Module 2 Flashcards
Property & Casualty Insurance
How many perils are covered by basic coverage?
12
How many perils are covered by broad coverage?
6
What is open-perils coverage?
Increased protection designed to protect against all perils except those specifically excluded from coverage. It is the most comprehensive type of protection for any homeowner to purchase, although (understandably) it’s the most expensive. The most popular types of homeowners policies, the HO-3 and HO-5, have open-perils coverage either in full or in part.
Homeowner policies are a package of coverage, with policies containing ? sections. What are those sections?
2; Section I, which covers property losses, and Section II, which covers liability losses.
Section I in a homeowner policy is divided into ? parts.
4 - A through D.
Section II in a homeowner policy is divided into ? parts.
2
The HO-2 policy provides broad coverage for ?
the dwelling and personal property. In addition, this form broadens certain perils and adds other perils.
Under an HO-3 policy, real property is covered on an open-perils basis, unless ?.
the peril is specifically excluded by the policy.
An HO-3 policy covers all of the perils listed in an ? policy and any other peril not excluded.
HO-2.
The value of the HO-3 is that this form will cover certain unusual losses not specifically named as perils in the HO-2.
Suppose an insured homeowner with an HO-2 policy, who lives in a rural area, owns a shed that is damaged when a neighbor’s livestock gets loose. Because none of the named perils addresses this particular situation, the loss will not be covered. However, had the shed been insured under an ? policy, the damage would have been covered because an ? policy generally has no such exclusions.
HO-3
Coverage under an ? policy is designed for tenants who do not own their dwelling. In such cases, the tenant has a need only for personal liability coverage, plus coverage for contents and loss of use.
HO-4
The ? policy does not protect the actual building or dwelling (Coverage A or Coverage B), which should be covered by the landlord’s policy.
HO-4
The ? policy is similar to the HO-3 policy except that Coverage C (personal property) is written on an open-perils basis.
HO-5
An ? policy provides coverage for the condo owner’s personal belongings and any owned structural part of the building. This type of policy also provides liability protection.
HO-6
The ? policy provides coverage for those who live in an older home that has a replacement cost exceeding its market value.
HO-8
The HO-8 policy uses a ? for loss.
functional replacement cost provision
Under the functional replacement cost, the insurance company agrees to pay the amount necessary to repair damage, but the coverage cannot be more than ? that make the dwelling functionally equivalent to its original style.
the materials and labor
Standard policies cover personal property at ? of the dwelling coverage.
50%
The only viable method to provide sufficient coverage on items with low limits of coverage (money, securities, jewelry, etc) is to ?.
add a personal property endorsement or purchase a separate inland marine policy
For high-value items, like those listed in the previous section, adequate protection generally is available as an endorsement to the policy. Coverage is in the amount of ?, not the replacement cost or ACV. For this reason, a client may be required to provide appraisals, invoices, photographs, or other evidence of ownership to obtain coverage.
the item’s stated value or appraised value
Residential flood insurance provides coverage for ?
physical loss from a flood.
While some private companies offer flood insurance, the predominant provider is the ? through the National Flood Insurance Program (NFIP).
federal government
Earthquake insurance provides coverage for ?
physical loss due to an earthquake.
Earthquake policies generally have deductibles that may be as high as ? of the face amount of the policy. The reason for this is to avoid having to process numerous small claims after an earthquake, which allows the underlying insurance company to keep the premiums down and focus on larger claims.
10%
Inland marine insurance is protection for ?
personal property that is in transit or that can be transported.
Inland marine insurance usually is written with ? coverage (meaning, all perils, except for those specifically excluded, are covered).
open perils
A primary benefit of open perils coverage is that it extends the coverage to ?.
theft and loss
What kind of insurance does the below refer to?
Generally, this form of insurance is used to cover valuable personal property, rather than more common, lower-value property (e.g., a fine art collection rather than a blender in the kitchen).
inland marine insurance
? insurance may be the only way to fully cover certain items that have coverage limits built into the standard homeowners policy.
Inland marine
An ? policy is one way to overcome problems related to an insurer’s pair or sets settlement option. When one item of a pair (or set) is lost, stolen, and/or damaged, the pair or sets option allows the insurer to only pay for the one item—not the set. This can create problems, as the value of the set is often greater when all the parts are there.
inland marine
By using an inland marine policy, it may be possible for the insured to recoup a greater amount of the loss related to the one piece.
A home may be viewed as having these three distinct values:
1) market value
2) assessed value
3) replacement cost value
What is the market value of a home?
This is the price that a willing buyer and willing seller, under no compulsion, would exchange property.
What is the assessed value of a home?
This is the value the taxing authority places on the property and upon which they base property taxes. Depending on the community, this is typically 60% to 80% of the market value and is usually re-determined every three to five years.
What is the replacement cost value?
This is what it would cost to rebuild the home as is.
In most cases, the coinsurance penalty formula will provide a greater benefit than ?.
ACV
Zachary’s home would cost $400,000 to rebuild. Insurance on his home is $300,000 with a $1,000 deductible. A kitchen fire causes $20,000 in damage. What amount will the insurance company pay to Zachary for his loss?
$17,750.
$400,000 (replacement cost) x .80 (coinsurance) = $320,000 (amount of insurance required)
$300,000 / $320,000 = 0.9375
0.9375 x $20,000 (loss/damage) = $18,750
$18,750 - $1,000 (deductible) = $17,750
An important factor to consider is that the replacement value is determined at the ?, not at the time the policy was purchased.
time of loss
Phil has decided to have his homeowners insurance policy reviewed for the first time in several years. He is concerned that he may not have enough coverage due to years of inflation. Phil’s home has a fair market value (FMV) of $340,000, a replacement cost value of $325,000, an ACV of $285,000, and an assessed value of $310,000.
How much should Phil insure his home for?
$325,000 - 100% of the replacement value.
What is the actual cash value (ACV) equation?
replacement cost - depreciation.
What is an inflation guard endorsement?
