Why do insurance policies usually define who is considered an insured under the policy?
A) To specify who is covered in addition to the named insured.
B) To specify who is a named insured.
C) To specify who is not insured.
D) To specify that the named ins
Answer: A
The word 'insured' can have a number of different meanings in an insurance policy. In addition to the named insured listed in the Declarations, the policy may cover other specifically designated persons or businesses as insureds under the policy
An insured owns 4 stores. As inventory is sold, the insured transfers new inventory from the other locations to the store making the sales. Which type of policy would best fit this insured's needs?
A) Scheduled policy.
B) Specific policy.
C) Value Reporti
Answer: D
When a business has several locations, it may have either a specific or blanket policy. Specific or scheduled policies are used for businesses whose values do not move from place to place. Each location is insured for a specific amount and, when
Which of the following amounts is the maximum that an insurer will pay in case of a loss?
A) Loss reserve.
B) Condition.
C) Actual cash value.
D) Limit of liability.
Answer: D
The limit of liability is the maximum amount an insurance company will pay in case of a loss.
A policy under which the insured and insurer agree on the property value and list the value in the policy is known as:
A) a block policy.
B) an agreed value policy.
C) an actual cash value policy.
D) a floater policy.
Answer: B
An agreed value policy is one in which the insured and insurer agree on a property value and list it in the policy. The insurer pays this amount in case of loss or damage. Agreed value policies are written for individuals who own expensive objec
Which of the following is an example of property that might be insured on a valued basis?
A) Golf equipment.
B) Coin collection.
C) Rare painting.
D) Jewelry.
Answer: C
For certain hard-to-value items, insurers will issue valued contracts. These contracts are written for a specified amount, and they list the value of the insured property as agreed to by both the insured and the insurer at policy inception. If t
The coverages offered by an insurance policy are described in the:
A) definition section.
B) conditions section.
C) insuring agreement.
D) declarations page.
Answer: C
The insuring agreement contains the insurer's promise to pay for loss if the loss should result from the perils insured against. This section also indicates what coverages the contract offers. The declarations page has information about the risk
The list of perils covered under a policy is found in which part of the policy?
A) Declarations page.
B) Conditions section.
C) Exclusions section.
D) Insuring agreement.
Answer: D
The insuring agreement contains the insurance company's promise to pay for loss if the loss should result from the perils insured against. This section also specifies the coverage the contract provides.
An all-risk or open-perils policy protects against:
A) named perils unless otherwise excluded.
B) any peril except those that are specifically excluded.
C) any peril.
D) only stated perils.
Answer: B
An open-perils, or all-risk, policy provides coverage for all physical damage except those perils, conditions, or property specifically excluded. If a peril is not specifically excluded, it is covered.
The insured has a named peril policy that covers hail, fire, wind, and lightning. Which one of the following events would be covered?
A) A rain storm causes the insured's basement to flood.
B) The roof collapses from heavy snow.
C) A window is broken in a
Answer: D
A named peril will provide coverage only if the loss is caused by one of the perils specifically named or identified in the policy. Since this policy listed lightning as a named peril, the damage to the roof as a result of an electrical storm wi
A business loses money because it was forced to close after a fire on the premises. This loss is described as a (an):
A) proximate cause.
B) named peril.
C) indirect loss.
D) direct loss.
Answer: C
Indirect loss is a financial loss incurred as a result of direct damage to property. In the case of a business, this includes loss of profits, rent, and continuing or extra expenses necessary to keep the business operating after a direct loss. F
Which one of the following situations describes an indirect loss?
A) Lost profits when business is suspended.
B) Water damage caused by firefighters extinguishing a fire.
C) Destruction of a car in a collision.
D) Damage to a roof from a hailstorm.
Answer: A
An indirect loss is a financial loss incurred as a result of direct damage to property. A business can suffer such a loss in the form of lost profits, rent, and continuing or extra expenses necessary to keep the business operating after a direct
When a small restaurant is damaged by a tornado, the owners are forced to close for 1 month while the property is repaired. The building suffers damages of $20,000. The owners estimate they will lose $50,000 in business receipts. In order to keep their st
Direct loss to property is physical damage to property that requires repair or replacement. The $20,000 damage to the building is a direct loss. The adverse financial effects due to the loss of use of that property, the lost business, and continuing payro
Which of the following policy provisions restricts certain risks from coverage?
A) Insuring agreement.
B) Conditions.
C) Exclusions.
D) Declarations.
Answer: C
In a policy's exclusions, the insurance company states what perils or property it will not cover, or under what situations the coverage does not apply. The exclusions must be read in conjunction with the insuring agreement. Some perils are exclu
The purpose of the conditions section of an insurance policy is to
A) cover unique insurable exposures of the insured.
