Module 2 - FP512
Which of the following statements best defines open-perils coverage? A) The coverage is for the repair or replacement of an intentionally damaged structure or attachment. B) The coverage is for only those perils specifically named in the policy. C) The coverage is designed to protect against all perils without exclusion. D) The coverage is designed to protect against all perils except those specifically excluded from coverage.
The answer is the coverage is designed to protect against all perils except those specifically excluded from the coverage. Open-perils coverage, which is usually the most expensive, protects against all perils except those specifically excluded from coverage.
The principal difference among the various homeowners forms is A) the extensions of coverage in each form. B) the perils insured against in Section I. C) the liability coverage under Section II. D) the definition of dwelling in each form.
The answer is the perils insured against in Section I. The principal difference among the various homeowners forms are the perils insured against in Section I of the policy. Specifically, some policies cover only basic perils, some cover broad perils, and others are written as open perils.
Coverage C in a homeowners policy insures the personal belongings of the policyowner and any resident family members. Which of the following is the typical limit on this coverage? A) 80% of the Coverage B limit B) 80% of the Coverage A limit C) 50% of the Coverage B limit D) 50% of the Coverage A limit
The limit on Coverage C coverage is typically 50% of the Coverage A limit.
Which of the following statements regarding typical personal liability umbrella policies is NOT true? A) The individual seeking the coverage is usually required to have increased levels of homeowners and automobile insurance liability. B) There are no standard policies. C) They commonly require a base policy with a minimum of $1 million of liability coverage. D) They generally have liability limits of at least $1 million.
Umbrella policies normally have liability limits of $1 million or more. Base policies normally include a minimum of $300,000 of liability coverage.
Under a standard personal auto policy (PAP), damages are based on which of the following criteria? A) Appraisal value B) Stated value C) Actual cash value D) Replacement cost
Under a standard PAP, coverage for damages is paid on an actual cash value basis, which is the replacement cost minus depreciation. There is no replacement cost coverage under a standard PAP.
Most automobile insurance companies use a classification system to determine premiums. Which of the following factors is traditionally used in a classification system? The location of the auto The age of the driver The gender of the driver The driving record of the driver A) II and IV B) I, II, III, and IV C) I only D) I, II, and III
All of these factors are used in classification systems to determine automobile insurance premiums.
Which of the following is covered under the uninsured motorist coverage of a personal auto policy (PAP)? A hit-and-run driver. A car that is operated without liability insurance. A) II only B) I only C) Neither I nor II D) Both I and II
Both hit-and-run drivers and cars operated without liability insurance are insured under uninsured motorist coverage.
All of the following are covered under a personal automobile policy's other-than-collision (comprehensive) coverage except A) colliding with a mailbox. B) flood. C) theft. D) earthquake.
Collision is defined as "the upset of your covered auto or its impact with another vehicle or object." Other examples of losses covered under other-than-collision coverage include vandalism, hail, and breakage of glass.
All of the following are exclusions from Coverage C: Personal Property of a homeowners policy except A) credit cards. B) property of roomers or boarders. C) animals, birds, and fish. D) jewelry.
D Jewelry is covered under Coverage C; however, coverage is typically limited to a maximum dollar amount of $1,500. The addition of an endorsement can increase the coverage limit for jewelry and other personal property items.
Which of the following policy sections do homeowners and auto policies share? Liability coverage Comprehensive coverage Medical payments coverage Duties after a loss
I, III, and IV With the exception of comprehensive coverage (auto policies only), all of these are sections are shared by homeowners and auto policies.
Liability insurance is primarily concerned with the financial consequences of A) all torts. B) negligence. C) intentional torts. D) felony crimes.
Liability insurance is primarily concerned with negligence. It does not cover intentional acts.
Cherice has the standard amount of coverage for her personal liability umbrella policy (PLUP). Based on this information, how much additional liability protection does Cherice have on top of her other liability coverage? A) $1,000,000 B) $2,000,000 C) $100,000 D) $5,000,000
The answer is $1,000,000. The standard amount provided is $1,000,000; however, the insured may obtain additional amounts relatively inexpensively.
