Chapter 22: Practice Exam 2

Answer C is correct. The Transfer of Rights of Recovery clause, also known as subrogation, gives the insurance company the right to recover from a third party who was at fault for a loss, up to the amount that the insurer has paid the insured for the loss. The abandonment provision merely states that the insured cannot decide to surrender damaged property to the insurer in return for full payment. (The acquisition of damaged property is at the option of the insurance company.) The pair or set clause states that the settlement for damage to one item that is part of a pair or set will be made with recognition of the reduction in value of the pair or set. Arbitration is a means of settling claims disputes when the insured and the insurance company disagree on the value of damaged property.

Answer C is correct. The purpose of insurance is not to avoid or eliminate risk, but to transfer risk. Risk reduction efforts play a part in loss control, which helps to keep insurance costs down, but insurance itself is not an example of reducing risk.

Answer B is correct. The preservation of property additional coverage under a businessowners policy covers direct physical loss or damage from any cause if the property has been removed to another location in order to protect it from loss by a covered peril. Coverage applies while the property is being moved and while it is temporarily stored at another location, but only for 30 days after the property is first moved.

Answer B is correct. If a dwelling policy includes the extended coverage (EC) perils, coverage for vandalism and malicious mischief (V&MM) may also be added. However, this coverage will not apply whenever the building has been vacant for more than 30 consecutive days.

Answer B is correct. Burglary is the taking of money or other property from inside a premises by someone who has unlawfully entered or exited the premises. There must be visible evidence of forced entry or exit. Robbery is taking money or property by force or threat. Embezzlement is taking money by means of bookkeeping fraud. Safe burglary is a special form of burglary that specifically refers only to breaking into a safe to take money or property, as opposed to just breaking in to a premises.

Answer B is correct. If the insurer cancels a commercial package policy, it must mail a written notice to the last known address of the first named insured. Ten days' notice is required for cancellation for nonpayment of premium; 30 days notice is required for cancellation for any other reason permitted by the policy.

Answer B is correct. The conditions state that the coverage territory includes the United States, its territories and possessions, and Canada. Mexico is not included in the coverage territory.

Answer A is correct. Insurance is only used to manage pure risks that involve only the possibility of loss and no opportunity for gain.

Answer B is correct. Concealment is similar to misrepresentation, except that it involves withholding a material fact where misrepresentation involves misstating a material fact. Fraud has a more extensive definition, which includes the insurance company relying on and being harmed by the misstatement of a material fact. Waiver and estoppel are terms that involve someone giving up a known right.

Answer B is correct. The insurance company is only required to give notice 10 days in advance when it cancels a policy for any reason during the first 60 days of coverage or for nonpayment of premium at any time during the policy term. However, after a policy has been in effect for 60 days, the insurer must give notice at least 30 days in advance when canceling for any reason other than nonpayment of premium.

Answer D is correct. The term "time element coverage" is used for many indirect losses, such as a business income loss, because the amount of loss might not be directly related to the amount of property damage that occurred, yet it is related to the time it takes to repair, rebuild, or restore the damaged property. Many factors can influence the ultimate loss, including the availability of supplies and replacement parts.

Answer D is correct. Generally, four-wheel private passenger autos, pickups, and vans owned by an individual or married couple are eligible if used for pleasure or general transportation. Pickups and vans used in a business, other than farming or ranching, are not eligible.

Answer A is correct. Risks may be retained in whole or in part by intentionally self-insuring or selecting high deductibles. The other risk management options are not examples of risk reduction. Transfer refers to the purchase of insurance, where the risk of loss is assumed by the insurance company in return for the premium. Avoidance means taking steps to not incur the risk at all, such as never driving a car to avoid the risk of collision. Reduction means taking steps to lower the severity of a loss if it occurs, such as installing a sprinkler systema fire might still occur, but it won't spread if the sprinkler system puts the fire out.

Answer D is correct. Damage to a covered auto while being used as part of a car pool is not excluded. All of the other answer choices are specifically excluded.

Answer C is correct. The Common Policy Declarations contain vital summary information about the contract, such as name and address of the named insured, policy period, coverage parts attached, premiums, and a list of forms attached to the policy. Exclusions are found in the individual coverage parts. Exclusions may be contained in coverage forms, causes of loss forms, or both.

Answer D is correct. Adverse selection means the tendency of people with a greater than average exposure to loss to purchase insurance coverage. For example, if insurers only sold earthquake coverage to applicants in earthquake-prone areas, or flood insurance only to those in flood-prone areas, the situation known as adverse selection would exist. Insurers and underwriters guard against adverse selection by trying to sell broad ranges of coverages to a large cross-section of the population in order to increase the premium base and spread the risk of loss.

Answer B is correct. Under the eligibility rules, office buildings may qualify for coverage under a businessowners policy if they do not contain more than 100,000 square feet of space and do not exceed 6 stories in height.

Answer D is correct. Many losses are reimbursed on an actual cash value (ACV) basis. Actual cash value is usually calculated by determining an item's replacement cost and subtracting an amount for depreciation.

Answer A is correct. A storage shed connected to the dwelling by a utility line would be considered an "other structure" available for insurance under Coverage B. All other answer choices are specifically described in the policy as being part of Coverage A, insurance for the dwelling.

Answer D is correct. Almost any building that is walled and roofed, is principally above ground, and is fixed to a permanent site is eligible to be covered by a flood policy. A policy may cover a building, its contents, or both.

