Chapter 2 Exam

Policy A provides liability coverage to F's Grocery up to $500,000. Policy B provides coverage for the same risks up to $1.5 million. Both policies pay on a pro rata basis. If F's Grocery is determined to have a legal liability of $400,000 to a claimant who was injured on the property, how much will Policy A pay?

$100,000

All of the following statements about binders are correct, except:

A binder must be written in order to be valid.

For insurance purposes, which of the following is the best definition of an accident?

A sudden, unforeseen, and unintended event that causes a loss

An unintended and unforeseen event from which a loss results is called which of the following?

Accident

All of the following statements regarding the structure of a property policy are correct, except:

Additional Coverages are added to the policy for an additional premium

Which person is not typically covered by a policy, but can be included in coverage by endorsement when they have insurable interest in property?

Additional insured

M purchases an insurance policy by paying the policy premium. If a loss does not occur during the policy period, M may have paid the premium without getting anything of value in return. If a loss does occur, however, M may receive a claim payment that far exceeds the premium amount. This unequal exchange indicates that the insurance contract is a(n):

Aleatory contract

Under a legal insurance contract, the insurer and insured exchange unequal values, as the values received by each party depends on the uncertainty of a covered loss occurring during the policy period. This best describes which type of contract?

Aleatory contract

Which of the following is considered an offer of a legal contract?

An applicant who submits a completed application and initial premium to the insurer

In property and casualty insurance, when a form is attached to alter or add to policy provisions or conditions, it is known as:

An endorsement

Under the Duties in the Event of Loss condition, if a fire burns the home and property of an insured, what must the insured provide?

An inventory of the damaged property

K gets a horrible rash after using wrinkle-prevention cream for 2 months. This is considered:

An occurrence

If the insured does not agree with the insurer's decision regarding a claim, what process helps decide the outcome?

Arbitration

Which of the following is used to resolve differences between the insured and the insurer when the parties disagree on whether or not a liability claim is payable?

Arbitration

M has a liability policy insuring M's flower shop. After M sells the shop, the buyer asks if M can transfer the liability policy as part of the sale. Which condition prevents M from making this transfer without the insurer's consent?

Assignment

The provision that the insured's interest in a property insurance policy may not be transferred to another person without the consent of the insurance company, is called:

Assignment

When an applicant intentionally fails to make a material fact known, it is best known as:

Concealment

Which of the following applies when two parties rely upon the promises of the other?

Concept of utmost good faith

Because the insurance company must pay claims and the insured must comply with the policy terms, the insurance contract is considered which of the following types of contracts?

Conditional contract

When both parties to a contract must perform certain duties in order to make the contract enforceable, this is known as a(n):

Conditional contract

An insured's home is insured on a Homeowners policy. During a storm, a tree falls and crashes into the side of the home. The Homeowners policy states that the insured must promptly notify the insurer of the loss. The requirement for prompt notice of loss is found in the policy's:

Conditions

The rules and procedures to be followed by the insured and the insurer are found in which section of an insurance policy?

Conditions

In an insurance contract, the value that each party gives the other is called the:

Consideration

L is applying for an insurance policy in Alabama. The statements made on the application and the premium paid by L represent what element of a legal contract?

Consideration

Which of the following best describes both the premium paid by the insured and the promise by the insurer to pay a covered loss and defend the insured in a lawsuit?

Consideration

A contract prepared by one party and submitted to the other party on a take-it-or-leave-it basis, without negotiations, is called a(n):

Contract of adhesion

An insurance contract is prepared by the insurer and submitted to the applicant on a take-it-or-leave-it basis, without negotiations. This describes which type of contract?

Contract of adhesion

What is the term for a contract written by one party on a take-it-or-leave-it basis?

Contract of adhesion

Two primary policies from different insurers apply to the same covered loss, and the insurers agree to pay equivalent amounts until policy limits are exhausted. This method is referred to as:

Contribution by equal shares

Which term describes the equal sharing of a loss by two or more insurers until the loss is paid, or until each insurer has exhausted its limits of insurance, whichever comes first?

