Personal Lines Insurance Practice Exam

A flood insurance policy issued by the NFIP would NOT cover A) personal property in a basement B) a commercial building C) property removed from the premises to protect it from flooding D) a mobile home affixed to a permanent site

A) personal property in a basement Explanation: Almost any building that is walled and roofed, is principally above ground, and is fixed to a permanent site is eligible for coverage under a flood policy. Property is also covered at another place, either above ground or outside of the special flood hazard area, for 45 days when removed by the insured to protect it from flood. Personal property in a basement or outside in the yard is not covered. Reference: 9.4.2 in the License Exam Manual

Which of the following classes of property are NOT Specifically excluded from coverage C-personal property? A) Animals, birds, or fish B) Property away from the residence C) Credit cards D) Property rented to others off of the residence premises

B) Property away from the residence Explanation: Property away from the residence premises shown in the declarations is covered for up to 10% of the Coverage C limit or $1,000, whichever is greater. This is worldwide coverage. Reference: 7.5.1 in the License Exam Manual

Which one of the following is part of the formula for calculating the actual cash value of a dwelling? A) Purchase price B) Replacement cost C) Assessed value D) Original market value

B) Replacement cost Explanation: Actual cash value (ACV) = replacement cost - depreciation Reference: 7.5.4 in the License Exam Manual

Depending on the circumstances, a passenger injured in an automobile accident may be able to recover under all of the following coverages EXCEPT A) medical payments B) collision C) liability D) uninsured motorist

B) collision Explanation: Collision coverage provides only physical damage coverage for the insured's vehicle. It protects against damage done to the covered auto by impact with another vehicle or an object. It also covers damage sustained if the car rolls over (is upset). Reference: 8.12.1 in the License Exam Manual

If death results from a compensable injury, the maximum amount of coverage paid under workers compensation for burial expenses is: A) $1,000 B) $4,000 C) $5,000 D) $2,000

C) $5,000 Explanation: If death results from a compensable injury, the maximum amount of coverage paid under workers' compensation for burial expenses is $5,000. Reference: See State Supplement

Jane's sister, Maggie, who lives with Jane and just sold her car, drives Jane's sports car to a party. On the way home Maggie loses control of the car, hits a parked car, and rolls the car. Maggie dies as a result of her injuries. What coverage will reimburse Jane for Maggie's funeral expenses? A) Uninsured motorist coverage. B) No coverage is available for funeral expenses. C) Medical payments coverage. D) Liability coverage.

C) Medical payments coverage. Explanation: Medical payments pay funeral expenses for covered persons, which includes the insured and any family member while in the insured vehicle. Reference: 8.8.1 on the License Exam Manual

Both parties rely on statements made to each other when writing a contract. This is known as a A) unilateral contract B) speculative contract C) contract of utmost good faith D) conditional contract

C) contract of utmost good faith Explanation: The principle of utmost good faith imposes a higher degree of honesty on parties to an insurance contract. The insurer relies on the truthfulness on the application, and the insured relies on the company's promise and ability to provide coverage and pay claims. Both parties must know all material facts and relevant information, neither may attempt to conceal facts or deceive the other party. A unilateral contract is one in which only one party makes a legally enforceable promise. In a conditional contract, the insurer's consideration is a promise to pay only if a certain condition is met. If the condition is not met, the insurer does not have to pay. Reference: 2.3.2.3 on the License Exam Manual

The following perils may be insured against under a basic dwelling policy EXCEPT: A) lightning. B) vandalism and malicious mischief. C) flood. D) fire.

C) flood. Explanation: Water damage, including flooding, is not a covered peril under a dwelling policy. Fire and lightning are covered perils on the Basic Form, and vandalism and malicious mischief is available for an additional premium. Reference: 6.4.1.1 in the License Exam Manual

Towing and labor coverage covers all of the following EXCEPT A) labor for changing a tire at the scene of a breakdown B) towing costs after a breakdown C) towing costs after an accident D) the cost of a fan belt replaced at the scene of a breakdown

D) the cost of a fan belt replaced at the scene of a breakdown Explanation: Parts are not covered under this coverage. The labor and service call costs are covered up to the limit of liability. Reference: 8.13 in the License Exam Manual

A dwelling policy can be used to insure all of the following EXCEPT A) an apartment building with 6 units B) rental homes C) lake cabins D) duplexes

A) an apartment building with 6 units Explanation: A dwelling policy may be used to insure a building with up to 4 units. Reference: 6.3.2 in the License Exam Manual

An insured has a $60,000 Special Form (DP-3). When a covered loss in the amount of $10,000 damages the attached garage, how much of that amount is paid under the Coverage B-Other Structures? A) $0 B) $10,000 C) $1,000 D) $6,000

A) $0 Explanation: The attached garage is considered part of the dwelling, so the $10,000 is paid under Coverage A-Dwelling. Real property located on the described property and separated from the dwelling by clear space is covered by Coverage B-Other Structures. Reference: 6.4.3 in the License Exam Manual

How much will the personal auto policy pay for a rental car if the insured vehicle is stolen? A) $20 per day, up to $600 maximum B) $25 per day, up to $650 maximum C) $30 per day, up to $900 maximum D) Nothing

A) $20 per day, up to $600 maximum Explanation: The PAP provides that if an insured's vehicle is stolen, and he has comprehensive insurance, the insurance company will pay $20 per day up to a maximum of $600 for a rental car. This coverage starts 48 hours after the theft. Reference: 8.12.2 in the License Exam Manual

The replacement cost of Arjun's home is $200,000. He carries $100,000 of insurance on the home with a $1,000 deductible. The policy has an 80% coinsurance requirement. If a $40,000 covered loss occurs, how much would Arjun's insurance company pay for the loss? A) $24,000 B) $39,000 C) $40,000 D) $25,000

A) $24,000 Explanation: Coinsurance requires the insured to carry a minimum amount of insurance (called insurance to value). In this case, Arjun does not carry the required amount of insurance (80%) of $200,000, or $160,000). The amount of loss paid is calculated by dividing the amount of insured carries ($100,000) by the amount of insurance required ($160,000) and the multiplying the resulting figure (0.625) by the amount of loss ($40,000). The result is $25,000; then the $1,000 deductible is subtracted to produce a payment of $24,000. Reference:4.4.1.4 in the License Exam Manual

A producer's license may be suspended for up to how many months? A) 12 B) 25 C) 6 D) 18

A) 12 Explanation: A suspension may be effective for up to 12 months. The Director cannot reissue a license to any person whose license has been revoked until he qualifies again for licensing and a year passed since the license was revoked. Reference: See State Supplement

If an insurer does not intend to renew a personal risk insurance policy, it must give at least how many days' notice to the insured? A) 30 B) 20 C) 10 D) 45

A) 30 Explanation: If an insurance company does not intend to renew a personal risk insurance contract, it must mail or deliver to the named insured, at the address listed in the policy, notice of its intention not to renew. The notice must be sent at least 30 days before the policy's expiration date. Reference: See State Supplement

When does flood insurance take effect? A) 30 days after the date of application and payment of premium B) As soon as the insured pays the 1st premium C) As soon as the agent binds coverage D) As soon as the policy is issued

A) 30 days after the date of application and payment of premium Explanation: During the first 30 days after a community becomes eligible for flood insurance, an individual's policy becomes effective as 12:01 AM of the day following the date he applied for the policy and paid the premium. After that first 30-day period, a policy becomes effective on the 30th calendar day after the applicant completes the application and pays the full premium. Reference: 9.4.6 in the License Exam Manual

Vandalism or malicious mischief losses to property on the residence premises are NOT covered if the dwelling has been vacant for A) 60 or more consecutive days B) 25 or more consecutive days C) 100 or more consecutive days D) 10 or more consecutive days

A) 60 or more consecutive days Explanation: Vandalism or malicious mischief is a basic named peril and is not covered if the property is vacant for 60 or more consecutive days. Reference: 7.5.2.1 in the License Exam Manual

Kelly is a sophomore in high school and just got her driver's license. Rand is a freshman. They verbally agree that Rand will pay her $2/day for her to drive him to and from school. Which statement below could cause this to NOT be a valid contract? A) A valid contract must be between two competent parties B) A valid contract must have consideration C) A valid contract must be in writing D) A valid contract must have a legal purpose

A) A valid contract must be between two competent parties Explanation: You can use the acronym CLOAC to remember the elements of a legal contract: consideration, legal purpose, offer, acceptance, and competent parties. Kelly and Rand are minors and therefore are not considered competent. Contracts may be oral or written. Reference: 2.3.1 in the License Exam Manual

An insured owns a pet lion that is caged on the homeowner's property. The owner takes great care to warn neighbors of the possible danger by posting signs, fencing the yard, and locking the cage at all times. When a neighbor's child manages to open the cage and is bitten, what type of liability would apply to the lion owner? A) Absolute liability B) Contractual liability C) Premises liability D) Vicarious liability

A) Absolute liability Explanation: The law imposes strict or absolute liability for specific situations or activities that pose threats to the safety of others. People who own dangerous animals are held to a higher standard of care. Absolute liability applies when a person is liable for a dangerous condition, regardless of the amount of care taken. Reference: 5.3.4 in the License Exam Manual

Physical damage losses under the personal auto policy are reimbursed on what basis? A) Actual cash value or cost to repair or replace, whichever is less B) Actual cash value or cost to repair or replace, whichever is greater C) Market value D) Functional replacement cost

A) Actual cash value or cost to repair or replace, whichever is less Explanation: Physical damage losses are reimbursed for actual cash value or the amount needed to repair or replace the property, whichever is less. Reference: 8.12.4 on the License Exam Manual

Who of the following are required to be members of the Arizona Property and Casualty Insurance Guaranty Fund? A) All insurers that write the types of insurance that are protected by the fund in Arizona B) Foreign property and casualty insurers only C) lien property and casualty insurers only D) All insurers that write insurance in Arizona, including life and health insurers

A) All insurers that write the types of insurance that are protected by the fund in Arizona Explanation: All insurers that write types of insurance that are protected by the fund are required to be member insurers of the fund. Reference: State Supplement in the License Exam Manual. Reference: 4.4.16.3 in the License Exam Manual

Under an auto policy, Other than Collision coverage would apply to which of the following situations? A) All of the car's tires are stolen. B) An insured has her car parked at an airport, and a suitcase is stolen from the car. C) The car rolls over after hitting a patch of ice. D) An insured breaks a window to gain access because the keys were left inside.

