Risk Management, Insurance Planning, and Employee Benefits

Coverage F

medical payments to others, claim expenses, and damage to property of others

tort

the act of causing physical, emotional, or financial harm to another. Torts may be intentional or unintentional and are of a civil, versus criminal, nature

Actual Cash Value (ACV)

Cost to replace property with new property of like kind and quality less depreciation.

Personal Contract

An agreement between an insurance company and an individual that states that insurance policies cover the individual's insurable interest.

Appraisal

An appraisal is necessary to avoid litigation when the insured and insurer cannot agree on the ACV or amount of the loss.

Waiver

An intentional, knowing relinquishment of a legal right. Example: an insurance company that recieves an application that does not meet the underwriting requirements but issues a policy anyway is barred from denying claims

Utmost Good Faith

An obligation to act in complete honesty and to disclose all relevant facts.

Comprehensive coverage pays for damages to the insured's automobile from all of these perils EXCEPT A. hail. B. collision with a tree. C. collision with a deer. D. damage from a falling tree.

B Collision with a tree (or any stationary object) would be covered by collision coverage under a PAP.

Edward recently built a house with a replacement cost of $200,000 and an actual cash value (ACV) of $150,000. He purchased insurance on the house providing Coverage A protection of $150,000. The roof of Edward's house has been damaged by fire. The determination has been made that the roof was 25% depreciated and that the cost for full replacement will be $20,000. What amount will the insurance company pay for the loss? A. $18,750 B. $18,750 less the deductible C. $20,000 D. $20,000 less the deductible

B. George did not carry insurance equal to at least 80% of the replacement cost of the dwelling. Specifically, the applicable computation is: $150,000/ (0.80 × $200,000) = $150,000/$160,000=0.9.75 $20,000x.9375= $18,750 less the deductible

Motor Vehicles

Because registered motor vehicles require their own liability coverage, liability arising out of the use of an automobile is excluded from CPL policies.

Aircraft

Damages inflicted through the ownership, maintenance, or use of an aircraft are also excluded from coverage under CPL policies. This exclusion extends to ultralight aircraft and hang gliders as well.

Demotech

Demotech provides financial stability ratings for property and casualty companies and title insurers, and has been doing so since 1985. Information on the insurers includes assets, policyholder surplus, and premiums written by year. Reports also include states in which the insurer is licensed. Ratings are available at www .demotech.com

Employer's Liability Insurance

Employer's liability insurance may be needed to protect an employer against suits filed by employees. If an employer is a manufacturer of a product that harms an employee and it can be shown that the employer/manufacturer was negligent in producing the product, the employee can bring a suit against the "manufacturer" of the product. The purpose of employer's liability insurance is to provide protection from these suits.

Fitch Ratings

Fitch Ratings' Insurance Group (formerly Duff and Phelps) provides ratings on over 800 insurance entities, along with fixed income security ratings. Fitch provides ratings via their website at www .fitchratings.com.

EXAMPLE: Who is an insured?

If Tim borrows Mark's car (Mark is a coworker) to run an errand for his employer and injures someone, the employer is also covered for any claims or lawsuits. However, if Tim is driving a company car to run the errand, the employer is not covered under Mark's PAP

EXAMPLE: Who is an insured?

If Tim drives his own car on an errand for his employer and injures someone, the employer is covered for any resulting claim or lawsuit against Tim.

Actual Cash Value (ACV)

Is the replacement cost minus depreciation

Liability versus Fault

It is important to remember that liability and fault are not synonymous. Liability can exist in the absence of fault (e.g., absolute liability), and clients need to be aware of this potential risk exposure

Last Clear Chance

Last clear chance is a modification of contributory negligence. Here, contributory negligence on the part of the injured party will not bar recovery if the other party, immediately prior to the accident, had a last clear chance to prevent the accident but failed to seize the chance.

Professional liability

Liability that may be incurred by a professional such as a CFP® certificant, insurance agent, lawyer, or physician is excluded and must be covered by a professional liability policy.

Home has 3 distinct values

Market Value Assessed Value Replacement Cost Value

Three Factors for Life Insurance Policy Premiums

Mortality rates, investment income, and expenses.

Flood Insurance

Residential flood insurance provides coverage for physical loss from a flood. While some private companies offer flood insurance, the predominant provider is the federal government through the National Flood Insurance Program (NFIP). If the property is located in a nonpreferred flood zone, the mortgage company will usually require the homeowner to purchase flood insurance. While a home located in a preferred flood zone is not required to purchase flood insurance, it is available at much more reasonable rates and should be considered.

Age and Gender of Driver

Single drivers under the age of 25 are grouped in the highest risk category. Individuals ages 25-75 are lower risk, however once individuals reach age 75, some companies rate them as higher risks as well. Females are considered lower risk drivers than males especially when single.

Insurance Designations Example

Some key insurance industry-specific designations are CPCU (Chartered Property and Casualty Underwriter), CLU (Chartered Life Underwriter), and LUTCF (Life Underwriter Training Council Fellow)

All of the following perils are excluded from coverage under most homeowners policies except A) earthquake. B) power failure. C) flood. D) volcanic eruption.

The answer is volcanic eruption. Losses from earthquakes, floods, and power failure are excluded from coverage in most homeowners insurance policies. Volcanic eruption is one of the 12 perils covered under basic coverage.

There was proximate cause

Which is an uninterrupted sequence of events that brought about the damage. - Example: The individual was texting, didn't see the other driver, and rear-ended him.

Conditional Contract

a contract that becomes enforceable only on the happening or termination of a specified condition

Open-Perils HO Coverage

is increased protection designed to protect against all perils except those specifically excluded from coverage. It is the most comprehensive type of protection for any homeowner to purchase, although (understandably) it's the most expensive. The most popular types of homeowners policies, the HO-3 and HO-5, have open-perils coverage either in full or in part.

Construction

materials, age, upkeep—is important in determining the cost of a homeowners policy.

Attractive nuisance

refers to something about a property (e.g., a swimming pool) that is likely to attract and possibly injure children. Property owners must use a high degree of care to discover others on their properties. They must also take steps to prevent harm, such as installing fences and locks.

tortfeasor

the person who commits physical, emotional, or financial harm to another

Hazard

this increases the likelihood of the loss occuring

Aleatory Contract

values exchanged may not be equal but depend on an uncertain event

Homeowners Policy most common question

"How much coverage should I have?" Careful analysis of the home's valuation will guide financial planners toward a reasonable solution.

HO-2

(broad form - named perils): covers the dwelling, other structures, and personal property on a named perils basis

TheStreet.com Ratings

(formerly Weiss Research). TheStreet publishes what it calls "safety ratings." All of the data TheStreet uses is public information. No meetings with company officers are held. TheStreet is the only rating service that does not charge companies for any of its ratings. TheStreet provides some of their ratings on their website at www .thestreet.com.

Look at Insurance Ratings for Companies

- A.M. Best - Demotech - Fitch Ratings - Moody's - Standard & Poor's - TheStreet.com Ratings

Homeowners (HO) Types of Coverage

- Basic Coverage - Broad Coverage - Open-Perils Coverage

Factors in Selecting and Insurance Agent

- Competence - Inclination to service - Experience - Training - Education - Specialization - Reputation

Policy Sections - Section I (4 areas of coverage)

- Coverage A - Coverage B - Coverage C - Coverage D These sections (I & II) are identical in all standard ISO homeowners forms; only amounts and perils insured against will vary from policy to policy.

Policy Sections - Section II (2 areas of coverage)

- Coverage E - Coverage F

HO Perils excluded from most HO Policies

- Earthquakes - Floods - Neglect - War or nuclear hazards - Power failure - Intentional loss (such as the insured deliberately burning down the house)

Broad HO Coverage 12 + 6 perils

- Falling Objects - The weight of ice, snow, or sleet - Accidental discharge or overflow of water or a steam - Sudden and accidental tearing apart, cracking. burning, or bulging of a steam hot water, air-conditioning, or automatic fire sprinkler system or of a household appliance - Sudden and accidental damage from an artificially generated electrical current

Basic HO Coverage Protects 12 perils to the Home

- Fire - Lightning - Windstorm - Hail - Riot or civil commotion - Aircraft - Vehicles - Smoke - Vandalism or malicious mischief - Explosion - Theft - Volcanic Eruption

Adjuster's Duties

- Investigation: During the investigation, all relevant information is evaluated. - Proof of loss: This may require helping the insured complete the necessary forms. - Payment or denial of the claim: Based on the adjuster's findings, the claim may be paid (in whole or in part) or denied.

Criteria Used to Select an Insurer

- Look at Ratings - What types of policies are available? Polic forms? Participating versus nonparticipating? - Is it their primary business or do they do it on the side? - Cost considerations - Financial ratioes (NAIC monitoring?)

Insurance Company Forms of Ownership

- Mutual Companies - Stock Companies

Insured's Duties

- Notice of loss - Protect property - Cooperate with insurer

Insured's Duty (Seven Provision)

- Notice of loss - Protection of property - Inventory - Evidence - Proof of loss - Assistance and cooperation - Appraisal

Insurer's options for settling claim

- Replacement - Abandonment & Salvage - Pair or Set

HO 15 Rider

- when added to the ho-3 form, provides open peril coverage for personal property -the rider eliminates the earth movement from exclusion from personal property that us located away from the premises and involved in earth movement. This essentially makes a HO-3 into a HO-5 (pretty much open peril policies)

Four Elements of Negligence

1. A Duty is owed 2. The Duty was breached 3. There were actual damages 4. There was a proximate cause, which is an uninterrupted sequence of events that brought about the damage

General HO Exclusions

8 General Exclusions to the property insuring agreement - Ordinance or law - Earth Movement - Water damage from outside the house - Power failure - Neglect - War - Nuclear hazard - Intentional loss

There were actual damages

Example: The other car had broken taillights and a crushed bumper.

Which item is always covered by a personal liability umbrella policy (PLUP)? A. General liability B. Business liability C. Watercraft liability D. Aircraft liability

A The policy may or may not cover watercraft or aircraft liability, but it never covers business liability (a separate commercial liability policy is required).

Commercial Liability Insurance

A basic commercial general liability (CGL) policy has more similarity to one another than other business insurance policies, but most packages sold are unique to the specific business operation. These policies generally protect against nonautomobile liability that does not involve injuries to employees (although coverage can be added that applies to automobile and/or employee liabilities). Most carriers include crime coverage with their standard package, and some automatically include surety coverage. There are certain forms of commercial liability insurance that may be of significance to your clients.

morale hazard

A condition of carelessness or indifference that increases the frequency or severity of loss.

Which of the following definitions of a term used in insurance contract law is CORRECT? A) Personal: the dollars that exchange hands are of unequal amounts. B) Indemnity: the insurance company pays on the condition of a loss. C) Adhesion: if you wrote the contract, you are bound by any ambiguities you created. D) Aleatory: only one party can enforce the contract.

A contract of adhesion maintains that, if you wrote the contract, you are bound by any ambiguities you created.

Adverse Selection

A high-risk person benefits more from insurance, so is more likely to purchase it.

Collateral Source Rule

A legal doctrine that provides that the damages owed to a victim should not be reduced because the victim is entitled to recover money from other sources, such as an insurance policy.

moral hazard

A moral hazard is a result of a client being unethical or misrepresenting himself in order to obtain insurance or to induce the payment of a claim.

Which of the following statements best describes a morale hazard? A) An unintentional tort in the form of an action or omission that leads to the injury of another party B) An act or condition that increases the likelihood of the occurrence of a peril and/or increases the severity of a loss if a peril does occur C) A false and material statement made by an applicant for insurance, providing a basis for the insurer to void the contract D) A condition of carelessness or indifference on the part of an individual as to whether a loss occurs and/or the size of a loss if one does occur

A morale hazard is a condition of carelessness or indifference as to whether a loss occurs and/or the size of a loss if one does occur. A homeowner's failure to lock the house doors at night is considered a morale hazard because it increases the probability of theft or loss.

Auto Endorsements

A number of endorsements (typically coverage additions or deletions) to the PAP are available that allow a client to have coverage tailored to his needs. - Extended liability coverage is available for various automobiles that would normally be excluded. - A named nonowner policy endorsement provides insurance for an individual who does not own a car, but who may borrow one. This provides protection when the owner of the borrowed car may not have any insurance, or may not have adequate insurance. - A miscellaneous-type vehicle endorsement extends coverage to motorcycles, motor scooters, and recreational vehicles such as all-terrain vehicles, minibikes, and go-carts, among others. This endorsement modifies the covered auto and covered persons definitions found in the policy. - A separate motor home endorsement and a snowmobile endorsement is available when the miscellaneous-type vehicle endorsement is used. - Because the PAP is an actual cash value policy and some vehicles would not have adequate coverage under the ACV method, there is a special endorsement for antique and classic automobiles. This is essentially an endorsement for a maximum specified value. Taking into consideration the condition and depreciation of the vehicle, the policy provides for payment of the lesser of, the stated amount, the ACV, or the cost of repair or replacement.

Cost of Auto Insurance

A number of factors are used to determine the cost of automobile insurance. Some of the factors relate to the owner/driver of the vehicle being insured; the others have to do with location of the vehicle, the vehicle itself, and deductibles. The five primary owner/driver factors are as follows: Age and gender of the driver Use of the vehicle Type of vehicle The driver's record Credit

Unilateral Contract

A one-sided contract wherein one party makes a promise so as to induce a second party to do something. The second party is not legally bound to perform; however, if the second party does comply, the first party is obligated to keep the promise.

