Property Basics Practice Questions

All of the following are duties of an insured after a loss, except : a. Determining the valuation method the insurer will use to pay the loss b. Forwarding any demands to the insurance company c. Giving prompt notice to the insurer d. Protecting property from further damage

A. Determining the valuation method the insurer will use to pay the loss Explanation The valuation method the insurer will use is set forth in the policy and is determined by the policy form selected at the time the insurance was purchased.

In an insurance policy, perils not insured against are found : a. In the exclusions b. In the Insuring Agreement c. In the Claim Settlement provision d. In the Declarations

A. In the Exclusions Explanation The Exclusions section of all insurance policies contains a list of the perils that are not covered by the policy, hence, excluded from coverage.

In property insurance, the practice that damaged property, which has been paid for by the insurance company, belongs to the insurer is known as : a. Salvage b. Surplus property c. Residual property d. Indemnity

A. Salvage Explanation The Property insurance policies give the insurer the option to take all or any part of the property at an agreed or appraised value.

Actual cash value may be defined as : a. The cost to replace or repair property, minus depreciation b. The original purchase price of property, minus depreciation c. The cost to replace or repair the property d. The agreed upon specific value determined before the policy was issued

A. The cost to replace or repair property, minus depreciation Explanation Actual cash value is the cost to repair or replace (replacement cost), minus depreciation.

Which of the following is the most correct regarding pro rata cancellation? a. The insured will receive back the entire unearned premium without any penalty b. The premium is fully earned by the insurance company c. The insured will receive back 90% of the unearned premium d. The insured will receive back 75% of the unearned premium

A. The insured will receive back the entire unearned premium without any penalty Explanation In pro rata cancellations, the premium refund is directly proportional to the unused portion of the policy term. Any unearned premium is refunded to the insured.

Which of the following best defines short rate cancellation? a. The insured will receive less than the full amount of the unearned premium b. The premium is fully earned by the insurance company c. The insured will receive none of the unearned premium d. The insured will receive exactly half of the unearned premium

A. The insured will receive less than the full amount of the unearned premium. Explanation With short rate cancellation, the premium refund is based upon a short rate table in which the insurer retains a portion of the unearned premium.

All of the following are included in the Declarations of a Property Policy, except : a. The perils not insured against b. The policy terms c. The premium amount d. The coverage amount

A. The perils not insured against Explanation The perils not insured against would be itemized in the Exclusions.

When a building has physical contents but no occupants, the building is said to be : a. Unoccupied b. Vacant c. Suspended d. Uninhabited

A. Unoccupied Explanation A vacant building is a building that contains neither contents nor occupants. An unoccupied building is a building that contains furnishings or equipment, but has no occupants.

Property insurance policies that apply coverage only to perils that are stated in the policy, are considered to be written on : a. An actual cash value basis b. A named peril basis c. An open perils basis d. A replacement cost basis

B. A named peril basis Explanation A named perils form stipulates the perils that are insured against. A broader approach is provided by an open perils form, which insures against all perils, except those specifically excluded under the policy.

When the insured and the insurer fail to agree on the amount to be paid for a property loss, the dispute resolution method is called a(n) : a. Approximate Clause b. Appraisal c. Agreement Clause d. Abandonment

B. Appraisal Explanation An appraisal is the procedure to be followed if the insured and insurer disagree on the amount of loss.

When the insurer and the insured cannot agree on the value of the property or the amount of a loss, which clause establishes the procedure to use? a. Definitions clause b. Appraisal clause c. Loss Payable clause d. Claim settlement clause

B. Appraisal Clause Explanation The Appraisal Clause of the insurance policy provides a method of settling disputes between the insurer and the insured as an alternative to legal action.

Which of the following is used to resolve differences between the insured and the insurer? a. Non-renewal b. Arbitration c. Subrogation d. Liberalization

B. Arbitration Explanation The arbitration provision of the insurance policy provides a method of settling disputes between the insurer and the insured as an alternative to legal action.

When a loss occurs as a result of two causes of loss, where one cause of loss is excluded and the other cause of loss is included, the situation is known as : a. Included Causation b. Concurrent Causation c. Proximate Causation d. Bilateral Causation

B. Concurrent Causation Explanation Concurrent Causation is the legal doctrine that states that when a property loss is due to two causes, one that is excluded and one that is covered, the loss is covered.

