Chapter 4

Question 1

The Actual Cash Value formula is:

Select one:

a. Original cost minus physical depreciation
b. Replacement cost minus physical depreciation

Answer 1

The correct answer is: Replacement cost minus physical depreciation

Question 2

A mortgagee must be given how much notice of cancellation?

Select one:

a. 10 days
b. 20 days
c. 40 days
d. 80 days

Answer 2

The correct answer is: 10 days

Question 3

A mortgagee who is not notified that the policy has been canceled may recover:

Select one:

a. the balance owing on the mortgage
b. the policy limit

Answer 3

The correct answer is: the balance owing on the mortgage

Question 4

Subrogation involves the:

Select one:

a. insured’s suit against the insurer.
b. insurer’s suit against the insured.
c. third party’s suit against the insurer.
d. insurer’s suit against the third party.

Answer 4

The correct answer is: insurer’s suit against the third party.

Question 5

Each of the following is true about the mortgagee EXCEPT:

Select one:

a. The mortgagee must be notified of cancellation or nonrenewal.
b. The mortgagee may file a claim if the insured fails to do so.
c. The mortgagee has an insurable interest.
d. The mortgagee is entitled to coverage which exceeds the policy limits.

Answer 5

Remember, we are looking for the false answer with EXCEPT questions. The mortgagee may only collect up to the balance owing on the mortgage debt but certainly cannot recover more than the policy limit.

The correct answer is: The mortgagee is entitled to coverage which exceeds the policy limits.

Question 6

If a covered peril causes a loss, the Insurer must:

Select one:

a. pay the loss
b. complete a proof of loss form

Answer 6

The correct answer is: pay the loss

Question 7

An Insurer’s required assignment of rights of recovery after paying a claim is:

Select one:

a. salvage
b. coinsurance
c. risk
d. subrogation

Answer 7

The correct answer is: subrogation

Question 8

A Special Form policy covers:

Select one:

a. rats eat wiring insulation.
b. decay that causes a wall to collapse.
c. fungus.
d. termite damage.

Answer 8

Special (as well as Broad Form) will cover collapse. However, mold (fungus), insects and vermin are excluded perils.

The correct answer is: decay that causes a wall to collapse.

Question 9

A process used to negotiate settlement of a claim is:

Select one:

a. appraisal
b. subrogation

Answer 9

The correct answer is: appraisal

Question 10

To guarantee that depreciation will not be a factor in calculating the amount to be paid at the time of a loss, an Insured should purchase:

Select one:

a. Actual cash value
b. Replacement cost

Answer 10

The correct answer is: Replacement cost

Question 11

Which section of the Basic or Broad form policy determines whether a peril is covered?

Select one:

a. Insuring agreements
b. Declarations
c. Conditions
d. Exclusions

Answer 11

The correct answer is: Insuring agreements

Question 12

A covered loss occurs after a policy is cancelled. The mortgagee was not notified of cancellation. The mortgagee may recover:

Select one:

a. $0
b. the balance owing on the mortgage
c. the fair market value of the property
d. up to the policy limits

Answer 12

The correct answer is: the balance owing on the mortgage

Question 13

Basic covers:

Select one:

a. rain which blows in an open window and damages goods
b. water damage when a fire sprinkler system activates due to a fire

Answer 13

The correct answer is: water damage when a fire sprinkler system activates due to a fire

Question 14

Which section of a Special form policy determines whether a peril is covered?

Select one:

a. Declarations
b. Exclusions
c. Insuring agreements
d. Conditions

Answer 14

Under a Special Form, the only way we can determine whether a peril is covered is to read the exclusions. If the peril isn’t in the list of exclusions, it will be covered.

The correct answer is: Exclusions

Question 15

The cost of hiring the umpire is:

Select one:

a. paid by the appraisers.
b. split between the insurer and insurance commissioner.
c. paid by the insurer alone.
d. split between the insurer and insured.

Answer 15

Everyone pays for their own appraiser but the cost of the umpire is split.

The correct answer is: split between the insurer and insured.

Question 16

If your building is destroyed by fire, you must notify the Insurer:

Select one:

a. within 60 days
b. promptly

Answer 16

The correct answer is: promptly

Question 17

Which is an indirect loss?