Claim Settlement: Pair or Set

A pair or set option gives the insurer the right to repair or replace any part, to restore a pair (e.g., of earrings) or set (e.g., of silverware) to its value before the loss, or to pay the difference between the ACV of the property before and after the loss. For example, this clause stipulates that a loss of one earring is not a total loss of the set. The insurer, in this case, does not have to replace both earrings, but it will try to reach an equitable settlement with the insured. If the insured has a personal property endorsement or floater policy (covered in a later module), the insurer normally will be required to pay the previously appraised and insured value of the pair of earrings. In this case, the insurer is not able to use the pair or set option.

Competence and Inclination to Service

A planner will find that, most often, the quality of an agent has more to do with how inclined she is to service than any other factor.

Protection of Property

A provision (i.e., a policy condition) that requires the insured to protect the damaged property after a loss.

Adhesion Contract

A take-it-or-leave-it offer made by a party who holds most of the power in a bargaining session

Once you have developed a risk management plan for the client, what is the next step in the risk management process? A) Communicate the recommendations. B) Gather pertinent data to determine risk exposure. C) Identify risk management goals. D) Monitor the plan for any changes and/or updates.

A. Communicate the recommendations. The steps in the risk management process are to: 1) identify and establish risk management goals, 2) gather pertinent data to determine risk exposures, 3) analyze and evaluate the information to identify risk exposures , 4) develop a risk management plan, 5) communicate the recommendations, 6) implement the recommendations, and 7) monitor the recommendations for needed changes.

Which of the following terms is correctly described? A. Moral hazard: unethical practices designed to induce the payment of a claim. B. Morale hazard: lack of confidence that a potential loss is adequately covered. C. Adverse selection: a standard underwriting approach so those that most need insurance can receive it. D. Underwriting process: the process of ensuring claims are settled equitably.

A. Moral hazard: unethical practices designed to induce the payment of a claim.

What is the stated amount of money the insured is required to pay on a loss before the insurer will make any payments under the policy? A) The deductible B) The exclusion C) The rider D) The endorsement

A. The deductible. A deductible is the amount of money an insured is required to pay on a loss before the insurer will make any payments under the policy. Deductibles help eliminate small claims, reduce premiums, and decrease morale hazards. Deductibles are used mainly in property, health, and automobile insurance contracts. Disability policies use an elimination period, which is a waiting period—measured in days—that must be satisfied before benefits become payable. This elimination period essentially acts as a time deductible.

Claim Settlement: Abandonment & Salvage

Abandonment involves surrendering ownership of damaged property to the insurance company so that a total loss can be claimed. Salvage takes place when the insurer takes ownership of the property and sells it to reduce its loss. Generally, abandonment and salvage rights are found in insurance contracts. An insured, however, does not have the right to choose to abandon property to an insurer in order to claim a total loss. The insured does have the right to keep the damaged property and accept a lower payment from the insurer (i.e., the insured "buys back" the damaged item at its salvage value).

Additional HO Exclusions

Additionally, some—or all—states may exclude coverage for certain perils. One common exclusion is for mold, which is seldom covered. As another example, several Gulf Coast states limit coverage for wind-related damage. It's always a good idea to check specific coverage inclusions and exclusions for a particular state.

Ordinance or law

After a home is built, building codes continually change. When a partial loss is incurred and the room is being rebuilt, it will need to be brought up to the current code. The cost of bringing the room up to code is considered "betterment" and is not covered by the standard insurance policy. With the ordinance or law endorsement, the additional expenses would be covered up to the limit listed in the declarations page.

Watercraft

CPL policies also exclude most watercraft from coverage. Certain small watercraft rented to the insured will be covered. Negligent entrustment is also excluded.

EXAMPLE: Liability coverages

Alex decided to have a backyard party, which included a camp fire for his guests to roast marshmallows. The wind picks up and blows the flames from the camp fire onto his neighbor's house causing several thousand dollars in damages. This would be an additional occurrence and Alex would be protected from his negligent act up to the liability limits of his homeowner's insurance policy.

Ken owns a hardware store that fills customers' propane tanks. You are Ken's insurance agent and are explaining insurance terms to Ken. Which of the following statements is CORRECT? Fire is a peril. Leaving oily rags in a hardware store's repair shop area is a hazard. The handling of propane is a hazard. A pure risk is one that involves only the chance of loss or no loss; in other words, there is no chance of gain. A) II only B) I only C) I, II, III, and IV D) I, II, and III

All of these statements are correct.

Business pursiuts

Although business pursuits generally are excluded from personal liability policies, certain persons can obtain a Business Pursuits Endorsement.

Coinsurance Penalty Formula (partial loss formula)

Amount of Insurance / Amount of insurance required times loss minus deductible. In most cases, the coinsurance penalty formula will provide a greater benefit than ACV. If the loss exceeds the amount of insurance, even if the amount of insurance is more than 80% of the replacement cost, the insurance company will not pay more than the amount of the insurance. An important factor to consider is that the replacement value is determined at the time of loss, not at the time the policy was purchased. This is one of the many reasons it is important to have clients regularly review their insurance coverages with their insurance agents. They should proactively monitor the replacement cost value of a given property and recommend coverage at 100% of the replacement cost value.

Vehicle Use

An automobile that is driven for pleasure only costs less to insure than one that is driven to work daily. Low annual mileage also allows for lower premiums. Farm use generally reduces the premium. The geographical location of the car/driver also has a significant impact on premiums (e.g., urban or rural, large city or small).

Which of the following is an example of a moral hazard? A) A person falls and breaks her hip. B) A car is damaged by a hailstorm. C) A homeowner carelessly burns leaves on a windy day, resulting in fire damage to his house. D) A driver slams on his brakes for no reason other than to cause the driver behind him to rear-end his car.

An example of a moral hazard is a driver slamming on his brakes for no reason other than to cause the driver behind him to rear-end his car. A moral hazard occurs when dishonesty causes a loss or causes the amount of the loss to be overstated on a claim.

Communicable disease

CPL policies generally exclude coverage for damages claimed because the insured infected someone with a communicable disease.

Minor (Voidable)

An insurance company can issue insurance to a minor, however, the minor can void but the insurer cannot void the contract

Inventory

An itemized report that must contain the quantity, a description, either the actual cash value (ACV) or replacement cost, and the amount of loss of the damaged property. ACV is the replacement cost of property less depreciation.

Exclusions from Liability Coverage

As discussed previously, insurance companies will not indemnify an insured for the costs of intentionally inflicting bodily injury or physical damage. Vehicles used for business such as a livery (e.g., delivery service/taxi/Uber or Lyft) are not covered under the PAP; business automobile coverage is required for this. There is no coverage for losses that are more appropriately covered under different sections of the policy or other forms of insurance. - You cannot be liable to yourself. - Property of the insured is not covered by the liability covered under an auto policy. - Nonpermissive users.

Underwriting Results

Can be issued as applied for, declined, or issued with modifications.

Once you have implemented the recommendations for managing risk for the client, what is the next step in the risk management process? A) Develop a risk management plan. B) Monitor the plan for needed changes. C) Gather pertinent data to determine risk exposure. D) Identify risk management goals.

B. Monitor the plan for needed changes. The next step is to monitor the plan for needed changes. The steps in the risk management process are to: 1) identify and establish risk management goals, 2) gather pertinent data to determine risk exposures, 3) analyze and evaluate the information to identify risk exposures, 4) develop a risk management plan, 5) communicate the recommendations; 6) implement the recommendations, and 7) monitor the recommendations for needed changes.

Once you have identified risk management goals for the client, what is the next step in the risk management process? A) Analyze and evaluate the information to identify risk exposures. B) Gather pertinent data to determine risk exposure. C) Monitor the plan for any changes and/or updates. D) Implement risk management recommendations.

B. The next step is to gather pertinent data to determine risk exposure. The steps in the risk management process are to 1) identify and establish risk management goals, 2) gather pertinent data to determine risk exposures, 3) analyze and evaluate the information to identify risk exposures, 4) develop a risk management plan, 5) communicate the recommendations, 6) implement the recommendations, and 7) monitor the recommendations for needed changes.

Which of the following statements regarding insurable interest is CORRECT? For property and casualty insurance, insurable interest must exist when the policy is issued and at the time of the loss. For life insurance, insurable interest must exist at the time the policy is issued.

Both

HO-4

Broad (Tenants or Renters Policy) - for those who do not own the dwelling. Coverage for personal liability coverage plus the coverage for contents and loss of use. This does not protect the actual building or dwelling (Coverage A or B), which should be covered by the landlord's policy

George has a home with a FMV of $425,000, an assessed value of $375,000, and a replacement cost value of $410,000. Which homeowners insurance coverage should you recommend to George? A. $340,000 B. $375,000 C. $410,000 D. $425,000

C The answer is $410,000. You should always recommend that a home is insured for 100% of its replacement cost value.

3. Which common peril is excluded from coverage in most homeowners policies? A. Power surge B. Tornado C. Power failure D. Volcanic eruption

C Damage caused to the policyowner's home by a power failure is typically excluded from coverage in most homeowners insurance policies.

David's son will soon turn 16 and start driving. He will be driving an older car. Knowing he must keep the car insured, David decides to eliminate collision coverage and increase the deductible on his comprehensive coverage. Which of the following methods of handling risk is David using? Risk avoidance Risk retention Risk transfer Risk reduction A) I and IV B) I and II C) II and III D) I, II, and III

C. II & III Eliminating coverage for collisions and increasing his deductible are risk retention techniques, while keeping insurance is risk transfer. Requiring the son to take a safe driving course would be risk reduction and not allowing his 16-year-old to drive at all would be risk avoidance.

Seven categories of Business Coverage

Commercial property insurance Boiler and machinery insurance Transportation insurance Crime insurance Commercial liability insurance Commercial automobile insurance Workers' compensation and employer's liability insuranc

Package Products for Coverage

Common Declarations form. This contains information about the insured, policy date and term, and the premium for applicable coverages. Common Policy Conditions form. This contains provisions common to most types of coverage. It includes provisions concerning changes to the policy, examination of books and records, inspections and surveys, premiums, and transfer of rights and duties. Common Conditions form. This contains provisions peculiar to this type of coverage. It includes provisions concerning concealment, control of property, insurance under two or more coverages, legal action against the insurer, liberalization of coverage, no benefit to bailee, other insurance, policy period, coverage territory, and transfer of rights of recovery. Exclusions. Each policy has its own set of exclusions and conditions. None of the monoline forms and package programs will provide coverage for intentional losses caused by the insured. A businessowner who causes a loss in an attempt to defraud an insurance company will not receive any benefits and may be guilty of a crime. As is true of all insurance contracts, read each policy carefully to determine the exact coverage, exclusions, and policy provisions.

Comparative Negligence

Comparative negligence is an alternative to the contributory negligence defense; comparative negligence reduces the defendant's liability in some proportion based on the injured party's contribution to the total negligence causing the injury. For example, if a jury determines that the injured party was 20% to blame for the injury, the plaintiff's award might be reduced by 20%

comprehensive (other-than-collision) damage.

Comprehensive damage is when something other than collision (e.g., fire, wind, hail, vandalism, etc.) damages the insured vehicle.

HO-6

Condo Policy -similar to HO - 4 -provides coverage for personal possessions contained within an owned condo and for personal liability -offers coverage for additions and alterations to condo HO-6: Unit (Condominium) Owners Form The insurance needs of condominium owners differ from those of single-family residence owners because the condo property's common areas (e.g., elevators, hallways, lobbies, and laundry rooms) are covered by insurance policies owned by the condo association. An HO-6 policy provides coverage for the condo owner's personal belongings and any owned structural part of the building. This type of policy also provides liability protection.

Factors Affecting the Cost of Homeowners Coverage

Construction Location Policy Type Deductible Insurer

Coverage A

Coverage A insures the dwelling, including additions or other structures attached to the building (ex: carpet). Coverage A also includes limited coverage on landscaping (trees, grass, shrubs) around the dwelling The coverage for sections B, C, and D and the pricing of a homeowners policy is largely determined by the limit selected for Coverage A on the dwelling. The insured is not asked to determine limits for other coverage under the policy because they are percentages of the Coverage A limit (or Coverage C in the case of HO4 renters insurance or HO6—condo unit owners).

Coverage B

Coverage B insures other structures (referred to as "detached structures" in some policies) on the premises of the dwelling, such as unattached garages, shed, fences, and sheds.

Coverage C

Coverage C insures general personal property (i.e., property not specifically named within the contract for provision of specific coverage, furniture, clothing, silverware, dishes, area rugs, etc.).

Coverage D

Coverage D provides loss-of-use coverage, which includes expenses incurred while the dwelling is uninhabitable due to damage caused by a covered peril. (Smoke since you cant stay in the house from the odor or the damage from a kitchen fire)

Which principle(s) of the workers' compensation law apply in most states? I. The indemnity paid to the injured employee is partial, but is to be considered final. II. The costs for workers' compensation benefits are funded through payroll taxes to which employees are expected to contribute. III. The benefits payable under workers' compensation is usually a percentage of the employee's average weekly pay. A. I only B. II only C. I and II D. I and III

D Workers' compensation is funded though insurance premiums paid by the employer.