This endorsement automatically increases the dwelling coverage each year by an amount that is usually tied to an index. A periodic review by the property and casualty agent, the insurance company, or a contractor can be used to confirm the replacement value.
The cost of a HO policy and its endorsements are affected by the following factors:
- construction
- location
- policy type
- deductible
- insurer
What is Comprehensive Personal Liability (CPL) Insurance?
CPL policies cover basic liability. The CPL policy provides coverage for damages payable as a result of the insured inflicting bodily injury or causing property damage that falls under the covered portion of the policy. Note that slander and libel are not covered under the personal liability portion of this policy because the policy will not cover intentional acts.
What section of an HO policy does the below refer to?
This section of the liability policy provides that if someone who is not living at the insured’s residence is injured there due to an act of the insured, the company will pay for medical care related to that injury. Negligence is not required.
medical payments to others
George owns a home in central Florida, which he has insured with a standard homeowners policy. He has an adventurous dog that tends to wander around the neighborhood. Whether or not George’s dog bites a pedestrian on or off of his property, his standard homeowners policy’s liability coverage (?) will cover him up to the policy limits for any damage or negligence as a result of his dog (dog bite lawsuit) that he is found to be legally liable. ? may also be applied for any medical bills, typically up to $1,000 for coverage of an occurrence on or off of the insured property.
Coverage E: Personal Liability; Coverage F: Medical Payments to Others
Stella is on vacation in California. While golfing with friends, she slices her drive into an adjacent fairway and hits another golfer causing several thousand dollars in medical bills. This is an additional occurrence, which Stella’s liability coverage within her homeowner’s policy (?) would protect her from litigation up to the policy limit because she is legally liable for her negligent drive of her golf ball. ? may also be applied for any medical bills, typically up to $1,000.
Coverage E: Personal Liability; Coverage F: Medical Payments to Others
In conjunction with the previous obligations, an insured MAY/MAY NOT sue the insurance company for failure to pay a claim if the insured did not reasonably assist or cooperate with the company in its attempt to settle the claim.
may not
What is personal injury liability?
Provides coverage for libel, slander, and defamation; false arrest, detention, imprisonment, or malicious prosecution; invasion of privacy; and other similar torts.
Sometimes coverage under a basic liability policy is not adequate. Most individuals obtain liability insurance through their homeowners and automobile policies. However, in today’s litigious world, many people want more protection than the typical homeowners or automobile policy offers. Rather than merely increase the coverage on the other two policies, clients will be better served if they are able to obtain a ?. This is sometimes called ?.
personal liability umbrella policy (PLUP); catastrophe liability insurance
A PLUP not only increases the coverage that is part of the homeowners and auto policies, it also ?.
broadens the overall coverage
A typical question arises as to how much coverage is enough, or even appropriate. Clients should have at least as much liability coverage as ?.
net worth
An exception would be high income earners (e.g., doctors, lawyers) who need higher liability limits even as they are starting their careers and have more debt than assets.
An advantage of an umbrella policy is ?.
that it is able to offer a quicker settlement
Harry purchases a $1 million PLUP requiring him to have $300,000 as the existing liability limit in Coverage E of his homeowners (HO) policy. However, his HO-policy only has $200,000 of existing personal liability coverage. Harry is sued for $1 million alleging his personal fault in an accident occurring in his garage. In this situation, Harry has only ? of liability coverage.
$900,000
($200,000 of homeowners coverage plus $700,000 of PLUP coverage)
The PLUP will pay only the difference in drop-down coverage between the liability amount Harry should have had in Coverage E ($300,000) and the amount of umbrella liability purchased ($1 million). Harry is personally at risk for the remaining $100,000 of potential liability.
What is a Personal Auto Policy (PAP)?
A type of insurance policy that provides coverage for private passenger vehicles. It is designed to protect individuals from financial losses due to car accidents, theft, or other damages involving their personal vehicles. A typical PAP includes several types of coverage.
? is the only mandatory part of auto insurance.
Liability coverage
What does 25/50/10 stand for?
An automobile liability policy will identify limits of liability you, as an insured, provide for others. Typical insurance coverage is shown in the format of 25/50/10. This is translated as follows: liability for bodily injury is covered for up to $25,000 per person and $50,000 per accident; with $10,000 for property damage liability.
Single drivers under the age of ? are grouped in the highest risk category.
25
Individuals ages ? are lower risk, however once individuals reach age ?, some companies rate them as higher risks as well.
25 - 75; 75
An automobile that is driven for pleasure only, costs less to insure than one that is ?.
driven to work daily
The PAP covers the following three general types of loss:
Legal liability
Injury to the insured and family
Damage to the vehicle
The following generally are considered to be insureds under a PAP:
The named insured, spouse, and resident relative(s) (e.g., children)
Anyone allowed to drive the insured’s covered auto
Any person or organization legally responsible for any insured’s use of a covered auto on behalf of that person or organization
Any person or organization legally responsible for the named insured’s or family members’ use of any auto or trailer (other than a covered auto or one owned by that person or organization)
If Tim drives his own car on an errand for his employer and injures someone, the employer is COVERED/NOT COVERED for any resulting claim or lawsuit against Tim.
covered
What is uninsured motorist coverage?
Provides protection for an insured who is involved in an accident with another driver who has no insurance.
What is underinsured motorist coverage?
Necessary in situations where an at-fault driver has insurance, but with very low limits. This coverage is added to the PAP by endorsement.
The two parts of physical damage coverage are ? and ?.
damage by collision; comprehensive (other-than-collision) damage
Generally speaking, damage by collision is when the insured hits something or the vehicle is overturned. Comprehensive damage is when something other than collision (e.g., fire, wind, hail, vandalism, etc.) damages the insured vehicle.
The PAP covers damage on an ? basis.
ACV
If your client wants a benefit that will cover towing and labor, she must add it to the PAP by ?.
endorsement
What are monoline forms?
Monoline forms refer to insurance policies that provide coverage for only one specific type of risk or insurance coverage, as opposed to multiple types of coverage bundled together in a single policy (like a package policy).
