P&C Ins Principles 3.1-3.1.4

Question 1

An uninsured, distracted driver crashes into the two cars parked in Kate’s driveway. When the driver backs away from the damaged cars, she rips the bumper off Kate’s car. The bumper flies through the air and knocks down Kate’s fence. What is the proximate cause of the damage to the fence?

Answer 1

The car crash. The proximate cause is the event that sets in motion an unbroken chain of events that lead to a loss.

Question 2

Sheila lives in New Mexico in a home constructed of adobe. What basic type of construction is her home?

Answer 2

In a building of masonry construction, the exterior walls are constructed of masonry materials, including adobe, brick, concrete, gypsum block, hollow concrete block, stone, tile, or similar materials with floors and roof of combustible construction. (This does not apply to floors resting directly on the ground.)

Question 3

A state ordinance prohibits trucks carrying hazardous materials from using Highway 84 and appropriate notices are posted. Jonas carefully drives his truck on Highway 84. Although his truck is loaded with dynamite, he drives carefully and does everything he can to avoid an accident or injury from his cargo. If damage or injury nevertheless results from Jonas’ actions, under what doctrine of liability could he be held liable?

Answer 3

Strict liability
Under strict liability, the law holds people responsible for injuries or damage even when they have not been careless or negligent. Some actions are so dangerous that the law simply holds someone liable for any damage or injury that results from those actions, without regard to the degree of care the person exercised.

Question 4

Jane’s insurance policy contains a stated amount valuation provision. This provision states that she will receive the lowest of three amounts if her covered property is stolen or destroyed. Which of the following is not one of those three amounts?

Answer 4

The property’s actual cash value at the time of the loss, minus depreciation With the stated amount approach, the insurer agrees to pay the lowest of three amounts if the covered property is damaged or stolen: the property’s actual cash value at the time of the loss, the cost to repair or replace the property with similar property, or the dollar amount of insurance specified in the policy schedule.

Question 5

Martin’s Music Shoppe submitted a claim to the insurance company that provides insurance on its building. If the insurance company denies the claim, what is the peril that caused the loss?

Answer 5

Flood Flood is an excluded peril on most property insurance policies.

Question 6

Larry submitted a claim under his homeowners insurance policy. The insurance company has the burden of proof to show that the loss is excluded; otherwise, it must pay Larry’s claim. What causes of loss are contained on Larry’s policy?

Answer 6

Open perils When a policy provides insurance on an open perils basis, all causes of loss are covered unless they are specifically excluded in the policy.

Question 7

One of Vincent’s business associates has requested a document that shows evidence Vincent has a certain type of insurance coverage in place. The document must show the name of Vincent’s insurance company, the type of coverage that is in place, and the limits of liability. What type of document does Vincent need?

Answer 7

A certificate of insurance
A certificate of insurance is a document issued as evidence that a certain type of insurance has been purchased by a particular party. For example, a homeowner may request that a plumber provide a certificate of insurance before beginning work in her kitchen.

Question 8

How does class rating differ from individual rating?

Answer 8

Class rates are used when insureds have similar characteristics and are charged the same rates.

Question 9

Which of the following is not a component of an insurance rate?

Answer 9

The three components of an insurance rate are loss costs, expenses, and profit margin.

Question 10

Patrick has a commercial property insurance policy that does not cover damage caused by an earthquake. He is interested in obtaining earthquake coverage. He read that it is possible to obtain a separate policy insuring against this specific peril and it was referred to as a(n)

Answer 10

Difference-in-conditions policyA difference-in-conditions (DIC) policy is a property insurance policy that is purchased in addition to a commercial property policy to obtain coverage for perils, like flood and earthquake, that the commercial property policy does not cover. Many DIC policies are issued by nonadmitted excess and surplus lines insurers.

Question 11

For a loss to be covered under a property insurance policy, a covered peril must be a(n)

Answer 11

Proximate cause of the loss

Question 12

Jack and Mel are involved in an intersection auto accident in which Jack is injured and incurs medical expenses. Jack sues Mel, and the trail court determines that Jack is 30 percent at fault and Mel is 70 percent at fault. If the state apportions liability under a comparative negligence law, what will happen?

Answer 12

Jack will recover 70 percent of his damages.Under a comparative negligence law, the amount of Jack’s recovery is reduced by his percentage of negligence. So he will recover 70 percent of his damages.

Question 13

While driving in heavy traffic, Sue crashes into the rear of Fred’s car. The drivers get out of their cars to exchange information, and Fred tells Sue that she is guilty of negligence. Which of the following is NOT an element of negligence?

Answer 13

IntentNegligence is the failure to use the degree of reasonable care that is necessary under the circumstances. Negligence involves a breach of this duty, a carelessness without the intent to injure.

Question 14

To identify what perils they cover, property insurance policies use either the named perils approach or the

Answer 14

Open perils approachA property insurance policy that uses the named perils approach includes a list or description of the perils that are covered. In contrast to the named perils approach, the open perils approach describes the causes of loss (perils) that are not covered.

Question 15

Ted is shopping for a new auto insurance policy and calls Sara, an independent agent, for advice on what type of policy to buy. Until the underwriter can review Ted’s application, Sara issues a written binder to initiate coverage before the policy is issued. Which statement is correct about this written binder in relation to an oral binder?

Answer 15

A written binder is preferable because it reduces the likelihood of a dispute over terms.