Physical Damage Coverage - Auto Exclusions

Coverage is excluded for business use of the vehicle, including carrying people for a fee. General wear and tear, freezing, road damage to tires, and mechanical or electrical breakdowns or failures are not covered unless they are a result of theft of the vehicle. There is no coverage for damage sustained by an act of war, the discharge of a nuclear weapon, or by radioactive contamination. If the government confiscates your vehicle, the insured receives no compensation from the policy. The insured is not covered if she is involved in organized racing with the vehicle. While coverage generally extends to non-owned vehicles the insured is driving, it doesn't extend to vehicles the insured doesn't reasonably believe he is permitted to drive. There is no coverage for sound equipment that is not permanently installed in the car, nor is there coverage for CDs, mp3 players, and other sound-related media. This also includes things such as CB radios, mobile phones, and scanning devices plus their accessories or antennas, unless they are installed in an opening in the dash or console where a radio is normally located. A couple of other interesting exclusions include radar detectors and materials installed to customize a pickup truck or van, such as carpeting, furniture, cooking facilities, custom murals and decals, TV antennas, awnings, and equipment designed to create additional living space, among others. Camper bodies and trailers that are not listed in the declarations section are not covered.

1. Which peril is included as basic coverage in most homeowners policies? A. Water damage B. Earth movement C. Ordinance or law D. Riot or civil commotion

D Basic homeowners coverage protects against a financial loss to the policyowner's home due to riot or civil commotion. All of the other causes are generally excluded.

2. Personal property is covered under all forms of homeowners policies. Which item is considered to be personal property as defined by the standard homeowners policy? A. A motorcycle B. A pet C. A credit card D. Borrowed property from a friend

D Borrowed property from a friend is considered to be personal property and is covered. The other items are excluded from coverage in the standard homeowners policy without special endorsements.

4. Under a homeowners policy, which types of property are excluded or have limited coverage and should, therefore, be singled out for coverage under a separate policy? I. Recreational vehicles II. Boats III. Trailers IV. Furs A. I and II B. I and IV C. II, III, and IV D. I, II, III, and IV

D Types of property that are excluded or have limited coverage include items such as recreational vehicles, boats, trailers, furs and jewelry, and items requiring valued coverage, such as fine arts or antiques.

John is driving on the expressway when the motorist in front of him suddenly slows down. The motorist has no operable taillights, and John hits him from the rear. The failure of the motorist to have working taillights would preclude the motorist from collecting damages from John under the law of A) intentional negligence. B) imputed negligence. C) comparative negligence. D) contributory negligence.

D. Contributory negligence. If contributory negligence is established, the motorist most likely cannot collect damages from John. Comparative negligence—a more lenient doctrine than contributory negligence—is used to apportion financial responsibility based on the degree of fault.

A Duty was breached

Example: The individual rear-ended another car

Earthquake Insurance

Earthquake insurance provides coverage for physical loss due to an earthquake. These policies generally have deductibles that may be as high as 10% of the face amount of the policy. The reason for this is to avoid having to process numerous small claims after an earthquake, which allows the underlying insurance company to keep the premiums down and focus on larger claims. Of all states, California tends to have the most earthquakes. Citizens of California can obtain earthquake insurance through the California Earthquake Authority (CEA), a body sponsored by the state to insure homeowners and renters in the event of an earthquake. This organization was created because very few insurance companies want to be exposed to an area that has such a high risk of earthquakes due to the potential of a catastrophic level of damage from this peril. If clients live outside of California but are still within an earthquake zone, they may have to check with their state insurance commissioner or local insurance agent to identify carriers that provide separate earthquake insurance.

Which of the following is NOT a method of managing risk? A) Reduction B) Elimination C) Transfer D) Retention

Elimination is not a method of managing risk. The four methods of managing risk are avoidance, retention, reduction, and transfer.

Adjustor

Essential part of the claim process. They are responsible for investigating insurance claims and determining the amount of payment to be made

Underwriters

Evaluate applicants risk. Insurnace company wll decide how much coverage will be provided for a particular risk and at what price

Field Underwriting

Even though insurance companies are willing to assume risk, they are not necessarily willing to accept all applications. The insurer must evaluate each applicant based on predetermined criteria. Insurance companies expect their agents and others working with clients to make informed, appropriate recommendations and assess the potential for clients to qualify for coverage.

A Duty is Owed

Example: Individuals have the duty to drive their vehicles in a safe manner

Experience, Training, Education, and Specialization

Experience (and where that experience is concentrated; i.e., specialization) is especially important because much of the knowledge needed to successfully serve a client's needs is not widely taught outside the industry. An agent who specializes in a particular area will have concentrated expertise in that area. An agent with significant experience also may have access to a number of other professionals who can assist in technical areas. Designations earned by an insurance agent are indicative of her dedication to being knowledgeable. Each of these designations requires that the recipient pass exams in areas applying to a specific field. There are many designations available to insurance agents, and most of them have some educational base. Ask any agent with whom you plan to work about her educational efforts.

For life insurance to be underwritten, an insurable interest must exist when the policy is issued. when the insured dies. A) Both I and II B) I only C) Neither I nor II D) II only

For a life insurance policy to be underwritten, an insurable interest must exist only when the policy is issued.

All of the following are elements of an insurable risk except A) the loss must not be definite. B) the loss must be measurable. C) a sufficiently large and similar sample of individuals or events must be present. D) the loss must be accidental and not intentional.

For a loss to be insurable, the loss must be definite. All of the other statements are correct.

Which of the following is NOT a necessary element of an insurable risk? A) The loss must be accidental and not intentional. B) The loss cannot be catastrophic to the insurer. C) There must be homogeneous exposure units. D) The loss must be indefinite

For a risk to be insurable, the loss must be definite and measurable. There must also be a sufficiently large number and similar sample of individuals or events (i.e., homogeneous exposure units) to make the losses reasonably certain. The loss must be accidental and not intentional. It cannot be catastrophic to the insurer.

Assumption of the Risk

If a party recognizes and understands the danger of an activity and voluntarily chooses to engage in it, then another cannot be held responsible for the injury. In some states, if you choose to ride a horse, you cannot hold the horse owner liable for injuries.

Personal Property Endorsement

For high-value items, like those listed in the previous section, adequate protection generally is available as an endorsement to the policy. Coverage is in the amount of the item's stated value or appraised value, not the replacement cost or ACV. For this reason, a client may be required to provide appraisals, invoices, photographs, or other evidence of ownership to obtain coverage. PROFESSOR'S NOTE Coverage of this type may be called a personal property endorsement, personal property floater, or inland marine coverage. Inland marine policies will be discussed later.

For life insurance, an insurable interest must exist when the policy is issued. when the insured dies. A) Neither I nor II B) Both I and II C) II only D) I only

For life insurance to be underwritten, an insurable interest need only exist when the policy is issued.

For a life insurance policy, an insurable interest must exist A) only when the policy is issued. B) only when the insured dies. C) neither when the policy is written nor when the insured dies. D) both when the policy is written and when the insured dies.

For life insurance, an insurable interest must exist only when the policy is issued.

Deductible

For obvious reasons, the size of the deductible will affect the cost of the policy. The higher the deductible, the lower the premium.

Liability Exclusions

General exclusions include intentional injury and business or professional activities. All forms of personal liability insurance exclude business and professional activities because they are not personal liability exposures. Losses covered under homeowners Section I, along with owned and rented property, are also not covered under a CPL policy. - Business Pursuits - Rental of property - Professional liability - Motor Vehicles - Watercraft - Aircraft - Communicable disease - Other exclusions

damage by collision

Generally speaking, damage by collision is when the insured hits something or the vehicle is overturned. It is possible, and common, to have a collision deductible that is larger than a comprehensive deductible. People often eliminate collision coverage on older cars, but many will maintain comprehensive coverage. Comprehensive coverage includes losses such as breakage of glass, loss caused by missiles, falling object, fire, theft, larceny, explosion, earthquake, windstorm, hail, water, flood, malicious mischief or vandalism, riot or civil commotion, or contact with a bird or animal. Collision coverage pays for damage to a covered auto whether or not the insured is at fault. Examples of such damage include breaking off the outside mirror when backing out of a garage, bumping into a steel and concrete post in a parking lot, or being rear-ended by another driver. Comprehensive coverage pays for damage when the insured is not at fault. Both coverages extend to a vehicle not owned by the insured but used by any insured as well as any vehicle being used as a substitute for an owned vehicle that is out of normal use because of breakdown, repair, servicing, loss (theft), or destruction.

Which of the following organizations rate life insurance companies? Standard and Poor's A.M. Best, Inc. Fitch Moody's

I, II, III, and IV

Exclusions to Medical Payments

Generally, the same vehicles excluded under liability coverage are also excluded from coverage under the medical payments section. Specifically, exclusions that apply to medical payments are as follows: - Vehicles with less than four wheels - Autos used to carry persons or property for a fee - Autos owned by or furnished for regular use of the named insured—other than the covered auto - Autos owned by or furnished for regular use of family members—other than the covered auto - Autos operated without a reasonable belief that the user is entitled to do so - Trucks used in business - Injuries sustained while occupying any vehicle intended for use as a residence or premises - Injuries sustained in course of employment (workers' compensation covers these) - Injuries caused by discharge of nuclear weapons, war, civil war, et cetera - Injuries caused by nuclear reaction, radiation, or radioactive contamination - Injuries sustained in a vehicle at a facility for racing, if competing in a race, practicing for a race, or planning to race Additionally, the provision does not allow for double payments from other auto insurance. If medical expenses are covered under a different portion of the policy or another's auto policy, they will not be paid by this section of the auto policy.

EXAMPLE: Liability and medical payments coverages

George owns a home in Central Florida, which he has insured with a standard homeowners policy. He has an adventurous dog that tends to wander around the neighborhood. Whether or not George's dog bites a pedestrian on or off of his property, his standard homeowners policy's liability coverage (Coverage E: Personal Liability) will cover him up to the policy limits for any damage or negligence as a result of his dog (dog bite lawsuit) that he is found to be legally liable. Coverage F: Medical Payments to Others may also be applied for any medical bills, typically up to $1,000 for coverage of an occurrence on or off of the insured property.

High Value property Coverage

Getting adequate insurance coverage for high-value or unique property is not always easy. One of the core principles of insurance is known as the law of large numbers. An insurer wants a substantial pool of units (e.g., houses, cars, etc.) over which to spread its risk exposure. Owners of very high-value property could encounter problems. Why? There are significantly fewer multimillion-dollar homes relative to the number of homes priced below $500,000. Fewer homes means fewer homogeneous exposure units over which to spread the risk. At the least, this often means higher premiums. As it turns out, it also means that there are fewer insurers willing to even consider providing coverage on very high-value properties. Several insurers offer enhanced or expanded coverage for high-value properties. Coverages may be more easily tailored to specific property owner needs, and some perils that otherwise would not be covered, may be covered. For example, a few insurers are starting to offer private flood insurance for high-value properties. As more insurers begin to explore this area, high-value property owners will likely be able to get—at a price—coverage that more completely meets their specific needs

Property and Liability Risk Review and Evaluation

Guidelines for the purchase of auto insurance fit the classic risk management paradigm. The balance of dollars spent versus risk assumed is a question only your client can answer. Your role as a financial planner remains one of providing education and monitoring the client's situation. Most advisers would agree that property or liability-related losses can seriously damage an individual's financial well-being. It's not hard to envision a scenario in which someone can experience a loss calculated in the millions of dollars. While this is true, some advisers choose to completely disregard this area when providing services to their clients. This does not mean that all advisers should provide P&C coverage. It does, however, mean that all advisers should make their clients aware of the potential for loss, and at the least, provide a referral to a competent professional. PROFESSOR'S NOTE Coverage needs are not the same for all clients. Some individuals have unique risk exposures. As a result, they typically should use specialized risk management and insurance tools. Pay attention to the fact set when you encounter test questions about auto and homeowners insurance.

HO-5

HO-5: Comprehensive Form The HO-5 policy is similar to the HO-3 policy except that Coverage C (personal property) for an HO-5 policy is written on an open-perils basis.

EXAMPLE: Personal Liability Umbrella Policy (PLUP)

Harry purchases a $1 million PLUP requiring him to have $300,000 as the existing liability limit in Coverage E of his homeowners (HO) policy. However, his HO-policy only has $200,000 of existing personal liability coverage. Harry is sued for $1 million alleging his personal fault in an accident occurring in his garage. In this situation, Harry has only $900,000 of liability coverage ($200,000 of homeowners coverage plus $700,000 of PLUP coverage). The PLUP will pay only the difference in drop-down coverage between the liability amount Harry should have had in Coverage E ($300,000) and the amount of umbrella liability purchased ($1 million). Harry is personally at risk for the remaining $100,000 of potential liability.

Nonpermissive users

If someone steals the car, insurance does not provide liability coverage for the thief.

Bankruptcy of the Insured

If the insured files for bankruptcy in an attempt to reduce or avoid her obligations under a court-ordered settlement, the insurance company's obligations under the same settlement are not affected. Under the previous example, the insured was found liable for $1 million and had only $500,000 of insurance. The insurance company would have to pay its $500,000 even if the insured filed for bankruptcy and ultimately had to pay little or no money out of her own pocket.

