Chapter 5

Craig has a PAP and the liability coverage is displayed as 100/300/50. How much property damage liability coverage does Craig have? (LO 5-2)

$50,000 When liability coverage is displayed in the format shown, the first number represents the thousands of dollars of bodily injury liability coverage per person. The second number is the amount of coverage in thousands of bodily injury liability coverage per accident. The third number represents the amount in thousands of property damage liability coverage. In this case Craig has $100,000 in bodily injury liability coverage per person, $300,000 in bodily injury liability coverage per accident, and $50,000 in property damage coverage per accident.

Kristen has a PAP and the liability coverage is displayed as 250/500/100. How much bodily injury liability coverage per accident does Kristen have? (LO 5-2)

$500,000 When liability coverage is displayed in the format shown, the first number represents the thousands of dollars of bodily injury liability coverage per person. The second number is the amount of coverage in thousands of bodily injury liability coverage per accident. The third number represents the amount in thousands of property damage liability coverage. In this case Kristen has $250,000 in bodily injury liability coverage per person, $500,000 in bodily injury liability coverage per accident, and $100,000 in property damage coverage per accident.

Which risk holds the greatest potential for financial loss for a homeowner? (LO 5-1)

A liability claim While the total loss of a dwelling and all contents could be significant, the unlimited potential of the dollar size of a liability claim holds the greatest potential for financial loss for a homeowner. For example, imagine the size of the lawsuit for a child who drowns in a homeowner's pool because it wasn't properly fenced, or the total of the claims of a second story deck collapsing with 20 guests on it.

With a standard PAP, under which basis are damages based? (LO 5-2)

Actual cash value Under a standard PAP, coverage for damages is paid on an actual cash value basis which is the replacement cost minus depreciation. There is no replacement cost coverage under a standard PAP.

Which HO policy form provides the highest level of building and personal property coverage? (LO 5-1)

HO 5 The new HO 5 policy form does provide open perils coverage on buildings and personal property.

Your clients have a penthouse in New York where they spend several months per year and a home in Virginia where they typically spend the winter. They frequently have their butler move their favorite art and collectibles between houses. In addition, they frequently travel for business overseas. Part of the business includes entertaining international guests and hosting formal events and yacht parties. The wife carries her expensive jewelry when they travel. While at hotels, they keep the jewelry in the hotel safe. Which combination of coverages should they consider that would best meet their needs? (LO 5-1)

Homeowners coverage on both homes, watercraft coverage, an inland marine policy, and a large umbrella policy at a minimum. Homeowners coverage on both homes, watercraft coverage, an inland marine policy, and a large umbrella policy to protect property and liability is correct. Based on business activities and where they travel, other insurance to be considered would be business liability, personal liability coverage, kidnap insurance, and a host of other types of coverages available. Many wealthy clients carry special medical insurance that ensures they will be taken to a high-quality hospital and accompanied by doctors from such prestigious medical facilities as the Cleveland Clinic. Having a butler also indicates a need for specific coverage. Working with an agent who is familiar with supporting high net worth clients would be critical.

Which of the following are covered under a basic Commercial General Liability (CGL) policy? I. Injuries to customers II. Injuries to employees III. Business auto liability (LO 5-3)

I only A basic CGL policy protects against non-auto, non-employee liability claims. A claim for injuries by a customer would be covered.

Personal property floater (inland marine) policies are available for which of the following items? I. Silverware II. Musical instruments III. Golfing equipment IV. Installed carpeting (LO 5-1)

I, II and III only Personal property floaters are available for silverware, musical instruments and golfing equipment, but they are not available for installed carpeting (however, coverage would be available for an item such as an antique rug).

Which of the following are true of Commercial Package Policies (CPP)? I. It is a package of monoline forms II. It includes both property liability coverage III. Additional coverages can be added to customize coverage IV. It operates in a similar manner to a BOP (LO 5-3)

I, II, III, and IV All four of these statements are true of a CPP.

Kevin and Nancy have brought their homeowners insurance policy in for your review. The residence is insured for $430,000 under an HO3 policy. Since taking ownership, they have made many improvements to the property. The market value of the residence is $776,000 and their 40-acre lot is valued at $150,000. Costs to rebuild the house now would be approximately$600,000. Last year they added a barn, which cost $60,000, to supplement the loafing sheds, tack shed, and pole barn, with a total estimated replacement cost of $50,000. This is where they store the hay for their four horses, miniature donkey, and the other horses boarding there. They have created a collection of western memorabilia, which they lend to a local museum every couple of years. When it is lent, the museum takes out a special insurance policy for $150,000 to protect against damage or theft. Which of the following are true statements regarding their risk and coverage? I. Coverage A is underinsured by $170,000. In case of a partial loss, the residence is under the 80% coverage requirement, so the coinsurance provision would apply. II. Coverage B is inadequate. III. Coverage C is adequate because 50% of the $430,000 will cover their memorabilia. IV. The horses and miniature donkey should be disclosed to the company. They have added liability due to the friends keeping horses and riding on their property that should be addressed. V. Kevin and Nancy need an agent familiar with horse property and high value collectibles. (LO 5-1)

I, II, IV, and V only This is the correct answer. III is incorrect because Coverage C may not fully cover the memorabilia. They should have inland marine coverage and/or a personal property endorsement. Additionally, not knowing the value of their other personal property, we cannot say Coverage C is adequate.