All package products include the following:
Common Declarations form.
Common Policy Conditions form.
Common Conditions form.
Exclusions.
What is a Business Owners Policy (BOP)?
A comprehensive insurance package designed for small to medium-sized businesses. It combines several essential types of coverage into a single policy, providing convenience and cost savings.
The basic businessowner’s policy (BOP) includes these four parts:
Part One—Businessowner’s Common Policy Conditions
Part Two—Businessowner’s Property Coverage
Part Three—Businessowner’s Causes of Loss and Exclusions
Part Four—Businessowner’s Liability Coverage
What is a Commercial Package Policy (CPP)?
An insurance policy that combines multiple types of coverage into one comprehensive package tailored to meet the specific needs of a business. It is designed for businesses that require more than the basic coverage offered by a Business Owner Policy (BOP), especially those with more complex or higher-risk operations.
What is a Basic Commercial General Liability (CGL) Policy?
A coverage against claims involving bodily injury, property damage, and personal or advertising injury arising from their operations, products, or services. It is a key component of most business insurance programs and is designed to protect businesses from the financial consequences of liability claims.
What is the below an example of?
A surgeon certainly intends to cut open the patient (technically battery); the surgeon just did not intend for the operation to have negative results.
Malpractice.
What does the below refer to?
In years past, especially in the medical field, the insured had the right to force the insurance company to fight claims in court. This generally was done because of the perception that any settlement was an admission of guilt. Over the years perceptions have changed, and many people have come to view liability cases in terms of economics rather than as a determination of guilt.
Under current conditions, if it will cost less to settle a case than to fight it, even if the insured can win the case, the insurer generally will try to settle the case out of court. Few insurance companies, and even fewer policies today, will allow an insured to prevent an out-of-court settlement.
Defense & Settlement
What is Errors & Omissions Insurance?
When a professional is in a position to cause fiscal (financial) harm (as opposed to physical harm) to a client, those types of liabilities will generally call for the use of errors and omissions insurance rather than malpractice insurance. An accountant, lawyer, insurance agent, stockbroker, or financial planner would use this form of insurance. Very little difference exists between the general structure of this form and malpractice insurance. All of the issues discussed previously also apply to this form of professional liability insurance.
There are two forms of social insurance required for business owners both large and small:
workers’ compensation and unemployment insurance. Both are funded through tax-styled premium payments and are designed to benefit the company employees.
Workers’ compensation benefits are funded through premiums paid by the ?.
employer
The insurer is the state, and benefits paid are usually a percentage of the employees’ average weekly pay (subject to maximum amounts) for employees who are injured on the job, and these benefits are considered final.
Which peril is included as basic coverage in most homeowners policies?
A. Water damage
B. Earth movement
C. Ordinance or law
D. Riot or civil commotion
D. Riot or civil commotion
Explanation: Basic homeowners coverage protects against a financial loss to the policyowner’s home due to riot or civil commotion. All of the other causes are generally excluded.
Personal property is covered under all forms of homeowners policies. Which item is considered to be personal property as defined by the standard homeowners policy?
A. A motorcycle
B. A pet
C. A credit card
D. Borrowed property from a friend
D. Borrowed property from a friend
Explanation: Borrowed property from a friend is considered to be personal property and is covered. The other items are excluded from coverage in the standard homeowners policy without special endorsements.
Which common peril is excluded from coverage in most homeowners policies?
A. Power surge
B. Tornado
C. Power failure
D. Volcanic eruption
C. Power failure
Explanation: Damage caused to the policyowner’s home by a power failure is typically excluded from coverage in most homeowners insurance policies.
Under a homeowners policy, which types of property are excluded or have limited coverage and should, therefore, be singled out for coverage under a separate policy?
I. Recreational vehicles
II. Boats
III. Trailers
IV. Furs
A. I and II
B. I and IV
C. II, III, and IV
D. I, II, III, and IV
D. I, II, III, and IV
Explanation: Types of property that are excluded or have limited coverage include items such as recreational vehicles, boats, trailers, furs and jewelry, and items requiring valued coverage, such as fine arts or antiques.
Edward recently built a house with a replacement cost of $200,000 and an actual cash value (ACV) of $150,000. He purchased insurance on the house providing Coverage A protection of $150,000. The roof of Edward’s house has been damaged by fire. The determination has been made that the roof was 25% depreciated and that the cost for full replacement will be $20,000. What amount will the insurance company pay for the loss?
A. $18,750
B. $18,750 less the deductible
C. $20,000
D. $20,000 less the deductible
B. $18,750 less the deductible
Explanation: George did not carry insurance equal to at least 80% of the replacement cost of the dwelling. Specifically, the applicable computation is:
$150,000 / (0.80 x $200,000) = $150,000 / $160,000 = 0.9375
0.9375 x $20,000 = $18,750 less deductible
George has a home with a FMV of $425,000, an assessed value of $375,000, and a replacement cost value of $410,000. Which homeowners insurance coverage should you recommend to George?
A. $340,000
B. $375,000
C. $410,000
D. $425,000
C. $410,000
Explanation: The answer is $410,000. You should always recommend that a home is insured for 100% of its replacement cost value.
Which item is always covered by a personal liability umbrella policy (PLUP)?
A. General liability
B. Business liability
C. Watercraft liability
D. Aircraft liability
A. General liability
Explanation: The policy may or may not cover watercraft or aircraft liability, but it never covers business liability (a separate commercial liability policy is required).
Comprehensive coverage pays for damages to the insured’s automobile from all of these perils EXCEPT:
A. hail.
B. collision with a tree.
C. collision with a deer.
D. damage from a falling tree.
B. collision with a tree.
Explanation: Collision with a tree (or any stationary object) would be covered by collision coverage under a PAP.
Which principle(s) of the workers’ compensation law apply in most states?
I. The indemnity paid to the injured employee is partial, but is to be considered final.
II. The costs for workers’ compensation benefits are funded through payroll taxes to which employees are expected to contribute.
