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Flashcards in Chapter 19 Deck (46):
1

The difference between Coverage E and Coverage F in the farm personal property coverage form is:

A) Coverage E is for liability while Coverage F is for medical payments.
B) Coverage E applies to other Private structures while Coverage F applies to loss of use.
C) Coverage E is a reporting form but Coverage F is not.
D) Insurance is scheduled under Coverage E but a blanket limit applies to Coverage F.

Answer: D

Classes of property are scheduled under Coverage E. Coverage F is covers farm personal property on a blanket basis both on and off the insured premises.

2

All of the following losses of cattle would be covered under a broad form farm policy EXCEPT:

A) loss due to accidental shooting of the cattle by a neighbor.
B) loss due to disease.
C) loss due to an accident while loading into railroad cars.
D) loss due to attacks by wild animals.

Answer: B

The causes of loss--broad form for the farm property form adds coverage for accidents involving loading or unloading, attacks on covered livestock by dogs or wild animals, and loss due to accidental shooting. Loss due to disease is not covered.

3

An insured who needs coverage against the breakdown of boilers and other machinery and equipment should purchase:

A) commercial property coverage.
B) difference in conditions coverage.
C) comprehensive general liability coverage.
D) equipment breakdown coverage.

Answer: D

Equipment breakdown coverage, also known as boiler and machinery coverage, can be used to insure boilers, machinery, and other equipment for both direct loss and indirect loss.

4

Which one of the following exposures to loss is NOT covered by the equipment breakdown protection coverage form?

A) Utility interruption.
B) Fire or combustion explosion.
C) Business income.
D) Spoilage damage.

Answer: B

Business income, spoilage damage, and utility interruption are coverages provided in the form. The policy excludes fire or combustion explosion because fire damage is covered by standard commercial property forms.

5

Aircraft hull insurance will provide coverage for which of the following?

A) Damage to or loss of the aircraft hull, fuselage, and property damage to others.
B) Damage to or loss of the aircraft hull, fuselage, and personal injury caused.
C) Damage to or loss of the aircraft hull or fuselage.
D) Damage to or loss of the aircraft hull, fuselage, and medical payments.

Answer: C

Aircraft hull insurance indemnifies the policyholder for damage to or loss of the aircraft hull or fuselage. These policies are similar to auto policies in terms of coverage's offered.

6

An aircraft liability policy provides coverage for liability arising from the operation of an aircraft. All the following statements are true about aircraft liability EXCEPT:

A) bodily injury is covered.
B) property damage is covered.
C) coverage is provided for the insured or other person who operates the insured's aircraft.
D) coverage is provided for the owner only.

Answer: D

An aircraft liability policy provides coverage for liability arising from the operation of an aircraft. It covers bodily injury and property damage, and coverage is provided for the insured or other person who operates the insured's aircraft.

7

Which policy would provide coverage for a surgeon when his patient is injured because of the doctor's failure to correctly perform a heart operation?

A) Personal umbrella.
B) Homeowners.
C) Professional liability.
D) General liability.

Answer: C

A professional liability insurance policy protects professionals against claims for damages resulting from providing, or failing to provide, professional services. General liability insurance is another term for commercial general liability insurance and provides protection against legal liability for commercial risks arising from ownership, maintenance, or use of business premises, defects in manufactured products, and completed operations. Umbrella policies provide broadened coverage and higher limits of liability for businesses, organizations, and individuals. Homeowners policies provide coverage for occupants of residential property.

8

Which policy provides coverage for professional liability?

A) Errors and omissions policy.
B) General liability policy.
C) Homeowners policy.
D) Personal umbrella policy.

Answer: A

Certain professionals must attain and maintain a minimum standard of special knowledge and ability and must exercise reasonable care in performing their services. A person who fails in this regard can be held liable to a client if the client is injured or damaged by such failure. Professional liability insurance protects professionals against claims for damages arising out of their providing, or failing to provide, services. Errors and omissions policies are a type of professional liability policy.

9

An errors and omissions policy could be issued to cover the following occupations EXCEPT:

A) architects.
B) accountants.
C) insurance agents.
D) veterinarians.