Select one:

a. a business loses money due to a fire
b. a water pipe breaks on the top floor and floods a basement

Answer 17

The correct answer is: a business loses money due to a fire

Question 18

The Insurer’s recovery from the sale of damaged property is:

Select one:

a. salvage
b. assignment

Answer 18

The correct answer is: salvage

Question 19

Which represents replacement cost?

Select one:

a. Paying for new materials to replace old materials.
b. Reducing payment by depreciation.
c. Denying a claim.
d. Paying market value for a loss.

Answer 19

The correct answer is: Paying for new materials to replace old materials.

Question 20

Under the Business Income Policy’s Arbitration Provision:

Select one:

a. the insured may request arbitration when submitting a claim.
b. either party may request arbitration.

Answer 20

I apologize for blindsiding you on this question, but this is what the exam will do. We have covered the Arbitration Provision and you know from the text and video that either party may initiate the arbitration process in any property policy. The old exam questions would have
simply asked if either party can initiate arbitration. However, the newer and tougher questions like to put the arbitration provision within a particular property policy (such as Business Income which we haven’t yet studied) and then ask the same old questions about the arbitration
provision.

So, we have covered the arbitration provision. Just don’t panic when they ask about an Arbitration Provision contained in any of the policies we will later study - the answer is the same in all of the policies, Business Income, Commercial Package Policy, Commercial Crime, Business
Owner Policy, etc., etc.

The correct answer is: either party may request arbitration.

Question 21

Which is a consequential loss?

Select one:

a. a house collapses due to termite damage
b. lost rental income due to a fire

Answer 21

The correct answer is: lost rental income due to a fire

Question 22

A Broad Form policy covers:

Select one:

a. sonic boom
b. off-premises power failure
c. damage from a broken water pipe
d. water which backs up through a basement drain

Answer 22

The correct answer is: damage from a broken water pipe

Question 23

After a loss, an insured must:

Select one:

a. request an appraisal
b. pay the next premium payment
c. protect the property from further loss
d. notify the Insurance Commissioner

Answer 23

Remember that insurance policies are unilateral - only the Insurer makes a promise. The Insured never promises to pay any future premiums.

The correct answer is: protect the property from further loss

Question 24

Which is true regarding the appraisal provision?

Select one:

a. The Insured may invoke the appraisal provision at the time of submitting the claim.
b. Either party may initiate the appraisal.

Answer 24

The correct answer is: Either party may initiate the appraisal.

Question 25

If the Insured tries to turn partially or totally destroyed property over to the Insurer while demanding full payment is, this could be construed as the Insured’s illegal attempt at:

Select one:

a. abandonment
b. salvage

Answer 25

The correct answer is: abandonment

Question 26

During a fire, one wall of a building collapses and damages an adjacent building. This is:

Select one:

a. an indirect loss
b. a direct loss

Answer 26

The correct answer is: a direct loss

Question 27

A consequential loss is:

Select one:

a. a direct loss
b. an indirect loss

Answer 27

The correct answer is: an indirect loss

Question 28

Each of the following provides coverage over and above the policy limit EXCEPT:

Select one:

a. Debris removal
b. Fire Department Service Charge
c. Preservation of Property

Answer 28

Key words “over and above.”

The correct answer is: Preservation of Property

Question 29

Each is true regarding subrogation EXCEPT:

Select one:

a. It allows larger recovery by the Insured.
b. It upholds the concept of indemnification by preventing double recovery by the insured.
c. It exists in many types of insurance policies.
d. It places the burden of the loss on the responsible third party.

Answer 29

The correct answer is: It allows larger recovery by the Insured.

Question 30

Depreciated value is:

Select one:

a. Replacement cost
b. Actual cash value

Answer 30

The correct answer is: Actual cash value

Question 31

The best example of indemnification is:

Select one:

a. replacement cost
b. actual cash value

Answer 31

The correct answer is: actual cash value

Question 32

If the parties disagree on the amount of the claim, their first step should be:

Select one:

a. arbitration
b. a lawsuit

Answer 32

The correct answer is: arbitration

Question 33

The Insurer may require the responsible party to pay for the loss under the concept of:

Select one:

a. indemnity
b. subrogation

Answer 33

The correct answer is: subrogation

Question 34

Salvage is a right of:

Select one:

a. the insured only.
b. the insurer only.
c. neither the insurer or insured.
d. both the insurer and insured.