Which of the following homeowners policies is designed for the owners of condominium units and cooperative apartments? A) HO-6 B) HO-4 C) HO-8 D) HO-2
The answer is HO-6. HO-6: Unit Owner Form (for Condominium Owners) covers the personal property of the insured for the same named perils listed in a HO-2 policy, except HO-6 insurance is for people residing in a condominium or cooperative apartment. This type of policy also provides liability protection.
Which of the following is true for property coverage in a commercial package policy (CPP)? A CPP will be offered at a discount from a collection of monoline forms. Customization is allowed in order to modify the standard CPP. The standard CPP includes building, contents, and commercial automobile coverage. The CPP is designed for smaller businesses.
The answer is I and II. A CPP is a standard package of what used to be monoline forms offered at a discount. The standard CPP includes coverage for buildings, contents, and liability coverage. Additional coverage is available for things like commercial autos, glass, and specific, unique-to-the-business causes of loss. Thus, a CPP is customizable so it can accommodate many different businesses. The CPP is designed for larger businesses, while the businessowner policy is designed for smaller businesses.
Which of the following are the perils covered under basic coverage in a homeowners policy? Smoke Theft Falling objects Earthquake
The answer is I and II. Basic coverage provides benefits for financial loss to the policyowner's home due to fire, lightning, windstorm, hail, riot or civil commotion, aircraft, vehicles, smoke, vandalism or malicious mischief, explosion, theft, and volcanic eruption. Loss or damage due to falling objects is covered under broad coverage. Loss from an earthquake is excluded from most homeowners policies.
Which of the following statements regarding Coverage B of a homeowners policy is CORRECT? Coverage B provides coverage for small detached structures on the dwelling property. The limit on Coverage B is typically a percentage of the Coverage A limit. Coverage B provides coverage for motorized land vehicles used off the premises.
The answer is I and II. Motorized land vehicles used off the premises is an exclusion to Coverage C: Personal Property.
Which of the following is a principle of the workers' compensation laws? In exchange for benefits, an employee gives up the right to sue the employer. The costs for workers' compensation benefits are funded through payroll taxes, and the employee is expected to contribute. The injured employee is not required to prove negligence on the part of the employer. Many states permit, or require, individuals who have domestic help to obtain workers' compensation insurance. A) I, III, and IV B) II and III C) I, II, III, and IV D) I only
The answer is I, III, and IV. Workers' compensation insurance is paid through premiums paid solely by the employer.
Which of the following about a businessowners policy (BOP) is true? A BOP includes liability coverage only. There are six parts to a BOP. BOPs are a specific, standard package of coverage. BOPs can be customized to a specific business.
The answer is IV only. A BOP includes both property and liability coverage and consists of four parts: common policy conditions, property coverage, causes of loss and exclusions, and liability coverage. BOPs are quite customizable so that the coverage a business needs can be added to the basic framework of the policy.
Which of the following is true for property coverage in a commercial package policy (CPP)? A CPP provides broader coverage but is a bit more expensive than a collection of monoline forms. No customization is allowed, as all potential risks are covered in the standard CPP. The standard CPP includes building, contents, and commercial automobile coverage. The CPP is designed for larger businesses.
The answer is IV only. A CPP is a standard package of what used to be monoline forms offered at a discount. The standard CPP includes coverage for buildings, contents, and liability coverage. Additional coverage is available for things like commercial autos, glass, and specific, unique-to-the-business causes of loss. Thus, a CPP is customizable so it can accommodate many different businesses. The CPP is designed for larger businesses, while the business owner policy is designed for smaller businesses.
Errors and omissions (E&O) insurance provides protection A) when a business transports goods domestically. B) against the deficient acts of a professional who handles money. C) for individuals whose liability could result in bodily harm. D) for businessowners in the event of disability.
The answer is against the deficient acts of a professional who handles money. E&O insurance provides protection against the deficient acts of a professional who handles money. Malpractice insurance is generally used where the deficient conduct of the insured may result in bodily harm (e.g., a physician, surgeon, or dentist). Inland marine insurance covers businesses that transport goods domestically. Business overhead expense insurance provides coverage for businessowners in the event of disability.
