Property and Casualty

Question 1

How is the replacement cost calculated in ACV?

Answer 1

Actual cash value is generally defined as current replacement cost ($3,000) minus physical depreciation.

Question 2

(Definition) Actual Cash Value:

Answer 2

is generally defined as replacement cost minus physical depreciation.

Question 3

What is the main requirement to have property insured?`

Answer 3

Insurable Interest (financial interest)

Question 4

Real Property

Answer 4

Land, and most things attached the land (I.E: Buildings, Vegetation)

Question 5

Personal Property

Answer 5

All tangible property not classified as real property

Question 6

Two type of loss to real or personal proerty

Answer 6

1. Direct

2. Indirect

Question 7

Direct Loss

Answer 7

Loss directly caused by a peril

Question 8

Indirect Loss/ Consequential Loss

Answer 8

Occurs secondary, or as a consequence of the loss

Question 9

To collect under an insurance policy, a person must…..?

Answer 9

a person must suffer financial harm from a loss that the insurance covers.

Question 10

How does an insured a have an insurable interest?

Answer 10

The risk of financial harm arising from the loss

Question 11

What must happen in order to an insured to make a claim?

Answer 11

An insurable interest must exist at the time of a loss in order for the insured to make a claim on the loss.

Question 12

Most property and casualty policies are contracts of………?

Answer 12

indemnity.

Question 13

Functional Replacement Cost

Answer 13

Functional replacement cost is the amount that it would cost to repair or replace the damaged building with less costly common construction materials and methods that are functionally equivalent to the obsolete, antique, or custom construction materials and methods that were originally used.

Question 14

Market Value

Answer 14

The market value of property is the amount for which it could be sold if the buyer and the seller are under no unusual pressure.

Question 15

Stated Amount

Answer 15

When a property insurance policy uses the stated amount approach, the value of insured items is listed in a “schedule” that is made a part of the policy.

Question 16

Corinne purchased her home with a 10 percent down payment and a 90 percent mortgage from Sidney Bank. Why does Sidney Bank have an insurable interest in Corinne’s house?

Answer 16

The bank faces the possibility of a loss if Corinne’s house is damaged or destroyed.

The property owner and the mortgage holder both have an insurable interest in Corinne’s home, because both will suffer a loss if the home is damaged.

Question 17

A fire severely damages Tyrone’s home, making it uninhabitable. He moves his family to a hotel while the house is repaired. The additional expenses incurs in housing the family are considered what type of loss?

Answer 17

The additional expense of a hotel is not the direct result of the fire, but an indirect consequence.

Question 18

Joel renews his homeowners insurance policy on January 15. He sells the house to Sandi on March 15. One week later a fire destroys the house. Joel makes a claim on the policy for the loss of the house. What will the insurance company do?

Answer 18

Since Joel did not own the house when it was destroyed, he cannot suffer a financial loss from its destruction. He did not have an insurable interest in it after he sold it. Therefore, he cannot collect on his claim. If Sandi insured the house with her own homeowners policy, she can file a claim under that policy. However, she cannot file a claim under Joel’s policy.`

Question 19

The leather couch in Rosendo’s family room cost $2,500 when he bought it new 5 years ago. The couch was expected to last 25 years. Today the couch would cost $3,000 new. A pipe above Rosendo’s family room burst, and the couch’s water damage is beyond repair. Rosendo’s homeowners policy, which covers water damage, provides actual cash value coverage on personal property. Disregarding any deductibles, what amount should Rosendo’s insurer pay?

Answer 19

Actual cash value is generally defined as current replacement cost ($3,000) minus physical depreciation. In this case, the couch had used up 20 percent of its expected life, so 20 percent of the current replacement cost is deducted for physical depreciation.

Question 20

Cause of a loss

Answer 20

Peril

Question 21

Conditions that increase the likely number of losses

Answer 21

Hazards

Question 22

are individual physical characteristics that increase the chance of loss

Answer 22

Phys. Hazard

Question 23

are tendencies or traits of an individual that increase the chance of a loss

Answer 23

Moral Hazards

Question 24

individual tendencies, but they arise from a state of mind, attitude, or indifference to loss

Answer 24

Morale Hazards

Question 25

What can increase the likelihood of loss resulting from a peril?

Answer 25

Hazards

Question 26

For a loss to be covered under a property insurance policy, the cause of loss (peril) must be….?