Answer 34

The correct answer is: the insurer only.

Question 35

Water damage to a building resulting from fire fighting efforts is:

Select one:

a. an indirect loss
b. a direct loss

Answer 35

The correct answer is: a direct loss

Question 36

If the Insured fails to submit a proof of loss, the mortgagee should:

Select one:

a. file a proof of loss form.
b. sue the insurer.

Answer 36

The correct answer is: file a proof of loss form.

Question 37

When the insured property is a total loss, who is entitled to the salvage?

Select one:

a. insurer
b. insured

Answer 37

The correct answer is: insurer

Question 38

Actual cash value:

Select one:

a. pays Fair Market Value
b. takes physical depreciation into account

Answer 38

The correct answer is: takes physical depreciation into account

Question 39

Extended Coverage does NOT cover:

Select one:

a. hail
b. earthquake
c. explosions
d. fire

Answer 39

The correct answer is: earthquake

Question 40

Payment of the actual cost to replace an item is:

Select one:

a. Replacement cost
b. Actual cash value

Answer 40

The correct answer is: Replacement cost

Question 41

The appraisal provision settles disputes about:

Select one:

a. the extent of loss
b. coverage

Answer 41

The correct answer is: the extent of loss

Question 42

The “other insurance clause” reinforces which insurance concept?

Select one:

a. indemnity
b. subrogation

Answer 42

The correct answer is: indemnity

Question 43

A sworn proof of loss statement must be submitted within:

Select one:

a. 10 days
b. 30 days
c. 45 days
d. 60 days

Answer 43

The correct answer is: 60 days

Question 44

Replacement cost coverage provides:

Select one:

a. Deductions for depreciation.
b. The total cost to repair or replace an item.

Answer 44

The correct answer is: The total cost to repair or replace an item.

Question 45

Broad form covers:

Select one:

a. glass breakage
b. Water damage to the floor due to water backing up through a clogged floor drain.

Answer 45

Sewer backup is an exclusion in all of our policies - that drain is connected to the sewer system.

The correct answer is: glass breakage

Question 46

A mortgage clause:

Select one:

a. Obligates the Insurer to pay the mortgage payments if the Insured is disabled.
b. Grants the mortgagee specific rights not granted to the Insured.

Answer 46

The mortgagee can get paid by the Insurer even if the Insured intentionally torches the property.

The correct answer is: Grants the mortgagee specific rights not granted to the Insured.

Question 47

The policy requires the mortgagee to be notified of:

Select one:

a. losses.
b. cancellation of the policy.

Answer 47

The correct answer is: cancellation of the policy.

Question 48

Insurable interest and actual cash value are both related to:

Select one:

a. Speculative risk
b. Peril
c. Law of Large Numbers
d. Indemnity

Answer 48

Both serve to make the Insured whole but to not allow the Insured to come out ahead. By requiring an insurable interest, we prevent the Insured from insuring property owned by others. By only paying ACV, we keep the Insured from coming out ahead by getting “new for old.”

The correct answer is: Indemnity

Question 49

After paying an Insured, the Insurer brings suit against the individual causing the loss. This is an example of the exercise of the right of:

Select one:

a. salvage
b. subrogation

Answer 49

The correct answer is: subrogation

Question 50

Which is true regarding salvaged property?

Select one:

a. The adjuster is entitled to the property.
b. The Insurer determines what happens to the property.
c. The Insurer must sell it to a salvage firm.
d. The Insured is entitled to the property.

Answer 50

The correct answer is: The Insurer determines what happens to the property.

Question 51

After a loss by a covered peril, the Insured demands full payment for damaged property given to the Insurer. This is an illegal attempt at:

Select one:

a. indemnity
b. abandonment

Answer 51

The correct answer is: abandonment

Question 52

A policy covers leaky roofs. The insured’s roof leaked after a satellite dish installer improperly mounted a new satellite dish on the roof. The leak damaged the wall, the floor, and a couch. The policy will pay for each of the following EXCEPT:

Select one:

a. the floor
b. the damage to the wall
c. repair of the leaky roof
d. the couch

Answer 52

Although the damage from the leaky roof is covered, the Insurer is not expected to repair the leaky roof. Likewise, if a water pipe breaks, the Insurer will cover the damage caused but the Insured is expected to repair the broken pipe.