Towing and Labor

If your client wants a benefit that will cover towing and labor, she must add it to the PAP by endorsement. Benefit amounts such as $25, $50, or $75 may be added.

Transportation Expense

If your client's insured auto becomes unavailable due to loss by damage or theft, the policy will provide a limited amount of money to help with alternate transportation. This benefit normally has a daily (e.g., $20 per day) and a claim (e.g., $600) limit. This may be used for the cost of a rental vehicle, bus fare, or train fare. It applies only to covered losses, and requires the auto to have collision coverage.

Suit Against Us

In conjunction with the previous obligations, an insured may not sue the insurance company for failure to pay a claim if he did not reasonably assist or cooperate with the company in its attempt to settle the claim.

Business Insurance: four approaches

In personal lines of insurance, there is substantial similarity among the policies issued by all carriers. However, the same is not true with commercial lines of insurance. The following four approaches are used to provide business or commercial insurance: - A combination of monoline forms, which are insurance policies that cover only one type or a very limited number of types of loss (e.g., boiler insurance) - Packaged coverage policies - The commercial package policy (CPP) for large businesses - Businessowner's policy (BOP) for smaller businesses

Monoline Forms

In the past, a business had to obtain many different forms of insurance from many different companies. Different policies were needed to provide the various coverages listed previously. Today, most coverages are available in package plans. Generally, this is a more cost-effective approach.

Location

In what type of community is the house located? Is it a fire prone area or is there a high vandalism and crime rate in the area? The quality of the local fire department, the available water supply, and the accessibility of the home itself also will affect insurance rates.

Inland Marine Insurance

Inland marine insurance is protection for personal property that is in transit or that can be transported. Inland marine insurance usually is written with open perils coverage (meaning, all perils, except for those specifically excluded, are covered). A primary benefit of open perils coverage is that it extends the coverage to theft and loss. Coverage may be written with little or no deductible, or, depending on the insurer and the insured's wishes, a higher deductible. As is true with other types of insurance, the greater the deductible, the lower the premium. You may see this coverage identified as inland marine (floater), personal property floater, scheduled personal property endorsement, or personal articles floater, but for exam purposes, they represent the same coverage. Generally, this form of insurance is used to cover valuable personal property, rather than more common, lower-value property (e.g., a fine art collection rather than a blender in the kitchen). Inland marine insurance may be the only way to fully cover certain items that have coverage limits built into the standard homeowners policy. The insured needs some sort of appraisal or receipt to verify the value of the property being insured. Additionally, coverage usually is for a stated (appraised) value rather than the replacement cost or ACV (i.e., depreciated value). An inland marine policy is one way to overcome problems related to an insurer's pair or sets settlement option. When one item of a pair (or set) is lost, stolen, and/or damaged, the pair or sets option allows the insurer to only pay for the one item—not the set. This can create problems, as the value of the set is often greater when all the parts are there. By using an inland marine policy, it may be possible for the insured to recoup a greater amount of the loss related to the one piece.

Which of the following best defines insurable interest? A) Permanent life insurance policy cash values increase over time. B) An interested party will suffer a financial loss if the insured loss occurs. C) Exercising a right to the economic benefits of an asset, such as a life insurance policy. D) It determines how much insurance is needed to protect against a loss of income

Insurable interest exists when an interested party will suffer a financial loss if the insured loss occurs

ISO stands for

Insurance Services Office

Which of the following statements regarding risk management is CORRECT? A) Speculative risk involves the chance of loss or no loss. B) A hazard is the cause of financial loss. C) Peril is the indifference to loss that creates carelessness and increases the chance of loss due to the existence of insurance. D) Insurance manages risk by having a large pool of people share in the financial losses suffered by members of the pool.

Insurance manages risk by having a large pool of people share in the financial losses suffered by members of the pool. Pure risk involves the chance of loss or no loss. Speculative risk involves both the chance of loss or no loss. A peril is the cause of financial loss. A morale hazard is the indifference to the loss that creates carelessness and increases the chance of loss due to the existence of insurance.

Values Policy

Insurance will cover up to what the value is (car for example)

Liability Protection

Liability coverage is the only mandatory part of auto insurance. The state is primarily concerned that you protect others. An automobile liability policy will identify limits of liability you, as an insured, provide for others. Typical insurance coverage is shown in the format of 25/50/10. This is translated as follows: liability for bodily injury is covered for up to $25,000 per person and $50,000 per accident; with $10,000 for property damage liability. Some states permit a single limit, such as $300,000, instead of having split limits. This single limit would cover both the bodily injury as well as the property damage. Each state has its own required coverage levels, often in the range of 25/50/10. TEST TIP Pay attention to liability-related issues because a lack of adequate liability limits is more likely to be tested than whether a specific accident is covered or not.

Replacement Cost Calculation

Many factors go into determining the level of coverage and the premiums required for a homeowners policy. The age of the home, type of construction materials, location, square footage, and number of rooms are factors that will determine the replacement value of a home. Once the proper level of coverage has been established, a client should insure the house for the cost to replace it (i.e., construction costs or replacement cost). Most insurance agents or brokers have access to sophisticated tools to assist with estimating the replacement value of the home that account for the style of home, square footage, and number of bedrooms and bathrooms are entered. Unique features can also be accounted for to make the replacement calculation more precise. However, this calculation is only as good as the inputs received.

Valuable Personal Property Typical Coverage

Money, bank notes, coins, bullion ($200 limit) Securities ($1,500 limit) Stamp collections ($1,500 limit) Watercraft and their trailers ($1,500 limit) Jewelry, furs, cameras (loss by theft—$1,500 limit) Firearms (theft—$2,500 limit) Silverware, goldware, etc. (by theft—$2,500 limit) Business property at home ($2,500 limit) Actual limits will vary by policy. However, in all cases in which limits apply, even having replacement cost coverage will not adequately cover these items. The only viable method to provide sufficient coverage on these items is to add a personal property endorsement or purchase a separate inland marine policy. Both methods provide essentially the same coverage options.

Moody's

Moody's uses a similar approach of generally rating a company at its request, but Moody's rates some companies with public information alone. Moody's publishes a "financial strength rating." Ratings can also be accessed by registering on their website at www .moodys.com.

The Personal Auto Policy (PAP)

Most clients not only have a need for some form of homeowners insurance, they also have a need for automobile insurance. Many of the issues that must be dealt with in this area are different than those regarding homeowners policies. All states require that automobile owners comply with financial responsibility laws. Even with this legal requirement, a significant number of drivers do not have automobile insurance. This addresses how a client can be protected if she is involved in an accident with an uninsured or underinsured driver. Note that there are other automobile forms besides the PAP in the marketplace today. This module will focus only on the PAP, which is the most widely used form and what CFP Board will test. The PAP provides coverage for liability, medical expenses, and property damage. The PAP has many components and some clients find it quite complicated. An understanding of the basic components will help you explain current coverage to a client and explore possible coverage improvements. As with homeowners forms, if this is not an area in which you provide advice on a regular basis, any analysis should be referred to a licensed insurance adviser

Credit Scores

Most insurance companies consider credit score to determine rates. Each state has different regulations as to what components can be used. Insurers typically use a different model than lenders as they are attempting to predict the propensity for a loss rather than the ability to repay a loan.

Personal Injury Liability Endorsement

Most liability policies generally are written to exclude certain personal injuries. These include libel, slander, and defamation; false arrest, detention, imprisonment, or malicious prosecution; invasion of privacy; and other similar torts. Coverage for such personal injuries is provided under a separate form of coverage referred to as personal injury liability. Most personal injury policies contain a number of exclusions. Examples of exclusions are intentional violations of the law by the insured, injuries to employees of the insured, business activities of the insured, and civic or public activities of the insured.

Driver's record

The driving record of an individual directly impacts the rate that will be charged by an insurer to offer auto coverage. Drivers with moving violations will pay more than drivers with no moving violations. In some instances, as in the case of operating while intoxicated or too many speeding tickets, an individual may be denied coverage altogether.

Which of the following statements regarding risk management are CORRECT? I. A misrepresentation is carelessness or indifference on the part of an individual as to whether a loss occurs and/or the size of a loss if one does occur. II. A morale hazard is a false and material statement made by an applicant for insurance, providing a basis for the insurer to make the contract voidable. A) Both I and II B) II only C) Neither I nor II D) I only

Neither statement is correct. Statement I is incorrect because it describes a morale hazard. Statement II is incorrect because it describes a misrepresentation.

Personal Property Exclusions

Nine classes of property are usually excluded under Coverage C of all homeowners forms: - Articles separately described and specifically insured under a floater (personal articles policy) or other insurance - Animals, birds, or fish (the animal itself, not the liability it creates) - Motorized land vehicles (with some exceptions) - Aircraft and their parts (except model or hobby aircraft) - Property of roomers, boarders, and other unrelated tenants - Property contained in an apartment that is regularly rented or held for rental to others by the insured - Property rented or held for rental to others away from the premises - Books of account, drawings, paper records, and software media containing business data - Credit cards or fund transfer cards, except as provided under the heading of Additional Coverages

Uninsured and Underinsured Motorist Coverage Exclusions

No payments will be made if the insured was in a vehicle that did not have coverage. No insured will receive benefits if another insured vehicle owned by the insured is at fault. If the insured settles with the other company without the approval of his own company, no benefits will be paid. No coverage exists when the person using the vehicle does not have the right to do so. The usual exclusions apply when the vehicle is being used for business or for a fee. Coverage also does not apply to benefit the insurer (or self-insurer) when workers' compensation, mandatory disability benefits, or similar laws are involved (these require other coverages).

Packaged Coverage

Packages of insurance combine coverage from the seven broad categories into a single package. Packaged coverage combines many types of previously monoline coverages, such as plate glass, boiler and machinery, fire, inland marine, and crime insurance. The package starts with two sections: the Common Policy Declarations form and the Common Policy Conditions form. These two sections typically are the same for all businesses using the Portfolio Program. To these sections are added the specific forms that are needed for the business: the Commercial Property Declarations form and the Common Policy Conditions form that reflect the needs of the particular business; the specific coverage forms that are necessary; and the Cause of Loss forms that apply. Just as individuals are interested in protecting their real property and personal property from loss or damage and themselves from liability, a business has those

What is a Covered Auto?

Not all vehicles owned by an insured may be insured. A covered auto is defined as follows: - Any vehicle listed in the declarations section of the policy - Any new vehicle that meets the eligibility requirements of the PAP- The company must be notified of the need for coverage within 14 days of obtaining it. In some states, the notification must be within 30 days. - Any utility-type trailer owned by the insured, excluding mobile homes and other large trailers - Any vehicle the insured is using as a substitute for a covered vehicle that cannot be used because of - breakdown, - repair, - servicing, - loss (theft), or - destruction

Coordination of Auto Policies

One area of concern is coordinating multiple insurance policies. Consider an individual who owns property in a number of locations. He may have purchased separate insurance policies for each property, and may not have checked to see how well the different policies coordinate. This can result in either overlapping coverage or gaps in coverage.

Other exclusions

Other exclusions are included in personal liability policies. Generally, these include war; sexual molestation or abuse; use or sale of controlled substances; contractual liability; damage to property owned by, rented to, or in the care of the insured; workers' compensation; nuclear perils; and injury to insured persons.

Which of the following limits an insurer's liability for covered losses? Misrepresentations by an agent acting within the agent's authority Other insurance coverage for the same loss A) I only B) Both I and II C) II only D) Neither I nor II

Other insurance coverage for the same loss may limit an insurer's liability for covered losses. An insurer is bound by an agent's misrepresentations while acting within the scope of the agent's authority.

Exclusions from PLUL

PLUPs do have some exclusions. If watercraft, aircraft, professional services, or business pursuits are covered by endorsements to the homeowners or auto policy, they will usually be covered by the PLUP. If they are not covered by the base policies, they typically will not be covered by the umbrella policy. The usual exclusions (remember, these are liability, rather than property, coverages) include owned or leased aircraft excluded under the base policy; watercraft of the type excluded under the basic homeowners policy; damage to rented or borrowed aircraft and watercraft; business pursuits; professional services, unless the underlying insurance program includes coverage for this risk; workers' compensation; and any act committed by, or at the direction of, the insured with the intent to cause personal injury or property damage.

Physical Damage Coverage - Auto

The two parts of this coverage are damage by collision and comprehensive (other-than-collision) damage.