Which of the following professionals would likely need errors and omissions insurance? A) A certified nursing assistant B) A physician's assistant C) An orthopedic surgeon D) An insurance agent
The answer is an insurance agent. Of the two professional liability forms available, malpractice insurance is for those professions where personal, physical harm can occur (e.g., doctors, nurses, and chiropractors). Errors and omissions insurance is for those professions where financial harm can occur (e.g., insurance agents, financial advisors, accountants, and attorneys).
Which of the following professionals would likely need malpractice insurance? A) An oncologist B) A financial advisor C) An attorney D) An accountant
The answer is an oncologist. Of the two professional liability forms available, malpractice insurance is for those professions where personal, physical harm can occur (e.g., doctors, nurses, and chiropractors). Errors and omissions insurance is for those professions where financial harm can occur (e.g., insurance agents, financial advisors, accountants, and attorneys).
Which of the following covered losses are included in a personal automobile policy? Injuries to the insured or family members Damage to the insured's vehicle A) Both I and II B) Neither I nor II C) II only D) I only
The answer is both I and II. Another covered loss is legal liability for injuries and damages to other persons.
Kaari has a homeowners policy. Three streets away from her house, her dog bites a mailman. What are the consequence of this event? A) Only personal liability coverage applies. B) There is no coverage under the policy because pets are excluded. C) Only medical payments coverage applies. D) Both medical payments and personal liability coverage may apply.
The answer is both medical payments and personal liability coverage may apply. Both of these coverages apply on and off of Kaari's property. Medical payments coverage will apply even if Kaari is not at fault, while her personal liability coverage will only apply if she is found to be negligent or legally liable.
In which of the following situations would a personal automobile policy (PAP) NOT provide coverage under the liability section of the policy? A) The named insured uses his car to regularly transport executives to the airport for a fee. B) The named insured uses his trailer, which is hitched to his brother's truck, to move furniture. C) A resident relative, with permission, borrows a truck to haul some sod to his house. D) The named insured borrows a van while his covered auto is being repaired.
The answer is the named insured uses his car to regularly transport executives to the airport for a fee. The PAP contains an exclusion for vehicles used to transport people or property for a fee.
James is a delivery driver for ABC Pizza. He gets into an accident and is ticketed for speeding while delivering one of ABC Pizza's delivery orders. The victim's attorney plans on going after ABC Pizza for special and punitive damages. Which of the following terms best describe why ABC Pizza being held liable for this accident? A) Comparative negligence B) Strict liability C) Vicarious liability D) Contributory negligence
The answer is vicarious liability. Vicarious liability results from when a person is liable for torts committed by someone else. For example, parents may be liable for the torts committed by their children, and employers can be liable for the torts committed by their employees. The principle of strict liability holds tortfeasors—parties who commit a tort—liable for damages sustained by their actions or from their products, whether or not they were deemed at fault. Under the contributory negligence rule, a person cannot recover damages if his own negligence contributed in any way to his injuries. Under comparative negligence, damages are adjusted to reflect the extent to which the injured party's own negligence contributed to his injuries.
Your client, Carol, has brought her declaration page and the following information to you. The market value of the residence is $468,000. Her builder advised her that to rebuild her house today, it would cost $450,000. According to the declarations page of the policy, it is HO-5 insured for $425,000 with a $1,000 deductible. The value of the land is $55,000. Which of the following statements is true regarding a total loss of Carol's house? A) The value of the land deducted from the residence's market value is less than the amount insured ($425,000); therefore, Carol's only out-of-pocket cost will be her deductible. B) She will have an out-of-pocket cost of $44,000 if she has the house rebuilt exactly the way it is today. C) She will have an out-of-pocket cost of $26,000 if she rebuids the house exactly the way it is today. D) Because it is an HO-5 policy, it covers replacement, so she will have no out-of-pocket costs other than her deductible.
