Module 2

Question 1

How many perils are covered by basic coverage?

Answer 1

12

Question 2

How many perils are covered by broad coverage?

Answer 2

6

Question 3

What is open-perils coverage?

Answer 3

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.

Question 4

Homeowner policies are a package of coverage, with policies containing ? sections. What are those sections?

Answer 4

2; Section I, which covers property losses, and Section II, which covers liability losses.

Question 5

Section I in a homeowner policy is divided into ? parts.

Answer 5

4 - A through D.

Question 6

Section II in a homeowner policy is divided into ? parts.

Answer 6

2

Question 7

The HO-2 policy provides broad coverage for ?

Answer 7

the dwelling and personal property. In addition, this form broadens certain perils and adds other perils.

Question 8

Under an HO-3 policy, real property is covered on an open-perils basis, unless ?.

Answer 8

the peril is specifically excluded by the policy.

Question 9

An HO-3 policy covers all of the perils listed in an ? policy and any other peril not excluded.

Answer 9

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.

Question 10

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.

Answer 10

HO-3

Question 11

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.

Answer 11

HO-4

Question 12

The ? policy does not protect the actual building or dwelling (Coverage A or Coverage B), which should be covered by the landlord’s policy.

Answer 12

HO-4

Question 13

The ? policy is similar to the HO-3 policy except that Coverage C (personal property) is written on an open-perils basis.

Answer 13

HO-5

Question 14

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.

Answer 14

HO-6

Question 15

The ? policy provides coverage for those who live in an older home that has a replacement cost exceeding its market value.

Answer 15

HO-8

Question 16

The HO-8 policy uses a ? for loss.

Answer 16

functional replacement cost provision

Question 17

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.

Answer 17

the materials and labor

Question 18

Standard policies cover personal property at ? of the dwelling coverage.

Answer 18

50%

Question 19

The only viable method to provide sufficient coverage on items with low limits of coverage (money, securities, jewelry, etc) is to ?.

Answer 19

add a personal property endorsement or purchase a separate inland marine policy

Question 20

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.

Answer 20

the item’s stated value or appraised value

Question 21

Residential flood insurance provides coverage for ?

Answer 21

physical loss from a flood.

Question 22

While some private companies offer flood insurance, the predominant provider is the ? through the National Flood Insurance Program (NFIP).

Answer 22

federal government

Question 23

Earthquake insurance provides coverage for ?

Answer 23

physical loss due to an earthquake.

Question 24

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.

Answer 24

10%

Question 25

Inland marine insurance is protection for ?

Answer 25

personal property that is in transit or that can be transported.

Question 26

Inland marine insurance usually is written with ? coverage (meaning, all perils, except for those specifically excluded, are covered).

Answer 26

open perils

Question 27

A primary benefit of open perils coverage is that it extends the coverage to ?.

Answer 27

theft and loss

Question 28

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).

Answer 28

inland marine insurance

Question 29

? insurance may be the only way to fully cover certain items that have coverage limits built into the standard homeowners policy.

Answer 29

Inland marine

Question 30

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.

Answer 30

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.

Question 31

A home may be viewed as having these three distinct values:

Answer 31

1) market value
2) assessed value
3) replacement cost value

Question 32

What is the market value of a home?

Answer 32

This is the price that a willing buyer and willing seller, under no compulsion, would exchange property.

Question 33

What is the assessed value of a home?

Answer 33

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.

Question 34

What is the replacement cost value?

Answer 34

This is what it would cost to rebuild the home as is.

Question 35

In most cases, the coinsurance penalty formula will provide a greater benefit than ?.

Answer 35

ACV

Question 36

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?

Answer 36

$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

Question 37

An important factor to consider is that the replacement value is determined at the ?, not at the time the policy was purchased.

Answer 37

time of loss

Question 38

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?

Answer 38

$325,000 - 100% of the replacement value.

Question 39

What is the actual cash value (ACV) equation?

Answer 39

replacement cost - depreciation.

Question 40

What is an inflation guard endorsement?

Answer 40

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.

Question 41

The cost of a HO policy and its endorsements are affected by the following factors:

Answer 41

• construction
• location
• policy type
• deductible
• insurer

Question 42

What is Comprehensive Personal Liability (CPL) Insurance?

Answer 42

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.

Question 43

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.

Answer 43

medical payments to others

Question 44

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.

Answer 44

Coverage E: Personal Liability; Coverage F: Medical Payments to Others

Question 45

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.

Answer 45

Coverage E: Personal Liability; Coverage F: Medical Payments to Others

Question 46

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.

Answer 46

may not

Question 47

What is personal injury liability?