Contribution by equal shares

The Additional Coverages part of a property insurance policy provides:

Coverage automatically included in the policy to supplement the basic coverages in the Insuring Agreement without an additional premium

The part of a property policy that gives basic information such as the named insured, a description of the property, the location of the property, and the amount of premium involved, is known as the:

Declarations

Words, terms, and phrases used throughout an insurance policy are specifically described in which section of the policy?

Definitions

Which statement defines estoppel?

Denial of a contractual right when a party has previously waived the right

All of the following are duties of an insured after a loss, except:

Determining the valuation method the insurer will use to pay the loss

An insurance contract is said to be a contract of utmost good faith, because:

Each party assumes that they can rely on the statements of the other party

Under the Other Insurance condition, when two property policies cover the same property on a pro rata basis, how is a loss apportioned?

Each policy will share losses proportionately according to the total insurance provided for the property

Which of the following is attached to a property and casualty insurance policy to amend policy provisions or conditions?

Endorsement

Which of the following may broaden the coverage found in an insurance policy?

Endorsements

Estoppel is defined as which of the following?

Estoppel prevents a party from denying a fact, if the fact was admitted to be true by a previous action

Which policy provision omits certain risks from coverage?

Exclusions

Who is responsible for paying premiums, and will receive any premiums that have to be returned?

First named insured

The Conditions section of a liability policy would include which of the following pieces of information?

If another insurance policy also applies to a covered loss, the insurer will pay its pro rata share

Each of the following is an element of a legal contract, except:

Indemnity

An individual lawfully owns property. The individual wants to ensure its safety because, as the owner, they would sustain a substantial economic loss if the property is damaged. This best describes which of the following insurance concepts?

Insurable interest

When an individual faces the risk of economic loss in the event of property damage, this indicates which of the following?

Insurable interest

An insured has two primary property policies on their home, and both policies have Other Insurance conditions that specify a pro rata liability coordination of coverage. The policy with Insurer A has a $100,000 limit. The policy with Insurer B has a $200,000 limit. In the event of a covered loss equaling $45,000, how will the insurers settle the losses?

Insurer A pays $15,000 and Insurer B pays $30,000

Which of the following is not a condition found in an insurance policy?

Insuring Agreement

Which part of a property insurance policy describes the perils?

Insuring Agreement

Which part of the policy contains the insurance company's promise to indemnify the insured?

Insuring Agreement

Which section lists the perils insured against by a property insurance policy?

Insuring Agreement

The Reasonable Expectations Doctrine states that the insured:

Is entitled to coverage that a reasonable and prudent buyer can expect, even if it goes against the strict terms of the policy

All of the following statements about subrogation are correct, except:

It allows the insurer to file suit against the insured

Which of the following best describes a liability policy that is written on a primary basis?

It is the policy that pays first with respect to other policies

Which condition states that a suit may not be filed by the insured against the insurer if the insured has not complied with policy terms?

Legal Action Against Us

The insurer may void an insurance policy for all of the following reasons, except:

Legal action is taken against the insurer by the insured

Insurer FGH publishes a new edition of a policy form to increase the amount of first aid benefits provided by the form, without a resulting premium increase. What is the name of the condition that automatically applies this broader coverage to all policies currently in effect by the same insurer?

Liberalization

Which condition broadens coverage of an existing policy with no increase in premium?

Liberalization

Which policy condition states that the insurer will automatically broaden coverage during the policy period if the broadened coverage does not require an increase in premium?

Liberalization

For a claim to be paid, insurable interest for a property or casualty contract must exist at the time of:

Loss

The Policy Period and Territory condition states that losses are only covered when they occur within the coverage territory. Typically, the territory includes all of the following places, except:

Mexico

A false statement in the application for insurance is called a:

Misrepresentation

When writing the application for Homeowners insurance, B's agent asked if B had any theft losses in the past 3 years. B answered no, despite the fact that B was a theft victim 3 times in the past 3 years. B is guilty of which of the following?