A) All of the car's tires are stolen. Explanation: Other than Collision coverage protects against all accidental damage not due to collision, upset, and other specified exclusions. Therefore, the car rolling over on the icy road would not be covered, nor would the loss of personal property, such as a suitcase. Breakage of glass would be covered only if the breakage were due to a collision and not intentionally caused by the insured. Reference: 8.12.1 in the License Exam Manual

An insurance company issued a homeowners policy that included ambiguous language regarding how a loss was settles. The insured sued the insurance company and won. The judge stated that due to the ambiguous language in the contract, the decision must be made in favor of the insured. The judge was basing this decision on which of the following types of insurance contracts? A) Contract of adhesion B) Conditional contract C) Aleatory contract D) Unilateral contract

A) Contract of adhesion Explanation: The insurance company writes the contract, which is either accepted or rejected by the applicant. Modifi9cations by the applicant cannot be made. As a result, courts generally have held that any ambiguity in the contract should be interpreted in favor of the insured. When doing so, the courts may rely on the doctrine of reasonable exp[ectations, which states that a policy includes coverage that an average person would reasonably expect it to include, regardless of what the policy actually provides. Reference: 2.3.2.1 in the License Exam Manual

Which of the following coverages in the homeowners policy is used to protect Sam when a friend files suit after falling down basement stairs that Sam is repairing? A) Coverage E-Personal Liability B) Coverage D-Loss of Use C) Coverage F-Medical Payments D) Coverage A-Dwelling

A) Coverage E-Personal Liability Explanation: Coverage E-Personal Liability provides coverage to the insured if a claim is made or a suit is brought against the insured for damages because of bodily injury to property damage of others. Coverage E requires that Sam's negligence be the cause of the accident. Reference: 7.6.1 in the License Exam Manual

Wilson owns a 4-family apartment building. Which dwelling form(s) would provide coverage against building damage caused by the freezing of plumbing, heating, air conditioning, and sprinkler systems? A) DP-2 and DP-3 B) DP-3 only C) DP-1 and DP-2 D) DP-1

A) DP-2 and DP-3 Explanation: Both the DP-2 and DP-3 would cover freezing of plumbing, heating, air conditioning, and sprinkler systems. Reference: 6.4.2 in the License Exam Manual

In homeowners policies, what does Coverage A insure? A) Dwelling B) Personal property C) Other structures D) Extra expenses

A) Dwelling Explanation: Coverage A provides dwelling coverage, Coverage B covers other structures, Coverage C insurers personal property, and Coverage D covers loss of use. Reference: 7.5.1 in the License Exam Manual

What are the 2 flood insurance programs that are available? A) Emergency program and the regular program B) Occurrence program and the claims-made program C) Basic program and the Special program D) State program and the federal program

A) Emergency program and the regular program Explanation: The emergency program goes into effect when the community applies to the National Flood Insurance Program and remains in effect until the government finalizes the flood insurance rates for that community. Then, the regular program provides coverage. Reference: 9.4.2 in the License Exam Manual

Which of the following perils is excluded in the HO-2 broad form? A) Escape of pollutants that results from any cause or loss B) Loss caused by fireplace smoke C) Damage to the dwelling caused by a vehicle operated by a nonresident of the household D) Accidental discharge of water from an appliace

A) Escape of pollutants that results from any cause or loss Explanation: All homeowners forms cover losses caused by the escape of pollutants only if a result of a broad form named-peril cause of loss, not ANY cause of loss. Reference: 7.5.2.3 in the License Exam Manual

The agent has many responsibilities to the applicant. One involves a trust relationship between the agent and the insured regarding the insured's finances and confidentiality. In this case, the agent acts in what capacity? A) Fiduciary B) Consultant C) Attorney-in-fact D) Special agent

A) Fiduciary Explanation: Agents have the duty to act in a fiduciary capacity that requires a high degree of trust and confidence. This duty deals with the agent's dealings with both the insured and the insurer. The agent is expected to be trustworthy, act in good faith, and preserve confidential information. Reference: 1.9.2 in the License Exam Manual

The Broad Form/HO-2 policy provides which type of coverage? A) Named perils coverage for dwelling and personal property coverage B) Open perils coverage for dwelling and personal property coverage C) Named perils coverage for personal property coverage, and open perils coverage for dwelling coverage D) Open perils coverage for dwelling coverage only

A) Named perils coverage for dwelling and personal property coverage Explanation: The HO-2 policy provides coverage for both dwelling and personal property on a named-peril basis. Perils covered include fire, lightning, removal, glass breakage, extended coverages, theft, falling objects, weight of ice or now or sleet, accidental discharge of heating or cooling systems, freezing of plumbing systems or appliances, and bulging and cracking of steam or hot water heating systems. Reference: 7.4.1 in the License Exam Manual

Which on of the following would be classified as a general damage? A) Pain and suffering B) Lost wages C) Medical bills D) Damaged property

A) Pain and suffering Explanation: Compensatory damages compensate an injured party for injuries sustained- nothing more. Their purpose is to make a person whole again in the position that existed before the loss or harm. Compensatory damages are further categorized by: general damages (which necessarily result from the act or omission, such as emotional distress, inconvenience, and pain and suffering) and special damages (losses measured in exact sums of money including medical bills, travel expenses for medical care, prescription costs damaged property, and lost wages). Reference: 5.3.6 in the License Exam Manual

What must an applicant do to qualify for a producer's license? A) Pass the state examination B) Be employed for at least 2 years by an insurer C) Be appointed by at least 2 insurers D) Be at least 21 years old

A) Pass the state examination Reference: See State Supplement

When an insurance company cancels a policy, what method is used to determine the premium due? A) Pro rate B) Short-rate C) Premature D) Flat

A) Pro rate Explanation: When the insurer cancels a policy, the premium refund is determined on a pro rata basis. Under this method, the premium refund equals the premium paid for the unexpired term of the policy. A short-rate method is used when the insured cancels the policy. A policy terminated by either the insured or insurer on its effective date results in a flat cancellation. The entire premium is returned to the policy holder. There is no premature method of determining how much premium is due. Reference: 3.4.3 in the License Exam Manual

Which of the following is an example of property that might be insured on an agreed value basis? A) Rare painting B) Car C) House D) Apartment building

A) Rare painting Explanation: Some items of property are very difficult to value after a loss has occurred. In this situation, the insured and insurer will agree on a value before the policy is issued. Antique furniture or fine arts will most likely have agreed values. If a loss occurs, the agreed value will be the amount the insured is guaranteed to receive. Reference: 4.4.10 in the License Exam Manual

Self-insurance is an example of what type of risk management? A) Retention B) Avoidance C) Transference D) Reduction

A) Retention Explanation: Self-insurance is a form of risk retention because the individual personally retains the risk and must accept the economic loss if the risk becomes a reality. Reference: 1.6.8 in the License Exam Manual

Which homeowners endorsement is used to insure high-value items of personal property? A) Scheduled personal property B) Business pursuits C) Personal property replacement cost D) Personal effects

A) Scheduled personal property Explanation: The scheduled personal property endorsement provides a separate schedule of insurance for 1 or more of 9 categories of valuable property. Reference: 7.5.7 in the License Exam Manual

George just returned from Europe with a beautiful Swiss watch valued at $10,000. He is concerned that his homeowners policy will not provide enough coverage. His insurance agent suggests that he add which endorsement to adequately cover his watch? A) Scheduled personal property endorsement B) Special property limits C) Coverage C-Personal Property D) Personal property replacement cost endorsement

A) Scheduled personal property endorsement Explanation: The scheduled personal property endorsement provides coverage for specific items of property, such as a watch, that exceeds the internal limit on the policy. Loss settlement is based on the actual cash value up to the amount listed on the endorsement. Reference: 7.5.7 in the License Exam Manual

Roberta shares carpool expenses with co-workers. During her turn driving to work, she is involved in an accident in which one of her passengers is injured and her car is damaged. How does her personal auto policy respond? A) The insurance company will cover the auto repairs and injuries. B) The insurance company will not cover the auto repairs or injuries. C) The insurance company will only cover the auto repairs. D) The insurance company will not cover the auto repairs.

A) The insurance company will cover the auto repairs and injuries. Explanation: PAP provides no coverage if the insured is paid a fee for providing a livery service, such as transporting people or property in a taxi or limo. A carpool, however, is not considered livery use, but rather sharing expenses. An accident that occurs while driving a carpool will be covered by the insured's PAP. Reference: 8.7.2 in the License Exam Manual

If a California resident with a personal auto policy with the minimum liability limits has an accident in a state that requires higher limits, which of the following will occur? A) The policy will automatically provide the required higher limits at no extra charge. B) The loss is not covered. C) The policy will provide the higher limits, but the insured must first pay the additional premium. D) The insured must first purchase an other states coverage endorsement.

A) The policy will automatically provide the required higher limits at no extra charge. Explanation: If the covered auto is used in another state where coverage limits are required by a financial responsibility law and those limits are higher than the limits of the insured's PAP, the insurer will interpret the policy to provide the higher limits required by the law. Reference: 8.12.1 in the License Exam Manual

Which of the following statements about dwelling policies is CORRECT? A) They may be used to insure rental homes B) Theft can be covered under an unendorsed dwelling policy C) The building must be occupied to be insured D) Liability coverage is automatically included in a dwelling policy

A) They may be used to insure rental homes Explanation: The dwelling policy is used by owners who otherwise do not qualify for homeowners policies, and include homes that are rented to tenants instead of owner-occupied. Theft and liability coverage must be added to the policy by endorsement. Homes that are under construction (or vacant) are eligible for dwelling coverage. Reference: 6.3.2 in the License Exam Manual

Which one of the following is NOT an appurtenant structure for purposes of a homeowners policy? A) Tree B) Storage shed C) Swimming pool D) Fence

A) Tree Explanation: Appurtenant structures, for purposes of a homeowners policy, are any structures that are set apart from the dwelling by clear space. This includes detached garages, fences, swimming pools, and storage sheds. Structures connected to the dwelling by only a fence, utility wire, or similar connection are considered unattached. Trees are not structures. Reference: 7.5.1 in the License Exam Manual

In legal terms, voluntary relinquishment of a known right is called a A) Waiver B) Concealment C) Warranty D) Withdrawal

A) Waiver Explanation: A waiver is a voluntary relinquishment of a known right. If an insurer wives a legal right under an insurance policy, it cannot deny a future claim on the basis of a violation of that right. This is known as estoppel, because the insurer is estopped from denying the claim. Reference: 2.3.2.11 in the License Exam Manual

An all-risk or open-perils policy protects A) against any peril except those specifically excluded B) only stated perils C) any peril D) named perils unless otherwise excluded

A) against any peril except those specifically excluded Explanation: An all-risk or open perils 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. Reference: 4.4.1 in the License Exam Manual

Jordan is attending the NBA playoffs and has front row seats. One of the players attempts to make a basket and the ball bounces off the court, hitting Jordan in the face. The defense that will probably be used is A) assumption of risk B) comparative negligence C) contributory negligence D) proximate cause

A) assumption of risk Explanation: Assumption of risk applies when a person knowingly exposes himself to danger or injury. By assuming this risk, the person may not be able to recover damages from the negligent party. Reference: 5.3.3.2 on the License Exam Manual

Section II of a homeowners policy covers all of the following EXCEPT A) bodily injury to one of the insured's resident family members B) property damage of another caused by the insured C) bodily injury to others D) liability for loss of use of another's property

A) bodily injury to one of the insured's resident family members Explanation: Section II coverages are the same in all 6 forms. They cover personal liability of the insured and medical expenses of a person injured on the insured's premises (with permission), injured as a result of the activities of the insured, or during the course of employment for the insured or by an animal owned by the insured. Section II does not cover injuries to the insured or to resident family memb4ers. Reference: 7.6.1 in the License Exam Manual

The amount of payment that comes into play when an insured fails to carry the sufficient amount of insurance is sometimes referred to as the A) coinsurance penalty B) claims penalty C) stated payment D) agreed value

A) coinsurance penalty Explanation: The coinsurance condition encourages policyholders to insure their property to value. The condition expresses the minimum amount of insurance the insured should carry as a percentage of the property's replacement cost. If the insured fails to insure the property to at least this amount, the insurer will only pay a percentage of what the contract would have paid, had the minimum amount been carried. The amount not paid by the insurer is sometimes referred to as the coinsurance penalty. Reference: 4.4.14 in the License Exam Manual

The insured forgets t set her parking break on a steep hill, and the car rolls backward and strikes a tree. The damage to the insured's car would be covered under the personal auto policy's A) collision coverage B) other than collision coverage C) comprehensive coverage D) Part A property damage coverage

A) collision coverage Explanation: Collision is defined as the impact of an auto covered by the policy with another object or vehicle, or the upset (overturn) of a vehicle. Reference: 8.12.1 in the License Exam Manual

All of the following perils are covered under the DP-2 Broad Form EXCEPT A) earthquake B) falling objects C) freezing of pipes D) loss caused by fireplace smoke

A) earthquake Explanation: Damage caused by earth movement is not covered under any of the dwelling forms. Reference: 6.4.2 in the License Exam Manual

Mary was involved in an accident with a hit-and-run driver. Her car was damaged. Mary must comply with all of the following duties EXCEPT A) following the hit-and-run driver to get a valid identification B) protecting the car against further damage C) calling the police D) permitting the insurer to inspect the damaged car

A) following the hit-and-run driver to get a valid identification Explanation: Going after the hit-and-run driver is not a duty. Instead, the insurer must call the police. Another duty is to cooperate with the insurer. Reference: 8.9.2 in the License Exam Manual

Payments for losses that cannot be precisely measured, such as the loss of companionship of spouse from another, are called A) general damages B) punitive damages C) spousal damages D) special damages

A) general damages Explanation: General damages, which are payable in addition to special damages, are payments for noneconomic losses or losses that are not normally directly measurable. General damages include pain and suffering, mental anguish, and loss of companionship. Special damages are awarded for out-of-pocket or economic losses such as medical costs, loss of income, or damage to property. When the courts wish to send a message or punish a defendant for prohibited conduct, punitive damages may be ordered. A defendant is usually awarded punitive damages only when the harm has been caused by gross negligence or malicious intent. Reference: 5.3.6 in the License Exam Manual