Just because a policy is one of replacement, it does not mean it will pay more than the insured amount. In this case, the maximum the company will pay is $425,000. The true statement is that her loss would be $26,000. ($425,000 coverage less $450,000 cost to rebuild, less the $1,000 deductible: $425,000 − $450,000 −$1,000 = −$26,000. The market price and land price are irrelevant. What is important is cost to rebuild minus insured amount.
Zhang has a personal auto policy, and the liability coverage is displayed as 100/300/50. How much property damage liability coverage does Zhang have? A) $300,000 B) $350,000 C) $100,000 D) $50,000
The answer is $50,000. When liability coverage is displayed in the format shown, the first number represents the thousands of dollars of bodily injury liability coverage per person. The second number is the amount in thousands of bodily injury liability coverage per accident. The third number represents the amount in thousands of property damage liability coverage. In this case, Zhang has $100,000 in bodily injury liability coverage per person, $300,000 in bodily injury liability coverage per accident, and $50,000 in property damage coverage per accident.
Dana owns a building that she purchased for $600,000. Its current replacement cost is $1.5 million. The building is covered up to $900,000 for fire-related perils by ZRP Insurance Company, with an 80% coinsurance provision and a $2,000 deductible. Last week, a fire broke out in the building, causing $800,000 in covered damage. What amount will ZRP Insurance Company pay for this loss? A) $598,000 B) $798,000 C) $800,000 D) $478,000
The answer is $598,000. It is computed as follows: amount of insurance required = $1,500,000 × .8 = $1,200,000 percentage of current insurance vs. insurance required = $900,000 ÷ $1,200,000 = .75 (percentage of insurance × loss incurred) − deductible = (.75 × $800,000) − $2,000 = $598,000
Donald has an HO-3 homeowners policy. His policy limit under Coverage E is $300,000. He is entertaining friends at his house one evening for a barbeque. Donald carelessly tries to start the grill with gasoline instead of lighter fluid, and one of his guests is severely burned as a result. The fire also causes $5,000 in damage to the guest's car. The burned guest sues Donald for negligence. The cost of Donald's legal defense is $20,000. At trial, the court orders Donald to pay the guest $60,000 for his medical expenses and $5,000 for the damage to his car. What amount will Coverage E of Donald's HO-3 policy pay as a result of this occurrence? A) $5,000 B) $60,000 C) $85,000 D) $80,000
The answer is $85,000. Coverage E protects the insured against claims arising out of both bodily injury and property damage. This coverage also pays the costs of defending the insured against a covered claim. Donald's policy limit of $300,000 is sufficient to cover the $5,000 in physical damage, the $60,000 in bodily injury, and the $20,000 for Donald's legal defense.
Elise has been working for a national dental firm as a dentist and recently left to start her own practice. Which of the following should she purchase to protect herself from business-related liability risks? Malpractice insurance Errors and omissions insurance A businessowners policy (BOP) A personal liability umbrella policy (PLUP) A) I, II, and III B) II and IV C) I, II, III, and IV D) I and III
The answer is I and III. As a medical professional, Elise would need malpractice insurance rather than errors and omissions insurance. A businessowners policy is also necessary, as she will be a business owner and will have business-related liability risks typical to any other business, such as people falling on the premises. A PLUP specifically excludes business-related liability, as it is a personal policy rather than a business policy. Elise could probably benefit from a PLUP's protection, but it is not for business-related risks as the question asks.
Which of the following statements regarding Coverage E and Coverage F within a standard homeowners insurance policy is CORRECT? Medical payments coverage (Coverage F: Medical Payments to Others) will automatically pay for bodily injuries, regardless of fault, typically up to $1,000 per occurrence on or off the premises. Personal liability coverage (Coverage E: Personal Liability) protects the insured homeowner and all resident family members against personal liability for bodily injury and property damage that may occur on or off the premises due to negligence, up to $300,000 per occurrence. Coverage E may cover the insured for injuries or property damage caused while playing golf.