General Provisions

Part F of the PAP has nine general provisions. - Bankruptcy of the insured does not eliminate insurer obligations under the policy. - Changes in the policy must be done by endorsement. General premium changes may be made only on the policy anniversary date. A liberalization clause is included as well. It provides that if the insurer wants to improve the coverage for its policies without increasing the premium, it doesn't need the approval of the insured. - Coverage will not be provided where there is fraud on the part of the insured. This would include fraudulent statements or conduct related to an accident or loss. - The policy states that if the insured does not comply with her duties under the policy, she may take no "legal action against us." State law may negate this provision. - A subrogation clause provides the insurance company a right to recover payment made for any loss for which the insured was not ultimately liable. - This section also includes a provision that identifies the policy period, or the time for which coverage is provided, and the geographic area in which coverage is provided. - One subsection explains the rights of each party regarding termination of the policy. - The transfer of the insured's interest in the policy section emphasizes that a transfer may not take place without the written consent of the insurer. This is an assignment provision (similar to those found in life insurance policies). - The final subsection describes what happens when two or more policies cover a single automobile and there is a loss. It points out that the maximum benefits paid will be the highest limit provided under either policy, but policy maximums will not be combined.

personal liability insurance (Coverage E)

Personal liability coverage is an integral part of homeowners insurance, including renters insurance. Some clients need substantial liability protection in addition to basic coverage provided by their homeowners insurance. Most homeowners policies are issued as a package policy, which includes the liability coverage listed in Section II. It is possible to purchase a stand-alone, or monoline, policy, which is a comprehensive personal liability (CPL) policy. In addition to paying for damages up to the limits of the policy, the company will pay legal defense costs. The insurance company generally reserves the right to make an out-of-court settlement at its discretion (without obtaining consent from the insured). PROFESSOR'S NOTE Do not be misled by the comprehensive terminology; CPL policies cover basic liability. The CPL policy provides coverage for damages payable as a result of the insured inflicting bodily injury or causing property damage that falls under the covered portion of the policy. Note that slander and libel are not covered under the personal liability portion of this policy because the policy will not cover intentional acts. Under homeowners Section II, the "insured" is the named insured and usually includes any member of the insured's household who are relatives or minors (21 years or younger) under the care of the insured. It also extends to a child who is residing at college.

Rental of property

Personal liability policies generally do not cover losses related to the insured's renting the property to others. However, occasional rentals of the residence are covered. The insured may also rent out a room or two, as long as there are no more than two roomers.

Example: Replacement cost recommendation

Phil has decided to have his homeowners insurance policy reviewed for the first time in several years. He is concerned that he may not have enough coverage due to years of inflation. Phil's home has a fair market value (FMV) of $340,000, a replacement cost value of $325,000, an ACV of $285,000, and an assessed value of $310,000. You should recommend that Phil insures his home for $325,000, or 100% of the replacement cost value.

Business Concerns for Coverage

Plate glass coverage Theft by customers Employee-related losses such as embezzlement, theft errors with accounts, negligence, injury to customers, and misrepresentation Injury to customers Damage to or loss of customers' property that is left with the business (i.e., bailed property) Product liability and other liabilities such as dual capacity liability, pension fiduciary liability, builder's risk liability, dram shop liability, and common carrier liability Damage to or loss of employee property that is left with the business Product liability Loss of business income and business interruptions Directors' and officers' (D&O) Pollution cleanup and removal Damage to or loss of inventory, including damage while in transit Damage to leased equipment Boiler and machinery losses Commercial vehicle risks

Estoppel

Prevents a party from asserting a known right because their own actions misled (intentionally or unintentionally) another party who relied on their understanding to their own detriment. Example: The insurer is estopped from denying a claim because it issued a policy that it normally would have

Which of the following are insurance producers who have the authority to hire agents to work for them? A) Brokers B) Producing general agents C) Captive agents D) Career agents

Producing general agents may, but do not have to, hire agents to work for them. The other options represent individual producers.

Property of the insured is not covered by the liability covered under an auto policy.

Property of the insured that is not installed in the vehicle is more appropriately covered under some form of property insurance, most likely the personal property section of a homeowners policy.

Klaus just purchased a new $75,000 luxury car with all of the options. Which form of risk management would generally be most appropriate? A) Risk transfer B) Risk diversification C) Risk retention D) Risk avoidance

Purchasing an insurance policy resulting in the transfer of risk to an insurance company makes the most economic sense.

Limit of Liability

Regardless of the number of people involved, the stated policy limit is the maximum amount payable under a policy. The limit is not increased by the number of people claiming to have suffered a loss. PROFESSOR'S NOTE This is not to say that the amount of insurance limits the damages the insured must pay. Some people mistakenly believe that a $500,000 liability policy will limit their liability to $500,000. Such a policy will provide protection up to the first $500,000 for which the insured may be liable, but if a court finds the insured liable for $1 million, the insurance will pay up to their limit (e.g., $500,000 in this case) and the insured will be responsible for paying the rest.

Which of the following statements regarding the principles of risk and insurance are CORRECT? Risk is a condition in which there is a possibility of an adverse result from the expected desired outcome. A hazard is the cause of a financial loss and is the actual event for which the individual purchases insurance. A peril is a condition that increases the probability that a financial loss will occur. Pure risk involves only the chance of loss or no loss. A) I and II B) I and IV C) I, II, and III D) I, II, III, and IV

Risk is the condition in which there is a possibility of an adverse result from the expected desired outcome. A peril is the cause of a financial loss, and a hazard is a condition that increases the chance of financial loss. Pure risk is the risk that only involves the chance of loss or no loss

Which of the following is NOT a correct statement regarding an insurer's liability? A) The actual cash value of a loss is the acquisition cost of the property less depreciation. B) The policy limit is the maximum amount that will be paid when the insured loss occurs. C) Coinsurance may refer to the minimum percentage of insurance that is required to avoid being penalized for inadequate insurance when there are partial losses. D) Coinsurance may be a splitting of costs.

The actual cash value of a loss is the replacement cost of the property less depreciation. All of the other statements are correct.

Personal Lability Umbrella Insurance (PLUP)

Sometimes coverage under a basic liability policy is not adequate. Most individuals obtain liability insurance through their homeowners and automobile policies. However, in today's litigious world, many people want more protection than the typical homeowners or automobile policy offers. Rather than merely increase the coverage on the other two policies, clients will be better served if they are able to obtain a personal liability umbrella policy (PLUP). This is sometimes called catastrophe liability insurance. A typical umbrella policy has a liability limit of at least $1 million and can go higher as needed. In most cases, the person seeking coverage must carry certain minimum liability coverage level under both homeowners and auto policies (e.g., $250,000 or $500,000). PROFESSOR'S NOTE There is no standard umbrella policy form. Each company will have its own specific set of requirements and criteria that must be met in order to issue a personal liability umbrella policy A PLUP not only increases the coverage that is part of the homeowners and auto policies, it also broadens the overall coverage. Some optional coverages under a homeowners policy, such as personal injury coverage, are standard under an umbrella liability policy. If the insured gets sued and the claim falls under the insured's homeowners or auto policy, the appropriate policy will pay first. It is helpful to think of the liability payment that is being made from the auto or homeowners insurance as a deductible to be paid prior to the umbrella liability policy being called upon. If the auto or homeowners policy is not adequate to pay the claim, then the umbrella policy picks up the difference, up to its limit of liability. For this reason, it is typically best to have both the PLUP as well as the underlying policies with the same insurance company. PROFESSOR'S NOTE A typical question arises as to how much coverage is enough, or even appropriate. Clients should have at least as much liability coverage as net worth. An exception would be high income earners (e.g., doctors, lawyers) who need higher liability limits even as they are starting their careers and have more debt than assets. An advantage of an umbrella policy is that it is able to offer a quicker settlement. Even if the injuries exceed the limits of the policy, the injured party might be willing to accept a settlement from the insurance company, rather than taking the case to trial, and potentially delaying settlement for a few years, even if it might be below the estimated value of the claim. By explaining how the policy works and the potential exposure, the client is in a better position to make an informed decision and select the appropriate coverage.

​One of the steps in the risk management process is to "gather pertinent data to determine risk​ ​exposures." Potential sources of necessary information include which of the following areas? Property Liability Personal injury Personal illness A) I, II, and III B) II, III, and IV C) I and IV D) I, II, III, and IV

Sources of information regarding property, liability, personal injury, and personal illness are all gathered during this step.

Standard & Poor's

Standard & Poor's publishes two separate ratings. The first, a "claims-paying ability rating," is done by request using public as well as nonpublic financial information. They also publish "qualified solvency ratings." These are done with public records only and at no charge to the companies being rated. Standard & Poor's provides ratings via their website at www .standardandpoors.com.

Personal Property Coverage

Standard policies cover personal property at 50% of the dwelling coverage. With the cost of furniture, rugs, clothes, appliances (not permanently installed), books, et cetera, this level of coverage may be inadequate. Additionally, most homeowners policies provide only limited coverage for valuable personal property.

Which of the following types of risk are associated with damage caused by an earthquake? Particular Dynamic Static Fundamental

Static Fundamental

EXAMPLE: Liability and medical payments coverages

Stella is on vacation in California. While golfing with friends, she slices her drive into an adjacent fairway and hits another golfer causing several thousand dollars in medical bills. This is an additional occurrence, which Stella's liability coverage within her homeowner's policy (Coverage E: Personal Liability) would protect her from litigation up to the policy limit because she is legally liable for her negligent drive of her golf ball. Coverage F: Medical Payments to Others may also be applied for any medical bills, typically up to $1,000.

The right of an insurer to recover damages from a third party for a loss covered by insurance is A) coinsurance. B) indemnity. C) insurable interest. D) subrogation.

Subrogation is the right of an insurance company that has paid for a loss to recover its payments if it is determined that a different insurance company or person is responsible for the loss and is required to pay for it. This prevents the insured from collecting twice for the same loss. Coinsurance may be a splitting of costs, or it may refer to a minimum percentage of insurance that is required to avoid being penalized for inadequate insurance when there are partial losses. Insurable interest exists when the interested party will suffer a financial loss if the insured loss occurs. Indemnity involves placing a person back in the position they would have been had the loss not occurred.

Which type of insurance producer handles any type of insurance that cannot be purchased using normal distribution channels within a given state? A) Producing general agents B) Surplus line agents C) Captive agents D) Independent agents

Surplus line agents and brokers serve a vital role by filling gaps in states where admitted insurers are unable to provide the insurance an individual may need.

A.M. Best

The A.M. Best Company is the oldest of the rating services rating over 4,500 such companies. Its ratings are based on comprehensive analysis of a company's financial records as well as interviews with key employees. It offers its ratings in a number of publications that provide at least annual updates. Their monthly periodicals, Best's Review (in both the life/health and the property/casualty issues) include changes regularly. A.M. Best provides ratings via their website at www .ambest.com. TEST TIP All rating agencies provide insight into insurance company strength, but A.M. Best is the only one that specializes in rating insurance companies. This differentiates them from the others.

Which of the following statements regarding the roles of the National Association of Insurance Commissioners (NAIC) in regulating insurance is CORRECT? The NAIC is composed of the state insurance commissioners from all 50 states. The NAIC makes recommendations for legislation and policy. The NAIC has the legal authority to require states to adopt its regulations.

The NAIC is composed of the state insurance commissioners from all 50 states. The NAIC makes recommendations for legislation and policy.

Actual Cash Value (ACV)

The PAP covers damage on an ACV basis. ACV is the replacement cost minus depreciation. Unlike under a homeowners policy, there is no replacement cost coverage under the standard PAP. The valuation used is the amount required to repair or replace the property with that of like kind and quality. This takes into consideration the condition of the property at the time of loss (i.e., depreciation)

Auto Policy Contents

The PAP was designed to cover automobiles owned by individuals or owned jointly by spouses. It also provides coverage when these individuals enter a long-term automobile lease. More specifically, the PAP is intended to insure four-wheeled private passenger automobiles, which include vans or pickup trucks under 10,000 pounds gross weight. Coverage can be extended to cover motorcycles, motor homes, golf carts, snowmobiles, and similar vehicles owned by those eligible for the basic coverage. Given the "personal" nature of the PAP coverage, vehicles may not be used as a public or livery conveyance (e.g., a taxi), nor may they be rented to others. The personal auto policy is a standard ISO form of insurance. The PAP covers the following three general types of loss: Legal liability Injury to the insured and family Damage to the vehicle Each policy has the following six parts: Part A: Liability Coverage Part B: Medical Payments Coverage Part C: Uninsured Motorist Coverage Part D: Coverage for Damage to Your Auto Part E: Duties After an Accident or Loss Part F: General Provisions

Reputation

The agent must be responsible in her dealings with the public. It seems likely that the most important area to be investigated here is, once again, service. Incidents of actual fraud or malfeasance are fairly rare. In reality, it is far more likely that a planner or client will end up in a controversy with an agent over a misunderstanding. The complexity of insurance, combined with how easily an expert can be misunderstood by someone not familiar with the area, makes such problems all too common. With this in mind, the planner can take a few steps that will help develop good working relationships and avoid misunderstandings

Kristen has a personal auto policy, and the liability coverage is displayed as 250/500/100. How much bodily injury liability coverage per accident does Kristen have? A) $100,000 B) $250,000 C) $750,000 D) $500,000

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

Kristen has a personal auto policy, and the liability coverage is displayed as 250/500/100. How much bodily injury liability coverage per accident does Kristen have? A) $500,000 B) $750,000 C) $250,000 D) $100,000

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

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) $2,000,000 B) $5,000,000 C) $100,000 D) $1,000,000

The answer is $1,000,000. The standard amount provided is $1,000,000; however, the insured may obtain additional amounts relatively inexpensively.

What is the standard amount of personal liability coverage provided by a personal liability umbrella policy? A) $500,000 B) $1,000,000 C) $2,000,000 D) $100,000

The answer is $1,000,000. The standard amount provided is $1,000,000; however, the insured may obtain additional amounts relatively inexpensively.