Which of the following policy sections do homeowner's and auto policies share? I. Liability coverage II. Comprehensive coverage III. Medical payments coverage IV. Duties after a loss (LO 5-1 and 5-2)

I, III, and IV only All of these sections are included in both homeowners and auto policies except Comprehensive coverage which is only a part of a PAP.

Umbrella policies cover liability and are generally in addition to homeowners and auto coverage. Which one of the following statements about umbrella policies is correct? (LO 5-1)

If an item such as watercraft is not covered by an underlying policy, it may not be covered under the umbrella for liability issues. This is a true statement. If an item such as watercraft is not covered by an underlying policy, it may not be covered under the umbrella for liability issues. People who think "the fishing boat is just worth $1,200 so I won't cover it" are forgetting that the liability could exceed $1 million.

Which one of the following policies does not include liability coverage? (LO 5-1, 5-2, 5-3)

Inland marine policies Auto, home, BOP, and liability umbrella policies all include liability coverage while an inland marine policy does not. Inland marine policies only provide coverage on the listed property.

Which of the following is true regarding inland marine insurance? (LO 5-1)

It is used for protection of property that is in transit. One of the primary purposes of inland marine insurance is to protect personal property that is in transit, such as between summer and winter residences.

Because Paul has a pickup truck, some friends have asked him to help move into their new apartment. Ryan, one of his friends is in the back of the truck unloading furniture and slips and falls breaking his arm. Which coverage of a PAP would cover the cost of Ryan's subsequent emergency room bill? (LO 5-2)

Medical Payments Medical Payments coverage is designed for just such a situation. It pays claims for people in, on, entering, or alighting a vehicle - whether by intention or accident. So, Paul's PAP would cover Ryan's emergency room bill up to the policy limit.

Which one of the following is true about the various HO forms? (LO 5-1)

Open perils forms cover all perils unless specifically excluded. This is correct about open peril coverage, also known as all risk coverage.

Your client, Carol, has brought her declaration page and the following information. The market value of the residence is $468,000. She knows the builder and he told her to rebuild her house today would cost $450,000. The declarations page says it is an HO5 insured for $425,000 with a $1,000 deductible. The value of the land is $55,000. Which one of the following statements is true regarding a total loss of her house (ignoring the deductible)? (LO 5-1)

She will be out $26,000 if she has it rebuilt exactly the way it is today. She will be out $26,000 if she has it rebuilt exactly the way it is today.

All of the following are factors used to determine the cost of automobile insurance except (LO 5-2)

The color of the vehicle The color of the vehicle has nothing to do with the cost of insurance for the vehicle.

What is the main reason that there are only a few insurance companies who provide coverage for very high-value homes? (LO 5-1)

The law of large numbers is necessary to make losses reasonably predictable and there just aren't that many very high-value homes. The problem with very high-value homes is that there are not enough homogenous units for the law of large numbers to apply well enough to gain predictability. Fewer homes means fewer homogeneous exposure units over which to spread the risk and this means that there are fewer insurers willing to consider providing coverage on very high-value properties.

Which of the following statements regarding typical umbrella liability policies is not true? (LO 5-1)

They commonly require a base policy with a minimum of $1 million of liability coverage. Base policies normally include a minimum of $300,000 of liability coverage.

Comprehensive personal liability coverage (CPL) can be acquired in all of the following ways except as (LO 5-1)

an endorsement to a personal auto policy (PAP). CPL coverage is not available through PAPs.

There are two types of automobile physical damage coverage: (1) damage by collision, and (2) comprehensive. All of the following would be considered to be damage by comprehensive except (LO 5-2)

bumping into a steel post in a parking lot. Hitting a steel post would be categorized as damage by collision.

Which of the following is not a part of a Business Owner's Policy (BOP)? (LO 5-3)

commercial package policy A commercial package policy is an alternative to, not part of, a BOP.

Which of the following generally is not covered by employment practices liability insurance? (LO 5-3)

government-imposed fines and penalties Government fines and penalties are generally not covered. However, some insurance companies will cover punitive damages.

Which of the following is normally included under the medical coverage provisions of a CPL policy? (LO 5-1)

injuries sustained by negligent guests Injuries sustained by guests, negligent or not, are normally covered. The guest can submit a claim, and the insurer will pay the claim.

Which of the following medical claims would be covered in the provisions of a PAP? (LO 5-2)

injuries sustained while using a covered automobile for personal errands PAPs cover medical costs for people driving covered automobiles for personal use.

Which of the following types of loss is not covered in a standard PAP? (LO 5-2)

personal property damaged in an auto accident Damage to personal property in an auto accident is not covered in a standard PAP. This type of loss would normally be covered in a homeowners policy.

All of the following professionals would be likely to purchase errors and omissions insurance except (LO 5-3)

physicians. Physicians generally purchase malpractice insurance rather than errors and omissions insurance.

The liability insuring agreement of a CPL policy contains all the following provisions except (LO 5-1)

the promise to pay sums owed by the insured due to slander. Most CPL policies do not cover slander, defamation, or libel. Additionally, they do not normally cover false arrest, imprisonment, or invasion of privacy.

1. Which of the following is not one of the eight general exclusions that apply to all standard ISO homeowners policies? (LO 5-1)

vandalism Vandalism is one of the ten basic coverages provided by standard ISO policies. It is not an exclusion.