Which statement is false? a. A direct loss results specifically from a peril insured against b. Direct loss includes lost rent or business income c. An indirect loss is the same as an consequential loss d. Water damage caused by firefighters is considered a direct loss

B. Direct loss includes loss rent or business income Explanation Lost rent or business income is an indirect loss, not a direct loss.

Which of the following statements is true? a. A peril is defined as a hazardous situation b. Fire damage to an insured residence is considered a direct loss c. It is the responsibility of the insurer to maintain the required coinsurance amount d. Coinsurance applies only in the event of a total loss

B. Fire damage to an insured residence is considered a direct loss Explanation A direct loss is one that is proximately caused by a peril. A fire loss, including any resulting smoke damage, or water damage incurred by the fire department in extinguishing the fire would all be considered a direct loss.

In addition to the named insured in a property policy, coverage is automatically provided for: a. Persons who appraise the property b. Persons who are legal representatives of the insured c. The insured's employer d. Persons who purchase the insured's property

B. Persons who are legal representatives of the insured Explanation The legal representative of the insured is also an insured under the policy.

Which of the following best describes the concealment and fraud condition in a property insurance policy? a. Making a false statement accidentally does not constitute fraud b. The policy will be voided if there is material concealment, misrepresentation, or fraud on the insured's part c. The company will not grant any coverage that benefits a bailee d. The insured must cooperate with the company in the investigation of a claim

B. The policy will be voided if there is material concealment, misrepresentation, or fraud on the insured's part Explanation The Concealment or Fraud Condition voids coverage in specified instances of concealment, making false statements, misrepresentation, and fraudulent conduct.

Under Binders, all of the following are incorrect, except : a. A binder does not name the company providing coverage b. The premium amount would not be stated c. A binder always expires 15 days after its inception date d. A binder will not end when the policy is issued

B. The premium amount would not be stated Explanation A Binder is a legal agreement that serves to effect insurance coverage temporarily until the actual insurance policy can be issued. It contains only the essential coverage information except premium. The premium will be determined after underwriting.

All of the following concerning exclusions are true, except : a. They describe situations that are not covered under the policy b. They are found in the Insuring Agreement c. They describe property not covered d. They restrict the Insuring Agreement

B. They are found in the Insuring Agreement Explanation The Exclusions may restrict the Insuring Agreement, but are found under its own heading in the policy structure.

Which of the following best describes the situation when a property has neither contents nor occupants? a. Unoccupancy b. Vacancy c. Abandonment d. Ordinance or Law

B. Vacancy Explanation A vacant building is empty of both contents and occupants. In contrast, an unoccupied building contains physical contents, but has no residents or ongoing business occupants.

The Additional/Supplement Coverages part of a property insurance policy provides : a. The insured to request coverage to supplement the deductible b. The company to voluntarily waive the deductible c. Coverage that is beyond, and supplements, the Coverages set forth as basic Coverages d. The insured to request that extra coverage be provided by endorsement

C. Coverage that is beyond, the supplements, the Coverages set forth as basic Coverages Explanation The Additional and Supplementary coverages are coverages for incidental expenses that often accompany the losses insured against.

Which of the following may broaden the coverage found in an insurance policy? a. Declarations b. Conditions c. Endorsements d. Insuring Agreement

C. Endorsements Explanation Endorsements may be used to broaden, as well as restrict coverage set forth in the original policy.

The Subrogation Clause found in many policies: a. Specifies exactly how much coverage is provided by the policy b. Provides a means for settling disputes between the company and policyholder c. Helps prevent insured from collecting twice for the same loss d. Spells out conditions that must be complied before a loss may be settled

C. Helps prevent insured from collecting twice for the same loss Explanation Subrogation is the transfer of the insured's right to collect from an at fault third party. It prevents the insured from collecting twice -- once from the at-fault party, and again from one's own insurance company.