B) list the obligations of the insured and the insurance company.
C) alter the general provisions of the insuring agreement.
D) eliminat
Answer: B
The conditions spell out in detail both the insurer's and the insured's rights and duties. These conditions relate to the insured's duties in the event of loss, change of risk, or exposure, as well as the process to be followed if a disagreement
The conditions section of an insurance contract sets forth:
A) the limits of liability under the contract.
B) the coverages provided by the contract.
C) the exclusions of coverage under the contract.
D) the duties of the insured and insurance company.
Answer: D
The insurance contract's conditions establish, in detail, the insurer's and the insured's rights and duties. These conditions describe the insured's duties in the event of loss, change of risk or exposure, the process to be followed if a disagre
Ace Insurance Company and Acme Insurance Company each insure the same building for the same amount. Both policies contain a pro rata other insurance clause. In the event of a partial loss, how much of the loss will Acme pay?
A) One-third, because the insu
Answer: C
Under a pro rata other insurance provision, each insurer pays a portion of the loss in proportion to the relationship its limit of liability bears to the total limit of liability under all applicable insurance. In this example, both policies hav
Two insurance policies apply to Monica's home. The limit for Policy A is $100,000, and the limit for Policy B is $50,000. Both policies have a pro rata other insurance clause. If she suffers a $9,000 covered loss to her home, how much will Policy A pay?
A
Answer: A
Under a pro rata other insurance clause, each company pro rates its payment for the loss. Each company's share is the proportion that its limit of liability bears to the total of all applicable limits, whether collectible or not. In the example,
What does the liberalization clause do to a property policy?
A) Eases the criteria for concealment or fraud.
B) Gives the insurer subrogation rights.
C) Broadens coverage.
D) Waives the premium in some situations.
Answer: C
A liberalization clause in an insurance policy provides that if the insurer changes its form to provide more coverage without additional premium, or if a legislative change requires a change in coverage, any policy already issued automatically p
The liberalization provision will do which of the following?
A) Require the insurer to liberalize the conditions of the policies.
B) Automatically broaden coverage without additional premium if there is a revision to the policy.
C) Protect the insured aga
Answer: B
The liberalization clause extends advantageous policy changes to the insured for no additional charge. If the insurer adopts a revision that would broaden the coverage under the policy without additional premium within a specified period, the br
A bailee is:
A) someone who escorts litigants into a court room.
B) a bond posted to free someone from jail.
C) a temporary reprieve from liability.
D) someone who has taken temporary custody of another person's property for a special purpose.
Answer: D
A bailee is someone who has care, custody, or control of another's property. Businesses such as laundries, dry cleaners, warehouses, parking garages, and storage facilities hold property for others. Because bailees have custody of others' proper
A parking valet at a hotel uses a guest's car to do a personal errand and damages the car in a collision. The guest has a personal auto policy (PAP). The insurance company will pay the claim and:
A) subrogate against the parking valet.
B) relieve the park
Answer: A
Part D-Coverage for Damage to Your Auto of the PAP contains a no benefit to bailee provision. This provision states that a carrier or other bailee for hire, such as a parking garage, service station, or moving company will not directly or indire
Which one of the following statements about the standard mortgage clause is CORRECT?
A) The mortgagee is the only party that can submit claims under the policy.
B) The mortgagee has no rights under the policy.
C) Nothing the insured does can prevent the m
Answer: C
A standard mortgage clause is a policy provision noting that any loss payment will be payable to the mortgage or lien holder as its financial interest may appear, and that the mortgage holder's right of recovery will not be defeated by any act o
When an insured fails to pay an insurance premium, the mortgagee remits the premium to the insurance company. When a loss occurs, the loss payment settlement would be made to the:
A) mortgagee.
B) insured.
C) insured and the mortgagee.
D) contractor.
Answer: A
The standard mortgage clause extends various rights to the mortgagee because of its insurable interest in the property. If the insured fails to render a proof of loss or to remit premium payments, the mortgagee may do so to protect itself.
Which of the following terms is used to describe an empty building that is not being used?
A) Absent.
B) Vacated.
C) Unoccupied.
D) Vacant.
Answer: D
A building that is not currently in use and does not have enough furnishings to function in its normal capacity is considered vacant. A building is unoccupied if no one is currently in it, but furnishings are present and the occupants intend to
Which of the following terms describes a building in which no one is present but to which the occupants intend to return?
A) Vacant.
B) Unoccupied.
C) Occupied.
D) Uninhabited.
Answer: B
A building's use will affect its coverage because different risks arise when a building is occupied, unoccupied, or vacant. An occupied building is being used. A building is unoccupied if no one is currently in it, but furnishings are present an
When a policy is written on a reporting basis, a premium is paid at the beginning of the policy period that is based on an estimate of what the final premium will be. This is called a (an):
A) total premium.