III. The benefits payable under workers’ compensation is usually a percentage of the employee’s average weekly pay.
A. I only
B. II only
C. I and II
D. I and III
D. I and III
Explanation: Workers’ compensation is funded though insurance premiums paid by the employer.
Which HO policy form provides the highest level of building and personal property coverage?
A. HO-2
B. HO-3
C. HO-5
D. HO-15
C. HO-5
Explanation: The HO-5 policy provides open perils coverage on both buildings and personal property. The HO-2 policy form only provides broad form coverage on buildings and personal property. The HO-3 policy form only provides broad form coverage for personal property. The HO-15 personal property endorsement provides open perils coverage on personal property. This endorsement is usually added to HO-3.
Teresa’s residence was insured 10 years ago for $300,000 with a replacement value policy and a $1,000 deductible. Today, the market value is $550,000 and replacement costs are $500,000. If she had damages that cost $100,000, how much would the insurance company pay her?
A. $59,000
B. $60,000
C. $74,000
D. $75,000
C. $74,000
Raylan has an income that allows him to live a comfortable life in his well-kept home. He lives in a state where the minimum auto liability coverage is 25/50/15. Raylan’s auto policy has liability limits of 50/100/50. What recommendation should be made given these facts?
A. He should leave coverage as is, but purchase an umbrella policy.
B. At a minimum, he should increase the liability limits to 250/500/100.
C. He should do nothing, as Raylan’s coverage is at least double the state requirements.
D. He should reduce coverage to state minimums to save on premium expenses.
B. At a minimum, he should increase the liability limits to 250/500/100.
Since he “lives a comfortable life in a well-kept home”, this is an indicator that the insurance he currently has is not enough.
Choose the CORRECT statement regarding a commercial package policy (CPP).
A. A CPP provides liability insurance only.
B. A CPP does not provide comprehensive coverage.
C. The business owners policy (BOP) is often part of a CPP.
D. A CPP features lower policy premiums than the combined premiums of several policies, each covering one type of risk exposure.
D. A CPP features lower policy premiums than the combined premiums of several policies, each covering one type of risk exposure.
All of these professionals are likely to purchase errors & omissions insurance except:
A. Financial planners
B. Accountants
C. Physicians
D. Attorneys
C. Physicians
Physicians should have malpractice insurance instead.
Which of the following is true for property coverage in a commercial package policy (CPP)?
A) No customization is needed, as all potential risks are covered in the standard CPP.
B) The CPP is designed for larger businesses and is offered at a discount from a collection of monoline forms.
C) The standard CPP includes building, contents, and commercial automobile coverage.
D) The CPP provides liability coverage, and any property coverage needs to be added by endorsement.
B) The CPP is designed for larger businesses and is offered at a discount from a collection of monoline forms.
A CPP is a standard package of what used to be monoline forms offered at a discount. The standard CPP includes coverage for buildings, contents, and liability coverage. Additional coverage is available for things like commercial autos, glass, and specific, unique-to-the-business causes of loss can be provided by endorsement, but are not included in the standard policy.
Which of the following professionals would likely need errors and omissions insurance?
A) Psychiatrist
B) Dentist
C) Financial planner
D) Optician
C) Financial planner
Of the two professional liability forms available, malpractice insurance is for those professions where personal, physical harm can occur (e.g., doctors, nurses, and chiropractors). Errors and omissions insurance is for those professions where financial harm can occur (e.g., insurance agents, financial advisors, accountants, and attorneys).
Which of the following statements concerning the need for homeowners insurance policy endorsements or additional policies is CORRECT?
I. Policy endorsements or separate policies are available to compensate for policy shortcomings or to accommodate special needs.
II. Examples of types of property with limited coverage under a typical homeowners policy are jewelry, silverware, and collections of coins, stamps, and firearms.
A) II only
B) I only
C) I and II
D) Neither I nor II
C) I and II
All personal property of any significance should be scheduled and valued in preparation of any future claims that may occur as because of a covered peril. Items like jewelry, silverware, collections of coins or stamps, and firearms have stringent limitations within a standard homeowners insurance policy. Endorsements or separate policies are available to accommodate shortcomings and should be added to any property whose value exceeds the normal coverage limit.
Which of the following types of automobile insurance coverage would apply if you backed into a tree on your front lawn?
A) General provisions
B) Comprehensive
C) Liability coverage
D) Collision
D) Collision
Collision is defined under Part D of a personal auto policy as “the upset of your covered auto or its impact with another vehicle or object.” Therefore, this provision covers damages incurred in an accident involving other vehicles or when an automobile runs into a tree.
Kaari has a homeowners policy. Three streets away from her house, her dog bites a mailman. What are the consequence of this event?
A) Only personal liability coverage applies.
B) There is no coverage under the policy because pets are excluded.
C) Both medical payments and personal liability coverage may apply.
D) Only medical payments coverage applies.
C) Both medical payments and personal liability coverage may apply.
Both of these coverages apply on and off of Kaari’s property. Medical payments coverage will apply even if Kaari is not at fault, while her personal liability coverage will only apply if she is found to be negligent or legally liable.
Augusto and Celena have an HO-3 homeowners policy on their home. The dwelling is insured for $150,000. As the result of a kitchen fire, their home suffers extensive structural and smoke damage and is made uninhabitable for nine months. They rent a hotel room while the damage is repaired, incurring expenses of $13,500. It also costs them $4,000 for meals during their hotel stay, for a total of $17,500. Which of the following statements regarding the couple’s coverage under their HO-3 policy is CORRECT?
A) The HO-3 policy covers the entire $17,500 in expenses.
B) The HO-3 policy does not cover any of their living expenses while their house is uninhabitable.
C) The HO-3 policy covers the full $13,500 in rental expenses but does not cover the $4,000 for meals.
D) The HO-3 policy covers only the first $15,000 of the $17,500 in expenses.
A) The HO-3 policy covers the entire $17,500 in expenses.