The insuring agreement of a policy describes : a. The duties of the insured in the events of a loss b. Transfer of the rights of recovery c. Perils that are covered d. Perils that are not covered

C. Perils that are covered Explanation The Insuring Agreement includes the perils insured against. The duties of the insured and the transfer of recovery rights (subrogation) would be included in the policy's conditions. Excluded perils would be listed in the Exclusions section.

Actual Cash Value in property insurance is best defined as which of the following? a. Market Value b. Property replacement cost c. Replacement cost at the time of loss, minus depreciation d. Appraised value

C. Replacement cost at the time of loss, minus depreciation Explanation Actual Cash Value valuation provides that the policy will pay the cost to repair or replace the damaged property at the time of loss, less a depreciation factor based upon the age of the property.

When a car dealer has an auto inventory that fluctuates from month to month, the car dealer should report the inventory on which of the following basis? a. Garagekeepers form b. Inventory form c. Reporting form d. Stated Value form

C. Reporting Form Explanation A reporting form is a form that provides for monthly or quarterly reporting of the values to be insured. The premium charged is based upon the values reported.

Which of the following best describes a hostile fire? a. A fireplace fire whose heat can be felt through the glass fireplace door b. The fire in the firebox of a furnace c. A fire in a trashcan being used to burn leaves d. A fire caused by a spark escaping from a fireplace and igniting a carpet

D. A fire caused by a spark escaping from a fireplace and igniting a carpet Explanation Fire insurance is intended to insure against hostile fires. A friendly fire, confined to its proper place, is not insured against by a fire insurance policy.

In property insurance, the clause that prevents the insured from relinquishing ownership and leaving damaged property to the insurer and claiming a total loss, is the: a. Loss Payable clause b. Claim Settlement clause c. Property Assignment clause d. Abandonment of Property clause

D. Abandonment of Property Clause Explanation The Abandonment clause simply makes clear that the company will not accept property abandoned by an insured when there is a claim dispute.

In Property and Casualty Insurance, when a form is attached to alter or add to policy provisions or conditions, it is known as : a. A consideration b. A warranty c. An exclusion d. An endorsement

D. An endorsement Explanation Endorsements are used to modify a policy. They may be used to broaden or restrict coverage, or further define conditions.

When the insured and the insurer fail to agree on the amount to be paid for a property loss, the dispute resolution method is called a(n) ; a. Abandonment b. Approximate Clause c. Agreement Clause d. Appraisal

D. Appraisal Explanation An appraisal is the procedure to be followed if the insured and insurer disagree on the amount of loss.

Which of the following methods of writing insurance is used to provide insurance on properties at different locations, using one policy, and a single limit of insurance? a. Unified b. Scheduled c. Listed d. Blanket

D. Blanket Explanation Blanket insurance covers more than one item of property on one policy for a single amount of insurance, which applies to each item as needed. The amount of insurance must equal at least 90% of the value of all items insured.

A direct loss is best described as : a. A proximate cause b. Loss of rents from a dwelling made uninhabitable because of fire c. Specific Coverage d. Bursting of a water pipe that causes water damage

D. Bursting of a water pipe that causes water damage Explanation The direct loss to the property is the damage to the property caused by an insured peril.

When a property is written with a replacement cost policy this means that losses will be paid : a. For an amount previously agreed upon by the insured and insurer b. For replacement with less costly property that is functionally equivalent c. For market value of the damaged property d. For full replacement cost, without any deduction for depreciation

D. For full replacement cost, without any deduction for depreciation Explanation For many years, damaged property was paid at its depreciated value (Principal of Indemnity). In recent years, insurance forms have been developed that pay replacement cost for many classes of property (new for old).

Which of the following describes actual cash value? a. Original cost less depreciation b. An agreed upon policy limit c. Original cost with no deduction for depreciation d. Replacement cost less depreciation

D. Replacement cost less depreciation Explanation Actual Cash Value is defined as replacement cost minus depreciation.

All of the following statements about binders are true, except : a. A binder specifies the premium amount b. A binder specifies the perils covered c. A binder specifies the insurer providing the coverage d. A binder specifies the effective date of coverage and amount of coverage

A. A binder specifies the premium amount Explanation A binder does not specify the premium amount. The Declarations of an actual policy would include the premium.