Answer: D

Errors and omissions policies are issued to cover professionals such as architects, engineers, insurance agents, and accountants. Veterinarians and other medical professionals are covered under medical malpractice insurance.

10

Of the following occupations, which would NOT use an Errors and Omission policy to provide coverage for professional losses?

A) attorney.
B) doctor.
C) insurance agent.
D) consultant.

Answer: B

Errors and omissions policies are designed for professionals such as architects, accountants, engineers, consultants, attorneys, stockbrokers, and insurance agents - not medical professionals. A doctor would need medical malpractice insurance.

11

The type of professional liability policy that provides coverage for insurance agents, as well as certain other types of professionals, is typically referred to as a/an:

A) Malpractice policy.
B) Contractual liability policy.
C) Errors and Omissions policy.
D) Directors and Officers policy.

Answer: C

An Errors and Omissions (E&O) policy provides liability coverage for insurance agents. E&O policies also provide professional liability coverage for certain other types of professionals as well, including accountants, architects, stockbrokers, engineers, consultants and attorneys.

12

What type of coverage is typically found in a professional liability policy?

A) Business contractual obligations of the insured.
B) Wrongful acts, errors, or omissions the insured commits and in some cases bodily injury.
C) All liability exposures that the insured has.
D) Wrongful acts, errors, or omissions the insured commits.

Answer: B

Unlike the commercial general liability policy, which provides coverage for bodily injury, property damage, and medical payments, a professional liability policy typically covers wrongful acts, errors, or omissions the insured commits. In some cases, such as medical malpractice and architects' and engineers' policies, bodily injury is a covered cause of loss due to the nature of the profession.

13

Which of the following entities could bring an errors and omissions claim against an insurance agent?

A) Clients an agent represents and state insurance departments.
B) Companies an agent represents and state insurance departments.
C) Companies an agent represents and clients they represent.
D) Companies an agent represents, clients they represent, and state insurance departments.

Answer: C

There are two sources of professional liability claims against insurance agents and brokers. The first is any insurance company an agent represents. If an agent exceeds his authority and causes an insurance company to suffer a loss by paying a claim that should not have been covered, the insurer may sue the agent to recover the loss. The second is the agent's client, who may sue for actions that adversely affect the collection of a claim.

14

Directors and officers may be held liable for all of the following EXCEPT:

A) confeasance, which is a person's failure to conform to the performance of an act in a proper manner.
B) misfeasance, which is the performance of an act in an improper manner.
C) nonfeasance, which is a person's failure to perform an act he has a duty to perform.
D) malfeasance, which is the commission of an illegal act.

Answer: A

There are three items for which a director and officer can be held liable. They are misfeasance, which is the performance of an act in an improper manner; nonfeasance, which is a person's failure to perform an act he has a duty to perform; and malfeasance, which is the commission of an illegal act.

15

Which one of the following would NOT be covered under an employment practices liability insurance policy?

A) Age discrimination.
B) Wrongful discharge.
C) Mass layoffs of employees.
D) Sexual harassment.

Answer: C

Employment practices liability insurance policies typically cover wrongful acts, including sexual harassment, discrimination, and wrongful discharge. Mass layoffs of employees is excluded under most policies.

16

An ex-employee files suit against her former employer. She believes she was dismissed for missing work to perform jury duty. Which one of the following policies would cover damages paid to the employee if she proves her case?

A) Commercial general liability (CGL).
B) Employment practices liability (EPL).
C) Errors and omissions (E&O).
D) Directors' and officers' liability (D&O).

Answer: B

Being dismissed for taking time off for jury duty would be grounds for a wrongful termination suit, and this would be covered under an employment practices liability insurance policy. E&O policies cover injuries that occur as a result of rendering or failing to render a service by a professional other than a doctor or lawyer. D&O policies protect against liability resulting form the breach of corporate duties by corporate officers and directors. CGL policies provide protection against liability for commercial risks.

17

Of the following statements regarding employment practices liability (EPL) insurance, which is NOT a correct statement?