Coverage D of a homeowners policy pays living expenses, including lodging costs and meals, incurred when the house is made uninhabitable by a covered peril. Under an HO-3 policy, Coverage D is limited to 20% of the Coverage A limit on the dwelling. In Augusto and Celena’s case, coverage under Coverage D is $30,000 ($150,000 × 20%), so their lodging expenses and meals are fully covered.
Which of the following professionals would likely need malpractice insurance?
A) An attorney
B) An accountant
C) An oncologist
D) A financial advisor
C) An oncologist
Of the two professional liability forms available, malpractice insurance is for those professions where personal, physical harm can occur (e.g., doctors, nurses, and chiropractors). Errors and omissions insurance is for those professions where financial harm can occur (e.g., insurance agents, financial advisors, accountants, and attorneys).
The personal liability umbrella policy (PLUP) is structured to provide a catastrophic layer of liability coverage, in addition to the current homeowners and automobile liability coverage. Which of the following are exclusions found in a PLUP?
I. Any act committed with the intent to cause bodily injury to another
II. Liability arising out of any personal activity
III. Directors and officers liability
IV. Workers’ compensation obligations
A) I, III, and IV
B) I, II, and III
C) I and II
D) III and IV
A) I, III, and IV
One of the more important exclusions found in a PLUP is liability arising out of any business activities.
Which of the following is true for property coverage in a commercial package policy (CPP)?
I. A CPP will be offered at a discount from a collection of monoline forms.
II. Customization is allowed in order to modify the standard CPP.
III. The standard CPP includes building, contents, and commercial automobile coverage.
IV. The CPP is designed for smaller businesses.
A) IV only
B) I, II, and IV
C) I and II
D) I and III
C) I and II
A CPP is a standard package of what used to be monoline forms offered at a discount. The standard CPP includes coverage for buildings, contents, and liability coverage. Additional coverage is available for things like commercial autos, glass, and specific, unique-to-the-business causes of loss. Thus, a CPP is customizable so it can accommodate many different businesses. The CPP is designed for larger businesses, while the businessowner policy is designed for smaller businesses.
Milt has an HO-3 homeowners policy, and his home is insured for $200,000. He has a detached garage on the premises. The garage has a replacement cost of $25,000. How much coverage does Milt have under Coverage B (Other Structures) of his homeowners policy?
A) $25,000
B) $40,000
C) $50,000
D) $20,000
D) $20,000
The coverage under Coverage B of a homeowners policy is 10% of the coverage on the dwelling ($200,000 × 10% = $20,000).
All of the following perils are excluded from coverage under most homeowners policies except
A) power failure.
B) volcanic eruption.
C) flood.
D) earthquake.
B) volcanic eruption.
Losses from earthquakes, floods, and power failure are excluded from coverage in most homeowners insurance policies. Volcanic eruption is one of the 12 perils covered under basic coverage.
Which of the following professionals would likely need malpractice insurance?
A) Attorney
B) Registered nurse
C) Financial advisor
D) Accountant
B) Registered nurse
Of the two professional liability forms available, malpractice insurance is for those professions where personal, physical harm can occur (e.g., doctors, nurses, and chiropractors). Errors and omissions insurance is for those professions where financial harm can occur (e.g., insurance agents, financial advisors, accountants, and attorneys).
Which of the following occupations would likely need errors and omissions insurance?
A) Family practice physician
B) Lawyer
C) Registered nurse
D) Anesthetist
B) Lawyer
Of the two professional liability forms available, malpractice insurance is for those professions where personal, physical harm can occur (e.g., doctors, nurses, and chiropractors). Errors and omissions insurance is for those professions where financial harm can occur (e.g., insurance agents, financial advisors, accountants, and attorneys).
Which of the following individuals are NOT insured under Section II of homeowners policies?
A) A family member residing in the household
B) The friends of the insured who are not in the care of the insured
C) Other persons under 21 years of age in the care of an insured
D) The named insured and spouse
B) The friends of the insured who are not in the care of the insured
The insured persons include the named insured and spouse, family members residing in the household, and other persons under age 21 in the care of an insured.
Which of the following are types of automobile insurance coverage under a personal auto policy (PAP)?
I. Uninsured motorists
II. Liability insurance
III. Medical payments
IV. Property damage
A) I and II
B) I, II, and III
C) III and IV
D) I, II, III, and IV
D) I, II, III, and IV
All of these are types of insurance coverage under a PAP.
Which of the following types of insurance provides benefits to employees who are injured on the job?
A) Malpractice insurance
B) Unemployment insurance
C) Errors and omissions insurance
D) Workers’ compensation insurance
D) Workers’ compensation insurance
Workers’ compensation benefits are funded through premiums paid by the employer. The insurer is the state, and benefits paid are usually a percentage of the employee’s average weekly pay (subject to certain maximums).
The National Flood Insurance Program provides subsidized flood insurance for property owners in qualified areas and
A) is considered to be in force immediately if elected during the first 30 days in which the insurance becomes available to a community.
B) does not have a deductible.
C) is mandatory for all people in qualified areas.
D) does not provide coverage for any personal property.
A) is considered to be in force immediately if elected during the first 30 days in which the insurance becomes available to a community.
Coverage is effective immediately if elected within the first 30 days of availability. Although not mandatory, mortgage lenders generally require homeowners to purchase flood insurance in flood-prone areas. Contents coverage applies to household and personal property usual or incidental to the occupancy of the dwelling. In addition, a deductible may apply to any claims.
Rebecca owns a gift shop and a home. She takes the bus everywhere she goes. In her spare time, she occasionally engages in activities that could possibly result in bodily injury to innocent bystanders if anything accidentally went wrong. Which of the following forms of insurance should Rebecca consider to avoid risk exposures from potential tort liability?
