Chapter 5 Flashcards
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 insured is the only person covered by the policy.
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, such as family members. These designations are usually found in the definition of ‘insured’ listed in the Definitions section of 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) Blanket policy.
B) Scheduled policy.
C) Specific policy.
D) Value Reporting policy.
Answer: A
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 property is moved to another location, an endorsement must be added to the policy to reflect those changing values. Under a blanket policy, the entire insured amount applies to all locations, assuming the 90% coinsurance requirement is met. The insured may move property from location to location without notifying the insurance carrier.
Which of the following amounts is the maximum that an insurer will pay in case of a loss?
A) Condition.
B) Actual cash value.
C) Limit of liability.
D) Loss reserve.
Answer: C
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 floater policy.
B) a block policy.
C) an agreed value policy.
D) an actual cash value policy.
Answer: C
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 objects (e.g., a fine art collection).
Which of the following is an example of property that might be insured on a valued basis?
A) Rare painting.
B) Jewelry.
C) Golf equipment.
D) Coin collection.
Answer: A
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 the item is damaged, this is the amount that will be used to value the loss. Art work is frequently covered on a valued basis. Jewelry, coin collections, and golf equipment are typically covered under inland marine policies, which are not valued policies.
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, effective date of coverage, deductible, premium, coinsurance percentage, and location of the property. The definitions section specifies the meaning of certain terms as used in the policy. The conditions section defines the insurer’s and the insured’s rights and duties.
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 window is broken in a riot.
B) The roof is damaged in an electrical storm.
C) A rain storm causes the insured’s basement to flood.
D) The roof collapses from heavy snow.
Answer: B
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 will be covered. Rain, snow, and civil unrest were not included as named perils, so any damage due to these perils will not be covered.
A business loses money because it was forced to close after a fire on the premises. This loss is described as a (an):
A) named peril.
B) indirect loss.
C) direct loss.
D) proximate cause.
Answer: B
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. For a personal dwelling, indirect loss involves the possible loss of rent from a rental unit or the extra expenses the homeowner incurs from living in a motel while the home is being repaired.
Which one of the following situations describes an indirect loss?
A) Water damage caused by firefighters extinguishing a fire.
B) Destruction of a car in a collision.
C) Damage to a roof from a hailstorm.
D) Lost profits when business is suspended.
Answer: D
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 loss. A homeowner can suffer such a loss in the form of lost rents from a rental unit or extra expenses incurred when living in a hotel while his home is being repaired after a direct loss. Indirect loss is also referred to as consequential loss. Water damage caused by firefighters, destruction of a car in a collision, and hail damage to a roof are examples of direct loss.
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 staff, the owners must continue to pay salaries totaling $5,000. Ignoring any deductible, how much of the direct loss will the business owners policy pay?
A) $55,000.00
B) $75,000.00
C) $20,000.00
D) $50,000.00
Answer: C
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 payroll are called indirect or consequential losses.
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 excluded because they are simply uninsurable (e.g., such catastrophic events as war or flood). Other events are excluded because the basic premium does not contemplate the exposure (e.g., automobile collision coverage under a homeowners policy).
The purpose of the conditions section of an insurance policy is to
A) eliminate uninsurable perils.
B) cover unique insurable exposures of the insured.
C) list the obligations of the insured and the insurance company.
D) alter the general provisions of the insuring agreement.
Answer: C
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 occurs about the value of a loss.
The conditions section of an insurance contract sets forth:
A) the exclusions of coverage under the contract.
B) the duties of the insured and insurance company.
C) the limits of liability under the contract.
D) the coverages provided by the contract.
Answer: B
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 disagreement occurs about the value of a loss, and other important contract provisions. Conditions are not used to grant or exclude coverage. They simply set forth the policy’s rules or administration.
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) 100%, although Acme will have the right to subrogate the claim against Ace Insurance Company.
B) One-third, because the insured is the third party to the contract and must bear a proportionate share of the loss.
C) None, because second-named insurers always provide excess coverage.
D) 0.5.
Answer: D
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 have the same limit of insurance, so each insurer will pay half of the amount of loss.
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) $3,000.00
B) $6,000.00
C) $9,000.00
D) $4,500.00
Answer: B
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, Policy A insures $100,000 and Policy B insures $50,000. The loss is $9,000. Therefore, Company A will pay $6,000 toward the claim, and Company B will pay $3,000.
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 provides the additional coverage. An endorsement is not required.
The liberalization provision will do which of the following?
A) Allow the insurer to set the property values.
B) Require the insurer to liberalize the conditions of the policies.
C) Automatically broaden coverage without additional premium if there is a revision to the policy.
D) Protect the insured against a cancellation of the policy.
Answer: C
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 broadened coverage will immediately apply to the policy.
A bailee is:
A) someone who has taken temporary custody of another person’s property for a special purpose.
B) someone who escorts litigants into a court room.
C) a bond posted to free someone from jail.
D) a temporary reprieve from liability.
Answer: A
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’ property for a fee, they have a higher degree of responsibility to care for that property while it is in their custody.
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 parking valet of legal liability for the loss.
C) subrogate against the named insured.
D) recover any additional loss from the lienholder.
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 indirectly benefit from the PAP’s insurance. A bailee is an individual or entity that assumes possession of goods owned by another for the purpose of transporting, servicing, or storing them. When temporary custody is assumed, the bailee becomes legally liable for the goods.
Which one of the following statements about the standard mortgage clause is CORRECT?
A) Nothing the insured does can prevent the mortgagee from collecting under the policy.
B) The mortgagee can only collect from the policy with the prior written consent of the policyowner.
C) The mortgagee is the only party that can submit claims under the policy.
D) The mortgagee has no rights under the policy.
Answer: A
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 or negligence of the insured. The lien holder’s financial interest is represented by the balance due on the loan. The lien holder’s right of recovery is absolute.
An insured fails to pay their homeowners insurance premium. The mortgagee becomes aware of this fact and remits the premium to the insurance company. Shortly thereafter the insured sets fire to their home in an attempt to receive payment for the loss. Any loss payment settlement would be made to the:
A) the insured and the mortgagee.
B) neither the insured or the mortgagee.
C) the mortgagee.
D) the insured.
Answer: C
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. In the event that a loss occurs that is a valid claim of the mortgagee under the policy, as long as the mortgagee has met their requirements as specified under the policy the mortgagee will receive payment even if the insured is denied payment, as would be the case in the scenario for this question. Intentional acts on the part of the insured are specifically excluded under an insurance policy.
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 return, as is the case when the residents are out of town on vacation.
