful.
b. prevent the insured from receiving excessive payment.

Answer 64

The correct answer is: encourage the insured to be careful.

Question 65

With regard to cancellation:

Select one:

a. Cancellation entitles the Insured to a pro rata refund if the Insured instigates the cancellation.
b. The insured may cancel without reason or prior notice to the insurer.

Answer 65

The correct answer is: The insured may cancel without reason or prior notice to the insurer.

Question 66

Property ownership is evidence of:

Select one:

a. an insurable interest
b. taxation

Answer 66

The correct answer is: an insurable interest

Question 67

The liberalization clause applies when:

Select one:

a. the coverage is decreased but the premium is not.
b. the coverage is increased but the premium is not.
c. both the coverage and the premium are increased.
d. the premium is increased but the coverage is not.

Answer 67

The correct answer is: the coverage is increased but the premium is not.

Question 68

Assume that a property is insured by two policies. Each policy has an equal amount of coverage. If the property is damaged by a covered peril:

Select one:

a. both insurers will share equally in the loss.
b. only the first policy issued will pay on the claim.

Answer 68

Insurance policies contain an “Other Insurance Clause” specifying what will happen if there are two or more policies covering the same claim. It is easy to remember that with a property policy, the insurers share the loss proportionally, that is, pro rata.

The correct answer is: both insurers will share equally in the loss.

Question 69

A property policy which lists the perils covered is:

Select one:

a. Open Peril (All-Risk)
b. Named Peril

Answer 69

The correct answer is: Named Peril

Question 70

The maximum the policy will pay for any one loss is the:

Select one:

a. risk
b. limit of liability

Answer 70

The correct answer is: limit of liability

Question 71

Each of the following can have an insurable interest EXCEPT:

Select one:

a. an ex-owner who didn’t cancel the policy
b. an ex-owner carrying the mortgage
c. a tenant
d. a mortgagee

Answer 71

The ex-owner who neglected to cancel the policy has no financial interest in the property and thus no longer has an insurable interest.

The correct answer is: an ex-owner who didn’t cancel the policy

Question 72

A peril is:

Select one:

a. the proximate cause of the loss.
b. any factor which increases the likelihood of a loss.

Answer 72

The correct answer is: the proximate cause of the loss.

Question 73

When must an insurable interest exist under a liability policy?

Select one:

a. at the time of application
b. at the time of the loss

Answer 73

If you have taken a Life/Health course, the answer was different there. Under Property or casualty policies, the insurable interest doesn’t need to exist up front - it need only exist at the time of the loss. I sometimes zone out and mess up answers to questions like this - if I do, please send me an email. Thank you, thank you.

The correct answer is: at the time of the loss

Question 74

Cancellation involves:

Select one:

a. the insurer’s refusal to continue the coverage at the end of the policy term.
b. termination by either the insurer or insured during the policy term.

Answer 74

The correct answer is: termination by either the insurer or insured during the policy term.

Question 75

With the consent of the insurer, Albert assigned his warehouse insurance policy to Benson. Benson is the:

Select one:

a. assignor.
b. assignee.

Answer 75

The new person is the assignee, the old person is the assignor.

The correct answer is: assignee.

Question 76

The insurer’s exposure under a policy is restricted by:

Select one:

a. reserve requirements.
b. the Limit of Liability.

Answer 76

The correct answer is: the Limit of Liability.

Question 77

To prevent recovery beyond the amount of the insured’s actual loss, the policy will contain:

Select one:

a. a Coinsurance Clause
b. an Other Insurance Clause

Answer 77

The correct answer is: an Other Insurance Clause

Question 78

A certificate of insurance:

Select one:

a. summarizes the policy’s coverage.
b. changes the policy to which it is attached.
c. is issued only to government agencies.
d. guarantees that the insurer complies with all state laws.

Answer 78

A certificate of insurance gives evidence that a policy is in effect by providing a summary of the policy. Third parties often demand a certificate of insurance as proof of insurance before dealing with an insured.

The correct answer is: summarizes the policy’s coverage.