The Special Form (DP-3) covers the dwelling and other structures for A) open perils B) broad form perils only C) extended coverage perils D) named perils

A) open perils Explanation: The DP-3, the special form, is an open perils policy. This type of insurance pays for all risks of direct physical loss to the insured property except for losses specifically excluded in the policy. The open perils policy contrasts with the named peril policy, which covers only the losses spelled out in the policy. Reference: 6.4.3 in the License Exam Manual

Comprehensive coverage pays for all of the following damages EXCEPT A) overturning of the auto B) explosion C) glass breakage D) hitting a deer

A) overturning of the auto Explanation: Comprehensive coverage pays for loss to a covered auto or its equipment for any cause except collision, overturn, or upset. Reference: 8.12.1 on the License Exam Manual

A commercial risk insurance policy can be cancelled for all of the following reasons EXCEPT: A) producer who sold the policy had his license revoked B) nonpayment of premium C) misrepresentations on the application for insurance D) breach of the policy's terms

A) producer who sold the policy had his license revoked Explanation: A notice of cancellation is only valid if it is based on certain specified reasons, including nonpayment of premium or if the insured used fraud or material misrepresentation to obtain the insurance, to continue the policy, or when pursuing a claim. Policies may also be canceled if the insured was convicted of a crime involving an act that increases any hazards insured against, if there was a material change in the risk that increases the risk of loss after policy issuance, or if there was a breach of any contractual duties or conditions. Reference: See State Supplement

Premium credits for all of the following will lower the insurance premiums for the owner of a mobile home EXCEPT: A) reducing Coverage C limit to 40% of Coverage A. B) installing an insurer-approved alarm system, fire system, or both. C) installing an automatic sprinkler system. D) tie-down credit.

A) reducing Coverage C limit to 40% of Coverage A. Explanation: Credits are given to owners of mobile home for doing several things. One is to reduce the Coverage C limit for personal property to 30% of Coverage A. Other actions include tying down the mobile home to make it more secure and less susceptible to damage due to windstorm, installing an insurer-approved alarm, fire system, or both, and installing an automatic sprinkler system. Reference: 9.6 in the License Exam Manual

Insurers must have a certificate of authority from the director showing that it meets the state's standards for the line of business designation in the certificate. This rule does NOT apply to A) surplus lines insurance B) personal lines insurance C) credit insurance D) variable insurance

A) surplus lines insurance Explanation: The certificate of authority does not need to be issued in regard to surplus lines insurance, reinsurance, or group annuities. Reference: See State Supplement

The greatest difference between the Dwelling Basic Form (DP-1) and the Broad Form (DP-2) is that DP-2 automatically includes coverage for A) vandalism and malicious mischief (VMM) B) fire and lightning C) flood D) earthquake

A) vandalism and malicious mischief (VMM) Explanation: The DP-1 Basic Form includes only fire, lightning, and internal explosion. Other coverages must be added by endorsement. Flood and earthquake are excluded on all DP forms. Reference: 6.4.1.1 on the License Exam Manual

An employee is delivering packages for her employer but is using her own vehicle. The employee hits a pedestrian. The employer may be held liable because of the doctrine of A) vicarious liability B) employer liability C) workers' compensation D) gross negligence

A) vicarious liability Explanation: Vicarious liability means that one person is liable for the negligent behavior of another, such as an employer being liable for the actions of its employee. Reference: 5.3.5 in the License Exam Manual

The Insurance Director's powers and duties include all of the following EXCEPT A) writing insurance laws B) handling complaints filed under the state's Unfair Claim Settlement Practices law C) overseeing insurance transactions that occur in Arizona D) issuing certificates of authority for insurance companies that transact business in the state

A) writing insurance laws Explanation: The Director has all the powers and authority expressly conferred by or reasonably implied from the Arizona insurance statutes (known as the Insurance Code). The Director is authorized to enforce the provisions of the Code, conduct examinations or investigations of any insurance matters, and examine or investigate insurance companies, adjusters, producers, and any other person regulated by the Code. However, this authority does not extend to writing insurance laws. That is the role of the state legislature. Reference: See State Supplement

Which of the following is NOT a peril covered under the personal property coverage in the HO-3-Special Form? A) Hail B) Water damage C) Freezing D) Malicious mischief

B) Water damage Explanation: Water damage is specifically excluded. This includes, for example, damage caused by flood, tidal water, water that backs up through the sewers, or water discharged from a sump pump. Reference: 7.5.2.1 in the License Exam Manual

An insured has an $80.000 dwelling policy with a $500 deductible. In addition to the house, the property includes a detached garage, storage shed, and an artist's studio. During a thunderstorm, the garage and storage shed are damaged by lightning. The loss is $3,000 to the garage and $1,000 to the shed. What amount is covered by the policy? A) $0 B) $3,500 C) $4,000 D) $3,000

B) $3,500 Explanation: Coverage B-Other Structures provides coverage for real property located on the described location and separated from the dwelling by clear space. Up to 10% of Coverage A (in this case, $8,000) is included for other structures. Lightning is a covered peril, so the policy would pay $3,500 (the $4,000 loss less the $500 deductible). Reference: 6.3.3 in the License Exam Manual

Rajeen has a $1 million personal umbrella policy with a self-insured retention of $10,000. The umbrella requires underlying homeowners and auto insurance limits of $300,000. Rajeen has a $500,000 loss that is excluded by his homeowners policy, but its covered by the umbrella. How much would the umbrella policy pay for this loss? A) $200,000 B) $490,000 C) $500,000 D) $190,000

B) $490,000 Explanation: The personal umbrella will provide broader coverage for some claims that would not be covered by the insured's primary insurance policies. This is called primary coverage, and the insured must select a retention limit that can vary from $250 to $10,000 and works like a deductible. The self-insured retention (SIR) represents the amount of loss the insured must cover out of pocket. Loss - retention = $ covered by umbrella policy $500,000 - $10,000 = $490,000 Reference: 9.9.1 in the License Exam Manual

Credit card fraud is covered under a homeowners policy to a maximum of what amount? A) $100 B) $500 C) $2,000 D) $1,000

B) $500 Explanation: Credit card fraud is covered to a maximum of $500. Coverage does not apply to loss arising out of business use or the dishonesty of the insured. Reference: 7.5.3 in the License Exam Manual

Jennifer owns a house valued at $500,000. She purchases a policy insuring it for $300,000 with an 80% coinsurance clause and a $1,000 deductible. Faulty wiring causes a fire that results in a loss of $100,000. How much will the policy pay? A) $239,000 B) $74,000 C) $59,000 D) $399,000

B) $74,000 Explanation: To satisfy the coinsurance clause requirement, the policyholder must carry coverage in an amount equal to at least the specified percentage of the total value of the property being insured. In this case, the value of the property is $500,000. Therefore, the amount of coverage needed to satisfy the 80% coinsurance requirement is $400,000 ($500,000 * 0.8). However, Jennifer's policy limit is only $300,000. The following formula is used to determine the amount that the insurer will pay for the loss in this case. [ (Amount of insurance carried / amount of insurance required) * amount of loss ] - any deductible [ ($300,000 / $400,000) * $100,000 ] - $1,000 = $74,000 [ 0.75 * $100,000 ] - $1,000 = $74,000 [ 75,000 ] - $1,000 = $74,000 Reference: 7.5.4 on the License Exam Manual

The insured has a homeowners policy (HO-3) with a $100,000 liability limit and a $1 million personal umbrella policy with a self-insured retention of $1,000. When a child is seriously injured on the insured's property, a jury awards the plaintiff $2 million. Given only these facts, for what amount is the insured personally responsible? A) $2 million B) $900,000 C) $1,000 D) $1 million

B) $900,000 Explanation: The amounts for a loss recovery under both property and liability policies are restricted by policy limits. In this case, the underlying homeowners policy pays the first $100,000 and the umbrella would pay $1 million (which exhausts both policy limits). The insured pays the balance of the $900,000 settlement. Settlement - Umbrella policy - HO-3 liability limit = remaining balance $2 mill - $1 mill - $100,000 = $900,000 Reference: 9.9.1.1 in the License Exam Manual

A loss that is total and permanent entitles an employee to payment of what percentage of his monthly wage> A) 45 B) 66-2/3 C) 33-1/3 D) 50

B) 66-2/3 Explanation: A loss that is total and permanent entitles the employee to payment of 66-2/3% of his average monthly wage, paid during the injured employee's life. Reference: See State Supplement

Under the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA), the federal government's share of compensation that exceeds the insurer's TRIPRA deductible is A) 75% B) 80% C) 85% D) 70%

B) 80% Explanation: The federal government is responsible for reimbursing 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. The federal share decreased from 85% to 80% in 2020. Reference: 3.8.2 in the License Exam Manual

Losses to the dwelling and other structures are paid at replacement cost as long as the insured carries an amount of insurance equal to or greater than A) 50% of the buildings replacement cost B) 80% of the buildings replacement cost C) 80% of the buildings actual cash value D) 20% of the buildings replacement cost

B) 80% of the buildings replacement cost Explanation: To be paid for replacement, the insured must agree to replace the damaged property. Otherwise, the insured will be paid actual cash value. Reference: 7.5.4 on the License Exam Manual

For personal property coverage, who is NOT insured by a homeowners policy? A) A live-in housekeeper requested by the named insured. B) A nonresident uncle. C) The named insured. D) A 20 year-old resident.

B) A nonresident uncle. Explanation: A homeowners policy insures the personal property of the named insured, all relatives of the named insured who live in the same household, and any other residents who are under the age of 21 and in the care of any member of the insured's family. On request of the named insured, the personal property of guests or a residence employee may be covered. Reference: 7.3.2 in the License Exam Manual

A warranty is a statement made by the applicant regarding the risk to be insured. Which of the following statements is NOT true about warranties? A) A warranty is part of the contract. B) A warranty must refer to a material fact. C) A policy can be canceled if the warranty is false. D) A warranty is guaranteed to be true.

B) A warranty must refer to a material fact. Explanation: A warranty is an answer to a specific question and literally becomes part of the insurance contract. A breach of warranty, meaning that the answer is not correct, may be grounds for cancelation by the company. However, the materiality of the statement is not required to cancel the policy. Reference: 2.3.2.8 in the License Exam Manual

Jim and his family are considering a move to the West Coast but are very concerned about earthquakes. Jim called an insurance agent for advice. What is the best advice the agent could give Jim about adequately covering his new home for possible earthquake damage? A) A separate earthquake policy should be purchased to provide full coverage for earth movement. B) Adding the earthquake endorsement will provide the coverage needed. C) The homeowners policy automatically provides earthquake coverage. D) A state insurance fund will cover any damage that occurs.

B) Adding the earthquake endorsement will provide the coverage needed. Explanation: The basic homeowners policy specifically excludes earthquakes, including the land shock waves or earth movement caused by a volcanic eruption; landslide; mine subsidence; mudflow; and earth sinking, rising, or shifting. The earthquake endorsement must be added to the homeowners policy to provide coverage for damage caused by earth movement. Reference: 7.5.7 in the License Exam Manual

While backing up her car into a parking space on a neighborhood street, Melanie struck a fire hydrant with her bumper. Which coverage under Melanie's personal auto policy (PAP) will cover the damage to the bumper? A) Medical payments B) Collision C) Comprehensive D) Liability

B) Collision Explanation: Part D of the PAP covers damage sustained by the insured auto after impact with another vehicle, an object, or upset (rolling the vehicle over). Reference: 8.12.1 on the License Exam Manual

The provisions of the Terrorism Risk Insurance Act of 2002 apply to which of the following lines of insurance? A) Homeowners B) Commercial property C) Automobile D) Dwelling

B) Commercial property Explanation: The Terrorism Risk Insurance Act of 2002 established a federal program to provide compensation for insured losses resulting from terrorism 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 coverage. Reference: 3.8.2 in the License Exam Manual

Which one of the following is an example of a peril? A) Gasoline stores on the premises B) Earthquake C) Indifference D) Illness

B) Earthquake Explanation: A peril is the actual cause of a loss. Examples of perils are fire, wind, hail, and collision. For example, if there is a house fire that destroys an entire house, the fire is the peril. Reference: 1.3 in the License Exam Manual

Which one of the following requires that insurance applicants be advised that a consumer report may be requested on them and the scope of any investigation resulting from the application? A) Fair Disclosure Act B) Fair Credit Reporting Act C) Freedom of Privacy Act D) Financial Freedom Act

B) Fair Credit Reporting Act Explanation: The federal Fair Credit Reporting Act (FCRA) requires that insurance applicants be advised that a consumer report may be requested from them and the scope of any investigation resulting from the application. If coverage is denied or restricted based solely on the report, the applicant must be supplied with the name and address of the reporting company that collected the information. The applicant may obtain from this company a copy of the information in its files and may dispute any information in the report. The reporting company then must reinvestigate and change its report, if necessary. Reference: 3.8.1 in the License Exam Manual

Robert wants open perils coverage on his dwelling and named perils coverage for his personal property. Which homeowners form should he choose? A) HO-6. B) HO-3. C) HO-2. D) HO-4.