Which statement is correct? a. A spark that jumps from a fireplace and ignites a nearby rug would be deemed a hostile fire b. Most property policies include inherent vice as a covered peril c. Loss of profits resulting from a fire is a direct loss d. Blanket coverage is commonly written when insuring property at a single location

A. A spark that jumps from a fireplace and ignites a nearby rug would be deemed a hostile fire Explanation A hostile fire is one that leaves the area in which it was intended to be kept.

All of the following are insured's duties after a loss under a property policy, except: a. Abandoning the property to the insurer b. Giving notice of loss as soon as possible c. Submitting to examination by insurer d. Furnishing inventory of damaged property

A. Abandoning the property to the insurer Explanation The insured may not abandon property to the insurer.

Which section of an insurance policy lists the rules and procedures to be followed? a. Conditions b. Exclusions c. Insuring agreement d. Declarations

A. Conditions Explanation The rules and procedures to be followed by the insurer and insured throughout the policy period are found in the Conditions.

The part of an insurance policy that states where the risk is located is the : a. Declarations b. The Insuring Agreement c. The Definitions d. The Conditions

A. Declarations Explanation The function of the Declarations is to apply the common policy to a specific insured and property. The risk location, therefore, is found in the Declarations.

Under coinsurance, all of the following are true, except : a. The value of the property at the time the policy was written determines the amount of insurance required at the time of loss b. Coinsurance results in a reduced rate c. If the specified percentage of insurance is not carried, the insured will share in the loss d. There is no penalty when the insured suffers a total loss

A. The value of the property at the time the policy was written determines the amount of insurance required at the time of loss Explanation The coinsurance clause stipulates that the value of the property at the time of loss determines the amount of insurance required at the time of loss.

The Insuring Agreement in an insurance policy is best described as : a. The additional coverages provided by the policy b. It determines the coverage that is provided c. A description of the property being insured d. The name and address of the insured and the name of the insurer

B. It determines the coverage that is provided Explanation The insuring agreement is the company's commitment of protection to the insured.

Which part of a Property Policy is in the insuring agreement? a. The name of the insured b. List of the named perils c. The amount of coverage d. Specified term of the policy

B. List of the named perils Explanation The perils covered in a property policy are always stated or referred to in the Insuring Agreement.

All of the following are methods of loss valuation, except : a. Actual cash value b. Stated amount c. Blanket value d. Replacement cost

C. Blanket value Explanation There is no valuation basis called blanket value. A blanket limit is a method of writing insurance limits.

The termination of an insurance policy, by either the insured or the insurer before the expiration date, is known as : a. Abandonment b. Subrogation c. Cancellation d. Nonrenewal

C. Cancellation Explanation Either party to the contract may cancel insurance policies before the expiration of the policy if the cancellation notice requirements are met.

All of the following are methods of writing property insurance limits, except : a. Specific coverage b. Scheduled coverage c. Concurrent coverage d. Blanket coverage

C. Concurrent Coverage Explanation Specific, Scheduled and Blanket are all methods of writing property insurance limits. Concurrent coverage applies to separate policies covering a risk, such as a primary policy and an umbrella policy. It does not indicate a type of insurance limit.

Kevin owns several buildings at several locations. He has them insured each on a separate policy and with separate amounts. Kevin has them insured on which of the following methods of writing insurance? a. Agreed Value b. Blanket c. Scheduled d. Specific

D. Specific Explanation Providing Specific insurance means providing a separate policy on each property. Scheduled and Blanket insurance covers more than one property per policy.

Which of the following is a property insurance provision that serves to prevent the insured from collecting twice for the same loss? a. Scheduled coverage b. Indirect loss c. Agreed value d. Subrogation

D. Subrogation Explanation Subrogation comes into play when a negligent third party is the cause of the loss. Since the insurance company has paid the loss, it receives the insured's right of recovery from the third party.

In property insurance, which of the following most accurately describes the abandonment condition? a. The insured must cooperate with the company in the investigation of a claim b. The insured must make reasonable and necessary repairs to protect the property c. The property must be protected from further damage d. The insured cannot abandon damaged property to the insurer

D. The insured cannot abandon damaged property to the insurer Explanation The Abandonment clause simply makes clear that the company will not accept property abandoned by an insured when there is a claim dispute.