Misrepresentation

Two insurance policies that cover the same risk, but provide coverage against different perils, are known as:

Nonconcurrent policies

When the insurer elects to end coverage at the end of the policy period, the policy is said to be which of the following?

Nonrenewed

An insured must inform the insurer of a loss as soon as possible after the loss or occurrence. This is done by supplying a written:

Notice of loss

What is the term for continuous exposure to the same harmful conditions?

Occurrence

The principle of indemnity helps avoid which of the following?

Overpayment of a claim

A policyholder has two policies that provide coverage for a covered loss. Policy A responds first, before Policy B, which only provides coverage if the loss exhausts Policy A's limit. Policy A is the:

Primary policy

A sworn, formal statement made by the insured that provides the necessary details for the insurer to determine its liability under a policy is called a:

Proof of loss

The formal statement an insured provides to an insurer, including all the details an insurer needs to assess its liability following a loss, is known as a:

Proof of loss

For a loss to be covered under a standard property policy, the insured must do which of the following?

Protect property from further damage

Most statements made by an applicant on an insurance application are considered to be:

Representations

Statements that are believed to be true to the best of the applicant's knowledge and belief are known as:

Representations

The transfer of the right of recovery from the insured to the insurance company is called:

Subrogation

Which insurance policy condition prevents the insured from collecting twice for the same loss?

Subrogation

X's neighbor shoots off fireworks on July 4th and puts the shells in X's trash can, causing a fire and damaging X's garage. X's insurance company pays the loss and contacts the neighbor for reimbursement. This is an example of:

Subrogation

The court requires an insurer to pay a claim because it declared the language of a policy exclusion to be unreasonable in the eyes of a prudent policyholder. This is an example of:

The doctrine of reasonable expectations

A certificate of insurance includes which of the following pieces of information?

The effective date, names of the insurer and named insured, and the limits of liability

Short-rate cancellation occurs when:

The insured cancels the policy mid-term

Which of the following best describes the principle of indemnity?

The insured is restored to the same financial condition as prior to the loss, with no loss or gain

The Assignment condition of an insurance policy states that:

The insured may not transfer ownership of the policy without the insurer's written permission

Which of the following best describes short-rate cancellation?

The insured will receive less than the full amount of the unearned premium

For any waiver of rights or policy changes to go into effect, they must be made in writing by:

The insurer

When writing and enforcing a legal contract, the competency of the parties to enter into the contract may be determined by:

The legal age of the parties

An insured needs to submit a claim after a property loss, and their insurer requires them to submit a notice of loss. All of the following statements about the notice of loss are true, except:

The notice of loss contains an inventory of damaged property

When forming a legal contract, its legal purpose refers to:

The parties entering into the contract in good faith, without violating public policy

All of the following are included in the Declarations of a property policy, except:

The perils insured against

The following are all found on the Declarations page, except:

The policy exclusions

When an insurance policy is not clear, the court will usually interpret in favor of the insured because of which characteristic?

The policy is a contract of adhesion

The Concealment and Fraud condition in a property insurance policy states:

The policy will be voided if there is material concealment, misrepresentation, or fraud on the insured's part

The concept that the insured should not profit from an insurance transaction is called:

The principle of indemnity

Which of the following is true of the Insuring Agreement?

The promise to indemnify an insured for a covered cause of loss

Under aleatory contracts, the exchange of values is:

Unequal

Because only the insurance company makes a promise to fulfill an obligation by paying a future covered claim, the insurance contract is:

Unilateral

Statements in the application that are guaranteed true, but later found to be false at the time of application, may result in which of the following?

Voidance of the contract

The voluntary surrender of a right is known as which of the following?

Waiver

Which term is described as the relinquishment of a legal right?

Waiver

Statements that are guaranteed to be true at the time of application are known as:

Warranties

Fraud is an intentional act of any of the following, except:

Warranty