Property insurance basics

Question 1

Fire Protection

Answer 1

Fire is an essential covered peril for property insurance. Nearly all policies will cover damage resulting from a hostile fire, which is a fire that burns outside of its intended boundaries or becomes uncontrollable. Property insurance does not cover damage from a fire that was intentionally set and that stays within its intended boundaries, known as a friendly fire.

Question 2

Frame

Answer 2

The building has a roof, floor, and supports made of combustible material, usually wood, and combustible interior walls. This construction is typically used for private residences.

Question 3

Joisted Masonry

Answer 3

The building has exterior walls of masonry (stonework) or fire-resistive construction rated for not less than 1 hour, along with combustible floors and roofs. This construction is typically used for private residences and light retail.

Question 4

Noncombustible

Answer 4

The building and its walls, floors, and structural framework are constructed of noncombustible materials, typically steel frame. This construction is typically used for warehouses and factories.

Question 5

Masonry Noncombustible

Answer 5

The building has exterior walls of masonry, typically concrete blocks, and noncombustible floors and roofs. This construction is typically used for shopping centers and low-rise office buildings.

Question 6

Modified Fire-Resistive

Answer 6

The materials used in the walls, floors, and roof of the building must have a fire-resistive rating of at least 1 hour, but less than 2 hours. This construction is typically used for mid- and high-rise office buildings.

Question 7

Fire-Resistive

Answer 7

The entire building and roof are constructed of reinforced concrete and steel, and must have a fire-resistive rating of at least 2 hours. This construction is typically used for high-rise office buildings and parking garages.

Question 8

Theft

Answer 8

is the broadest definition, and it includes any act of stealing, including burglary and robbery

Question 9

Burglary

Answer 9

is the taking of property from inside the premises, a locked safe, or a locked vault by a person who forcibly enters or exits the property

Question 10

Robbery

Answer 10

is the taking of property from the care and custody of a person who has been threatened with bodily harm or has been harmed

Question 11

mysterious disappearance

Answer 11

Sometimes property goes missing and the cause of loss is not known

Question 12

Unoccupancy

Answer 12

refers to a property that contains personal property, but has no occupant

Question 13

Vacancy

Answer 13

refers to property that contains no personal property and has no occupants. The Vacancy provision specifies how coverage is affected after an extended period of vacancy, typically for more than 60 days of vacancy.

Question 14

bailee

Answer 14

is a person or organization that has taken the property of another into their care, custody, or control for servicing, repair, or storage.

Question 15

bailor

Answer 15

The person who retains the ownership of the property that has been taken into a bailee’s care, custody, or control

Question 16

direct loss

Answer 16

is one that is the immediate result of a peril

Question 17

indirect loss

Answer 17

also known as consequential loss, is a consequence of a direct physical loss. Indirect losses refer to financial losses, such as loss of income or additional expenses incurred while property is being repaired

Question 18

All of the following losses are direct losses, except:

Answer 18

Loss of income

Question 19

primary cause of loss i

Answer 19

proximate cause

Question 20

concurrent causation

Answer 20

which says that when two perils simultaneously cause a loss (in other words, both perils are the proximate cause), the insurer must pay for the loss even if one of the perils is excluded by the policy.

Question 21

Inherent vice

Answer 21

refers to a quality within property that causes it to damage or destroy itself, such as spoiled food, rusting, or wear and tear. Inherent vice is not covered by property policies.

Question 22

Named perils

Answer 22

coverage is a type of coverage that only provides insurance for the causes of loss that are listed in the policy

Question 23

Open perils

Answer 23

coverage, also called all-risk coverage, provides insurance for all causes of loss that are not specifically excluded under the policy.

Question 24

Loss Valuation

Answer 24

A property policy pays for losses based on the valuation method contained in the policy, as specified by the Loss Settlement condition, or the method chosen by the insured in an endorsement added to the policy

Question 25

Actual Cash Value (ACV)

Answer 25

When losses are settled on an actual cash value basis, the policy will pay for the cost to repair or replace the damaged property at the time of loss, minus depreciation

Question 26

What calculation is used to determine the actual cash value (ACV) of a loss?

Answer 26

Replacement cost – depreciation = ACV

Question 27

Replacement Cost

Answer 27

Replacement cost is the full cost to repair damaged property or replace damaged property with property of like kind and quality, at current pricing, without a deduction for depreciation. Many property policies providing loss valuation at replacement value require covered property to be insured to a certain percentage of its replacement value, such as 80%. This loss valuation basis may be available by endorsement for policies that automatically pay losses on an ACV basis.