I. Homeowners policy
II. Personal auto policy
III. Umbrella liability policy
IV. Commercial liability policy
A) III and IV
B) I, III, and IV
C) II and IV
D) I and II
B) I, III, and IV
As a businessowner, Rebecca should have a commercial liability policy for her business, most likely as a part of a businessowner’s policy. As a homeowner, she should have homeowners insurance, and since she is a businessowner and potentially a target for lawsuits, a liability umbrella policy is also a good idea. Since she does not drive, she has no need for a personal auto policy.
Which of the following statements regarding personal auto policy (PAP) Part B Medical Payments coverage is CORRECT?
I. Part B of the PAP provides payment for the reasonable and necessary medical expenses of an insured as a result of an automobile accident.
II. The insureds under Part B include the named insured, spouse, and any family members while they are occupying a motor vehicle, or when, as a pedestrian, they are struck by a vehicle.
A) Both I and II
B) II only
C) I only
D) Neither I nor II
A) Both I and II
Part B: Medical Payments coverage provides payment for the reasonable and necessary medical expenses of the insured as a result of an automobile accident. Expenses must be incurred within three years of the incident, and limits are provided on a per-person, per-occurrence basis. Individuals covered by Part B include the named insured, spouse, and any family member while they are occupying a motor vehicle, or when, as a pedestrian, they are struck by a vehicle.
Which of the following statements regarding Coverage E and Coverage F within a standard homeowners insurance policy is CORRECT?
I. Medical payments coverage (Coverage F: Medical Payments to Others) will automatically pay for bodily injuries, regardless of fault, typically up to $1,000 per occurrence on or off the premises.
II. Personal liability coverage (Coverage E: Personal Liability) protects the insured homeowner and all resident family members against personal liability for bodily injury and property damage that may occur on or off the premises due to negligence, up to $300,000 per occurrence.
III. Coverage E may cover the insured for injuries or property damage caused while playing golf.
A) I and III
B) I only
C) II only
D) I, II, and III
A) I and III
Coverage F is protection that will automatically pay for bodily injuries regardless of fault. In contrast, Coverage E only pays for bodily injury and property damage for which the insured is legally liable. If the insured causes damage to property or others while golfing, Coverage E will cover the insured up to the policy limit of $100,000. Also, Coverage E may cover the insured for injuries or property damage resulting from negligence while on the golf course.
All of the following are exclusions from Coverage C: Personal Property of a homeowners policy except
A) property of roomers or boarders.
B) credit cards.
C) jewelry.
D) animals, birds, and fish.
C) jewelry.
Explanation: Jewelry is covered under Coverage C; however, coverage is typically limited to a maximum dollar amount of $1,500. The addition of an endorsement can increase the coverage limit for jewelry and other personal property items.
Which of the following policy sections do homeowners and auto policies share?
I. Liability coverage
II. Comprehensive coverage
III. Medical payments coverage
IV. Duties after a loss
A) I, II, III, and IV
B) I only
C) I and III
D) I, III, and IV
D) I, III, and IV
Explanation: With the exception of comprehensive coverage (auto policies only), all of these are sections are shared by homeowners and auto policies.
Which of the following is true for property coverage in a commercial package policy (CPP)?
I. A CPP provides broader coverage but is a bit more expensive than a collection of monoline forms.
II. No customization is allowed, as all potential risks are covered in the standard CPP.
III. The standard CPP includes building, contents, and commercial automobile coverage.
IV. The CPP is designed for larger businesses.
A) I, II, and III
B) I, II, III, and IV
C) IV only
D) III and IV
C) IV only
Explanation: The answer is IV only. A CPP is a standard package of what used to be monoline forms offered at a discount. The standard CPP includes coverage for buildings, contents, and liability coverage. Additional coverage is available for things like commercial autos, glass, and specific, unique-to-the-business causes of loss. Thus, a CPP is customizable so it can accommodate many different businesses. The CPP is designed for larger businesses, while the business owner policy is designed for smaller businesses.
Which of the following is a common property coverage that can be included in a businessowners policy (BOP)?
A) General liability
B) Inland marine
C) Workers’ compensation
D) Professional liability
B) Inland marine
Explanation: The answer is inland marine. Inland marine coverage is a property coverage, while the other answer choices provide liability coverage.
Which of the following forms insures the dwelling and other structures on an open-perils basis?
A) HO-4
B) HO-2
C) HO-1
D) HO-3
D) HO-3
Explanation: The answer is under HO-3. All direct physical losses are covered, unless specifically excluded.
Which of the following homeowners coverage amounts are specified as a percentage of the Coverage A amount?
I. Coverage B
II. Coverage C
III. Coverage D
IV. Flood insurance rider
A) I, II, III, and IV
B) I and IV
C) I, II, and III
D) II and III
C) I, II, and III
Explanation: The answer is I, II, and III. If a homeowner has flood insurance, it is under a separate policy and not stated as a percentage of Coverage A in the homeowners insurance policy.
Coverage C in a homeowners policy insures the personal belongings of the policyowner and any resident family members. Which of the following is the typical limit on this coverage?
A) 80% of the Coverage A limit
B) 80% of the Coverage B limit
C) 50% of the Coverage B limit
D) 50% of the Coverage A limit
D) 50% of the Coverage A limit
Explanation: The limit on Coverage C coverage is typically 50% of the Coverage A limit.
Your client, Carol, has brought her declaration page and the following information to you. The market value of the residence is $468,000. Her builder advised her that to rebuild her house today, it would cost $450,000. According to the declarations page of the policy, it is HO-5 insured for $425,000 with a $1,000 deductible. The value of the land is $55,000. Which of the following statements is true regarding a total loss of Carol’s house?
A) She will have an out-of-pocket cost of $26,000 if she rebuilds the house exactly the way it is today.
B) She will have an out-of-pocket cost of $44,000 if she has the house rebuilt exactly the way it is today.
C) Because it is an HO-5 policy, it covers replacement, so she will have no out-of-pocket costs other than her deductible.
D) The value of the land deducted from the residence’s market value is less than the amount insured ($425,000); therefore, Carol’s only out-of-pocket cost will be her deductible.
A) She will have an out-of-pocket cost of $26,000 if she rebuilds the house exactly the way it is today.