Stewart owns a home with a replacement cost of $300,000. He purchased $200,000 of property insurance on the house with a $1,000 deductible for all losses. The house caught on fire and sustained $100,000 worth of damage. The actual cash value (ACV) of the damaged portion of the property was $80,000. How much will Stewart receive as reimbursement for the loss? A) $300,000 B) $82,333 C) $200,000 D) $99,000

The answer is $82,333. The insurance company will pay the greater of $80,000 ACV or the coinsurance amount of $82,333, calculated as follows: $200,000 (current coverage amount) divided by $240,000 (required insurance amount) equals 0.8333; 0.8333 multiplied by the $100,000 loss equals $83,333; $83,333 minus the $1,000 deductible equals $82,333. Because the coinsurance amount of $82,333 is greater than the $80,000 ACV, Stewart will receive $82,333 as a partial payment for his $100,000 loss. If Stewart had insured his home for at least $240,000 (80% of $300,000), he would have been fully reimbursed for the loss minus the $1,000 deductible.

How much homeowners insurance coverage should financial planners encourage their clients to maintain? A) 80% of the actual cash value of the home B) 90% of the replacement cost of the home C) 80% of the replacement cost of the home D) 100% of the replacement value of the home

The answer is 100% of the replacement value of the home. Unless a financial planner is a licensed property and casualty agent, the planner cannot discuss a client's coverages. However, the planner can and should encourage clients to maintain at least 100% of the replacement value of the home. Many insurance companies offer additional riders to increase that amount, and the client can discuss that with an insurance agent.

Which of the following rating agencies specializes in rating only insurance companies? A) Fitch Ratings B) A.M. Best C) Moody's D) Standard and Poor's

The answer is A.M. Best. The A.M. Best Company is the oldest of the rating services, rating over 4,500 insurance companies.

Which of the following homeowners policies is designed for the owners of condominium units and cooperative apartments? A) HO-4 B) HO-6 C) HO-2 D) HO-8

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 homeowners policies is designed for the owners of condominium units and cooperative apartments? A) HO-4 B) HO-6 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 homeowners insurance forms is used for condominium owners? A) HO-8 B) HO-3 C) HO-6 D) HO-2

The answer is HO-6. The unit owners form is used for condominium owners, providing limited coverage on the dwelling and broad coverage on personal property.

Which of the following are requirements of an insurable risk? A large, homogenous exposure to loss so as to adequately make reasonable prediction of the loss Economically feasible premium Catastrophic loss Calculable chance of loss A) II only B) I and III C) II, III, and IV D) I, II, and IV

The answer is I, II, and IV. Insurers wish to avoid all catastrophic losses.

Your clients recently found the home they want to buy. It is 80 years old with beautiful hand-carved woodwork throughout, a marble fireplace, skillfully done plasterwork, and exceptional exterior brickwork. It is in an old part of the city, which is seeing a rebuilding and renovation surge. Because of the location, however, the house is a bargain. To build it now would cost more than twice what they will be paying for it. Which of the following forms of property insurance will your clients likely be purchasing to cover this home? A) HO-8 B) HO-4 C) HO-6 D) HO-3

The answer is HO-8. The HO-8 form is designed to cover homes that would cost more to replace than to purchase. The coverage will provide for a functional replacement, but it will not cover the custom craftsmanship that would be required to restore the home to its current appearance if it is destroyed. It is possible to purchase better coverage for high-value older homes, but such coverage is generally provided by only a few insurers on a customized basis.

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. A) I and III B) I and II C) IV only D) I, II, and IV

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 statements concerning the need for homeowners insurance policy endorsements or additional policies is CORRECT? Policy endorsements or separate policies are available to compensate for policy shortcomings or to accommodate special needs. Examples of types of property with limited coverage under a typical homeowners policy are jewelry, silverware, and collections of coins, stamps, and firearms. A) I only B) I and II C) II only D) Neither I nor II

The answer is I and II. All personal property of any significance should be scheduled and valued in preparation of any future claims that may occur as because of a covered peril. Items like jewelry, silverware, collections of coins or stamps, and firearms have stringent limitations within a standard homeowners insurance policy. Endorsements or separate policies are available to accommodate shortcomings and should be added to any property whose value exceeds the normal coverage limit.

Which of the following perils is ordinarily covered in an open-perils HO-3 policy? Ice damage Lightning Flood Earthquake A) I and II B) I and III C) I, II, III, and IV D) IV only

The answer is I and II. HO-3 is an open-perils policy, but the general exclusions in all HO policies include earthquake and flood.

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. A) II and III B) I only C) I and III D) I and II

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 statements regarding mutual companies and stock companies is CORRECT? Mutual companies are owned by their policyholders and offer participating policies a share in the profits of the company through the payment of policy dividends. Stock companies are owned by the stockholders and usually offer nonparticipating policies. Stock companies are owned by policyholders, while mutual companies are owned by the stockholders. A) III only B) I and II C) II only D) I only

The answer is I and II. Mutual companies are owned by their policyholders and offer participating policies that share in the profits of the company through the payment of policy dividends. Conversely, stock companies are owned by the stockholders and usually offer nonparticipating policies.

Which of the following are examples of managing risk through risk retention? Having a coinsurance provision in medical insurance Increasing the amount of an automobile insurance deductible Increasing the benefit period on disability income insurance Having a waiver of premium rider on life insurance A) II and III B) I and II C) III and IV D) I and IV

The answer is I and II. Options I and II are both methods of retention, as coinsurance and increased deductibles leave the insured with the potential for greater out-of-pocket expenses. Increasing a benefit period and adding a waiver of premium rider are forms of risk transfer.

What types of coverage are considered professional liability insurance? Malpractice insurance Errors and omissions insurance Inland marine insurance Business overhead expense insurance A) II, III, and IV B) II and III C) I and II D) I, II, and III

The answer is I and II. The two types of professional liability insurance are malpractice insurance and errors and omissions insurance. The type of policy underwritten depends on the profession that is considered for coverage.

John has been working for a large medical practice as a family practice physician and recently left to start his own practice. Which of the following should he purchase to protect himself 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) I and III C) I, II, III, and IV D) II and IV

The answer is I and III. As a medical professional, John would need malpractice insurance rather than errors and omissions insurance. A businessowners policy is also necessary, as he will be a businessowner 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. John could probably benefit from a PLUP's protection, but it is not for business-related risks as the question asks.

A client is shopping for homeowners insurance. He wants a policy that will provide open-perils coverage on both the dwelling and his personal property. Which of the following policies without an endorsement will meet his needs? HO-2 HO-3 HO-5 A) II and III B) I, II, and III C) III only D) I only

The answer is III only. The only policy that provides open-perils coverage on both the dwelling and personal property without an endorsement is an HO-5 policy. Coverage under an HO-2 policy provides named-perils coverage on both the dwelling and personal property. An HO-3 policy provides open-perils coverage on the dwelling but named-perils coverage on personal property.

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. A) I and III B) I, II, and III C) I only D) II only

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.

Which of the following statements regarding maximum possible loss and probability of loss is CORRECT? The maximum possible health care loss or claim is unlimited. The probability of experiencing long-term care costs below age 60 is high. The maximum loss to personal property is limited to its value. A) I, II, and III B) I and III C) II and III D) II only

The answer is I and III. The probability of experiencing long-term care costs below age 60 is low.

Which of the following are types of agent authority? Express authority Legal authority Apparent authority A) I only B) II and III C) I and III D) I, II, and III

The answer is I and III. Types of agent authority include express authority, implied authority, and apparent authority. Express authority is the actual authority an insurance company gives to its agents and is specifically stated in writing and contained in the agency agreement. Implied authority is not expressly given to the agent by the insurance company but is the type of authority agents in similar circumstances normally possess. An example of implied authority is the acceptance of premium payments on behalf of the insurance company. Apparent authority occurs when an agent does not have express or implied authority, but the insured is led to believe that the agent has authority.

Which of the following statements concerning liability coverage under the personal auto policy is CORRECT? The insureds under Part A: Liability Coverage include the named insured, spouse, resident relatives, and any other person using a covered auto with permission. Coverage does not include legal expenses incurred in defending the insured against a claim of liability. A) II only B) Neither I nor II C) I only D) Both I and II

The answer is I only. Under Part A, legal defense costs are paid in addition to the limit of liability.

Which of the following statements concerning liability coverage under the personal auto policy is CORRECT? The insureds under Part A: Liability Coverage include the named insured, spouse, resident relatives, and any other person using a covered auto with permission. Coverage does not include legal expenses incurred in defending the insured against a claim of liability. A) Both I and II B) II only C) I only D) Neither I nor II

The answer is I only. Under Part A, legal defense costs are paid in addition to the limit of liability. LO 2.3.1

Which of the following statements regarding property coverage in a commercial package policy (CPP) are true? 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 liability coverage. The CPP is designed for larger businesses. A) I and IV B) I, II, III, and IV C) II and IV D) I, II, and III

The answer is I, II, III, and IV. 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 statements regarding property coverage in a commercial package policy (CPP) are true? 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 liability coverage. The CPP is designed for larger businesses. A) I, II, and III B) I, II, III, and IV C) I and IV D) II and IV

The answer is I, II, III, and IV. 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 statements regarding insurance contracts are CORRECT? An insurance policy is conditional, in that the insurer is obligated to compensate the insured only if certain conditions are met. A warranty is merely a promise made by the insured to the insurer that is part of the insurance contract and, as such, must be adhered to by the insured. Representations are statements made by the proposed insured to the insurer in the application process. Concealment occurs when the insured is silent about a fact that is material to the risk. A) I and III B) I, II, III, and IV C) I and II D) II, III, and IV

The answer is I, II, III, and IV. All of the statements are correct.

Which of the following are insurance company rating services? Moody's A.M. Best Standard and Poor's Fitch Ratings A) II and IV B) I, II, and III C) I and II D) I, II, III, and IV

The answer is I, II, III, and IV. All of these are insurance company rating services.

Which of the following are methods of managing risk? Avoidance Retention Reduction Transfer A) II, III, and IV B) I and II C) I, II, III, and IV D) III and IV

The answer is I, II, III, and IV. All of these are risk management techniques. Avoidance and reduction are methods of risk control. Retention and transfer are methods of risk financing.

Which of the following are types of automobile insurance coverage under a personal auto policy (PAP)? Uninsured motorists Liability insurance Medical payments Property damage A) I and II B) I, II, III, and IV C) I, II, and III D) III and IV

The answer is I, II, III, and IV. All of these are types of insurance coverage under a PAP.

Which of the following statements regarding malpractice and errors and omissions (E&O) insurance is CORRECT? Malpractice insurance is generally used where the deficient conduct of the insured may result in bodily harm (e.g., a physician, surgeon, or dentist). E&O insurance is coverage that provides protection against deficient acts of a professional who handles money. Malpractice insurance allows the insurance company to settle claims out of court on behalf of the professional. Most financial services professionals, including financial planners, will have E&O insurance at either the individual or group level. A) I, II, III, and IV B) II, III, and IV C) II and III D) I, II, and III

The answer is I, II, III, and IV. All of these statements are correct.

Which of the following are exclusions that apply to all of the standard homeowners forms? War or nuclear hazard Earthquake Flood Power failure A) I and II B) I, II, III, and IV C) II, III, and IV D) I and IV

The answer is I, II, III, and IV. Other exclusions that apply to all of the standard homeowners forms include neglect and intentional loss.

A personal liability umbrella policy (PLUP) is written only for persons with substantial underlying liability insurance. provides additional coverage to the underlying policies. has a drop down limitation that will apply in most cases. A) I and II B) I and III C) II and III D) I, II, and III

The answer is I, II, and III. All of these statements correctly describe a characteristic of the PLUP.

A personal liability umbrella policy (PLUP) is written only for persons with substantial underlying liability insurance. provides additional coverage to the underlying policies. has a drop down limitation that will apply in most cases. A) II and III B) I and II C) I, II, and III D) I and III

The answer is I, II, and III. All of these statements correctly describe a characteristic of the PLUP.

Which of the following typically are enacted by the state legislative branch of government to regulate insurers? Laws that a foreign company must follow to obtain a license Laws that set forth the standards of solvency for insurance companies in that state Laws that govern the conduct of insurers in that state Laws that determine the meaning of policy terms A) I, II, and III B) I, II, and IV C) II and IV D) III and IV

The answer is I, II, and III. Options I, II, and III are definitely within the purview of the legislative branch of state governments; however, policy terms are defined by the insurance companies. Courts will interpret any ambiguity in terms against the insurance company, but the company defines its own terms.

Which of the following are important when selecting an insurance producer? Experience Training Education Production awards earned A) II and III B) IV only C) I, II, III, and IV D) I, II, and III

The answer is I, II, and III. Options I, II, and III, along with competence, inclination to service, specialization, and a good reputation, are important when selecting an insurance producer. The production awards earned are an indication of sales ability, but not necessarily what should be sought in an insurance producer.

Which of the following are important when selecting an insurance producer? Competence Training Specialization Length of service with the company A) II and III B) IV only C) I, II, III, and IV D) I, II, and III

The answer is I, II, and III. Options I, II, and III, along with experience, inclination to service, education, and a good reputation, are important when selecting an insurance producer. The length of time with a single insurance company may indicate nothing more than the ability to keep one's job. Experience, which should be sought in an insurance producer, is intentionally developed expertise.

Which of the following are particular risks? Premature death Disability Unemployment Earthquake A) II and III B) I and II C) I, II, and III D) I, II, III, and IV

The answer is I, II, and III. The risk of premature death, disability, and unemployment directly affect an individual. Particular risks are risks that affect only individuals, such as the possibility of the loss of income or assets because of the inability to earn income (e.g., premature death, dependent old age, sickness, disability, unemployment). The risk of an earthquake is a fundamental risk.