The answer is I and III. Coverage F is protection that will automatically pay for bodily injuries regardless of fault. In contrast, Coverage E only pays for bodily injury and property damage for which the insured is legally liable. If the insured causes damage to property or others while golfing, Coverage E will cover the insured up to the policy limit of $100,000. Also, Coverage E may cover the insured for injuries or property damage resulting from negligence while on the golf course.
Raul is in the process of purchasing homeowners insurance for his new residence. Which of the following factors may affect Raul's premium? The policy form and coverage provided The location of the property The amount of the deductible The level of fire protection provided by the city or municipality A) I only B) I, II, and III C) II and IV D) I, II, III, and IV
The answer is I, II, III, and IV. All of these are factors used in classifying and pricing a homeowners policy. Other factors include the construction type of the residence and the amount of insurance requested by the applicant.
Which of the following are types of automobile insurance coverage under a personal auto policy (PAP)? Uninsured motorists Liability insurance Medical payments Property damage
The answer is I, II, III, and IV. All of these are types of insurance coverage under a PAP.
Which of the following homeowners coverage amounts are specified as a percentage of the Coverage A amount? Coverage B Coverage C Coverage D Flood insurance rider
The answer is I, II, and III. If a homeowner has flood insurance, it is under a separate policy and not stated as a percentage of Coverage A in the homeowners insurance policy.
Which of the following are true for a businessowners policy (BOP)? A BOP includes property and liability coverage. There are four parts to a BOP. BOPs are a specific, standard package of coverage. BOPs can be customized to a specific business. A) II and IV B) I and III C) I, II, and III D) I, II, and IV
The answer is I, II, and IV. A BOP includes both property and liability coverage and consists of four parts: common policy conditions, property coverage, causes of loss and exclusions, and liability coverage). BOPs are customizable so that the coverage a business needs can be added to the basic framework of the policy.
Which of the following is a common property coverage that can be included in a businessowners policy (BOP)? A) Auto B) Workers' compensation C) General liability D) Employment practices liability
The answer is auto. Auto coverage is a property coverage that can be added to a BOP, while the other answer choices provide liability coverage.
Which of the following statements concerning a personal liability umbrella policy (PLUP) is CORRECT? A PLUP is designed primarily to provide liability coverage for catastrophic legal claims or judgments. A PLUP requires the policyowner to carry certain underlying liability coverages of specified minimum amounts.
The answer is both I and II. A PLUP is structured to provide a layer of liability insurance coverage for catastrophic legal claims or judgments, on top of the individual's homeowners and automobile insurance policies. To be eligible for umbrella coverage, an insurer may require the insured to maintain minimum amounts of underlying liability coverage.
Which of the following statements regarding the basis for policy premiums on a personal automobile policy (PAP) is NOT correct? A) A multicar discount is generally available for insureds who own more than one automobile. B) Young male drivers have the highest rate of automobile accidents. C) An automobile that is driven only for pleasure costs less to insure than one that is driven to work daily. D) Farm-use vehicles generally have higher premiums.
The answer is farm-use vehicles generally have higher premiums. Farm-use vehicles generally have reduced premiums.
Which of the following professionals would likely need errors and omissions insurance? A) Financial planner B) Dentist C) Optician D) Psychiatrist
The answer is financial planner. Of the two professional liability forms available, malpractice insurance is for those professions where personal, physical harm can occur (e.g., doctors, nurses, and chiropractors). Errors and omissions insurance is for those professions where financial harm can occur (e.g., insurance agents, financial advisors, accountants, and attorneys).
Which of the following policies does NOT include liability coverage? A) Inland marine policies B) Automobile policies C) Businessowners policies D) Homeowners policies
The answer is inland marine policies. Auto, home, businessowners policy, and liability umbrella policies all include liability coverage, while an inland marine policy does not. Inland marine policies only provide coverage on the listed property.
Which of the following is a common property coverage that can be included in a businessowners policy (BOP)? A) Professional liability B) General liability C) Inland marine D) Workers' compensation
The answer is inland marine. Inland marine coverage is a property coverage, while the other answer choices provide liability coverage.