B) HO-3. Explanation: The homeowners HO-3-Special Form provides open perils coverage on the dwelling and named perils coverage on personal property. HO-2 is the Broad Form and HO-6 is the Condominium Owners Form. Reference: 7.4.1 in the License Exam Manual

Tammy was struck by a hit-and-run driver and suffered injuries to her neck. Which part of her personal auto policy, if any, will cover this loss? A) Her collision coverage pays the medical bills. B) Her uninsured motorist coverage pays her medical bills. C) Her liability coverage pays her medical bills. D) Her policy will not cover the loss; she must sue the other driver to recover these expenses.

B) Her uninsured motorist coverage pays her medical bills. Explanation: Uninsured motorists coverage includes being struck by a hit-and-run driver. Provided that neither the driver nor owner of the hit-and-run car can be found and Tammy informs the police promptly, her uninsured motor coverage will pay her medical bills. Reference: 8.9.3 on the License Exam Manual

For an insurance contract to be legally binding, both parties to the contract must be considered competent. Which of the following would NOT be used to determine competency? A) Individual is not under the influence of drugs or alcohol B) Individual is over age 80 C) Individual is of legal age D) Individual is mentally competent

B) Individual is over age 80 Explanation: For a contract to be legally binding, both parties must have the legal capacity to make a contract. The insured must be of legal age (usually 18) and be mentally competent (sane and sober) to make an insurance contract. The fact that an individual is over age 65 would not make that person mentally incompetent. Reference: 2.3.1.4 on the License Exam Manual

How does the dwelling policy provide theft coverage? A) It is only included in the DP-2 and DP-3 B) It must be added by endorsement C) It is automatically included in the policy D) It is included in the DP-3 only

B) It must be added by endorsement Explanation: Coverage for theft is provided by adding an endorsement to the policy. Reference: 6.7.1 in the License Exam Manual

Which of the following losses would be covered under the Broad Form dwelling policy (DP-2)? A) Jamaal leaves his home vacant for 3 months while he takes an extended backpacking trip across Europe. When he returns, he discovers his sump pump has malfunctioned, causing water to overflow throughout the house. B) Janae's dishwasher malfunctions and pours water all over her brand-new hardwood floors. C) Amaya's 20-year-old air conditioner freezes and damages the compressor. D) Tim's basement has several feet of standing water after a severe thunderstorm causes nearby streets to flood.

B) Janae's dishwasher malfunctions and pours water all over her brand-new hardwood floors. Explanation: The DP-2 covers accidental discharge of water from within a household appliance. This peril does not apply the freezing of a system or appliance or to accidental discharge if the building has been vacant for more than 60 consecutive days. Water damage in general, including flooding, water backing up into a building, and water leaking or seeping from below ground, is excluded in all dwelling forms. Reference: 6.4.2 in the License Exam Manual

Which one of the following hazards can be described as a careless attitude or general indifference on the part of the insured toward the occurrence of loss? A) Physical B) Morale C) Legal D) Moral

B) Morale Explanation: A hazard is a situation or factor that increases the possibility of a loss occurring. A morale hazard is a careless attitude or general indifference on the part of the insured toward the occurrence of loss. Reference: 1.3 in the License Exam Manual

Medical Payments Coverage is Part B in the personal automobile policy. All of the following statements about medical payments coverage are correct EXCEPT A) coverage is provided for the named insured if hit by a car while walking a road B) Part B covers reasonable expenses for services incurred within 5 years of the date of injury C) no coverage is available if the vehicle is being used as a residence D) coverage is available if an injury occurs while getting into or out of a vehicle

B) Part B covers reasonable expenses for services incurred within 5 years of the date of injury Explanation: Part B covers reasonable and necessary medical and funeral expenses incurred within the first 3 years- not 5 years- of the date of injury, regardless of fault. Reference: 8.8.1 in the License Exam Manual

Joan is a music teacher who teaches piano to 20 students who come to her home for weekly lessons. Which endorsement does Joan need to add to her homeowners policy to make sure she is covered if a student is injured on her property? A) Personal liability. B) Permitted incidental occupancies. C) Business pursuits. D) Personal injury.

B) Permitted incidental occupancies. Explanation: The permitted incidental occupancy endorsement deletes exclusions in the policy pertaining to a business conducted on the resident premises. Reference: 7.5.7 in the License Exam Manual

Which of the following losses would be excluded under the liability section of the personal auto policy? A) Dave loses control of his car on a snow-covered street and strikes a pedestrian. B) Ricardo loses control of his car while backing out of his driveway and strikes the fence surrounding his home C) Li accidentally turns the wrong way on a one-way street and strikes another car head-on D) Anita accidentally strikes another car while backing out of a parking space

B) Ricardo loses control of his car while backing out of his driveway and strikes the fence surrounding his home Explanation: The personal auto policy does not cover damage to property owned or being transported by the insured. Reference: 8.7.4 in the License Exam Manual

Richard and his wife own 2 family cars. In addition, Richard is given a company car to makes sales calls. He occasionally uses the company car for personal use and is concerned that he may not have sufficient company coverage. Which of the following is the best advice his agent can give him? A) Richard can add the company car to his automobile policy as car number 3. B) Richard can add the extended nonowned coverage for named individual endorsement to his policy. C) Richard has to rely on the coverage his company gives him and follow their usage rules. D) Richard can add the drive other car endorsement to his policy.

B) Richard can add the extended nonowned coverage for named individual endorsement to his policy. Explanation: The extended nonowned endorsement is used to extend the drive other car coverage of the policy to include coverage for a vehicle furnished regularly to the insured. Coverage applies to the individual named in the endorsement, and a separate premium is required. Reference: 8.13 in the License Exam Manual

Which type of return premium computation is used when the policyholder cancels a policy? A) Aggregate B) Short-rate C) Flat D) Pro rata

B) Short-rate Explanation: The short-rate method is used when a policyholder cancels his policy before it reaches its natural expiration. In this case, the company pays a return premium less the pro rata part that remains unearned. The pro rata mentioned is used when the insurance company cancels the policy. When a po9licy is terminated on its effective date, it is called a flat cancellation and the entire premium is refunded to the policyholder. Aggregate does not refer to a method of computing premium refunds. Reference: 3.4.3 in the License Exam Manual

While driving down the street, an insured swerves to avoid a pedestrian, goes over a curb, and damages a neighbor's fence. Which of the following will pay for the repairs to the fence? A) The driver's general liability policy B) The driver's automobile policy under the property damage liability provisions C) The insured's homeowners policy D) The driver's automobile policy under the collision provisions

B) The driver's automobile policy under the property damage liability provisions Explanation: Property damage liability provides coverage for the responsibility of compensating another person for lost use or destruction or damage to that person's tangible property. This coverage is included in most personal and commercial liability policies along with bodily and personal injury coverages. Reference: 8.12.1 in the License Exam Manual

Which one of the following statements about the nonrenewal of personal risk insurance policies is CORRECT? A) The insured may bring a lawsuit against an insurer's agent or employee for providing information regarding why the policy should not be renewed. B) The insurer must state the specific reasons for nonrenewal in the notice it sends to the insured. C) The insurer must give at least 10 days' written notice to the insured of its intent not to renew. D) The insured must give written notice to the insurer if he intends to contest the nonrenewal.

B) The insurer must state the specific reasons for nonrenewal in the notice it sends to the insured. Explanation: If an insurance company does not intend to renew a personal risk insurance contract, it must mail or deliver to the named insured at the address listed in the policy notice of its intention not to renew. The notice must be sent at least 30 days before the policy's expiration date. The notice must state the specific reasons for the nonrenewal action. A lawsuit cannot be brought against any insurer, its authorized representatives, agents, employees, or against any firm, person, or corporation providing information to the insurer as to a reason for nonrenewal. If an insured believes the nonrenewal is arbitrary or capricious, he may use the appeal procedures set forth under Arizona law. Reference: See State Supplement

Which of the following statements about umbrella policies is NOT correct? A) They provide coverage above the limits of underlying policies. B) They are written only for commercial risks. C) Losses that are excluded by the underlying policy but covered by the umbrella are subject to the umbrella's retention limit. D) If the insured fails to keep the underlying coverage in force, the umbrella policy will not cover the amount of loss that would have been paid by the underlying policy.

B) They are written only for commercial risks. Explanation: Umbrella liability policies may be written for both personal and commercial risks. Reference: 9.9.1 in the License Exam Manual

An insurance company organized in Pennsylvania, with its home office in Philadelphia, is licensed to conduct business in New York. In New York, this company is classified as A) a domestic company B) a foreign company C) an alien company D) a regional company

B) a foreign company Explanation: A foreign company operates within a state in which it is not chartered and in which its home office is not located. Reference: 1.7.2 in the License Exam Manual

All of the following properties can be insured under an unendorsed homeowners policy EXCEPT A) a duplex that is owner-occupied B) a mobile home that is owner-occupied C) a home under construction that the owner intends to occupy D) a townhouse that is owner-occupied

B) a mobile home that is owner-occupied Explanation: All of the types of property described can be insured under a homeowners policy, but only mobile homes require a special endorsement. Reference: 7.3.2 in the License Exam Manual

Items of property that are difficult to value after a loss has occurred, such as antique furniture or fine art, may be insured on A) a replacement cost basis B) an agreed value basis C) a repair cost basis D) a market value basis

B) an agreed value basis Explanation: Some items of property are very difficult to value after a loss has occurred. In this situation, the insured and insurer will agree on a value before the policy is issued. Antique furniture or fine art will most likely have agreed values. If a loss occurs, the agreed value will be the amount the insured is guaranteed to receive. Reference: 4.4.10 in the License Exam Manual

All of the following are the insured's duties following a loss EXCEPT A) protecting the property from further damage B) assisting the investigator during the claim investigation procedure C) completing a detailed proof of loss D) giving prompt notice of claim to the agent or insurer

B) assisting the investigator during the claim investigation procedure Explanation: The duties following a loss include giving prompt notice of claim, protecting the property from further damage, submitting a detailed inventory of damages, making property available for inspection, submitting to examination under oat if required, and assisting the insurer (not the investigator) as required during the claim investigation procedure. Reference: 3.4.6.1 in the License Exam Manual

Craig was driving his family in his owned station wagon on vacation in Wisconsin when a deer ran out in the road and collided with the front end of the wagon. Craig had the car towed to the nearest town, where the only car repair shop told him that it would take at least a week to get the parts to repair the engine. Craig's automobile policy provides coverage for transportation expenses. All of the following statements about transportation expenses are correct EXCEPT: A) the maximum coverage is $600. B) coverage starts 48 hours after a car is damaged by an other than collision loss. C) there is a $20 per-day limit for expenses. D) no deductible applies.