A) EPL insurance may be issued as a separate policy.
B) Policy provisions with EPL insurance differ among insurers.
C) Only standard ISO forms are used to issue EPL insurance.
D) EPL insurance may issued as an endorsement to a D&O policy.

Answer: C

Employment practices liability insurance insurance may be issued as an endorsement to a Director and Officers (D&O) Liability policy or as a separate policy. While standard ISO forms for EPL insurance are available, many insurance companies issue their own policies. EPL insurance policy provisions differ among insurers.

18

A Difference in Conditions contract is a(n):

A) endorsement used to modify the covered perils in a surety bond.
B) modification of the duties of the insured condition in inland marine insurance.
C) exclusion that applies when there has been an increase in hazard under the insured's control.
D) policy issued to cover what is normally excluded in other property insurance contracts.

Answer: D

A DIC policy is designed to cover events commercial property policies typically exclude. It provides coverage for the difference between a very broad open perils policy and the insured's property coverage, typically provided by a building and personal property coverage form.

19

Which one of the following perils is normally excluded in a Difference in Conditions (DIC) policy?

A) Fire.
B) Flood.
C) Earthquake.
D) Radioactive contamination.

Answer: A

A DIC policy is designed to cover events commercial property policies otherwise exclude, such as earthquake, flood, and mysterious disappearance. Conversely, it excludes those perils that are normally included in a commercial property policy, such as fire.

20

All property policies contain exclusions. An insured may be interested in covering these gaps. A difference in conditions policy bridges these gaps by covering events:

A) commercial property policies otherwise exclude and including coverages normally found in a commercial property policy.
B) commercial liability policies otherwise exclude.
C) commercial property policies otherwise exclude and excluding coverages normally found in a commercial property policy.
D) commercial property policies otherwise exclude.

Answer: C

All property policies contain exclusions. An insured may be interested in covering these gaps. A difference in conditions policy is designed to cover events commercial property policies otherwise exclude. It excludes coverages normally found in a commercial property policy.

21

A commercial umbrella policy is an indemnity contract that would provide coverage to a business in all the following losses EXCEPT:

A) personal and advertising.
B) contractual.
C) workers' compensation.
D) premises and operations.

Answer: C

Umbrella policies provide excess liability coverage over other existing liability coverages. It also provides extra coverage for other liability exposures not covered by the underlying contracts. Workers' compensation is excluded in umbrella policies.

22

Ted's TV store is covered by a commercial package policy with a $1 million liability limit. Ted also has a $5 million commercial umbrella policy that contains a $25,000 self-insured retention limit. Abby, a customer, is injured, and Ted's TV is held liable. Abby is awarded $1.5 million, and Ted has $100,000 in legal fees. How much would the commercial umbrella pay?

A) $475,000 plus all of the legal fees.
B) $475,000 plus some of the legal fees.
C) $500,000 plus some of the legal fees.
D) $500,000 plus all of the legal fees.

Answer: C

The umbrella policy would pay the amount that exceeded the limit of the basis coverage policy, the commercial general liability policy. The insured does not have to pay the self-insured retention because this loss had an underlying policy in force. Some of Ted's legal fees would be covered by his CGL.

23

Who does a surety bond protect?

A) Obligee.
B) Principal.
C) Obligor.
D) Surety.

Answer: A

A surety bond provides monetary compensation if the bonded party fails to perform a certain act. It guarantees that the principal (also called the obligor) is honest and has both the financial capacity and work expertise to satisfy the obligation for which he is bonded. It is essentially a guarantee of performance, or an assurance to the obligee. Usually, the surety is a casualty insurance company that lends its name and credit to guarantee the obligation between two parties.

24

Who are the three parties to a surety bond?

A) Insurance company, agent, and policyholder.
B) Insured, agent, and beneficiary.
C) Principal, agent, and surety.
D) Principal, obligee, and surety.

Answer: D

The principal is the one whose acts are being guaranteed by the bond. The obligee is the one who collects if the principal fails to perform as guaranteed. The surety is the one giving the guarantee. The agent is not a party to the bond.

25

Which of the following is NOT a type of surety bond?