What are the types of agent authority? Express authority Implied authority Apparent authority A) I and II B) I, II, and III C) I only D) II and III

The answer is I, II, and III. Types of agent authority include express authority, implied authority, and apparent authority. Express authority is the actual authority an insurance company gives to its agents and is specifically stated in writing and contained in the agency agreement. Implied authority is not expressly given to the agent by the insurance company but is the type of authority agents in similar circumstances normally possess. An example of implied authority is the acceptance of premium payments on behalf of the insurance company. Apparent authority occurs when an agent does not have express or implied authority, but the insured is led to believe the agent has authority.

Which of the following are considered covered autos under the liability coverage of the personal auto policy (PAP)? Any vehicle listed in the policy Any trailer owned by the insured A company car provided by the insured's employer Any private passenger auto that the insured acquired during the policy period, provided the insured requested coverage within 14 days (30 days in some states) A) I, II, and IV B) I, II, III, and IV C) III and IV D) I and IV

The answer is I, II, and IV. An employer-provided company car is specifically excluded from liability coverage under a PAP. The PAP does extend liability coverage for many trailers that are towed by the insured vehicle. The PAP does not extend coverage if the trailers are used in the course of business.

Which of the following statements regarding insurance contracts are CORRECT? Insurance contracts are generally contracts of indemnity, meaning that the policyowner will be reimbursed by the insurer only up to the actual loss amount without the opportunity for profit. Insurance contracts are contracts of utmost good faith, meaning that both parties must disclose all facts truthfully, or the contract may be reformed or rescinded. Insurance contracts are unilateral contracts, in that all parties to the contract are legally bound to perform. Insurance contracts are aleatory contracts, meaning that the outcome is affected by chance, and the dollars collected by the parties are usually unequal. A) I and III B) II, III, and IV C) I, III, and IV D) I, II, and IV

The answer is I, II, and IV. Insurance contracts are unilateral contracts, in that only one party to the contract is legally bound to perform.

Rebecca owns a gift shop and a home. She takes the bus everywhere she goes. In her spare time, she occasionally engages in activities that could possibly result in bodily injury to innocent bystanders if anything accidentally went wrong. Which of the following forms of insurance should Rebecca consider to avoid risk exposures from potential tort liability? Homeowners policy Personal auto policy Umbrella liability policy Commercial liability policy A) II and IV B) I and II C) I, III, and IV D) III and IV

The answer is I, III, and IV. As a businessowner, Rebecca should have a commercial liability policy for her business, most likely as a part of a businessowner's policy. As a homeowner, she should have homeowners insurance, and since she is a businessowner and potentially a target for lawsuits, a liability umbrella policy is also a good idea. Since she does not drive, she has no need for a personal auto policy.

The personal liability umbrella policy (PLUP) is structured to provide a catastrophic layer of liability coverage, in addition to the current homeowners and automobile liability coverage. Which of the following are exclusions found in a PLUP? Any act committed with the intent to cause bodily injury to another Liability arising out of any personal activity Directors and officers liability Workers' compensation obligations A) I and II B) III and IV C) I, II, and III D) I, III, and IV

The answer is I, III, and IV. One of the more important exclusions found in a PLUP is liability arising out of any business activities.

Kevin and Nancy have brought their homeowners insurance policy in for your review. The residence is insured for $430,000 under an HO-3 policy. Since taking ownership, they have made many improvements to the property. The market value of the residence is $776,000, and their 40-acre lot is valued at $150,000. Costs to rebuild the house now would be approximately $600,000. Last year, they added a barn, which cost $60,000, to supplement the loafing sheds, tack shed, and pole barn, with a total estimated replacement cost of $50,000. This is where they store the hay for their four horses, miniature donkey, and the other horses boarding there. They have created a collection of western memorabilia, which they lend to a local museum every couple of years. When it is lent, the museum takes out a special insurance policy for $150,000 to protect against damage or theft. Which of the following statements regarding their risk and coverage is true? Coverage A is underinsured by $170,000. In case of a partial loss, the residence is under the 80% coverage requirement, so the coinsurance provision would apply. Coverage C is adequate because 50% of the $430,000 will cover their memorabilia. The horses and miniature donkey should be disclosed to the company. They have added liability due to the friends keeping horses and riding on their property that should be addressed. Kevin and Nancy need an agent familiar with horse property and high-value collectibles. A) II, III, and IV B) I, II, III, and IV C) I, III, and IV

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

Marcel has been working for a large broker-dealer as a financial advisor and recently left to start his own practice. Which of the following should he purchase to protect himself from business-related liability risks? Malpractice insurance Errors and omissions insurance A businessowners policy (BOP) A personal liability umbrella policy (PLUP) A) II, III, and IV B) I, II, III, and IV C) II and III D) II and IV

The answer is II and III. As a financial services professional, Marcel would need errors and omissions insurance rather than malpractice insurance. A BOP is also necessary, as he will be a businessowner 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. Marcel 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 concerning the difference between malpractice insurance and errors and omissions (E&O) insurance are CORRECT? Only malpractice insurance is considered a professional liability contract. Malpractice insurance is generally used when conduct may result in bodily harm. E&O insurance provides protection against the deficient acts of a professional who handles money. The insurance company is not permitted to settle claims out of court on behalf of the professional with regard to malpractice insurance. A) II, III, and IV B) I and II C) II and III D) I, II, and III

The answer is II and III. Both malpractice and E&O insurance are professional liability insurance contracts. The insurance company is permitted to settle claims out of court on behalf of the professional with regards to malpractice insurance.

Comprehensive personal liability coverage (CPL) can be acquired in which of the following ways? As an endorsement to a personal auto policy (PAP) As an individual CPL policy. As part of a homeowners policy. A) I and III B) III only C) II and III D) I, II, and III

The answer is II and III. CPL coverage is not available through PAPs.

Which of the following is important when selecting an insurance producer? Length of service with the company Professional designations earned Inclination to service Production awards earned A) I, II, and III B) II and III C) I, II, III, and IV D) IV only

The answer is II and III. Options II and III, along with competence, experience, specialization, and a good reputation, are important when selecting an insurance producer. The production awards earned are an indication of sales ability but not necessarily what should be sought in an insurance producer. The length of time with a single insurance company may indicate nothing more than the ability to keep one's job. Experience, which should be sought in an insurance producer, is intentionally developed expertise.

Steven has a dog that has been known to wander through the neighborhood. His home is covered by an HO-3 policy. If Steven's dog bites a mailman three blocks away from his home, which of the followings statements regarding Steven's homeowners insurance coverage is CORRECT? Steven will not have any coverage because the bite did not take place at his personal residence. Coverage E of Steven's policy may apply or provide coverage if he is found to be legally liable (dog bite lawsuit). Coverage F of Steven's policy may be applied to any medical bills, typically up to $1,000. A) II only B) I only C) II and III D) III only

The answer is II and III. Steven will be covered if his dog bites the mailman on or off his property. Coverage E will apply only if he is found to be legally liable, and Coverage F will apply to any medical bills typically up to $1,000. Coverage F does not require Steven to be at fault to provide coverage.

Which of the following statements regarding the replacement cost coverage of the standard homeowners form is CORRECT? The standard homeowners form will provide replacement cost coverage for a partial loss up to the policy limit, minus any deductible if the home is insured for at least 80% of the purchase price. The standard homeowners form will cover the cost of required repairs for a partial loss up to the policy limit, minus any deductible without any deduction for depreciation if the home is insured for at least 80% of the replacement cost of the dwelling. Financial planners should recommend at least 100% of the replacement cost value of the home with regard to homeowners insurance coverage recommendations. A) II and III B) I only C) I, II, and III D) I and II

The answer is II and III. The replacement cost coverage provision will cover the cost of required repairs up to the policy limit, minus any deductible without any deduction for depreciation if the insured has covered the building for at least 80% of the replacement cost (not the purchase price of the home). Financial planners should always recommend at least 100% of the replacement value of the home with regard to homeowners insurance coverage.

Which of the following statements regarding a businessowners policy (BOP) are true? A BOP includes property coverage only. 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) II and III D) I, II, and III

The answer is 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 characteristics of inland marine coverage are explained correctly? Personal property floater risks are not eligible for coverage under inland marine policies. Many of the same items may be covered under an inland marine policy or as an endorsement to a homeowners policy. If a fishing boat is too large to be covered under a homeowners policy, it can be covered under an inland marine form called a boatowners policy. Silverware and golfing equipment may be covered under an inland marine policy. A) III and IV B) II, III, and IV C) I and II D) II and IV

The answer is II and IV. Option I is incorrect because most coverages available to an individual as separate inland marine policies are also available as endorsements to a homeowners policy. Option III is incorrect because a boatowners policy is not an inland marine policy.

Which of the following is covered under Coverage B: Other Structures of the HO-2, HO-3, and HO-8 homeowners forms? Structures attached to the dwelling Garages and other structures that are detached from the dwelling Land Structures used for business purposes or those that are rented to anyone other than a tenant of the residence A) I, II, III, and IV B) I and III C) II only D) I, II, and IV

The answer is II only. Structures attached to the dwelling are covered under Coverage A: Dwelling of the HO-2, HO-3, and HO-8 homeowners forms. Structures used for business purposes or those that are rented to anyone other than a tenant of the residence are not covered. An exception is made for the rental of a garage, which may be rented to anyone if used exclusively for garage purposes.

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. Customization is allowed in order to modify the standard CPP. The standard CPP includes building, contents, and liability coverage. The CPP is designed for larger businesses. A) I, II, III, and IV B) I, II, and IV C) I and II D) II, III, and IV

The answer is II, III, and IV. 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 examples of risk reduction? Decreasing insurance deductibles Moving from a high-risk neighborhood Maintaining a safe rate of speed while driving Installing dead bolt locks in a residence A) II, III, and IV B) I, II, III and IV C) III and IV D) I and II

The answer is II, III, and IV. Options II, III, and IV are all methods of reducing risk because, while the potential for loss to the individual remains, it is lessened. Option I is a form of risk transfer because by lowering one's deductible, more risk is transferred to an insurance company.

Which of the following statements regarding Coverage C: Personal Property within a standard HO-3 homeowners insurance policy are CORRECT? The limit on Coverage C is 50% of the Coverage A limit, and items are covered at replacement cost value. Furs, stamp collections, jewelry, and coin collections are examples of types of personal property that have only limited coverage. Animals, birds, fish, credit cards, motorized land vehicles used off the premises, property of roomers or boarders not related to the insured, and articles specifically described and insured by other policies such as a boat are all excluded items. The actual cash value is the depreciated value of personal property per an internal insurance company table and not the value of the property after depreciation for income tax purposes. A) II, III, and IV B) I, II, III, and IV C) I, II, and III D) I, II, and IV

The answer is II, III, and IV. The limit on Coverage C is 50% of the Coverage A limit, and the standard homeowners policy provides only actual cash value coverage on personal property. The insured may choose to increase the coverage on personal property by electing the replacement cost.

Which of the following characteristics must be present for a risk to be insurable? The loss must be intentional. The loss must be uncertain. The loss cannot be catastrophic to society. The loss must be measurable. A) I, II, and III B) I and III C) III and IV D) II and III

The answer is III and IV. In order for a risk to be insurable, the loss must be accidental and not intentional. There must be a sufficiently large and similar sample of individuals or events (i.e., homogeneous exposure units) to make the loss reasonably certain. The loss must also be measurable and noncatastrophic to society.

Which of the following are important when selecting an insurance company? Competence Training Ratings by the ratings companies History A) III and IV B) I and III C) III only D) I, II, III, and IV

The answer is III and IV. Options III and IV, along with the NAIC Watchlist, the size and age of the company, operating ratios, persistency, average policy size, lines of business, investment returns, and direct recognition, are all things one should look at when evaluating an insurance company. Competence and training are important when evaluating insurance producers, not companies.

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. A) II and IV B) I, II, and III C) IV only D) I and III

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 examples demonstrates vicarious liability? A) XYZ Paper Company must pay damages caused by the negligence of a delivery driver. B) Adam is sentenced to three years in jail for burglary. C) Joe must pay damages for intentionally striking his neighbor during an argument. D) Alice must pay damages for negligently causing an automobile accident while she was texting.

The answer is XYZ Paper Company must pay damages caused by the negligence of a delivery driver. Vicarious liability occurs when a person is liable for a tort committed by someone else, such as when an employer is responsible for damages caused by an employee.

Which of the following is an insurance producer who represents the applicant for insurance? A) An independent agent B) A career agent C) A producing general agent D) A broker

The answer is a broker. Brokers represent potential insureds. Agents represent insurance companies.

Which of the following cannot bind coverage for insurance on behalf of an applicant? A) An independent agent B) A broker C) A career agent D) A captive agent

The answer is a broker. Brokers represent the insured, and for exam purposes, brokers cannot bind coverage since they do not represent a specific company.

Which of the following can provide property coverage for a small businessowner's business property? A) A personal auto policy (PAP) B) A businessowner's policy (BOP) C) A commercial general liability (CGL) policy D) An employment practices liability policy

The answer is a businessowner's policy (BOP). As a packaged product, a BOP provides both property and liability coverage. While a PAP provides property coverage, business use is excluded by the base policy. A CGL and an employment practices liability policy provide only liability coverage.