Question 28

Functional Replacement Cost

Answer 28

Some properties, like older dwellings or Victorian homes, use outmoded or obsolete materials and construction techniques that would make replacing them in their original condition too cost-prohibitive. These properties are often insured on a functional replacement cost basis, meaning the insurer will pay the cost of replacing the property with its functional equivalent.

Question 29

Guaranteed Replacement Cost

Answer 29

Policies that pay on a guaranteed replacement cost basis will pay the full cost of replacing the dwelling, even if the amount exceeds the policy limits, which none of the other loss valuation methods will do. Often, this coverage will require that the insured allow the insurer to set the replacement cost and automatically increase it as needed. This coverage is not available in every state or from every insurer.

Question 30

Agreed Value

Answer 30

Some policies insure covered property for an agreed-upon policy limit that is paid in the event of a total loss, regardless of the actual cash value of the property at the time of loss. This basis is useful for articles that are difficult to replace or value, such as fine arts, paintings, and classic automobiles

Question 31

valued policies

Answer 31

Policies that are written on an agreed value basis are sometimes

Question 32

Stated Value

Answer 32

Stated amount valuation means that the insurer bases the policy premium on the insured’s statement of the property’s value

Question 33

Market Value

Answer 33

Though it is less common than the other valuation methods, some policies will value covered property at the market value, which is the price a willing buyer would pay for property purchased from a willing seller under fair market conditions

Question 34

Salvage Value

Answer 34

The amount for which property can be sold at the end of its useful life is the salvage value. In property insurance, the salvage value is the scrap value of damaged property.

Question 35

Replacement cost

Answer 35

the value of replacing property with material of like kind and quality at current prices without deduction for depreciation

Question 36

Actual cash value

Answer 36

The value of repairing or repacing damaged property at the current replacement cost mnys applicable depreciation

Question 37

Functional Replacement cost

Answer 37

The cost to replace property that performs the same function with similar efficiency. Replacement property is not identical to the property being replace

Question 38

specific limit

Answer 38

insures a single item of property for a single limit of insurance. For example, a Dwelling policy insures one dwelling for $100,000

Question 39

blanket limit

Answer 39

insures multiple items of property for a single amount of insurance that applies to all covered property

Question 40

Scheduled limits

Answer 40

insure multiple items of property on a single policy with a different limit applying to each item, as scheduled in the Declarations. For example, one Farm policy insures the residential dwelling for $100,000 and a barn for $200,000.

Question 41

Which of the following best describes scheduled limits of insurance on a property policy?

Answer 41

They insure multiple items of property on a single policy, with a specified limit per item

Question 42

Deductible

Answer 42

A deductible is a specified amount of each loss that the insured must bear as a way to share the cost of a loss, often applicable to each occurrence. Property insurers typically subtract the deductible from the amount of loss when making the claim payment.

Question 43

Deductibles are an underwriting tool that the insurer uses to reduce the number of small claims. A large number of small claims may increase the likelihood of moral hazards, increase the financial costs of the policy, or take away from the insurer’s ability to pay larger, more urgent claims. By accepting a larger deductible, the insured’s premium may be reduced.

Answer 43

Deductibles apply to property insurance policies. They typically do not apply to casualty insurance policies.

Question 44

Coinsurance

Answer 44

Insurance to value is the amount of insurance sufficient to cover a total loss to the insured property. For example, if a home is valued at $500,000, but the owner only carries $300,000 in coverage, it lacks full insurance to value, as the amount of insurance is not enough to cover a total loss. This puts the insured at a greater danger of financial loss in the event of a total property loss.

To encourage insureds to purchase and maintain insurance to value, many property policies include a Coinsurance provision. This provision requires an insured to carry a certain percentage of the property’s total valuation (usually 80%) in order for losses to be paid in full. If the insured carries less than the required percentage, the policy will only pay an amount proportionate to the amount of insurance carried. The coinsurance formula is:

Coinsurance Percentage x Current Replacement Cost = Amount of Insurance Required

(Amount of Insurance Carried ÷ Amount of Insurance Required) x Amount of Loss = Amount Payable before deductible

Coinsurance only applies to partial losses. In the event of a total loss, the policy would pay up to its specified limit of insurance.

Question 45

Which of the following is not true of coinsurance?