B) coverage starts 48 hours after a car is damaged by an other than collision loss. Explanation: With a theft loss, coverage is provided for substitute transportation beginning 48 hours after the theft. For all other covered collision or Other than Collision losses, coverage begins 24 hours after the loss. Reference: 8.12.2 in the License Exam Manual

Common exclusions with a liability policy would typically include all of the following EXCEPT A) damage to property owned by the insured B) injuries or damages caused intentionally by the insured C) damage to property in the insured's care, custody, or control D) injuries or damages caused unintentionally by the insured

B) injuries or damages caused intentionally by the insured Explanation: The purpose of liability insurance is to protect the insured against financial loss in the event that he becomes legally obligated to pay the actual damages caused to others, and coverages for injuries or damages caused unintentionally by the insured is included. There are certain items, however, that are excluded. Common exclusions typically include items such as damage to the insured's property, bodily injury to the insured, damage to property in the insured's care, custody, and control, and injuries or damages caused intentionally by the insured. Reference: 5.3.10 in the License Exam Manual

All of the following coverages are typically included in the supplementary payments of a liability policy EXCEPT A) property damages the insured is found legally liable for B) loss of earnings C) defense costs D) first aid to others at the time of the accident

B) loss of earnings Explanation: Property damages the insured is found to be legally liable for are covered under the applicable liability section of the liability policy. Supplementary payments are paid in addition to the policy's limit of liability and include items such as the expenses the insurance company incurs (defense costs, claim investigation expenses, interest on judgments, and other court related costs)), premiums for certain types of bonds (bail, appeal, or release of attachment bonds), first aid to others at the time of the accident, and reasonable expenses the insured incurs (including loss of earnings). Reference: 5.3.9.1 in the License Exam Manual

All of the following are unfair trade practices EXCEPT: A) offering an applicant an expensive briefcase as an inducement to purchase a policy B) paying bonuses to policyholders out of surplus accumulated from nonparticipating insurance C) making misleading statements about a producer's business in a direct letter D) omitting relevant information during the sales process

B) paying bonuses to policyholders out of surplus accumulated from nonparticipating insurance Explanation: It is not considered an unfair trade practice for a company to pay equitable bonuses to policyholders out of surplus accumulated from nonparticipating insurance. Misleading statements is defamation, offering an expensive briefcase is rebating or illegal inducement, and omitting relevant information is misrepresentation. Reference: See State Supplement

Section II of the homeowners policy provides liability coverage for all of the following EXCEPT A) use of a 17-foot sailboat B) renting the garage to a jewelry maker C) actions of a domestic animal in the care of the insured D) actions of a residence employee

B) renting the garage to a jewelry maker Explanation: The homeowners policy excludes liability arising out of the rental of any part of the premises, except for the rental part of an insured location as a residence. Reference: 7.6.4 in the License Exam Manual

In a flood policy issued by the NFIP, all of the following would be considered a flood EXCEPT A) mudslide B) sewer backup into a mobile home C) overflow of inland waters D) collapse of land as a result of excessive erosion due to flood

B) sewer backup into a mobile home Explanation: In the NFIP policy, flood generally refers to an overflow of inland or tidal waters; unusual and rapid accumulation or runoff of surface water from any source; mudslides; and collapse of land as a result of excessive erosion due to flood. Sewer backup into a dwelling unit is not covered. Reference: 9.4.2 in the License Exam Manual

The risk that involves the chance of both loss and gain is A) impure risk B) speculative risk C) whole risk D) pure risk

B) speculative risk Explanation: Speculative risk involves the chance of both loss and gain. For example, the placement of a bet at a racetrack is a speculative risk. Insurance cannot be used to handle speculative risks. Insurance can be used to manage only pure risks, which involve only the possibility of loss. Reference: 1.3 in the License Exam Manual

The insured rear-ends another vehicle that is stopped at a red light. The driver of the car struck by the insured is badly injured. The insured, his daughter and her friend were in the car and were also injured. Part B of the insured's personal auto policy will pay medical expenses for all of the following EXCEPT: A) the insured. B) the occupant of the car struck by the insured. C) the insured's daughter's friend. D) the insured's daughter.

B) the occupant of the car struck by the insured. Explanation: Part B of the personal automobile policy (PAP) provides coverage for medical payments incurred in an auto accident without regard to fault. Covered persons include the insured, family members, and any passengers in the insured's vehicle. It does not provide liability coverage for injuries sustained by passengers in another auto involved in an incident with the insured. Reference: 8.8.1 in the License Exam Manual

An insured has a $70,000 dwelling policy (DP-1 basic) with a $500 deductible. While the insured is on vacation, burglars enter the house and steal several items. The total loss is estimated to be $5,000. How much of that loss will be paid under the policy? A) $5,000 B) $5,500 C) $0 D) $4,500

C) $0 Explanation: The DP-1 basic is a named peril policy that provides coverage only if a loss is caused by one of the perils specifically named or identified in the policy. If a peril is not listed, it is not covered. The DP-1 basic covers only fire, lightning, and internal explosion. Bulgary is not listed as a named peril and is not covered. Reference: 6.4.1 in the License Exam Manual

An insured has a $40,000 Dwelling Special Form (DP-3) policy. After hosting an afternoon party, the insured discovers that the family's credit cards and ATM cards are missing. If the cards are used, what coverage is provided under Coverage C-Personal Property, and why? A) $4,000, because Coverage C provides up to 10% of the dwelling amount for loss of personal property B) $20,000, because Coverage C provides up to 50% of the dwelling amount for loss of personal property C) $0, because Coverage C excludes coverage for credit cards D) $0, because Coverage C provides insurance only for the insured's personal property

C) $0, because Coverage C excludes coverage for credit cards Explanation: The Dwelling Forms exclude coverage for accounts, bank notes, coins, bills, securities, animals, aircraft, motor vehicles and equipment, watercraft, and data. Reference: 6.3.3 in the License Exam Manual

Bob has a liability policy in the amount of 300/500/100. How much coverage does he have per occurrence for property damage liability? A) $50,000 B) 300,000 C) $100,000 D) $500,000

C) $100,000 Explanation: The limits of liability in an insurance policy may be expressed as a split limit. 300/500/100 indicates that Bob has $300,000 per person, $500,000 per occurrence for bodily injury liability, and $100,000 per occurrence for property damage liability. Limits of liability may also be expressed as a combined single limit; for example, $300,000 per occurrence for bodily injury, property damage, or both combined. Reference: 5.3.8 on the License Exam Manual

The insured's home is insured under an HO-3 with a $100,000 Coverage A limit. A tornado destroys the home and uproots a tree valued at $5,000. How much would the insurance company pay for the loss to the insured's home and tree? Ignore any deductible that would apply. A) $105,000 B) 95,000 C) $100,500 D) $100,000

C) $100,500 Explanation: The trees, shrubs, and other plants additional coverage does not cover damage caused by certain perils, such as wind. It covers damage caused by fire, lightning, explosion, riot, aircraft, vehicles not owned or operated by a resident, theft, and vandalism or malicious mischief. Coverage is limited to 5% of the Coverage A limit and a maximum of $500 for any one tree, shrub, or plant. Reference: 7.5.3 in the License Exam Manual

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 is paid in full? A) $192,000 B) $200,000 C) $160,000 D) $80,000

C) $160,000 Explanation: 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 carry at least $160,000 of coverage to satisfy the coinsurance clause requirement. Reference: 4.4.1.4 in the License Exam Manual

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) $5,000 B) $9,000 C) $7,000 D) $3,000

C) $7,000 Explanation: The actual cash value of the property is defined as replacement cost minus depreciation. ($12,000 - $5,000 = $7,000) Reference: 4.4.8.1 on the License Exam Manual

In Arizona, an insurer must give notice of its intention to not renew a homeowners policy at least ___ days before the end of the policy period. A) 60 B) 20 C) 30 D) 10

C) 30 Explanation: An insurer must give notice of its intention to not renew a homeowners policy at least 30 days before the end of the policy period. Reference: See State Supplement

Which one of the following is NOT considered to be an unfair trading practice on the part of a producer? A) Misrepresenting any insurance policy provisions B) During the sales process, omitting relevant information regarding the insurer's policies. C) Advertising an insurance agency D) Placing before the public a false statement of an insurer's financial condition.

C) Advertising an insurance agency Explanation: An insurance producer can advertise for an insurance agency provided the ads are not misleading. It is an unfair trading practice for an insurance producer to omit relevant information during the sales process, to falsely represent the insurer's financial condition, and to misrepresent any insurance policy provisions. Reference: See State Supplement

Which of the following statements about Arizona's workers' compensation law is NOT true? A) Employers are permitted to set up a formal self-insurance program instead of purchasing private insurance. B) In most cases, compensation benefits are an employee's exclusive remedy against the employer. C) All employments are subject to the law, and there are no exceptions. D) Employers are generally required to provide statutory benefits for work-related injuries.

C) All employments are subject to the law, and there are no exceptions. Explanation: Employers of one or more workers, except domestic servants, are generally subject to the law. Exempted employers may come under the provisions of the law by complying with its provisions and the rules and regulations of the Arizona Industrial Commission. Reference: See State Supplement

Which of the following statements about risk retention groups is NOT true? A) Risk retention groups are insurance companies B) Each group is made up of members who are in the same or very similar industries. C) An RRG typically writes workers' compensation insurance for its members. D) An RRG is owned by its members

C) An RRG typically writes workers' compensation insurance for its members. Explanation: Risk retention groups (RRGs) are insurance companies that are owned by their members. The only coverage these groups may write is liability insurance. Members of a group are in the same industry and require liability insurance, which would otherwise be prohibitive in premium if obtained elsewhere. Reference: 1.6.6 in the License Exam Manual

ABC State Insurance Company has agents who are under a contract that allows them to sell only ABC State Insurance Company policies. Which distribution system describes ABC State Insurance Company's organization? A) Independent B) Group C) Captive D) Direct

C) Captive Explanation: The exclusive, or captive, agency system is one where the agent represents only one company. The insurer owns policies sold by exclusive agents. Reference: 1.8.1 on the License Exam Manual

Which of the following is considered an uninsured/underinsured motor vehicle? A) A dune buggy used off-road B) Car owned by the state insurance department C) Car insured for less than the limits required by the state D) Car furnished by an employer to an aunt living in the insured's household

C) Car insured for less than the limits required by the state Explanation: Under Part C-Uninsured Motorists Coverage, the insured is paid damages for bodily injury caused by an operator of certain vehicles. It is not one owned or available for use by the insured or family member, owned by any government agency, or designed for use off public roads. Reference: 8.9.2 on the License Exam Manual

John's dog bites a friend who is visiting John's house. Which part of John's homeowners policy, if any, would cover the visitor's ensuing medical expenses? A) Coverage F only. B) This loss is excluded because it was caused by an animal owned by the insured. C) Either Coverage E or Coverage F. D) Coverage E only.

C) Either Coverage E or Coverage F. Explanation: This loss would be covered under Coverage E if John is determined to be legally liable for the loss, or Coverage F. Loss caused by an animal owned by the insured is not excluded under Coverage E or F. Reference: 7.6.1 and 7.6.2 in the License Exam Manual

Which one of the following is NOT an exclusion found in Section I of the homeowners policies? A) Power failure occurring away from the insured's premises B) Water damage from flood or surface water C) Failure of the insured to care for the property before the loss D) Earth movement such as earthquake, mudflow, and landslide

C) Failure of the insured to care for the property before the loss Explanation: Earth movement, water damage and power failure are all standard exclusions in the homeowners form. Neglect of the insured to care for the property may be a hazard, but it is not an excluded loss. If a loss has already occurred,m however, the insured must take reasonable care to protect the property from further damage or else any additional loss will not be covered., Reference: 7.5.2.3 on the License Exam Manual

Which of the following types of property is NOT covered by a dwelling policy? A) 3 apartment dwellings B) Row houses C) Farm dwellings D) Mobile homes on permanent foundations

C) Farm dwellings Explanation: Properties eligible for dwelling policies include mobile homes on permanent foundations, townhouses, row houses, and dwellings containing up to 4 apartments. Farm dwellings are not covered by dwelling or homeowners policies. They must be insured under the farm program policy. Reference: 6.3.2 in the License Exam Manual

All states have financial responsibility laws that require each driver to prove that he can pay for bodily injury or property damage liability losses arising out of auto accidents. These are also known as A) Other insurance coverage B) Out-of-state coverage C) Financial responsibility laws D) Supplementary insurance coverage

C) Financial responsibility laws Explanation: An important provision under Part A of the personal auto policy deals with financial responsibility laws. A driver normally meets this requirement by purchasing an auto insurance policy with limits of liability that meet the limits required by that state's law. Reference: 8.7.6 in the License Exam Manual

Which of the following damages is covered under Part D-Coverage for Damage to the insured's Auto? A) Freezing B) Wear and tear C) Flood D) Mechanical breakdown and not resulting from total theft

C) Flood Explanation: Part D-Coverage for Damage to the Insured's Auto provides Other than Collision (comprehensive) coverage and collision coverage. Damage from wear and tear, freezing, mechanical breakdown, and electrical breakdown (unless resulting from total theft of the auto) are excluded. Reference: 8.12.1 in the License Exam Manual

Part A of the personal auto policy would apply in which of the following situations? A) Driver who intentionally causes an accident. B) Garage mechanic while test-driving the insured's auto. C) Insured's 13-year-old son who, while playing with the car, starts it and lets it roll into the street, damaging other parked cars. D) Driver using the insured vehicle to transport people for a fee.