Question 16

Ed’s home is located on several acres of land. Ed used to farm a portion of the land and keeps an old tiller machine on the property. Children from a nearby neighborhood often play on the tiller, even though Ed erected a fence around the property and posted warning signs to prevent trespassing. One day a child is seriously injured while playing on the tiller. On what grounds, if any, may the child’s parents sue Ed for the injuries?

Answer 16

Attractive nuisance Under the attractive nuisance doctrine, a party can be held liable for maintaining something on its property that appeals to curious children, even though the children are trespassers. A common example is an unfenced swimming pool.

Question 17

Ted, the insurance representative for Malone Company, does not understand the difference between insurance written on a stated amount basis or on an agreed value basis. How would you explain the difference to Ted?

Answer 17

With stated amount, Ted will recover no more than the stated amount, and may recover less if actual cash value is less. With agreed value, Ted recovers the listed value.
With stated amount, an item’s value is listed in the policy. If the item is stolen or destroyed, the insured will not get that amount if the item’s actual cash value is less than the stated amount. With agreed value, the insurer and the insured agree on the value of the item when the policy is written. If a loss occurs, the insurer agrees to pay that amount.

Question 18

Edie crashes her car and submits a claim to the insurance company. When the insurance company learns that the car is owned by, and titled to, Edie’s boyfriend, it denies her claim. For what specific reason is the claim denied?

Answer 18

Edie doesn’t have insurable interest in the car

Question 19

Monty, an employee of Happiness Bakery, is sending text messages on his phone while driving the company truck to deliver baked goods. He crashes into the car in front of him, injuring the passenger. The passenger sues Monty and Happiness Bakery. On what grounds could Happiness Bakery be held liable?

Answer 19

Vicarious liabilityVicarious liability arises when a person is legally responsible for the acts of another. A common example is when an employer is held liable for damages resulting from the negligence of an employee who was acting in the course and scope of his or her employment.

Question 20

ABC Insurance Company is able to predict its loss costs based upon data collected about prior losses and because its business expenses have been fairly predictable. ABC should therefore be able to estimate accurately the amount of money it will need to pay claims. What could significantly impact that estimated amount?

Answer 20

Catastrophic events
Although an insurer’s expenses are predictable, certain factors may alter an insurer’s actual loss costs from its predicted loss costs. In property insurance, for example, major hurricanes, earthquakes, and other catastrophic events may result in actual loss costs that are much higher than the anticipated losses factored into the rates.

Question 21

Because Irene owns a dog, her insurance agent tells her that she’s more likely to submit a liability claim than someone who doesn’t own a dog is. What insurance term BEST defines the condition of Irene’s dog ownership?

Answer 21

A hazard is a condition that increases the likelihood of a loss or the severity of a loss.

Question 22

Which of the following is not a class of legal wrong?

Answer 22

Punitive damages

Punitive damages are not a class of legal wrong; they are amounts a party is required to pay as punishment for committing a civil wrong.

Question 23

After Jackson’s Hardware Store is closed for business, a thief breaks in and steals merchandise and cash that was left in the cash register. Which peril caused this loss?

Answer 23

Burglary

Burglary is theft of property from within a premises by a person who unlawfully enters the premises. Robbery is theft by use of force or threat of harm.

Question 24

Which of the following is not an element of negligence?

Answer 24

Malice The four elements of negligence are a duty of care, breach of that duty of care, causation, and damages (in other words, a loss or injury) resulting from the breach.

Question 25

Rob submitted a $1,000 claim against Steve’s auto insurance policy, alleging Steve was negligent and caused the accident. When Steve’s insurer paid Rob’s claim, it only paid $800 because it had determined that Rob was 20 percent responsible for the accident. What defense against negligence did the insurer use?

Answer 25

Comparative negligence. When comparative negligence is used as a defense against negligence, the claimant’s recovery of damages is reduced by his or her degree of negligence.

Question 26

When Mr. and Mrs. Unger lived in New Hampshire, they didn’t buy earthquake insurance because they believed they were unlikely to suffer an earthquake loss. When they moved to California, however, they bought earthquake coverage immediately because of their high exposure to earthquakes in that state. What underwriting principal do their actions characterize?

Answer 26

Adverse selection

Question 27

Larry submitted a claim under his homeowners insurance policy. The insurance company has the burden of proof to show that the loss is excluded; otherwise, it must pay Larry’s claim. What causes of loss are contained on Larry’s policy?

Answer 27

Open perils

Question 28

Which of the following types of liability holds an insured legally responsible if another party is injured or damaged because its operations, or other conditions pertaining to the insured, are considered inherently dangerous?

Answer 28

Strict liability is imposed in limited situations where the insured’s inherently dangerous operations or other activities will always be considered a breach of duty if injury or damage results. Examples of such operations and activities include demolitions operations and keeping wild animals.

Question 29

How does class rating differ from individual rating?

Answer 29

Class rates are used when insureds have similar characteristics and are charged the same rates.

Question 30

What are the two types of compensatory damages?

Answer 30

Special and general

Question 31

Erica’s dire financial condition compels her to consider filing for bankruptcy. What type of hazard does her financial condition represent?

Answer 31

Moral hazards are tendencies or traits of an individual that increase the chance of a loss. A person in bad financial condition is somewhat more likely than a person in good financial condition to intentionally destroy property in order to collect on his or her insurance or to fail to take proper care of property.