Answer 45

It applies in the event of a total loss

Question 46

Loss Settlement

Answer 46

This condition specifies which loss valuation method will apply to the property insured under the policy. Though the claim payment will be based on the appropriate valuation method, the insurer will not be liable beyond the actual amount necessary to repair, rebuild, or replace the damaged property. Claim payment is also subject to the appropriate policy limit.

Question 47

Loss Payment

Answer 47

This condition specifies how the insurer will make payment for loss and what applicable time frames must be honored when submitting claim documents.

Question 48

Right of Salvage

Answer 48

The right of salvage is the right of the insurer to take possession of damaged property after paying for its loss. The salvage belongs to the insurer.

Question 49

Abandonment of Property

Answer 49

Abandonment is when the insured surrenders damaged property to the insurer for repair or disposal. Property policies prohibit the abandonment of property, and the insurer will not accept it. Arranging for repair or disposal is the insured’s responsibility, unless otherwise elected.

Question 50

Mortgage Clause

Answer 50

In property policies, the Mortgage clause specifies how the policy protects a mortgagee’s financial interest. Payment can be made to mortgagees only up to its insurable interest in covered property and in order of precedence. The mortgagee must comply with certain requirements if the insured’s claim is denied and the mortgagee wishes to collect under the policy:

It must pay any premium due under the policy on demand if the insured fails to do so
It must notify the insurer of any change in ownership or occupancy, or any substantial change in risk of which the mortgagee is aware
It must submit a proof of loss to the insurer if the insured fails to do so, typically within 60 days after receiving notice that the insured failed to do so
If the insurer is cancelling or nonrenewing the policy because the insured failed to pay the premium, the insurer must provide the mortgagee advance written notice (typically 10 days’ notice) before cancelling or nonrenewing, giving the mortgagee the opportunity to pay the necessary premium.

Question 51

The Mortgage clause on a property insurance policy allows the mortgagee to do all of the following, except:

Answer 51

Be the sole recipient of any claim payment

Question 52

Loss Payable Clause

Answer 52

Similar to the Mortgage clause, the Loss Payable clause designates a loss payee as a beneficiary of the policy. A loss payee is a party that is paid first in the event of a loss to property in which it has insurable interest, such as a creditor, lender, or lienholder.

Question 53

No Benefit to Bailee

Answer 53

Coverage does not apply if loss payment benefits a bailee. Because bailees are legally responsible for property in their care, property insurance policies exclude coverage for the insured’s property that the bailee must protect and insure. Bailees can insure the property of others in their care, custody, or control using commercial property coverages available to them.

Question 54

Third party provisions

Answer 54

Must pay premium if insured fails to pay
must notify insurer of change in ownership or occupancy
Must submit proof of loss if unsured fails to

Question 55

Loss payable clause

Answer 55

for creditors lenders or lienholders with insurable interest in property

allows them to be a beneficiary of the policy

Question 56

No benefit to bailee

Answer 56

bailee is a person or organization with care, custody or control of property for servicing , repair or storage
Bailees do not benefit from the name insureds policy
need separate policy

Question 57

Pair or Set Clause

Answer 57

A Loss to a Pair or Set condition describes how the insurer will cover a partial loss to property that comes as a pair or set, such as a pair of earrings or a fine china dinnerware set. The clause recognizes that the value of the pair or set is comprised of the value of each individual part and the value of the pair or set as a whole—the total value is greater than simply the sum of its parts.

In the event of a loss to part of a pair or set, the insurer may eith

Question 58

Appraisal

Answer 58

Appraisal addresses disputes about the amount of a property loss, and it may be requested by either the insurer or the insured. Each party selects its own appraiser, and the appraisers select an umpire. Agreement by any two parties settles the loss. Each party pays the costs of its own appraiser, and the parties share the cost of the umpire and the appraisal process. Appraisal is not used to determine whether the policy provides coverage for a loss.

Question 59

Recovered Property

Answer 59

If the insured or insurer recovers lost or stolen property after the insurer has made payment under the policy, that party must notify the other party of the recovery. The insured may keep the claim payment (and give up their right to the recovered property) or retain the recovered property (and return the claim payment). If the insured chooses to retain the recovered property, the insurer will pay for recovery and repair expenses

Question 60

Standard Fire Policy

Answer 60

The standard fire policy (SFP) of New York is the foundation for almost all property insurance policies issued today. This policy is written based on 165 lines, which are standardized by law to describe coverages. States that use the standard fire policy enforce the requirement that insurers cannot write a property policy that is more restrictive than the 165 lines.