Answer 26

Proximate Cause of Loss

Question 27

Proximate Cause of Loss

Answer 27

the cause that sets in motion an unbroken chain of events leading to the loss. It may or may not be the immediate cause of the loss

Question 28

A property insurance policy that uses the named perils approach includes a list or description of the perils that are covered.

Answer 28

Named Peril

Question 29

is theft of property from within a premises by a person who unlawfully enters the premises.

Answer 29

Burglary

Question 30

is a theft during which force is used or threatened.

Answer 30

Robbery

Question 31

Celia put her laptop computer on a shelf in back of the classroom before taking an exam. She was the last to finish the exam, and when she got ready to leave, she discovered her computer was missing. Fortunately, Celia learned that her homeowners insurance policy covered this type of loss, which insurance practitioners commonly refer to as:

Answer 31

Mysterious disappearance

Mysterious disappearance is a term used by insurance practitioners for situations in which covered property disappears from a known place and was probably stolen.

Question 32

Which one of the following perils is least likely to be covered under a property insurance policy that covers buildings and contents against the basic causes of loss?

Answer 32

Property insurance policies covering basic causes of loss invariably include coverage for fire, lightning, and explosion. Falling objects coverage is more likely found in a broader policy that covers a longer list of perils.

Question 33

A dump truck collided with a tall oak tree in Marian’s front yard. The tree fell onto her house, breaking a glass picture window and knocking a lamp off the table inside it. Sparks from the lamp started a fire that destroyed half the house. What is the proximate cause of the damage to Marian’s house?

Answer 33

The collision

Question 34

3 broad classes of legal wrongs

Answer 34

1. Crime
2. Tort
3. Breach of contract

Question 35

Why does the government enforce criminal law?

Answer 35

to protect the legal rights of its population.

Question 36

Contract law protects the legal rights of …..?

Answer 36

parties that have voluntarily entered into contractual agreements.

Question 37

Tort law protects…..?

Answer 37

the rights of individuals from other civil wrongs.

Question 38

The four elements of negligence are:

Answer 38

1. a duty of care,
2. a breach of the duty of care,
3. a proximal connection between the breach and the loss or damage that results from the breach
4. Damages resulting from the breach.

Question 39

There are two broad categories of civil damages:

Answer 39

1. compensatory damages

2. punitive damages

Question 40

The two types of compensatory damages that can arise out of an injury are:

Answer 40

1. special damages

2. general damages

Question 41

Punitive damages are imposed only when:

Answer 41

when the defendant acted in an especially outrageous manner

Question 42

The three most common defenses to a negligence suit, are based upon?

Answer 42

Plaintiff’s conduct

Question 43

Under strict liability, the law holds people responsible for injuries or damage

Answer 43

even when they have not been careless or negligent.

Question 44

Vicarious liability

Answer 44

is involved when one person is legally responsible for the acts of another.

Question 45

Under the attractive nuisance doctrine,

Answer 45

a party can be held liable for maintaining something on its property that appeals to curious children even though the children are trespassers.

Question 46

Allan’s Carpet Cleaning Service removed the stains from Cleo’s red family room carpet—and also removed most of the color. To prove that the damage to her carpet was caused by Allen’s negligence, Cleo must be able to prove all the following, EXCEPT:

Answer 46

The cleaning solution Allan used contained chlorine.

The elements of negligence are duty of care, breach of the duty of care, proximate causation, and damages.

Question 47

Francisco’s children have grown up and moved away, but the tree house that Francisco built for them now draws other neighborhood children despite Francisco’s handmade “No Trespassing” sign. If a neighbor’s child is injured by falling from the tree house, Francisco might be held liable for the child’s injuries under what legal doctrine or principle?

Answer 47

Attractive Nuisance

Under the attractive nuisance doctrine, a party can be held liable for maintaining something on its property that is attractive to curious children even though the children are technically trespassers.

Question 48

Kristie opens the remote-controlled gate to the mansion where she lives to allow her friend Marta to enter the grounds. Kristie does not realize that a vacuum cleaner salesman follows Marta through the open gate. Kristie’s watchdogs are trained to attack intruders, and they injure both Marta and the salesman. Which of the following statements is true?

Answer 48

Kristie has less of an obligation to the uninvited salesman than she has to her invited friend Marta.