Answer 47

Provides coverage for libel, slander, and defamation; false arrest, detention, imprisonment, or malicious prosecution; invasion of privacy; and other similar torts.

Question 48

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 ?.

Answer 48

personal liability umbrella policy (PLUP); catastrophe liability insurance

Question 49

A PLUP not only increases the coverage that is part of the homeowners and auto policies, it also ?.

Answer 49

broadens the overall coverage

Question 50

A typical question arises as to how much coverage is enough, or even appropriate. Clients should have at least as much liability coverage as ?.

Answer 50

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.

Question 51

An advantage of an umbrella policy is ?.

Answer 51

that it is able to offer a quicker settlement

Question 52

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.

Answer 52

$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.

Question 53

What is a Personal Auto Policy (PAP)?

Answer 53

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.

Question 54

? is the only mandatory part of auto insurance.

Answer 54

Liability coverage

Question 55

What does 25/50/10 stand for?

Answer 55

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.

Question 56

Single drivers under the age of ? are grouped in the highest risk category.

Answer 56

25

Question 57

Individuals ages ? are lower risk, however once individuals reach age ?, some companies rate them as higher risks as well.

Answer 57

25 - 75; 75

Question 58

An automobile that is driven for pleasure only, costs less to insure than one that is ?.

Answer 58

driven to work daily

Question 59

The PAP covers the following three general types of loss:

Answer 59

„ Legal liability
„ Injury to the insured and family
„ Damage to the vehicle

Question 60

The following generally are considered to be insureds under a PAP:

Answer 60

„ 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)

Question 61

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.

Answer 61

covered

Question 62

What is uninsured motorist coverage?

Answer 62

Provides protection for an insured who is involved in an accident with another driver who has no insurance.

Question 63

What is underinsured motorist coverage?

Answer 63

Necessary in situations where an at-fault driver has insurance, but with very low limits. This coverage is added to the PAP by endorsement.

Question 64

The two parts of physical damage coverage are ? and ?.

Answer 64

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.

Question 65

The PAP covers damage on an ? basis.

Answer 65

ACV

Question 66

If your client wants a benefit that will cover towing and labor, she must add it to the PAP by ?.

Answer 66

endorsement

Question 67

What are monoline forms?

Answer 67

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).

Question 68

All package products include the following:

Answer 68

„ Common Declarations form.
„ Common Policy Conditions form.
„ Common Conditions form.
„ Exclusions.

Question 69

What is a Business Owners Policy (BOP)?

Answer 69

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.

Question 70

The basic businessowner’s policy (BOP) includes these four parts:

Answer 70

„ 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

Question 71

What is a Commercial Package Policy (CPP)?

Answer 71

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.

Question 72

What is a Basic Commercial General Liability (CGL) Policy?

Answer 72

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.

Question 73

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.

Answer 73

Malpractice.

Question 74

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.

Answer 74

Defense & Settlement

Question 75

What is Errors & Omissions Insurance?

Answer 75

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.

Question 76

There are two forms of social insurance required for business owners both large and small:

Answer 76

workers’ compensation and unemployment insurance. Both are funded through tax-styled premium payments and are designed to benefit the company employees.

Question 77

Benefits are funded through premiums paid by the ?.

Answer 77

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.

Question 78

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

Answer 78

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.

Question 79

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

Answer 79

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.

Question 80

Which common peril is excluded from coverage in most homeowners policies?

A. Power surge
B. Tornado
C. Power failure
D. Volcanic eruption

Answer 80

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.

Question 81

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

Answer 81

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.

Question 82

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

Answer 82

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

Question 83

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

Answer 83

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.

Question 84

Which item is always covered by a personal liability umbrella policy (PLUP)?

A. General liability
B. Business liability
C. Watercraft liability
D. Aircraft liability

Answer 84

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).

Question 85

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.

Answer 85

B. collision with a tree.

Explanation: Collision with a tree (or any stationary object) would be covered by collision coverage under a PAP.

Question 86

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

Answer 86

D. I and III

Explanation: Workers’ compensation is funded though insurance premiums paid by the employer.

Question 87

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

Answer 87

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.

Question 88

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

Answer 88

C. $74,000

Question 89

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.

Answer 89

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.

Question 90

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.

Answer 90

D. A CPP features lower policy premiums than the combined premiums of several policies, each covering one type of risk exposure.

Question 91

All of these professionals are likely to purchase errors & omissions insurance except:

A. Financial planners
B. Accountants
C. Physicians
D. Attorneys

Answer 91

C. Physicians

Physicians should have malpractice insurance instead.