The correct answer is: repair of the leaky roof

Question 53

The burden of proving a loss rests on the:

Select one:

a. insurer
b. insured

Answer 53

The correct answer is: insured

Question 54

Which is an indirect loss?

Select one:

a. heavy snows cause a roof to collapse
b. a fire causes a business to close
c. smoke from an oven damages living room drapes
d. water damage from firefighters

Answer 54

The correct answer is: a fire causes a business to close

Question 55

Subrogation involves transfer of whose rights?

Select one:

a. Insured
b. Insurer

Answer 55

The correct answer is: Insured

Question 56

Firefighter damage to an insured property is an example of:

Select one:

a. consequential loss
b. indirect loss
c. direct loss
d. an exclusion

Answer 56

The correct answer is: direct loss

Question 57

Replacement cost coverage will pay:

Select one:

a. the original price paid when the property was purchased.
b. the depreciated value of the property.
c. the fair market value of the property.
d. the cost to replace the property.

Answer 57

The correct answer is: the cost to replace the property.

Question 58

The Standard Mortgage Clause:

Select one:

a. gives the mortgagee the right to modify the policy.
b. is another name for the appraisal provision.
c. pays the insurance premium if the insured dies.
d. allows the mortgagee to pay the premium if the insured doesn’t.

Answer 58

The correct answer is: allows the mortgagee to pay the premium if the insured doesn’t.

Question 59

Under the appraisal provision:

Select one:

a. the court selects the appraisers.
b. each party selects an umpire.
c. each party selects an appraiser.
d. the court selects the umpire.

Answer 59

The correct answer is: each party selects an appraiser.

Question 60

A third party causes damage to the Insured’s property. After paying the claim, the property Insurer brought suit against the third party under the concept of:

Select one:

a. indemnity
b. subrogation

Answer 60

The correct answer is: subrogation

Question 61

Using an impartial third party to resolve a claim dispute is:

Select one:

a. arbitration
b. subrogation

Answer 61

The correct answer is: arbitration

Question 62

Using a disinterested third party to resolve a claim dispute is:

Select one:

a. arbitration
b. assignment

Answer 62

The correct answer is: arbitration

Question 63

Salvage:

Select one:

a. reduces the overall cost of claims.
b. is a right of the insured.

Answer 63

Only the Insurer has the right of salvage. The right of salvage permits the Insurer to sell the damaged item to reduce its claims costs. It also prevents the Insured from coming out ahead by getting “new stuff” and keeping the “damaged stuff.” Thus, the right of salvage upholds the
principle of indemnification.

The correct answer is: reduces the overall cost of claims.

Question 64

A special coverage policy covers:

Select one:

a. all losses except those specifically excluded
b. all losses

Answer 64

The correct answer is: all losses except those specifically excluded

Question 65

Most property policies provide:

Select one:

a. Replacement cost
b. Actual cash value

Answer 65

The correct answer is: Actual cash value

Question 66

Special covers each of the following EXCEPT:

Select one:

a. Theft
b. Mysterious disappearance
c. Floods and earthquakes
d. Acts of God

Answer 66

Floods and earthquakes aren’t covered by Special. But, Special will cover mysterious disappearance, theft, and all the other things that are commonly referred to as “Acts of God” because we mortals can’t figure out where else to place the blame.

The correct answer is: Floods and earthquakes

Question 67

The policy’s appraisal provision determines:

Select one:

a. the amount of the loss.
b. whether the loss is caused by a covered peril.

Answer 67

The correct answer is: the amount of the loss.

Question 68

In arbitration, the selected third party is the:

Select one:

a. arbitrator
b. umpire

Answer 68

The correct answer is: umpire

Question 69

New zoning laws prevent an Insured from replacing a destroyed property. If the Insured transfers ownership of the property to the Insurer, this is an example of:

Select one:

a. abandonment
b. subrogation
c. assignment
d. arbitration

Answer 69

The correct answer is: abandonment

Question 70

The insurer must be notified of the loss:

Select one:

a. within 60 days
b. immediately

Answer 70

The correct answer is: immediately

Question 71

Which is correct regarding subrogation?