Samantha has a homeowners policy. Her dog bites the mailman, and he incurs emergency room expenses of $600. What is the consequence of this event? A) Only medical payments coverage applies, not liability coverage. B) Medical payments coverage is applicable, and liability coverage is applicable if Samantha is held legally liable. C) There is no coverage under this policy because pets are excluded. D) Samantha needed a personal liability umbrella policy for coverage of this type of risk.
The answer is medical payments coverage is applicable, and liability coverage is applicable if Samantha is held legally liable. Section II of a homeowners policy applies regardless of whether the insured is legally liable. Personal liability coverage applies if the insured is legally liable.
Which of the following items are covered without a dollar limit under the personal property provision of a homeowners policy? A) None of these B) Jewelry C) Coin collections D) Furs
The answer is none of these. None of these items are covered without a dollar limit under the standard homeowners policy. To increase this limit to an agreed-upon value, items need to be scheduled or endorsed.
Which of the following types of loss is NOT covered in a standard personal auto policy (PAP)? A) Damage to the vehicle B) Personal property damaged in an auto accident C) Legal liability D) Injury to the insured and her family
The answer is personal property damaged in an auto accident. Damage to personal property in an auto accident is not covered in a standard PAP. This type of loss would normally be covered in a homeowners policy.
Augusto and Celena have an HO-3 homeowners policy on their home. The dwelling is insured for $150,000. As the result of a kitchen fire, their home suffers extensive structural and smoke damage and is made uninhabitable for nine months. They rent a hotel room while the damage is repaired, incurring expenses of $13,500. It also costs them $4,000 for meals during their hotel stay, for a total of $17,500. Which of the following statements regarding the couple's coverage under their HO-3 policy is CORRECT? A) The HO-3 policy covers only the first $15,000 of the $17,500 in expenses. B) The HO-3 policy covers the entire $17,500 in expenses. C) The HO-3 policy does not cover any of their living expenses while their house is uninhabitable. D) The HO-3 policy covers the full $13,500 in rental expenses but does not cover the $4,000 for meals.
The answer is the HO-3 policy covers the entire $17,500 in expenses. Coverage D of a homeowners policy pays living expenses, including lodging costs and meals, incurred when the house is made uninhabitable by a covered peril. Under an HO-3 policy, Coverage D is limited to 20% of the Coverage A limit on the dwelling. In Augusto and Celena's case, coverage under Coverage D is $30,000 ($150,000 × 20%), so their lodging expenses and meals are fully covered.
Which of the following is the main reason there are only a few insurance companies that provide coverage for very high-value homes? A) Most owners of very high-value homes self-insure. B) Most insurance companies couldn't afford the loss of a very high-value home. C) Insuring high-value homes could be catastrophic to an insurance company. D) The law of large numbers is necessary to make losses reasonably predictable, and there aren't that many homes of very high value.
The answer is the law of large numbers in necessary to make losses reasonably predictable, and there aren't that many homes of very high value. The problem with very high-value homes is that there are not enough homogenous units for the law of large numbers to apply well enough to gain predictability. Fewer homes means fewer homogeneous exposure units over which to spread the risk, and this means that there are fewer insurers willing to consider providing coverage on very high-value properties. Given that a typical insurance company insures a vast number of homes, losses on a few high-value homes wouldn't become catastrophic to the company.
Which of the following is a common property coverage that can be included in a commercial package policy? A) Employer's liability B) Commercial liability C) Theft by customers D) Workers' compensation
The answer is theft by customers. Coverage for theft by customers is a property coverage, while the other answer choices provide liability coverage.
Which of the following forms insures the dwelling and other structures on an open-perils basis? A) HO-3 B) HO-2 C) HO-4 D) HO-1
The answer is under HO-3. All direct physical losses are covered, unless specifically excluded.
Which homeowners policy covers the tenant's personal property against loss or damage and also provides personal liability insurance? A) HO-4 B) HO-3 C) HO-2 D) HO-6
The answer is under HO-4: Contents Broad Form (for Tenants or Renters). Personal property is covered under the same named perils that are listed in the HO-2 policy. Up to 10% of the insurance on personal property can be applied to cover any additions or alterations to the building made by the insured.