The SFP provides coverage for direct loss resulting from fire, lightning, and the removal of property from premises endangered by fire or lightning.

Question 61

pro rata liability

Question 62

As required by the standard fire policy, property policies must use a loss valuation basis that is not more restrictive than:

Answer 62

Actual cash value basis

Question 63

Which term describes coverage that applies only to loss by the perils stated in a policy?

Answer 63

Named perils

Question 64

Which of the following statements best describes the Other Insurance condition on a standard property insurance policy, when two separate property policies provide coverage for the same loss?

Answer 64

Each policy pays its pro rata share of the loss

Question 65

When coverage applies to a property loss by any peril except those that are specifically excluded, the policy is written on which basis?

Answer 65

Open perils

Question 66

What is the term for a dwelling that is uninhabited, but has household furniture inside?

Answer 66

Unoccupied

Question 67

A basic form property insurance policy protecting a building and its contents provides which of the following?

Answer 67

Coverage against limited named perils

Question 68

If the insured and insurer do not agree on the value of a property loss, what condition would apply?

Answer 68

Appraisal

Question 69

When a property policy values property on a stated value basis, how would the insurer settle a total loss?

Answer 69

The insurer pays the lesser the insured’s reported value of the property and the property’s actual cash value

Question 70

Which of the following statements about a property policy is false?

Answer 70

The purpose of coinsurance is to have the insured retain part of the risk

Question 71

Which term describes coverage that applies only to loss by the perils stated in a policy?

Answer 71

Named perils

Question 72

After a partial loss to property that is included in a set, the insurer may:

Answer 72

Pay the difference between the actual cash value of the property before and after the loss

Question 73

When property is difficult to replace or value, like fine art pieces, insurers will often use which valuation basis to settle covered losses?

Answer 73

Agreed value

Question 74

A basic form property insurance policy protecting a building and its contents provides which of the following?

Answer 74

Coverage against limited named perils

Question 75

After a covered partial property loss, the insured must retain an amount of the loss, and that amount is subtracted from the insurer’s claim payment. This amount is known as:

Answer 75

deductible

Question 76

An insured’s property is stolen, and the loss is covered by the insurer. A few weeks after the insured receives the claim payment, the stolen property is located and returned to the insured. The insured can:

Answer 76

Keep the claim payment and surrender the returned property to the insurer

Question 77

An insured has a pair of pearl earrings insured by a property policy. One of the earrings is lost, and the loss is covered by the policy. The claim payment from the insured will equal:

Answer 77

The lost value of the single earring, plus the lost value of the earrings as a pair

Question 78

Loss of income suffered by a storeowner after their store is destroyed in a fire is considered a(n):

Question 79

All of the following are methods of loss valuation, except:

Answer 79

blanket value
actual cash value
stated amount
replacement cost

Question 80

What is the term for a dwelling that is uninhabited, but has household furniture inside?

Answer 80

Unoccupied

Question 81

The insurer’s promise to pay covered claims within a specified time frame after receiving the sworn proof of loss is included in which section of the policy?

Answer 81

Conditions

Question 82

An insured has a Homeowners policy, and a mortgage holder is shown in the Declarations. If the insured is denied a claim because they failed to submit a proof of loss, the mortgage holder may still receive loss payment if they do all of the following, except:

Answer 82

Acquire the insured’s financial records and make them available for insurer inspection

Question 83

Which of the following best describes the situation when a property has neither contents nor occupants?

Answer 83

Vacancy

Question 84

M owns a building that is insured for $40,000 with an 80% coinsurance requirement. A loss of $10,000 occurs, and the replacement cost of the property at the time of loss is $100,000. How much will be recovered?

Answer 84

5,000

Question 85

Which of the following methods of writing insurance is used to provide insurance on properties at different locations, using a single policy, and a single limit of insurance?

Answer 85

Blanket

Question 86

An insured owns a home with a replacement cost of $300,000 and a market value of $250,000. What is the most a valued policy will pay in the event of a total loss without a deductible?

Answer 86

The policy limit

Question 87

When filing a property insurance claim, the insured is required to do all of the following, except:

Answer 87

Hire an appraiser

Question 88

An insured puts $50,000 of covered inventory into storage, where the items are later damaged by a covered peril. What provision on the insured’s property policy prevents the storage facility from collecting any payment from the insured’s claim?

A
No Benefit to Bailee

Question 89

A basic form property insurance policy protecting a building and its contents provides which of the following?

Answer 89

Coverage against limited named perils