Answer A is correct. If a building is insured on a replacement cost basis, a businessowners policy will provide additional coverage for increased cost of construction when required to comply with an existing ordinance or law. This coverage is limited to 10,000.

Answer B is correct. Although mobile equipment exposures are usually covered by CGL insurance, it is covered by business auto insurance while being carried or towed by a covered auto because in such cases it is considered an extension of the covered auto.

Answer B is correct. Fidelity bonds are contracts between three parties. The employees who are required to act honestly are the principals. The surety or guarantor, which is usually an insurance company, agrees to be responsible for a loss if a principal violates the terms of the bond. The obligee, the employer, is the party who is being protected by the bond and who will be paid if a loss occurs.

Answer B is correct. The coinsurance requirement is for the insured to carry 80% of the $300,000 building value, or $240,000 of coverage. Because the insured only has $200,000 of coverage, a penalty applies. The formula is that the amount actually carried ($200,000) is divided by the amount required ($240,000) to produce a fraction that will be multiplied by the loss. In this case, the fraction is 5/6 and the loss was $60,000, so the result is a $50,000 covered loss. However, the standard deductible is $500 per occurrence, so the net amount paid will be $49,500.

Answer C is correct. Family cemetery plots, newly acquired premises, and premises used as a temporary residence by an insured are all included in the policy definition of "insured location." Farm exposures are specifically excluded by the homeowner eligibility rules.

Answer A is correct. When an insured cancels a policy prior to expiration, the unearned premium may be returned on a short rate basis. This means that the company not only keeps the earned premium for the insurance provided, but also keeps an additional amount for expenses of issuing the policy.

Answer C is correct. Crime insurance written under a loss sustained form covers losses sustained during the policy period and discovered either during the policy period or up to one year after the policy expires.

Answer B is correct. CGL insurance policies provide coverage for medical expense payments for accidental injuries if the expenses are incurred and reported to the insurer within one year after the accident date.

Answer C is correct. The Federal Insurance Administration sets rates, eligibility requirements, and coverage limitations for flood insurance. Maximum limits do apply to the amount of coverage available, coverage may be written by private insurance carriers, and the FIA reimburses insurance companies for losses that exceed premiums collected.

Answer A is correct. A Personal Umbrella may cover losses that are excluded by underlying insurancein which case, a self-insured retention limit applies. This operates similar to a deductible because it is the out-of-pocket amount the insured must absorb before the umbrella coverage applies.

Answer C is correct. Insurance policies are contracts of adhesion. The insurer draws up the contract language, and the insured simply adheres to the terms. For this reason, any ambiguity in the wording is usually resolved in favor of the insured by the courts.

Answer C is correct. Assumption of risk, contributory negligence, and the fellow servant rule are the traditional common law defenses against employer liability. Proximate cause is a concept applied to determine which peril or event actually caused a loss.

Answer C is correct. The business auto coverage form includes supplementary payments under the liability section that state the insurer will pay expenses incurred by an insured at the insurer's request, including up to $250 a day for lost earnings because of time off from work.

Answer D is correct. Homeowners policies do cover some property used for business, but the coverage is subject to special limitations. The policy will only provide up to $2,500 of coverage for business property on the residence premises and $500 of coverage for business property away from the premises.

Answer C is correct. Farm property, including the principal residence and other structures, may not be covered by homeowner forms. All of the other answer choices reflect exposures that may be covered by farm forms.

Answer B is correct. Although all dwelling forms settle personal property losses at actual cash value, under the broad and special forms (DP-2 and DP-3), replacement cost coverage for buildings is provided if the insured carries insurance equal to at least 80% of the full replacement cost at the time of loss.

Answer D is correct. Interline endorsements attached to a commercial package policy are endorsements that can apply to more than one line of insurance or coverage part.

Answer D is correct. The commercial building and personal property coverage form does provide a number of coverage extensions but only if an 80% or higher coinsurance percentage or a value reporting symbol is shown in the declarations.

Answer C is correct. Coverage for medical payments to others under a homeowners policy applies to necessary medical expenses incurred within three years of an accident that causes bodily injury.

Answer D is correct. Under the BOP eligibility rules, there is no size limitation on apartment buildings, but a size limit does apply to office buildings. Banks, saving and loan associations, bars, and pubs are specifically described as ineligible risk categories.

Answer D is correct. Commercial crime coverage written on a discovery policy form will cover a loss discovered during the policy period even if it was sustained months or years earlier. It will also cover a loss discovered up to 60 days after the policy expires. Exclusions do apply to this coverage.

Answer C is correct. Coverage for transportation expenses is included in the physical damage section of a personal auto policy. All of the other answer choices are optional coverages that may be added by endorsement.

Answer C is correct. Ocean marine protection and indemnity (P&I) coverage provides liability coverage for job-related injuries to sailors, cargo lost or damaged through negligence, damage to other vessels when caused by collision, and a few other things. Damage to the insured ship is not covered under P&I, but the insurance is available under hull coverage.

Answer D is correct. All dwelling policies provide coverage for the loss of fair rental value if a building or other structure becomes uninhabitable because of an insured cause of loss. A limited amount of coverage is provided under the Other Coverages section of the policy, but an insured with a greater exposure might purchase a specific amount of coverage.

Answer B is correct. Liability assumed under contract is specifically excluded under the employers liability section of a workers compensation policy. The other answer choices are not excluded and are commonly covered by the policy.

Answer D is correct. All homeowner policies provide some coverage for loss of use. The other answer choices reflect available optional coverages, but they must be added by endorsement.