B) audited premium.
C) deposit premium.
D) fina
Answer: C
Policies are issued on a reporting basis when it is difficult to determine in advance what amount of coverage should be purchased. Instead of paying a flat premium, the insured pays a deposit premium, and then periodically submits reports to the
Which of the following phrases best describes actual cash value?
A) Original cost less depreciation.
B) Replacement cost less depreciation.
C) Replacement cost plus appreciation.
D) Original cost less appreciation.
Answer: B
Actual cash value (ACV) is the amount of money required to pay for damage to or loss of property. Actual cash value is determined by subtracting depreciation caused by obsolescence or wear and tear to the property from the property's current rep
The definition of actual cash value is:
A) the cost of replacing damaged or destroyed property at the time of a loss.
B) replacing damaged property with similar property that performs the same function as the damaged or destroyed property.
C) replacement
Answer: C
The actual cash value of the property is defined as replacement cost minus depreciation. Replacement cost is the amount of money needed to replace the damaged or destroyed property at the time of the loss. Functional replacement cost is replacin
The furniture Harold purchased 10 years ago was destroyed in a fire. The furniture cost $9,000 when new and has depreciated by $5,000. It would cost $12,000 to replace this furniture today. What is the actual cash value of Harold's destroyed furniture?
A)
Answer: A
The actual cash value of the property is defined as replacement cost mines depreciation. To calculate the actual cash value of Harold's furniture, subtract $5,000 (the depreciation cost) from $12,000 (the replacement cost). The actual cash value
An insured owns an office building valued at $200,000. He carries a deductible of $1,000. The building sustains a loss of $40,000. If the insurance policy carries an 80% coinsurance clause, how much coverage must the insured carry to ensure that the loss
Answer: C
A coinsurance clause requires a policyholder to carry insurance equal to a specified percentage of the total value of the property insured. Therefore, if a property is valued at $200,000 and the coinsurance clause is 80%, the policyholder must c
Which one of the following best describes the purpose of coinsurance?
A) Rate penalty.
B) Claims credit.
C) Partial deductible.
D) Rate credit.
Answer: D
Because property losses typically are only partial losses, property owners are inclined to carry just partial insurance on their property. To distribute the cost of insurance more equitably among insureds, many companies include coinsurance clau
The insured has a building with a replacement cost of $200,000 but has insured it for only $100,000. An 80% coinsurance provision is present in the policy. When a $80,000 loss occurs, the policy will pay:
A) $40,000.00
B) $80,000.00
C) $100,000.00
D) $50,
Answer: D
Coinsurance is an insurance policy provision under which the insurer and the insured share costs incurred after the deductible is met, according to a specific formula. In a property insurance contract, the insured must insure the property for a
An insurance company takes possession of a damaged auto it has covered. When the company becomes the legal owner of the auto, it is exercising the right of:
A) condemnation.
B) leasing.
C) liability.
D) salvage.
Answer: D
The insurance company has the right to any salvage when it settles a loss. The company may take possession of the damaged property and pay the insured the value of the loss. It then can sell or otherwise dispose of this salvaged property to redu
An auto is sold for salvage value following payment of a loss. Who receives the proceeds?
A) Lien holder.
B) Insurance company.
C) Insured.
D) Claimant.
Answer: B
When it settles a loss, an insurance company has the right to any salvage. The company may take possession of the damaged property and pay the insured the appropriate value of the loss. The property may be sold or otherwise disposed of in order
Which one of the following describes the concept of subrogation?
A) The insured claims the right to sue a third party.
B) The insurer claims the right to send the disputed claim into arbitration.
C) The insurer claims the right to collect from a negligent
Answer: C
When an insurer pays the insured for a loss for which some person other than the policyholder is responsible, the insurer has the right to recover its loss from the negligent party. The insurer essentially steps into the insured's place to take
Which of the following legal principles allows insurance companies to collect from a negligent third party damages it paid to an insured?
A) Assignment.
B) Risk transfer.
C) Subrogation.
D) Indemnity.
Answer: C
When an insurance company pays the insured for a loss for which a person other than the policyholder is responsible, the insurer has the right to recover its loss from the negligent party. Subrogation is designed to prevent the insured from coll
When the insurer and the insured cannot agree on the value of a loss, the matter is submitted to disinterested parties for resolution. Under a standard appraisal clause, how many parties are involved in determining the value of the loss?
A) One.
B) Two.
C
Answer: D
When the insurer and the insured cannot agree on the value of a loss and the matter is submitted to disinterested parties for resolution, the insured chooses one appraiser and the insurance company chooses another. The two appraisers then choose