A property owner has less of an obligation to a trespasser (the uninvited salesman) than to an invitee (Marta).

Question 49

Rafael was seriously injured when his car collided with Eugene’s car at an intersection. A court determined that the accident was 99 percent Eugene’s fault, but Rafael was not entitled to recover from Eugene because Rafael was 1 percent at fault. On what defense was this court’s determination based?

Answer 49

Contributory Negligence

Question 50

Policy lists perils that are NOT covered, and All other perils are covered

Answer 50

Open Perils (special perils)

Question 51

Policy lists perils that ARE covered

Answer 51

Named Peril (specified perils)

Question 52

If a loss involves at least one covered peril, loss is covered even if other perils not covered

Answer 52

Concurrent Causes of loss

Question 53

• Separate policy that covers perils not covered by commercial property policy (e.g., earthquakes and floods)

Answer 53

Difference in Conditions (D-I-C)

Question 54

(failure to use degree of care reasonably necessary to avoid causing injury)

Answer 54

Negligence

Question 55

• Plaintiff must prove all 4 conditions existed to hold defendant (insured) liable:

Answer 55

• Duty of Care (does defendant have a duty of care?)
• Breach of Duty of Care (did defendant fail in that duty of care?)
• Causation (was the accident’s proximate cause the result of defendant’ breach of duty of care?)
• Damages (did the accident result in legally compensable injury or damage?)

Question 56

• Defenses to Negligence

Answer 56

• assumption of risk
• contributory negligence
• comparative negligence

Question 57

Strict (Absolute) Liability vs. Vicarious Liability

Answer 57

• strict: Liable by nature of the cause of loss even when not careless
• vicarious: Legally responsible for the actions of another

Question 58

Rates vs. Premiums

Answer 58

• Rate: Cost of insurance per unit of exposure

* Premium: Periodic payment required to maintain coverage (equal to insurance rate times number of exposure units)

Question 59

• Rate:

Answer 59

Cost of insurance per unit of exposure

Question 60

• Premium:

Answer 60

Periodic payment required to maintain coverage (equal to insurance rate times number of exposure units)

Question 61

Miles is told that his application for auto insurance was rejected based on information in his motor vehicle report (MVR). Which of the following is material underwriting information that might have appeared on Miles’ MVR?

Answer 61

his driving under the influence (DUI) conviction

An MVR provides details about an auto insurance applicant’s driving history, which includes conviction of various violations, accidents, license suspensions, and license restrictions.

Question 62

QBS Insurance Company uses class rating to determine the premiums for its auto insurance policies. This means that the rate for every insured driver is

Answer 62

determined by placing the driver and vehicle into a class with other similar drivers and vehicles.

With class rating, all insureds with similar characteristics are placed into the same rating class and are charged the same rates.

Question 63

Loss costs are usually the largest component of an insurance rate. What do loss costs reflect?

Answer 63

the insurer’s expected losses for each exposure unit while the policy is in force

Loss costs are a rating component that reflects the insurer’s estimate of the amount of money it expects to pay for each exposure unit during the period when the policy is in force.

Question 64

What two things does an insurance company’s loss ratio for a given period compare?

Answer 64

losses and premiums

Question 65

A water damage exclusion in Sadie’s property insurance policy excludes coverage for any damage that might be caused by a flood. If Sadie wants flood coverage, from where can she get a flood insurance policy?

Answer 65

the federal government’s National Flood Insurance Program

Question 66

The declarations of their homeowners insurance policy lists Rich and Allyson as the named insureds. However, the policy’s definition of “insured” indicates that relatives living in their household are also insureds. This would seem to include their young sons Kyle and James. When this policy uses the word “you,” to whom is it referring?

Answer 66

“You” refers to the named insured and his or her spouse. Kyle and James are insureds, but they are not named insureds, nor are they included in the definition of “you.

Question 67

Coworkers who live near her residence ride to work in Felicia’s car and help pay for her gas and other expenses. An exclusion in Felicia’s auto insurance policy says it does not cover a vehicle while it is carrying persons for a fee but then seems to contradict that statement by saying the exclusion does not apply to a share-the-expense carpool. What is this apparent contradiction?

Answer 67

An exception to an exclusion

Some exclusions, like this one, contain exceptions that specify circumstances to which the exclusion does not apply. If Felicia were carrying passengers to make a profit, this “taxicab” exclusion would apply, but because they are merely sharing expenses, the exclusion does not apply, and her coverage is not impaired.