C) Insured's 13-year-old son who, while playing with the car, starts it and lets it roll into the street, damaging other parked cars. Explanation: Family members are insureds under the personal auto policy, regardless of their age. There are specific exclusions relating to carrying passengers in a rented vehicle, intentional acts, and the use of owned autos by people in the automobile business. Reference: 8.7.2 in the License Exam Manual

Which of the following coverages is NOT included in a boatowners/watercraft package policy? A) Medical payments B) Liability C) Longshore and harbor workers' compensation insurance D) Property

C) Longshore and harbor workers' compensation insurance Explanation: Boatowners/watercraft package policies were developed by individual insurance companies and they combine property, liability, and medical payments insurance on an open peril basis. Longshore and harbor workers' compensation insurance is found in personal yacht policies, which are used to insure larger vessels than those covered under boatowners policies. Reference: 9.8.1 in the License Exam Manual

Which one of the following is NOT an additional coverage found in homeowners policies? A) Fire department service charge B) Loss assessment C) Market valuation D) Debris removal

C) Market valuation Explanation: Debris removal, fire department service charges, and loss assessment costs are all additional coverage in the homeowners policies. Market valuation of loss is not an additional coverage. Reference: 7.5.3 in the License Exam Manual

If a vehicle collides with a boulder that came tumbling down the side of a mountain, what coverage would pay for the damage? A) Collision B) Uninsured motorist C) Other than Collision D) Supplemental payments

C) Other than Collision Explanation: Other than collision coverage pays for direct and accidental losses to a vehicle including colliding with falling objects such as a boulder. Reference: 8.12.1 in the License Exam Manual

Which one of the following auto policy coverages would pay for damage to the insured's car that the insured motorist caused by hitting a farmer's cattle while driving though the country? A) Collision B) Uninsured motorists C) Other than collision D) Liability

C) Other than collision Explanation: Other than Collision coverage, also known as comprehensive coverage, protects against almost all accidental damage, with the exception of coverage provided under collision. Coverage includes losses due to fire, theft, explosions, earthquake, windstorm, missiles, falling objects, hail, water, flood, vandalism and malicious mischief, riot and civil commotion, glass breakage, and collision with birds or animals that are wild or domestic. Reference: 8.12.1 in the License Exam Manual

Which department within an insurance company organization is typically responsible for helping to cover the insurer's exposure to loss? A) Actuarial department B) Loss control department C) Reinsurance department D) Accounting department

C) Reinsurance department Explanation: To cover their own exposure to loss, insurance companies often purchase insurance themselves. This is referred to as reinsurance and would fall under the responsibility of the insurer's reinsurance department. Reference: 1.5.4 in the License Exam Manual

Which one of the following dwellings would a HO-3 Homeowners Form cover? A) Condominium B) Office building C) Single-family home D) Apartment building

C) Single-family home Explanation: HO-3 Homeowners Form covers owner-occupied single family dwellings. Condominiums are covered by the HO-6. Office and apartment buildings would be covered by a commercial policy. Reference: 7.4.1 in the License Exam Manual

Which of the following statements about the Dwelling Basic Form (DP-1) is CORRECT? A) The DP-1 is an open perils policy B) The policy covers fire, lightning, and all types of explosion C) The DP-1 provides coverage for appurtenant structures D) The policy is designed to provide broad coverage for personal property

C) The DP-1 provides coverage for appurtenant structures Explanation: The policy provides coverage for appurtenant (other) structures. The DP-1 policy is a named peril policy that provides coverage only for perils specifically named in the policy: fire, lightning, and internal explosion. The definition of internal explosion does not include electric arcing, breakage of water pipes or pressure devices, or loss by explosion of steam pipes or boilers. Coverage for personal property is limited to a cleared value, and not all items may be insured. Reference: 6.3.4.1 on the License Exam Manual

Which of these situations would be covered under the homeowners policy? A) The insured is hosting a client appreciation and new products party at her house and one of her clients is injured during the product demo. The client incurs $3,000 of medical expenses. B) A small business owner forgot some critical work documents at home. He asks one of his employees to go to his house and pick them up. The employee falls down the steps at the house. He incurs $499 of medical expenses. C) The insured is playing golf (away from the premises described on the declarations page) and on his back swing accidentally hits a person in the head. The other person incurs $5,000 of medical expenses. D) The insured is an attorney. For his convenience, he asks a claimant and her attorney to meet him at his house. After a heated discussion, things get physical and the claimant breaks the attorney's jaw. The attorney incurs $7,000 of medical expenses.

C) The insured is playing golf (away from the premises described on the declarations page) and on his back swing accidentally hits a person in the head. The other person incurs $5,000 of medical expenses. Explanation: Although there are limited exceptions, such as certain permitted incidental occupancies, personal lines policies (homeowners) typically exclude losses related to business activities, professional services, and work-related injuries. Reference: 7.6.4 on the License Exam Manual

Which one of the following terms indicates that an insurance contract contains the enforceable promises of only one party? A) Aleatory B) Adhesion C) Unilateral D) Conditional

C) Unilateral Explanation: Unilateral means one-sided. Insurance contracts are unilateral in that only one party (the insurer) makes any kind of enforceable promise. Insurers promise to pay benefits when a certain event occurs, such as death or disability. The applicant makes no such promise. He does not even promise to pay premiums, and the insurer cannot require that they be paid. In contrast with a bilateral contract, each contracting party makes enforceable promises. Reference: 2.3.2.4 on the License Exam Manual

Mary's purse was stolen from her as she walked down the sidewalk. She has an HO-2 policy. Will Mary's policy cover this loss subject to the deductible? A) Yes, if Mary has added the Scheduled Personal Property endorsement to her policy. B) No, theft is not a covered peril in the HO-2. C) Yes, theft is a covered peril under all of the homeowners forms. D) No, because the loss occurred away from the insured premises.

C) Yes, theft is a covered peril under all of the homeowners forms. Explanation: The peril of theft is automatically included in all homeowners policies, whether theft occurs on the insured's premises or not. Reference: 7.5.2.1 in the License Exam Manual

A personal auto policy provides coverage for all of the following drivers of an insured car EXCEPT A) a neighbor who uses the car with the insured's permission B) the insured's child who attends school in another state C) a thief who steals the car D) the insured's spouse

C) a thief who steals the car Explanation: Part A of the PAP insures the named insured, any person who uses the covered auto with the named insured's permission, and any family member who resides in the named insured's household. This includes any children, whether or not licensed, and students who live away from home but still depend on the insured. Obviously, a thief who steals the car does not fall into theses categories of insureds. Reference: 8.7.2 in the License Exam Manual

Coverage E in the dwelling policy provides coverage for A) medical payments B) fair rental value C) additional living expense D) personal liability

C) additional living expense Explanation: Coverage E applies to additional living exposes under the dwelling policy forms. Additional living expenses includes the increased expenses that must be incurred for the occupants to maintain their normal lifestyles and standards of living. Reference: 6.4.3 in the License Exam Manual

The Director gives approval to an insurer to do business in Arizona with a certificate of A) attachment B) adhesion C) authority D) admittance

C) authority Explanation: Insurers must hold a certificate of authority from the Director before they can transact insurance business in Arizona. A certificate of authority indicates that a company meets the state's standards to operate as an insurer and to transact insurance. Reference: See State Supplement

Rosita is a licensed personal lines producer. If she moves from Phoenix to Tucson, she must A) complete additional continuing education hours at her next license renewal B) submit a new license application to the Insurance Director under the new address C) give notice of her change of address to the Insurance Director within 30 days of the move D) file a $50,000 surety bond with the Insurance Director

C) give notice of her change of address to the Insurance Director within 30 days of the move Explanation: A licensee must inform the Direct in writing within 30 days of any change in the licensee's name, residential or business address, or email address. Reference: See State Supplement

The principal that restores someone to the condition he enjoyed before a loss is A) risk reduction B) risk transfer C) indemnity D) insurance

C) indemnity Explanation: Insurance is a contract of indemnity. The insurance contract seeks to return the policyholder to substantially the same financial position she enjoyed before the loss- no more, no less! Reference: 2.3.2.7 in the License Exam Manual

Howard borrows his neighbor's car because his son took his car to college for a week while moving into the dorm. Under Howard's automobile policy, his neighbor's car is considered a (n): A) temporary substitute automobile. B) owned automobile. C) nonowned automobile. D) uninsured automobile.

C) nonowned automobile. Explanation: A nonowned auto is one that may be driven by the insured, but he does not own it. The owner gives permission to the insured to use the vehicle. Reference: 8.4 in the License Exam Manual

An insured speeds through a residential neighborhood, almost striking several children. Under the insurance definition of negligence, such an insured would be held: A) negligent. B) strictly liable. C) not legally liable. D) legally liable.

C) not legally liable. Explanation: A person may be held liable for negligent acts if each of the following 4 elements is present: 1) legal duty to act (or refrain from acting) 2) failure to perform that duty (breach of duty) 3) injury or damage occurs 4) breach of duty caused the injury or accident Although the driver was reckless, no injury or damage occurred, and a person usually is not held legally liable unless all 4 of these elements are present. Reference: 5.3.2.1 in the License Exam Manual

With a few exceptions, most personal insurance policies exclude losses arising out of all of the following EXCEPT: A) business activities B) rendering of professional services C) personal activities conducted away from the insured premises D) work-related injuries

C) personal activities conducted away from the insured premises Explanation: Although there are limited exceptions, such as certain permitted incidental occupancies, personal lines policies typically exclude losses related to business activities, professional services, and work-related injuries. Reference: 7.6.2 in the License Exam Manual

A producer offers a prospective buyer $100 basketball game tickets to induce him to purchase a policy. If the prospect purchases the policy and accepts the tickets, the producer will be guilty of: A) twisting B) conservation C) rebating D) defamation

C) rebating Explanation: It is illegal for an insurance producer to offer anything of value not specified in the contract as an inducement to purchase insurance, such as basketball tickets. This type of unfair trade practice is called rebating. Reference: See State Supplement

A contract in which one insurer cedes all or part of a risk to another insurer is known as: A) assuming insurance B) retro insurance C) reinsurance D) a participating policy

C) reinsurance Explanation: In a reinsurance contract, an insurer protects itself from loss or liability arising from an original contract of insurance by insuring itself through another insurer. Reinsurance is the spreading or sharing of a risk too large for one insurer by ceding part of the risk to another company or reinsurer. Reference: 1.5.4 in the License Exam Manual

The scheduled personal property endorsement provides a separate schedule of insurance for all of the following categories EXCEPT A) musical instruments B) camera equipment C) snowboarding equipment D) jewelry

C) snowboarding equipment Explanation: 9 major categories of valuable property may be covered on the scheduled personal property endorsement under the homeowners policy. Snowboarding equipment is not one of them. When an insured separately schedules property in one or more of the categories, the coverage is provided on an open perils basis with no deductible. Reference: 9.7.1.1 in the License Exam Manual

Andre's spouse is killed in an accident caused by a drunk driver. The negligent driver's insurance company pays $5,000 for funeral expenses arising out of the accident. The funeral expenses are an example of A) liquidated damages B) punitive damages C) special damages D) general damages

C) special damages Explanation: Special damages include all direct and specific expenses involved in particular loss, such as medical expenses, lost wages, funeral expenses, and the cost to repair or replace damaged property. General damages compensate for things that cannot be specifically documented or measured, such as pain and suffering and mental anguish. While the spouse dying causes pain and suffering, the funeral expenses specifically are set, specific expenses. Reference: 5.3.6 in the License Exam Manual