A) Completion bond.
B) Bid bond.
C) Fiduciary bond.
D) Collateral bond.

Answer: D

A completion bond guarantees that when contractors borrow money to fund construction projects, the project will be carried out and the work will be delivered free and clear of liens or encumbrances. A bid bond guarantees that if a contractor's bid is accepted, the contractor will enter into a contract and provide the required performance bond. A fiduciary bond guarantees that a person will fulfill his fiduciary obligations set forth by law.

26

Which of the following statements regarding bond agreements is CORRECT?

A) If a default occurs, the surety may institute legal action against the obligee.
B) A surety bond serves as a guarantee of performance.
C) A principal may be asked to provide subrogation rights to the surety in case a loss occurs.
D) The cost of a surety bond reflects the surety's anticipation that a loss will occur.

Answer: B

A surety bond serves as a guarantee of performance. Suretyship does not anticipate losses. The price of a surety bond is merely an administrative fee and does not have a large enough premium to pay losses. If a default occurs under a surety bond, the surety may institute legal action against the principal (not the obligee) to recoup any losses. There is no right of subrogation with surety bonding.

27

Which one of the following parties is the principal in a surety bond?

A) A contractor who has signed a contract to build an addition to a residence.
B) The homeowner who will pay the contractor for the work.
C) The insurance company that has provided the bond to guaranty the performance of the contractor's work.
D) The workers who have contracted with the builder to perform the work.

Answer: A

The principal is one of the three parties to a surety agreement. The principal is the party who promises to do or not do a specific thing. The surety is the party (usually the insurance company) that agrees to be responsible for loss that may result if the principal does not keep her promise. The obligee is the party to whom the principal makes the promise, and for whose protection the bond is written

28

Which of the following bonds guarantees that bills for labor and materials will be paid to the contractor as they are due?

A) Contract bond.
B) Completion bond.
C) Payment bond.
D) Performance bond.

Answer: C

A payment bond, also known as a labor and material bond, guarantees that bills for labor and materials will be paid to the contractor as they are due. A performance bond guarantees that a contractor, typically a construction contractor, will complete the contract as drawn. A contract bond guarantees performance of the terms and provisions of written contracts. A completion bond guarantees that a lender will be paid for any loans it issues in connection with contracted work.

29

What type of bond is used by a contractor to guarantee that work will be completed to specifications?

A) Bail.
B) Performance.
C) Bid.
D) Permit.

Answer: B

A performance bond guarantees that a contractor will complete the contract as drawn.

30

Which of the following is a contract bond?

A) Performance bond.
B) Judicial bond.
C) Fidelity bond.
D) Public official bond.

Answer: A

Contract bonds are issued to guarantee performance based on the terms and provisions of written contracts. The principals on these instruments are usually construction contractors, although the work of other types of firms may be bonded. Performance and bid bonds are the two common types of contract bonds.

31

A bid bond guarantees to the entity awarding the contract that the bidding contractor, if selected, will undertake the contract and will furnish a performance bond for the project. What will the bond do if the contractor does not take the job?

A) Agree to pay the difference between the selected contractor's bid and the bid that is then accepted.
B) Pay the entity for the entire contract.
C) Agree to pay the difference between the selected contractor's bid and the bid that is then accepted plus a 10% penalty for the trouble caused.
D) Agree to pay the difference between the selected contractor's bid and the bid that is then accepted plus a 20% penalty for the trouble caused.

Answer: A

Sometimes contracts are awarded to the firms that enter the lowest bids. Bid bonds agree to pay the difference between the selected contractor's bid and the bid that is then accepted.

32

License and permit bonds are required by government entities, including states, cities, and towns, from individuals requesting permission or license to take certain actions that may affect the public. What do these bonds do?

A) Protect the governmental units from the dishonest acts of their employees.
B) Guarantee that the businessowner will complete the contract in accordance with the terms of the contract.
C) Permit someone to seek a remedy in a court of equity.
D) Guarantee that the principal will perform the described activity in conformance with the specifications, terms, and codes governing such activities.