Question 68

A provision in Alden’s auto insurance policy states, “We will pay for direct and accidental loss to your covered auto and its equipment.” What is the name for this broad statement?

Answer 68

An insuring agreement

An insuring agreement, which might also be called an insuring clause, is a very broad statement that sets forth the insurer’s basic promises under the policy.

Question 69

A provision in Alden’s auto insurance policy states, “We will pay for direct and accidental loss to your covered auto and its equipment.” What is the name for this broad statement?

Answer 69

An insuring agreement

An insuring agreement, which might also be called an insuring clause, is a very broad statement that sets forth the insurer’s basic promises under the policy.

Question 70

• Parties entitled to coverage?

Answer 70

• Insureds and secured creditors (mortgage holders, loss payees)
• “No Benefit to Bailee” Provision

Question 71

Liberalization clause

Answer 71

• Named insured benefits from policy enhancement at next renewal

Question 72

Conditions affecting property insurance coverage

Answer 72

• Policy limits (limit of liability)
• Deductibles
• Coinsurance (requires the insured to buy a limit of insurance at least equal to a specified percentage of the full insurable value of the covered property, e.g., 80%)
• Restoration of limits
• Policy period

Question 73

Conditions after loss (Insured)

Answer 73

Notify insurer of loss
• Notify police if theft or other law violation
• Protect property from further harm
• Cooperate with insurer
• Sworn proof of loss within 60 days of insurer’s request

Question 74

• Conditions after loss (Insurer)

Answer 74

• Salvage: Insurer may salvage total loss property
• Subrogation: Insurer may recover claim payment from party responsible for loss
• Appraisal: Independent appraisal when insured and insurer cannot agree on value

Question 75

Statements in an insurance policy are referred to as:

Answer 75

policy provisions or clauses.

Question 76

When a policy contains more than one coverage,

Answer 76

it is common for each coverage to have its own insuring agreement, exclusions, definitions, and conditions.

Question 77

What does the coverage territory provision in a property and casualty insurance policy explain?

Answer 77

where coverage applies

Question 78

The building that houses Margarita’s business has an insurable value of $500,000. Margarita insures this building for $300,000 under a property insurance policy with an 80 percent coinsurance clause. Ignoring any deductible that might apply, if the building sustains exactly $20,000 in damage due to a covered peril, how much will the insurer pay Margarita?

Answer 78

Less than 20,000

Because her property is underinsured, the coinsurance clause in Margarita’s insurance policy reduces the amount that the insurer will pay for a covered loss. To recover $20,000 for this loss, she should have purchased limits of at least $400,000 (that is, 80 percent of the $500,000 building’s insurable value).

Question 79

Following a heated argument with her drunken boyfriend, Mona sets his bed on fire. The boyfriend escapes unharmed, but the house is damaged. Mona’s homeowners insurance policy has a standard mortgage clause that names First Credit Union as mortgage holder. As regards this fire loss, what will the insurer do?

Answer 79

pay First Credit Union to the extent of its insurable interest, but not pay anything to Mona because she intentionally started the fire

Question 80

Jed is purchasing his home with a 20 percent down payment and a mortgage from Second Bank. Which of the following statements concerning Second Bank is correct?

Answer 80

Jed’s insurance policy can protect Second Bank’s interest in Jed’s home.

As mortgagee or mortgage holder, Second Bank has an insurable interest in Jed’s home that serves as collateral for the mortgage. To protect its interest, Second Bank will require Jed to name Second Bank as mortgage holder in Jed’s property insurance policy.

Question 81

Price differentials in insurance rates that fail to reflect equitably the differences in expected losses and expenses will result in

Answer 81

Unfair Discrimination

Question 82

If an insurer sells a personal lines policy and uses credit information to underwrite the policy or rate the risk, when must the insurer disclose this fact to the consumer?

Answer 82

Either when presenting the application or when the application is taken.

Question 83

If the insurer fails to give the renewal terms and a statement of the amount of premium due at least 45 days before the policy’s expiration date

Answer 83

the insurer automatically extends the existing policy for a period of 45 days. (The premium for this extended period is prorated based on the premium that applies to the existing policy

Question 84

In a conflict between the insurance policy and the summary disclosure form, the provisions of which document will prevail?

Answer 84

the provisions of the policy prevail.