Explanation: Just because a policy is one of replacement, it does not mean it will pay more than the insured amount. In this case, the maximum the company will pay is $425,000. The true statement is that her loss would be $26,000. ($425,000 coverage less $450,000 cost to rebuild, less the $1,000 deductible: $425,000 − $450,000 −$1,000 = −$26,000. The market price and land price are irrelevant. What is important is cost to rebuild minus insured amount.
The principal difference among the various homeowners forms is
A) the perils insured against in Section I.
B) the liability coverage under Section II.
C) the definition of dwelling in each form.
D) the extensions of coverage in each form.
A) the perils insured against in Section I.
Explanation: The answer is the perils insured against in Section I. The principal difference among the various homeowners forms are the perils insured against in Section I of the policy. Specifically, some policies cover only basic perils, some cover broad perils, and others are written as open perils.
Which of the following are the perils covered under basic coverage in a homeowners policy?
I. Smoke
II. Theft
III. Falling objects
IV. Earthquake
A) II and III
B) II, III, and IV
C) I, II, and III
D) I and II
D) I and II
Explanation: The answer is I and II. Basic coverage provides benefits for financial loss to the policyowner’s home due to fire, lightning, windstorm, hail, riot or civil commotion, aircraft, vehicles, smoke, vandalism or malicious mischief, explosion, theft, and volcanic eruption. Loss or damage due to falling objects is covered under broad coverage. Loss from an earthquake is excluded from most homeowners policies.
Which of the following policies does NOT include liability coverage?
A) Homeowners policies
B) Inland marine policies
C) Businessowners policies
D) Automobile policies
B) Inland marine policies
Explanation: The answer is inland marine policies. Auto, home, businessowners policy, and liability umbrella policies all include liability coverage, while an inland marine policy does not. Inland marine policies only provide coverage on the listed property.
Which of the following statements concerning a personal liability umbrella policy (PLUP) is CORRECT?
I. A PLUP is designed primarily to provide liability coverage for catastrophic legal claims or judgments.
II. A PLUP requires the policyowner to carry certain underlying liability coverages of specified minimum amounts.
A) I only
B) Both I and II
C) II only
D) Neither I nor II
B) Both I and II
Explanation: The answer is both I and II. A PLUP is structured to provide a layer of liability insurance coverage for catastrophic legal claims or judgments, on top of the individual’s homeowners and automobile insurance policies. To be eligible for umbrella coverage, an insurer may require the insured to maintain minimum amounts of underlying liability coverage.
Donald has an HO-3 homeowners policy. His policy limit under Coverage E is $300,000. He is entertaining friends at his house one evening for a barbeque. Donald carelessly tries to start the grill with gasoline instead of lighter fluid, and one of his guests is severely burned as a result. The fire also causes $5,000 in damage to the guest’s car. The burned guest sues Donald for negligence. The cost of Donald’s legal defense is $20,000. At trial, the court orders Donald to pay the guest $60,000 for his medical expenses and $5,000 for the damage to his car. What amount will Coverage E of Donald’s HO-3 policy pay as a result of this occurrence?
A) $5,000
B) $60,000
C) $80,000
D) $85,000
D) $85,000
Explanation: The answer is $85,000. Coverage E protects the insured against claims arising out of both bodily injury and property damage. This coverage also pays the costs of defending the insured against a covered claim. Donald’s policy limit of $300,000 is sufficient to cover the $5,000 in physical damage, the $60,000 in bodily injury, and the $20,000 for Donald’s legal defense.
Under a standard personal auto policy (PAP), damages are based on which of the following criteria?
A) Replacement cost
B) Actual cash value
C) Appraisal value
D) Stated value
B) Actual cash value
Explanation: Under a standard PAP, coverage for damages is paid on an actual cash value basis, which is the replacement cost minus depreciation. There is no replacement cost coverage under a standard PAP.
Which of the following types of loss is NOT covered in a standard personal auto policy (PAP)?
A) Injury to the insured and her family
B) Damage to the vehicle
C) Legal liability
D) Personal property damaged in an auto accident
D) Personal property damaged in an auto accident
Explanation: The answer is personal property damaged in an auto accident. Damage to personal property in an auto accident is not covered in a standard PAP. This type of loss would normally be covered in a homeowners policy.
In which of the following situations would a personal automobile policy (PAP) NOT provide coverage under the liability section of the policy?
A) A resident relative, with permission, borrows a truck to haul some sod to his house.
B) The named insured uses his trailer, which is hitched to his brother’s truck, to move furniture.
C) The named insured uses his car to regularly transport executives to the airport for a fee.
D) The named insured borrows a van while his covered auto is being repaired.
C) The named insured uses his car to regularly transport executives to the airport for a fee.
Explanation: The answer is the named insured uses his car to regularly transport executives to the airport for a fee. The PAP contains an exclusion for vehicles used to transport people or property for a fee.
Which of the following covered losses are included in a personal automobile policy?
I. Injuries to the insured or family members
II. Damage to the insured’s vehicle
A) I only
B) II only
C) Neither I nor II
D) Both I and II
D) Both I and II
Explanation: The answer is both I and II. Another covered loss is legal liability for injuries and damages to other persons.
Most automobile insurance companies use a classification system to determine premiums. Which of the following factors is traditionally used in a classification system?
I. The location of the auto
II. The age of the driver
III. The gender of the driver
IV. The driving record of the driver
A) I, II, and III
B) I only
C) II and IV
D) I, II, III, and IV
D) I, II, III, and IV
Explanation: All of these factors are used in classification systems to determine automobile insurance premiums.
Which of the following is a principle of the workers’ compensation laws?
I. In exchange for benefits, an employee gives up the right to sue the employer.
II. The costs for workers’ compensation benefits are funded through payroll taxes, and the employee is expected to contribute.