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) relieve the parking valet of legal liability for the loss B) subrogate against the named insured C) subrogate against the parking valet D) recover any additional loss from the lienholder

C) subrogate against the parking valet Explanation: 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 gar5age, 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. Reference: 8.7.2 in the License Exam Manual

Under Coverage C-Personal Property, the homeowners policy (HO-3) covers property owned or used by an insured. When jewelry valued at $5,000 is stolen from the residence, the policy will pay A) $5,000 B) $1,000 C) $0 D) $1,500

D) $1,500 Explanation: The HO-3 insuring agreement contains the obligation of the insurer to pay covered claims, subject to specified conditions and exclusions. Under the special limits of liability section, the policy limits loss by theft of jewelry, watches, furs and precious and semiprecious stones to $1,500. If the insured needs additional coverage, the property may be scheduled, and an additional premium will be charged. Reference: 7.5.1.1 in the License Exam Manual

Under an HO-2 policy with a coverage limit of $50,000 on the dwelling, what is the amount of personal property coverage that would be available? A) $30,000 B) $50,000 C) $20,000 D) $25,000

D) $25,000 Explanation: Homeowners policies provide an automatic amount of coverage for other structures, personal property and loss of use. The amount of coverage for personal property is 50% of Coverage. Reference: 7.5.4 in the License Exam Manual

Effective June 30, 2020, the minimum requirements in Arizona for uninsured motorists coverage for bodily injuries are A) $20,000 per person in all cases B) $50,000 per accident regardless of the number of persons involved C) $50,000 per person and $100,000 per accident D) $25,000 per person and $50,000 per accident

D) $25,000 per person and $50,000 per accident Explanation: An insured must purchase uninsured motorists coverage with bodily injury limits of at least $25,000 per person and $50,000 per accident. Reference: See State Supplement

If a producer moves, he must report his new address to the director within how many days after moving? A) 90 B) 120 C) 60 D) 30

D) 30 Explanation: If a producer changes his address (business or residential) or name, the producer must notify the director within 30 days of the date of the change. Reference: See State Supplement

Motor vehicle insurance policies must provide a minimum grace period of how many days after a premium due date? A) 10 B) 15 C) 30 D) 7

D) 7 Explanation: Motor vehicle insurance policies must include a minimum grace period of seven days after a premium due date. The policy must continue in full force during the grace period even though the premium has not been paid. If a policy is canceled or nonrenewed for nonpayment of premium after the grace period the cancellation or nonrenewal becomes effective on the date such notice is mailed to the policyholder. Reference: Law Supplement in the License Exam Manual

Which one of the following could be insured under Coverage B of a homeowners policy? A) A garage next to the house with only the roof connecting the two B) A detached garage with a second-floor room rented by a travel agent for several representatives to book cruises over the telephone C) A detached garage rented to a friend to change the oil for neighbors at a discounted price D) A detached garage rented to a neighbor to store his sports car during the winter

D) A detached garage rented to a neighbor to store his sports car during the winter Explanation: Coverage B-Other Structures covers structures on the premises set apart from the dwelling by clear space, such as a detached garage. The policy does not cover other structures rented to others for other than use as a private garage. A detached garage used for business is also not covered. Reference: 7.5.1 on the License Exam Manual

Which one of the following statements pertaining to risk is NOT correct? A) Only pure risks are insurable B) Pure risk involves only the chance of loss; there is never a possibility of gain or profit C) Uncertainly regarding financial loss is the definition or risk; therefore, it is characteristic of both pure and speculative risk D) A stock market venture is an example of a pure risk

D) A stock market venture is an example of a pure risk Explanation: A stock market venture involves the chance of both gain and loss and is, therefore, a speculative risk. Pure risk involves only the chance of loss. Reference: 1.3 in the License Exam Manual

All of the following are basic ways in which underwriters assign rates EXCEPT A) Manual (class) rating B) Judgement rating C) Experience (merit) rating D) Application rating

D) Application rating Explanation: Judgemental, manual, and experience are the 3 types of ways that underwriters can classify and assign risks. Reference: 3.7.1 in the License Exam Manual

Damage caused by burglars is excluded under which of the Dwelling Forms? A) All forms exclude damage caused by burglars B) Special Form C) Broad Form D) Basic Form

D) Basic Form Explanation: The Basic Form is the most restrictive of the 3 Dwelling Forms. The only perils insured against are fire, lightning, and internal explosion. Burglary, vandalism, and mischief are not listed as covered perils. Reference: 6.4.1.1 in the License Exam Manual

Bobby, age 16, borrows his parents' car without their permission and gets into an accident. Which of the following statements about coverage under the parents' personal auto policy is CORRECT? A) Bobby is covered by his parents' policy because he is included in the definition of named insured. B) Bobby is not covered for this accident because he used the car without permission. C) Bobby is not covered because it was not his car. D) Bobby is covered by his parents' policy because he is a family member.

D) Bobby is covered by his parents' policy because he is a family member. Explanation: Bobby is a family member and thus automatically is covered under the family's PAP policy. Even though Bobby is using the car without permission, the exclusion pertaining to nonpermissive users does not apply to use of an owned auto policy by resident family members. Reference: 8.7.2 in License Exam Manual

Making false or maliciously critical or derogatory statements about an insurance company with the intent of causing injury is an unfair practice known as: A) Illegal inducement B) Unfair discrimination C) Unfair claim settlement D) Defamation

D) Defamation Explanation: Making, publishing, or circulating any oral or written statement that is false, maliciously critical, or derogatory to the financial condition of an insurer, or that is calculated to injure anyone engaged in the insurance business is an act of defamation. Reference: See State Supplement

Every state requires that each person be able to prove he is financially prepared if involved in an accident. Suppose your state requires minimum liability limits of 25/50/10. What is the name of that law? A) Compulsory insurance law. B) Tort law. C) Unsatisfied judgment law. D) Financial responsibility law.

D) Financial responsibility law. Explanation: The financial responsibility law in each state requires proof of financial responsibility if in an accident. Failure to provide proof may result in loss of license, loss of vehicle registration, or both. Each state requires a minimum limit, such as 25/50/10 ($25,000 bodily injury per person, $50,000 bodily injury per accident, $10,000 property damage per accident) Reference: 8.7.6 in the License Exam Manual

Which homeowners policy would be written to cover personal property only? A) HO-2 B) HO-3 C) HO-5 D) HO-4

D) HO-4 Explanation: The HO-2, HO-3 and HO-5 all provide coverage on both the dwelling and personal property. HO-4 (referred to as the Tenants or Renters Form) does not provide coverage on the dwelling because the insured does not own it. Reference: 7.5.1 on the License Exam Manual

Jonathan and Mary have 2 sons. Steve lives at home and the other son, Stan, lives in an apartment across town. Jonathan wants to buy a car for Stan so he can get a job after his college classes. Jonathan titles the car in both his name and Stan's name and wants to add the car to his automobile policy. Which endorsement will provide this coverage? A) Extended, nonowned coverage for named individual B) Drive other car C) Miscellaneous type vehicle D) Joint ownership coverage

D) Joint ownership coverage Explanation: This endorsement provides coverage for the interests of each owner of a covered auto, including a son living out of the household. Reference: 8.13 on the License Exam Manual

Coverage D in homeowners insurance is for what type of loss? A) Personal property B) Dwelling C) Personal liability D) Loss of use

D) Loss of use Explanation: The 6 insuring agreements in the homeowners forms are A-Dwelling, B-Other Structures, C-Personal Property, D-Loss of Use, E-Personal Liability, and F-Medical Payments Reference: 7.5.1.1 in the License Exam Manual

Jane insures her car with ABC Insurers. Which of the following individuals describes a family member on Jane's policy? A) Uncle Joe visiting from Texas. B) Robert, her ex-husband who moved out last week. C) Renee, a friend, who lives with Jane. D) Maggie, her older sister, who lives with Jane.

D) Maggie, her older sister, who lives with Jane. Explanation: A family member is someone related to the named insured by blood, marriage or adoption, who is a resident of the insured's household. Since Maggie is Jane's sister and is a resident of Jane's household, she would best fit the description of a family member under the policy. Reference: 8.4 in the License Exam Manual

In which of the following areas would PAP coverage typically NOT extend? A) Canada B) Hawaii C) Puerto Rico D) Mexico

D) Mexico Explanation: PAP coverage applies to occurrences that take place within the US, its territories and possessions (including Peurto Rico) and Canada. The PAP generally does not provide coverage for vehicles operated in Mexico (although some insurers offer coverage for vehicles operating a short distance within the Mexican border). Reference: 8.5 in the License Exam Manual

An auto policy would provide coverage for an auto driven in all of the following places EXCEPT A) Paducah, Kentucky B) Alberta, Canada C) Honolulu, Hawaii D) Mexico City, Mexico

D) Mexico City, Mexico Explanation: The personal auto policy applies only to losses, accidents, or occurrences that take place within the US, its territories and possessions, or Canada, or while being transported between ports in any of those places. Coverage for losses in Mexico usually must be purchased from Medican insurers. However, some insurers provide coverage for vehicles from the US operating within a certain distance from the Mexican border, such as 100 miles. Many states require some limited insurance for physical damage in Mexico. Reference: 8.5 in the License Exam Manual

Malik is seriously injured when Mike crosses the center line and strikes Malik's car head-on. Malik's medical expenses arising out of this accident are $100,000. Mike's $50,000 liability limits comply with the state's financial responsibility law. Which coverages will pay for Malik's medical expenses? A) Mike's liability coverage and Malik's underinsured motorists as excess coverage after his uninsured motorist coverage is paid B) Mike's underinsured motorist and Malik's liability coverage C) Mike's underinsured motorist coverage and Malik's uninsured motorist coverage D) Mike's liability coverage and Malik's underinsured motorists coverage

D) Mike's liability coverage and Malik's underinsured motorists coverage Explanation: Uninsured motorist coverage applies when the motorist liable for injury or death is unknown, uninsured, or has insurance by the carrier is unable to make payment because of insolvency. Underinsured motorist coverage applies when the motorist liable for injury or death has insurance or a liability bond, but the total of all applicable coverage is less than the total damages for injury or death resulting from the accident. Underinsured motorist coverage will not provide coverage for a claim against an uninsured motorist. Reference: See State Supplement

Which of the following is NOT an eligibility requirement for a homeowners policy? A) Named insured is the owner-occupant of dwelling B) Dwelling is a seasonal residence C) No more than 4 families occupy the home D) Named insured lives on a farm

D) Named insured lives on a farm Explanation: Farms are not covered under homeowners policies. They have their own specific farm policy. A homeowners policy requires that the named insured in the owner-occupant and there are no more than 4 families in the home. A seasonal residence may also be covered under a homeowners policy. Reference: 7.3.2 in the License Exam Manual

What part of the personal auto policy covers losses caused by malicious mischief, vandalism, hail or floods? A) Liability B) Property damage C) Collision D) Other than Collision

D) Other than Collision Explanation: Other than Collision coverage includes, but is not limited to, malicious mischief, vandalism, hail and floods. Reference: 8.12.1 in the License Exam Manual

While driving to work, Leonard is eating his breakfast, reviewing his appointment book, and talking on his phone. He runs a red light and collides with a commuter van. The van's occupants are hospitalized. Which part of Leonard's personal auto policy covers the occupants' injuries and damage to the van? A) Part B B) Part D C) Part C D) Part A

D) Part A Explanation: Bodily injury and property damage to others is covered under Part A liability coverage when the accident is due to the insured's negligence. Reference: 8.7.1 in the License Exam Manual

Which of the following individuals is NOT an insured under Section I of the homeowners policies? A) Resident relative of the insured B) The spouse of the named insured C) Person younger than 21 who is in the care of the named insured D) Person hired by the insured to perform work on the insured premises

D) Person hired by the insured to perform work on the insured premises Explanation: The definition of who is an insured under homeowners policies, while quite broad, is not all-inclusive and would not be extended to include people hired by the insured to perform work on the insured's premises. Those individuals should look to their own commercial policies for protection. Reference: 7.3.2 in the License Exam Manual

Which of the following statements about flood insurance is NOT correct? A) There are two types of flood insurance programs available: emergency and regular B) A flood includes an overflow of inland or tidal waters C) Sewer backup into a dwelling is not considered flood and is not covered D) Personal property in a basement or outside in the yard is covered

D) Personal property in a basement or outside in the yard is covered Explanation: Personal property in a basement or outside in the yard is NOT covered under flood insurance. Reference: 9.4 in the License Exam Manual

Sandy and Stewart had a fire loss, and the insurance company reimbursed them for their damaged personal property. They believed that they did not get enough for this property because the settlement was based on actual cash value. Which endorsement would have provided a better loss settlement? A) Special limits of liability. B) Scheduled personal property endorsement. C) Coverage C--Personal property increased limits. D) Personal property replacement cost endorsement.