Answer: D

These bonds guarantee that the principal will perform the described activity in conformance with the specifications, terms, and codes governing such activities. They have two broad classifications. The first is bonds designed to guarantee that laws and regulations of particular business activities, such as funeral directors, private detectives, and real estate broker, are performed. The second is bonds that guarantee that certain taxes are paid, such as for sale of gasoline, liquor, and tobacco products.

33

After Acme Construction wins a bid to build an office complex, the owner demands that Acme purchase a payment bond to cover electrical and heating subcontractors. What guarantee is the owner seeking from Acme Construction by demanding the payment bond?

A) The fidelity will complete and deliver the work free of any liens or encumbrances.
B) The principal will complete and deliver the work free of any liens or encumbrances.
C) The obligee will complete and deliver the work free of any liens or encumbrances.
D) The surety will complete and deliver the work free of any liens or encumbrances.

Answer: B

The payment bond, or labor and material bond, guarantees that the principal will complete and deliver the work free of any liens or encumbrances. The bond assures the owner that if the contractor does not pay the bills for subcontracted labor or materials, the property will be turned over to the owner free of any financial attachments.

34

Insurance companies that are nonadmitted insurers fall into two categories. They are either an authorized nonadmitted carrier or an unauthorized nonadmitted insurer. What type of license do you need to sell for an authorized nonadmitted insurer?

A) A property and casualty license issued by the state in which you reside.
B) A surplus lines license.
C) A property and casualty license issued by the state you reside in and a nonresident license in the state where the insurance company is domiciled.
D) A surplus lines license and a property and casualty license issued by the resident state.

Answer: D

When the agent is unable to obtain the insurance through an admitted insurer or a company licensed to business in the state in which he will sell, a nonadmitted insurer may be an alternative. A property and casualty license issued by the resident state and a surplus lines license are required.

35

All of the following statements about surplus lines insurance are true EXCEPT:

A) agents can place directly with surplus lines companies.
B) policies are usually not protected by state guaranty associations.
C) the insured usually must be given a disclosure stating that the policy is placed with a nonadmitted carrier.
D) each state insurance department determines which types of risks may be put in the surplus and excess market.

Answer: A

When you deal with a nonadmitted insurer, you are unable to obtain the insurance through an admitted insurer or a company licensed to business in the state. Agents must arrange coverage through a licensed surplus lines agent or broker.

36

If an agent is unable to place business with an admitted insurer or a company licensed to do business in the state, where would he look to place this type of risk?

A) Export lines market.
B) State assigned risk market for nonadmitted carriers.
C) Surplus lines market.
D) Fiduciary market.

Answer: C

Insurance companies that are nonadmitted insurers write policies in the surplus lines market. The agent will deal with a nonadmitted insurer when he is unable to obtain the insurance through an admitted insurer or a company licensed to business in the state.

37

Henry is a pilot who just purchased his first Cessna Skyhawk single-engine airplane. He asks his insurance agent about aviation liability insurance and learns that this type of insurance is part of a special line of insurance business requiring a different agent. To which special line of insurance business is the agent referring?

A) Umbrella lines.
B) Fraternal lines.
C) Surplus lines.
D) Personal lines.

Answer: C

Surplus lines accommodate the placement of insurance for applicants with unusual risk characteristics. Standard insurance companies are unwilling or unable to provide this market. Aviation, products, earthquake, and professional liability are examples of surplus lines risks.

38

When business is placed with a nonadmitted insurer, all of the following are true EXCEPT:

A) each state insurance department determines which types of risks may be put in the excess market.
B) an agent can place business directly with a surplus lines company.
C) the policy is not protected by state guarantee associations.
D) the insured must be given a disclosure that the policy is placed with a nonadmitted carrier.

Answer: B

When you deal with a nonadmitted insurer, you are unable to obtain the insurance through an admitted insurer or a company licensed to business in the state. Agents must arrange coverage through a licensed excess lines agent or broker.

39

If an agent is unable to place business with an admitted insurer or a company licensed to do business in the state, where would they look to place this type of risk?

A) Fiduciary excess lines market.
B) Export lines market.
C) State assigned risk market for nonadmitted carriers.
D) Surplus lines market.