III. The injured employee is not required to prove negligence on the part of the employer.
IV. Many states permit, or require, individuals who have domestic help to obtain workers’ compensation insurance.
A) I, II, III, and IV
B) I only
C) II and III
D) I, III, and IV
D) I, III, and IV
Explanation: The answer is I, III, and IV. Workers’ compensation insurance is paid through premiums paid solely by the employer.
Elise has been working for a national dental firm as a dentist and recently left to start her own practice. Which of the following should she purchase to protect herself from business-related liability risks?
I. Malpractice insurance
II. Errors and omissions insurance
III. A businessowners policy (BOP)
IV. A personal liability umbrella policy (PLUP)
A) I, II, III, and IV
B) II and IV
C) I and III
D) I, II, and III
C) I and III
Explanation: The answer is I and III. As a medical professional, Elise would need malpractice insurance rather than errors and omissions insurance. A businessowners policy is also necessary, as she will be a business owner and will have business-related liability risks typical to any other business, such as people falling on the premises. A PLUP specifically excludes business-related liability, as it is a personal policy rather than a business policy. Elise could probably benefit from a PLUP’s protection, but it is not for business-related risks as the question asks.
Dana owns a building that she purchased for $600,000. Its current replacement cost is $1.5 million. The building is covered up to $900,000 for fire-related perils by ZRP Insurance Company, with an 80% coinsurance provision and a $2,000 deductible. Last week, a fire broke out in the building, causing $800,000 in covered damage.
What amount will ZRP Insurance Company pay for this loss?
A) $798,000
B) $598,000
C) $800,000
D) $478,000
B) $598,000
Explanation: The answer is $598,000. It is computed as follows:
amount of insurance required = $1,500,000 × .8 = $1,200,000
percentage of current insurance vs. insurance required = $900,000 ÷ $1,200,000 = .75
(percentage of insurance × loss incurred) − deductible = (.75 × $800,000) − $2,000 = $598,000
Which of the following statements regarding typical personal liability umbrella policies is NOT true?
A) They commonly require a base policy with a minimum of $1 million of liability coverage.
B) There are no standard policies.
C) The individual seeking the coverage is usually required to have increased levels of homeowners and automobile insurance liability.
D) They generally have liability limits of at least $1 million.
A) They commonly require a base policy with a minimum of $1 million of liability coverage.
Explanation: Umbrella policies normally have liability limits of $1 million or more. Base policies normally include a minimum of $300,000 of liability coverage.
Raul is in the process of purchasing homeowners insurance for his new residence. Which of the following factors may affect Raul’s premium?
I. The policy form and coverage provided
II. The location of the property
III. The amount of the deductible
IV. The level of fire protection provided by the city or municipality
A) II and IV
B) I only
C) I, II, and III
D) I, II, III, and IV
D) I, II, III, and IV
The answer is I, II, III, and IV. All of these are factors used in classifying and pricing a homeowners policy. Other factors include the construction type of the residence and the amount of insurance requested by the applicant.
Liability insurance is primarily concerned with the financial consequences of
A) negligence.
B) felony crimes.
C) intentional torts.
D) all torts.
A) negligence.
Explanation: Liability insurance is primarily concerned with negligence. It does not cover intentional acts.
Zhang has a personal auto policy, and the liability coverage is displayed as 100/300/50. How much property damage liability coverage does Zhang have?
A) $300,000
B) $350,000
C) $50,000
D) $100,000
C) $50,000
Explanation: The answer is $50,000. When liability coverage is displayed in the format shown, the first number represents the thousands of dollars of bodily injury liability coverage per person. The second number is the amount in thousands of bodily injury liability coverage per accident. The third number represents the amount in thousands of property damage liability coverage. In this case, Zhang has $100,000 in bodily injury liability coverage per person, $300,000 in bodily injury liability coverage per accident, and $50,000 in property damage coverage per accident.
All of the following are covered under a personal automobile policy’s other-than-collision (comprehensive) coverage except
A) flood.
B) theft.
C) colliding with a mailbox.
D) earthquake.
C) colliding with a mailbox.
Explanation: Collision is defined as “the upset of your covered auto or its impact with another vehicle or object.” Other examples of losses covered under other-than-collision coverage include vandalism, hail, and breakage of glass.
Which of the following is covered under the uninsured motorist coverage of a personal auto policy (PAP)?
I. A hit-and-run driver.
II. A car that is operated without liability insurance.
A) II only
B) Neither I nor II
C) I only
D) Both I and II
D) Both I and II
Explanation: Both hit-and-run drivers and cars operated without liability insurance are insured under uninsured motorist coverage.
Which of the following are true for a businessowners policy (BOP)?
I. A BOP includes property and liability coverage.
II. There are four parts to a BOP.
III. BOPs are a specific, standard package of coverage.
IV. BOPs can be customized to a specific business.
A) I, II, and III
B) I, II, and IV
C) II and IV
D) I and III
B) I, II, and IV
Explanation: The answer is I, II, and IV. A BOP includes both property and liability coverage and consists of four parts: common policy conditions, property coverage, causes of loss and exclusions, and liability coverage). BOPs are customizable so that the coverage a business needs can be added to the basic framework of the policy.
Which of the following is a common property coverage that can be included in a commercial package policy?
A) Employer’s liability
B) Workers’ compensation
C) Commercial liability
D) Theft by customers
D) Theft by customers
Explanation: The answer is theft by customers. Coverage for theft by customers is a property coverage, while the other answer choices provide liability coverage.
Errors and omissions (E&O) insurance provides protection
A) for individuals whose liability could result in bodily harm.
B) against the deficient acts of a professional who handles money.
C) when a business transports goods domestically.
D) for businessowners in the event of disability.
B) against the deficient acts of a professional who handles money.
Explanation: The answer is against the deficient acts of a professional who handles money. E&O insurance provides protection against the deficient acts of a professional who handles money. Malpractice insurance is generally used where the deficient conduct of the insured may result in bodily harm (e.g., a physician, surgeon, or dentist). Inland marine insurance covers businesses that transport goods domestically. Business overhead expense insurance provides coverage for businessowners in the event of disability.