Select one:

a. It is a method for insurers to recover from responsible third parties.
b. It lists the losses covered by the policy.

Answer 71

The correct answer is: It is a method for insurers to recover from responsible third parties.

Question 72

If the Insurer and Insured disagree about the amount to be paid under a policy, the parties should:

Select one:

a. cancel the policy
b. demand an appraisal

Answer 72

The correct answer is: demand an appraisal

Question 73

After a fire, an Insured is reimbursed in full for the loss. This is:

Select one:

a. Replacement cost
b. Actual cash value

Answer 73

The correct answer is: Replacement cost

Question 74

An Insurer may recover part of the losses paid for an Insured’s damaged auto by:

Select one:

a. using its right of salvage to sell the auto
b. waiving its right to assignment

Answer 74

The correct answer is: using its right of salvage to sell the auto

Question 75

After a boat accident, the Insured should do each of these EXCEPT:

Select one:

a. Notify the Insurance Commissioner.
b. Protect the property from further damage.
c. File a Proof of Loss.
d. Notify the insurer as soon as possible.

Answer 75

The Insurance Commissioner simply doesn’t want to hear about our problems unless the Insurer improperly fails to pay the claim.

The correct answer is: Notify the Insurance Commissioner.

Question 76

Which is an example of an indirect loss?

Select one:

a. fireplace smoke damages the home
b. a frozen pipe bursts
c. a business loses profits after a fire
d. a twister damages a home

Answer 76

Other names for Indirect Loss are Consequential, Loss of Income, and Loss of Use. Indirect loss refers to the financial loss that is a consequence of the direct loss. All of these refer to direct loss (damage to property) except for the loss of profits after a fire which is an indirect loss.

The correct answer is: a business loses profits after a fire

Question 77

The Insurer’s right to recover from a negligent third party for a claim paid by the Insurer to the Insured is known as:

Select one:

a. subrogation
b. insurable interest

Answer 77

The correct answer is: subrogation

Question 78

Special covers:

Select one:

a. all perils except those excluded
b. all perils

Answer 78

The correct answer is: all perils except those excluded

Question 79

Transfer of rights of recovery against others to the Insurer is:

Select one:

a. assignment
b. subrogation

Answer 79

The correct answer is: subrogation

Question 80

“New for old” refers to:

Select one:

a. Replacement cost
b. Actual cash value

Answer 80

The correct answer is: Replacement cost

Question 81

Which is NOT an extended coverage peril?

Select one:

a. earthquake
b. volcano
c. lightning
d. smoke and fire

Answer 81

The correct answer is: earthquake

Question 82

Which is a direct loss?

Select one:

a. loss of rental income following a fire
b. water damage caused by firefighters

Answer 82

The correct answer is: water damage caused by firefighters

Question 83

The mortgagee:

Select one:

a. must be given notice by the insurer if the insurer cancels or nonrenews.
b. is required to be the umpire in any appraisal disputes.
c. must pay the premium.
d. may cancel the owner’s policy.

Answer 83

The correct answer is: must be given notice by the insurer if the insurer cancels or nonrenews.

Question 84

L insures his garage for $15,000 with Co. A. He insures his building for $20,000 with Co. B. The fire coverage is equal to the replacement cost of the structures. Each policy has a $250 deductible. If both structures are destroyed by a covered peril, the maximum L will receive is:

Select one:

a. $5,000
b. $34,500
c. $34,750
d. $35,000

Answer 84

The correct answer is: $34,500

Question 85

The mortgagee must be notified of:

Select one:

a. rate changes
b. nonrenewal

Answer 85

The correct answer is: nonrenewal

Question 86

“Acts of God” are best covered by:

Select one:

a. Liability policies
b. Special form
c. Broad form
d. Basic form

Answer 86

New point - If we are concerned about unusual forces of nature, nothing can provide better coverage than the good old Special form policy! Liability insurance covers acts of the Insured, not acts of God.

The correct answer is: Special form