D) Personal property replacement cost endorsement. Explanation: The personal property replacement cost endorsement modifies the basis of loss settlement from actual cash value to replacement cost. Payment at the time of loss will be no greater than the replacement cost, the limit of Coverage C, or any other special limits of liability stated in the policy. Reference: 7.5.7 in the License Exam Manual

Which of the following items could be insured under Coverage C of a homeowners policy? A) Exotic birds B) Motorized go-kart C) Snowmobile D) Personal property usually located in a secondary residence

D) Personal property usually located in a secondary residence Explanation: Coverage C covers personal property under a homeowners policy. Personal property usually located in a secondary residence may be insured under Coverage C. In addition, the following personal property is covered: personal property the insured owns or uses that is located anywhere in the world; personal property of others while it is in the portion of the residence the insured occupies; and personal property of a guest or employee while it is located in any resident the insured occupies. Animals and motorized vehicles are excluded. Reference: 7.5.1 in the License Exam Manual

Which of the following methods of cancelling a policy is used when a policyholder cancels her policy before it reaches its natural expiration? A) Pro rata B) Long-rate C) Flat D) Short-rate

D) Short-rate Explanation: The short-rate method is used when a policyholder cancels her policy before it reaches its natural expiration. The insured pays a penalty on the unearned premium for canceling early. The pro rata method is used when the insurer cancels the policy; the refund is the premium paid for the unexpired term of the policy. A flat cancellation takes place when the policy is terminated on its effective date. There is no long-rate method of cancellation. Reference: 3.4.3 in the License Exam Manual

Of the Dwelling Forms, which one of the following provides the broadest coverage? A) Standard B) Premier C) Specific D) Special

D) Special Explanation: The DP-3 Special Form provides the broadest coverage of the 3 Dwelling Forms. It provides open perils coverage for buildings and related structures and named perils coverage for personal property. Reference: 6.4.3 in the License Exam Manual

Stephanie is an agent in a local insurance agency. While visiting a client in his home, Stephanie accidentally leaves a coffee cup on an antique coffee table, damaging the wood surface. She asks her sales manager whether she has coverage under her homeowners policy. Which of the following is the best advice given to Stephanie? A) Your homeowners policy provides coverage for this exposure. B) The personal injury endorsement should be added to your policy to provide coverage for injury or damage you may cause to a client. C) You need to buy a commercial liability policy. D) The business pursuits endorsement should be added to your homeowners policy to protect you if you personally damage property while conducting business.

D) The business pursuits endorsement should be added to your homeowners policy to protect you if you personally damage property while conducting business. Explanation: The business pursuits endorsement provides homeowners liability coverage for personal damage or injury caused while conducting business as a salesperson working for a company. The basic homeowners policy does not provide this coverage automatically. Reference: 7.7 in the License Exam Manual

Which of the following describes a personal contract? A) The contract is a promise made only by one party B) The contract insures a property C) The persons involved may void the contract D) The contract protects the individual who owns the property

D) The contract protects the individual who owns the property Explanation: Insurance policies are considered to be personal because they protect the individual who owns the property. It is made between the insured and the insurer, and cannot be transferred to another person. Reference: 2.3.2.5 in the License Exam Manual

What happens if a consumer notifies a credit reporting agency that information in the consumer's credit report is incorrect? A) The credit reporting agency is required to send the complaint to the insurer so the issue may be investigated by the insurer and the insurer's file is corrected if appropriate. B) Information is retained in these reports for seven years, even if it is incorrect. C) The consumer must report the issue to the insurer who requested the report. The insurer is responsible for getting the credit report information corrected. D) The credit reporting agency is required to investigate the complaint, and, if it is justified, correct or delete the information.

D) The credit reporting agency is required to investigate the complaint, and, if it is justified, correct or delete the information. Explanation: Consumers who feel that information in their files is inaccurate or incomplete may dispute the information, and the reporting agencies may be required to reinvestigate and correct or delete information. Reference: 3.8.1 in the License Exam Manual

All of the following statements regarding Part D- coverage for damage to your auto are correct EXCEPT A) This coverage is commonly known as physical damage coverage B) This coverage pays for direct and indirect loss to the named insured's rental or borrowed cars C) This coverage pays for direct and indirect loss to the named insured's covered auto D) This coverage covers all personal property in the vehicle

D) This coverage covers all personal property in the vehicle Explanation: Part D coverage for damage to your auto covers loss caused against collision and other than collision. It does not cover any personal property in the vehicle. Reference: 8.12.1 in the License Exam Manual

Thomas had a forklift injury at work that caused his death. How much money will his surviving spouse receive for burial expenses? A) Up to $10,000 B) Up to $1,000 C) Up to $2,500 D) Up to $5,000

D) Up to $5,000 Explanation: Burial expenses, not to exceed $5,000, are in addition to the compensation. Reference: See State Supplement

Which of the following terms is used to describe an empty building that is not being used? A) Vacated B) Absent C) Unoccupied D) Vacant

D) Vacant Explanation: 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 intended to return, as is the case when the residents are out of town on vacation. Reference: 4.4.15 in the License Exam Manual

Which one of the following principles is used to describe liability for the actions of another person? A) Absolute liability B) Implied liability C) Strict liability D) Vicarious liability

D) Vicarious liability Explanation: Vicarious liability describes insurance extends to anyone who is liable because of the negligence of a person. For example, general contractors, many times, have vicarious liability for the negligent acts of a subcontractor, and parents do for their underage children. Reference: 5.3.5 on the License Exam Manual

Which of the following terms describes an insured's oral or written statement that becomes part of an insurance contract and can void a policy if they are breached? A) Waiver B) Representative C) Misrepresentation D) Warranty

D) Warranty Explanation: A warranty is a specific agreement between the insured and the insurer that becomes a part of the insurance policy. A breach of warranty can void the policy. Reference: 2.3.2.8 in the License Exam Manual

A business loses money because it was forced to close after a fire on the premises. This loss is described as A) a named peril B) a direct loss C) a proximate cause D) an indirect loss

D) an indirect loss Explanation: 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. Reference: 4.4.6 on the License Exam Manual

Jeffrey bought a car yesterday for his daughter to drive to school and her job. Under Jeffrey's automobile policy, this car is considered A) a nonowned automobile B) an uninsured automobile C) a temporary substitute automobile D) an owned automobile

D) an owned automobile Explanation: A newly acquired automobile is an owned automobile that must be an eligible vehicle. For any coverage except Coverage for Damage to Your Auto, this car will have the broadest coverage provided for any of the cars listed on the declarations until it is added to the policy. It must be insured within 14 days after the insured becomes the owner. Reference: 8.4 in the License Exam Manual

The covered auto is defined in the policy as all of the following EXCEPT: A) any additional auto acquired in the past 30 days. B) any auto shown in the declarations. C) any auto used as a temporary substitute while an insured auto is being repaired. D) any trailer owned by the insured or spouse.

D) any trailer owned by the insured or spouse. Explanation: An additional auto acquired during the policy period is considered a covered auto. However, some restrictions do apply. For example, if the newly acquired auto is in addition to any vehicle shown on the declarations, it must be insured within 14 days of the purchase date. If it replaces one of the cars, the insured does not need to add it during that policy period. Reference: 8.4 on the License Exam Manual

All of the following are basic parts of an insurance contract EXCEPT A) conditions B) declarations C) exclusions D) binders

D) binders Explanation: The 4 basic parts of an insurance contract are declarations, insuring agreement, conditions and exclusions. A binder is an oral written statement that provides immediate insurance protection for a temporary period. Reference: 3.3 in the License Exam Manual

The insured's car collides with a deer. The damage to the insured's car arising out of this accident would be covered under the personal auto policy's A) Part A property damage coverage B) collision coverage C) uninsured motorist property damage coverage D) comprehensive/other than collision coverage

D) comprehensive/other than collision coverage Explanation: Contact with a bird or animal is specifically listed in the personal auto policy as being a comprehensive coverage loss, not a collision loss. Reference: 8.12.1 in the License Exam Manual

Four separate property coverages are provided by the homeowners policy under Section 1. Coverage A covers: A) other structures B) loss of use C) personal property D) dwelling and structures attached to the dwelling

D) dwelling and structures attached to the dwelling Explanation: Coverage A-dwelling covers the dwelling and structures attached to the dwelling as well as materials and suppliers for repair and construction of those structures if they are located on or next to the residence premises (the dwelling location listed in the declarations) Reference: 7.5.1 in the License Exam Manual

All of the following are excluded under collision or Other than Collision coverages EXCEPT A) damages to awnings, cabanas, or other equipment B) damage due to wear and tear C) road damages to tires D) flood damage

D) flood damage Explanation: Flood damage to a vehicle is not excluded under the Other than Collisions coverage. Reference: 8.12.1 in the License Exam Manual

An occurrence is best described as something that A) happens when no one is present B) in intentional C) is expected D) may take place over time

D) may take place over time Explanation: An occurrence can refer to an accident or to continuous or repeated exposure to the same conditions, resulting in injury to persons or damage to property that is neither expected nor intentional. Reference: 5.3.8 in the License Exam Manual

All of the following vehicles can be insured under an unendorsed personal auto policy EXCEPT A) trailers hitched to the insured vehicle B) newly acquired vehicles C) rental cars D) motorcycles

D) motorcycles Explanation: The miscellaneous type vehicle endorsement to the PAP covers motorcycles, motor homes, all-terrain vehicles (ATVs), dune buggies, and other types of vehicles that are otherwise excluded by the policy. Reference: 8.4 on the License Exam Manual

A group of individuals who agree to share each other's losses is known as a A) reinsurer B) service organization C) mixed group D) reciprocal group

D) reciprocal group Explanation: A member of a reciprocal agrees to share the insurance responsibilities with all other members of the unincorporated group. A reciprocal exchange is an unincorporated mutual organized for the mutual protection of its members. A reciprocal is managed by an attorney-in-fact. Reference: 1.6.4 in the License Exam Manual

A bailee is A) a temporary reprieve from liability B) a bond posted to free someone from jail C) someone who escorts litigants to a courtroom D) someone who has taken temporary custody of another person's property for a special purpose

D) someone who has taken temporary custody of another person's property for a special purpose Explanation: A bailee is someone who has taken temporary custody of another person'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. Reference: 4.4.16.3 in the License Exam Manual

All of the following statements are TRUE regarding an insured's duties to the insurer after a loss to an insured dwelling EXCEPT A) undamaged property must be protected from further loss B) the insurance company must be notified of the loss C) the insured must furnish proof of loss D) the damaged property must be appraised

D) the damaged property must be appraised Explanation: The property needs to be appraised only if the insured and the insurer cannot agree on the amount or value of the loss. The conditions section of the policy spells out, in detail, both the insurer's and the insured's rights and duties. If the insured does not comply with these conditions, the insurer may be released from its obligation to pay for a loss. Reference: 6.5.1 on the License Exam Manual

Trees, shrubs, and other plants are covered as additional coverages for Coverages A-The coverage is limited to certain perils, however. All of the following perils are covered when causing damage to a tree or shrub EXCEPT A) riot B) explosion C) theft D) wind

D) wind Explanation: The insurer will cover trees, shrubs, plants or lawns at the residence premises for loss caused by fire, lightning, explosion, riot, civil commotion, aircraft, nonowned vehicles, vandalism and malicious mischief, and theft. Wind, a common peril causing damages to trees, is not covered. Reference: 7.5.3 in the License Exam Manual