Answer: D

Insurance companies that are nonadmitted insurers write policies in the excess lines market. The agent will deal with a nonadmitted insurer when he is unable to obtain the insurance through an admitted insurer or a company licensed to business in the state.

40

Insurance companies that are nonadmitted insurers fall into two categories. They are either an authorized nonadmitted carrier or an unauthorized nonadmitted insurer. What type of license do you need to sell for an authorized nonadmitted insurer?

A) A property and casualty license issued by the state you reside in and a nonresident license in the state where the insurance company is domiciled.
B) A surplus lines license and a property and casualty license issued by the state.
C) A property and casualty license issued by the state.
D) A excess lines license.

Answer: B

When the agent is unable to obtain the insurance through an admitted insurer or a company licensed to business in the state, a nonadmitted insurer may be an alternative. A property and casualty license and an excess lines license are required.

41

The provisions of the Terrorism Risk Insurance Act of 2002 apply to which of the following lines of insurance?

A) Commercial property.
B) Automobile.
C) Homeowners.
D) Dwelling.

Answer: A

The Terrorism Risk Insurance Act of 2002 established a federal program to provide compensation for insured losses resulting from terrorist acts. Most commercial property and casualty policies are required to offer coverage for certified acts of terrorism. The program does not apply to personal lines coverages.

42

The Terrorism Risk Insurance Act addresses only a defined category of terrorism losses. To come within the new federal program, an act of terrorism must be certified as such by the Secretary of the Treasury and must have all the following characteristics EXCEPT:

A) it must produce property and casualty insurance losses in excess of $30 million.
B) it must be a violent act or an act that is dangerous to human life, property, or infrastructure.
C) it must have resulted in damage within the United States, to an air carrier as defined in the United States code, to a U.S. flag vessel or other vessel based principally in the United States and insured under U.S. regulation, or on the premises of any U.S. mission (e.g., an embassy or consulate).
D) it must have been committed by someone acting on behalf of a foreign person or foreign interest, as part of an effort to coerce the civilian population of the United States or to influence the policy or affect the conduct of the U.S. government by coercion.

Answer: A

As of January 1, 2007, covered acts of terrorism must produce property and casualty insurance losses in excess of $100 million. Acts that might otherwise meet these criteria but that occur during the course of a declared war cannot be certified as acts of terrorism under the act, except with respect to workers' compensation claims. All commercial insurers writing business in the United States are required to participate in the federal program and to offer insurance for terrorism risks as defined in the act.

43

The TRIA removes the exclusion of coverage for which of the following causes of loss?

A) War.
B) Intentional acts.
C) Damage caused in the act of committing a crime.
D) Acts of terrorism.

Answer: D

The passage of the TRIA voids any existing terrorism exclusions in commercial property and casualty insurance policies. Presently, all commercial policies must offer coverage for certified acts of terrorism. This coverage may be waived, but it must be done in writing.

44

For a loss to be covered under the TRIA, the cause of the loss must:

A) be certified as an act of terrorism.
B) be the result of criminal activity.
C) result in losses in excess of $10 million dollars.
D) result in loss of life.

Answer: A

For an act of terrorism to be covered under the TRIA, it must be certified as such by the Secretary of the Treasury, the Secretary of State, and the Attorney General of the United States.

45

The federal government will reimburse what percentage of an insured's losses when the damage is due to an act of terrorism?

A) 50%.
B) 75%.
C) 100%.
D) 85%.

Answer: D

The federal government is responsible for reimbursing 85% of each insurer's terrorism losses above the insurer's annual deductible, which is based on a percentage of its direct earned premium for TRIA property and casualty covered insurance lines in the previous year.

46

The federal government is not obligated under the TRIA to make payments for any portion of losses that exceed how much annually?

A) $1 billion.
B) $100 billion.
C) $5 million.
D) $100 million.

Answer: B

If the aggregate insured property and casualty losses for certified acts of terrorism exceed $100 billion annually, the federal government is not obligated to make any payments for any portion of the losses that exceed the $100 billion limit.