Which of the following describes an insurance agent who represents only one company or one group of companies? A) A broker B) A captive agent C) Surplus lines agent D) An independent agent

The answer is a captive agent. They represent a single company or group of companies. Independent agents, brokers, and surplus lines agents represent several companies.

Because clients can only accept or reject an insurance contract and cannot modify its terms, the contract is said to be A) an aleatory contract. B) a contract of adhesion. C) a contract of utmost good faith. D) a contract of indemnity.

The answer is a contract of adhesion. A contract of adhesion is a contract that a potential client can only accept or reject—not modify its terms or provisions.

A policy designed to provide protection against a lawsuit or judgment in excess of the limits of basic liability insurance is A) a self-insurance policy. B) a casualty insurance policy. C) an excess benefit plan. D) a personal liability umbrella policy (PLUP).

The answer is a personal liability umbrella policy (PLUP). A PLUP covers losses in excess of the limits of basic liability insurance. Typically, coverage is available in amounts ranging from $1 million to $10 million.

Which of the following statements best describes pure risk? A) One requirement for proving negligence (i.e., a continuous succession of events from the negligent act to the final event causing injury) B) The ability to continue employer-provided or employer-sponsored benefits after termination of employment C) The price charged for a period of coverage provided by an insurance policy and found by multiplying the periodic rate per unit by the number of units of coverage D) A possibility of loss that involves only two outcomes: loss or no loss

The answer is a possibility of loss that involves only two outcomes: loss or no loss. Pure risks involve only the chance of loss or no loss.

Which of the following is the result of physical harm, emotional harm, or financial loss? A) Tort B) Criminal act C) Physical hazard D) Estoppel

The answer is a tort is the result of physical harm, emotional harm, or financial loss.

In settling an insured's loss, the duties of the insured do NOT include which of the following? A) Providing notice of loss B) Providing proof of loss C) Accepting any settlement offered by the insurer D) Protecting property

The answer is accepting any settlement offered by the insurer. The insured is not obligated to accept any settlement offered by the insurer. The duties of the insured include providing notice of loss, protecting property, and providing proof of loss.

The replacement cost of personal property minus depreciation is the property's A) appraised value. B) amortized value. C) coinsurance value. D) actual cash value.

The answer is actual cash value. This value is the personal property's replacement cost less depreciation.

Which of the following terms is correctly matched with its definition? A) Adhesion: one party writes the contract, and the other party has no say in the matter—she only accepts or rejects the contract. B) Doctrine of waiver: prevents a party from asserting a right to which he would otherwise be entitled where, because of his own actions or behavior, he misled someone (even though unintentionally) who relied on the understanding created, thereby to his own detriment. C) Doctrine of estoppel: a party, by her own actions (or the actions of her agent), has voluntarily relinquished a known right. D) Reformation: an equitable remedy by which the original contract entered into by the parties is deemed null from its beginning.

The answer is adhesion: one party writes a contract, and the other party has no say in the matter—she only accepts or rejects the contract. This is an accurate description of adhesion.

Open-perils coverage in a homeowners policy includes coverage for A) only the perils occurring outside the home's physical structure. B) only the perils named in the policy. C) windstorm and hail only. D) all perils except those specifically excluded in the policy.

The answer is all perils except those specifically excluded in the policy. Open-perils coverage provides protection from all perils except those specifically outlined as exclusions in the policy.

Which of the following insurance concept definitions is CORRECT? A) An indemnity contract is one that allows the policyowner to be reimbursed for more than the actual amount of the loss. B) A contract of adhesion is one in which the terms can be modified. C) Unilateral contracts require a promise to perform from both the insurance company and the insured. D) An aleatory contract is one in which one party might receive benefits substantially greater in value than the benefits received by the other party.

The answer is an aleatory contract is one in which one party might receive benefits substantially greater in value than the benefits received by the other party. Insurance is an aleatory contract. As such, one party (the insured) may receive benefits substantially greater in value than those of the other party (the insurance company).

Which of the following vehicles is NOT eligible to be covered under a personal auto policy (PAP)? A) A motorcycle B) A pick-up truck C) A snowmobile D) An automobile owned by a corporation

The answer is an automobile owned by the corporation. An automobile must be owned by an individual to be eligible for PAP coverage. Motorcycles and snowmobiles are considered nonstandard vehicles. Though not included under the definition of a covered auto, these can be added to a personal auto policy with an endorsement.

If Mega Insurance Company has an A+ Superior rating with A.M. Best Company, what should a planner tell his client about the rating? A) AAA+ is the highest rating given by A.M. Best. B) An evaluation of the financial strength of an insurance company is best obtained by consulting more than one rating service. C) This rating means the company is safe, and the client will never lose money. D) This rating is the highest rating given by any rating service.

The answer is an evaluation of the financial strength of an insurance company is best obtained by consulting more than one rating service. The highest rating awarded by A.M. Best is A++. A rating service focuses on the financial condition of the insurance company (loss reserves and surpluses) and the reliability of its claims-paying ability. The rating assigned to an insurance company may vary, depending on the rating service. A financial planner should advise clients to purchase products from companies that are in the highest rating tiers of each rating service.

All of the following statements regarding torts are correct except A) torts can either be intentional or unintentional. B) an individual can only be liable for torts he personally committed. C) a tort is a private wrong that occurs when one person infringes on the rights of another. D) negligence is a type of tort.

The answer is an individual can only be liable for torts he personally committed. A person may be liable for torts committed by someone else. For example, parents may be liable for torts committed by their children, and employers may be liable for the torts committed by their employees. This type of liability is known as vicarious liability.

Which of the following professionals would likely need errors and omissions insurance? A) A certified nursing assistant B) An orthopedic surgeon C) A physician's assistant 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 errors and omissions insurance? A) A physician's assistant B) An orthopedic surgeon C) An insurance agent D) A certified nursing assistant

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 accountant B) A financial advisor C) An attorney D) An oncologist

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 is a common property coverage that can be included in a businessowners policy (BOP)? A) Workers' compensation B) General liability C) Employment practices liability D) Auto

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 is a common property coverage that can be included in a commercial package policy? A) Workers' compensation B) General liability C) Commercial liability D) Boiler and machinery

The answer is boiler and machinery. Coverage for boiler and machinery is a property coverage, while the other answer choices provide liability coverage.

The state insurance department, headed by the state insurance Commissioner: administers compliance. sets regulations implementing legislation. A) II only B) Neither I nor II C) Both I and II D) I only

The answer is both I and II. As part of the executive branch of government, the insurance commissioner is responsible for enforcing laws pertaining to the insurance industry in his state. As such, both options are correct.

Which of the following statements regarding personal auto policy (PAP) Part B Medical Payments coverage is CORRECT? Part B of the PAP provides payment for the reasonable and necessary medical expenses of an insured as a result of an automobile accident. The insureds under Part B include the named insured, spouse, and any family members while they are occupying a motor vehicle, or when, as a pedestrian, they are struck by a vehicle. A) Neither I nor II B) Both I and II C) I only D) II only

The answer is both I and II. Part B: Medical Payments coverage provides payment for the reasonable and necessary medical expenses of the insured as a result of an automobile accident. Expenses must be incurred within three years of the incident, and limits are provided on a per-person, per-occurrence basis. Individuals covered by Part B include the named insured, spouse, and any family member while they are occupying a motor vehicle, or when, as a pedestrian, they are struck by a vehicle.

Which of the following statements regarding professional liability insurance is CORRECT? Professional liability insurance covers a wide variety of insurance policies for many occupations and protects against liability for failing to use the degree of skill expected of a person in a particular occupation. Professional liability insurance includes both medical malpractice insurance and errors and omissions insurance. A) I only B) Both I and II C) II only D) Neither I nor II

The answer is both I and II. Professional liability insurance covers a wide variety of insurance policies for many occupations and protects against liability for failing to use the degree of skill expected of a person in a particular occupation. Professional liability insurance includes both medical malpractice insurance and errors and omissions insurance.

Which of the following statements regarding professional liability insurance is CORRECT? Professional liability insurance covers a wide variety of insurance policies for many occupations and protects against liability for failing to use the degree of skill expected of a person in a particular occupation. Professional liability insurance includes both medical malpractice insurance and errors and omissions insurance. A) I only B) II only C) Neither I nor II D) Both I and II

The answer is both I and II. Professional liability insurance covers a wide variety of insurance policies for many occupations and protects against liability for failing to use the degree of skill expected of a person in a particular occupation. Professional liability insurance includes both medical malpractice insurance and errors and omissions insurance.

Which of the following statements regarding professional liability insurance is CORRECT? Professional liability insurance covers a wide variety of insurance policies for many occupations and protects against liability for failing to use the degree of skill expected of a person in a particular occupation. Professional liability insurance includes both medical malpractice insurance and errors and omissions insurance. A) II only B) Neither I nor II C) I only D) Both I and II

The answer is both I and II. Professional liability insurance covers a wide variety of insurance policies for many occupations and protects against liability for failing to use the degree of skill expected of a person in a particular occupation. Professional liability insurance includes both medical malpractice insurance and errors and omissions insurance.

In property insurance, an insurable interest must exist A) at the time of the loss only. B) when the policy is issued only. C) both at the time of issuance and at the time of loss. D) neither at the time of issuance nor at the time of loss.

The answer is both at the time of issuance and at the time of loss. With property insurance, an insurable interest must exist both when the policy is issued and at the time of loss.

Kaari has a homeowners policy. Three streets away from her house, her dog bites a mailman. What are the consequence of this event? A) Both medical payments and personal liability coverage may apply. B) Only personal liability coverage applies. C) There is no coverage under the policy because pets are excluded. D) Only medical payments coverage applies.

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.

There are two types of automobile physical damage coverage: damage by collision and comprehensive. All of the following would be considered damage by comprehensive except A) hail damage. B) bumping into a steel post in a parking lot. C) being struck by a falling branch. D) being struck by gravel from a passing truck.

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

Which type of insurance producer sells insurance from direct writer companies? A) Captive agents B) Brokers C) Independent agents D) Solicitors

The answer is captive agents. Captive agents sell for direct writers, and examples of these include State Farm, Allstate, and Farmers Insurance.

Which of the following professionals would likely need malpractice insurance? A) Attorney B) Financial advisor C) Chiropractor D) Accountant

The answer is chiropractor. 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).

The insurance provision that states that the insured will split the costs of a loss to some degree, usually on a percentage basis, describes which of the following? A) A deductible B) Coinsurance C) Other insurance D) Subrogation

The answer is coinsurance. The question defines coinsurance, which is a splitting of costs. A deductible is what the insured must pay before the insurance company pays anything. It is possible to have a loss that is valued at an amount below the deductible, and nothing would be owed by the insurance company. It is not possible for the insurance company and the insured to not split costs when coinsurance applies.

Which of the following types of automobile insurance coverage would apply if you backed into a tree on your front lawn? A) Collision B) General provisions C) Comprehensive D) Liability coverage

The answer is collision. Collision is defined under Part D of a personal auto policy as "the upset of your covered auto or its impact with another vehicle or object." Therefore, this provision covers damages incurred in an accident involving other vehicles or when an automobile runs into a tree.

Which of the following types of automobile insurance coverage would apply if you backed into a tree on your front lawn? A) Liability coverage B) Comprehensive C) Collision D) General provisions

The answer is collision. Collision is defined under Part D of a personal auto policy as "the upset of your covered auto or its impact with another vehicle or object." Therefore, this provision covers damages incurred in an accident involving other vehicles or when an automobile runs into a tree.

Which of the following is a risk-financing technique? A) Risk retention B) Risk avoidance C) Risk evaluation D) Risk reduction

The answer is risk retention. Risk retention (financing the risk oneself) and risk transfer (passing the cost of the risk to another, most commonly via insurance) are risk financing techniques. Risk reduction and risk avoidance are risk control techniques, and risk evaluation is neither risk financing nor control.

Which defense against liability reduces the defendant's proportion of liability based upon the injured party's contribution to the total negligence that causes injury? A) The last clear chance rule B) Assumption of risk C) Contributory negligence D) Comparative negligence

The answer is comparative negligence. This is an alternative to the contributory negligence defense. Comparative negligence reduces the defendant's liability in some proportion based upon the injured party's contribution to the total negligence that causes the injury. If the jury determines that the injured party was 20% to blame for the injury, the plaintiff's award might be reduced by 20%.

An insurance contract requires an exchange of value to be considered a legally binding document. What is the term used to describe this requirement? A) Legal form B) Legal capacity C) Legal object D) Consideration

The answer is consideration. Consideration occurs when there is an exchange of value. The insurance contract requires an exchange of value to be legally binding. For most insurance, the promise to pay the premium is usually sufficient consideration to make the contract binding; however, for life insurance, the premium must be paid before the insurance contract is binding for the insurer. The submission of a completed insurance application (offer) plus the payment of the first premium (consideration) to the insurance company will generally create a binding contract if the application would pass standard underwriting requirements.

Inland marine insurance for business A) is designed primarily to cover personal watercraft. B) includes the liability of the property owner. C) covers domestic goods in transit. D) is designed to cover personal autos.

The answer is covers domestic goods in transit. Inland marine is often part of a commercial package policy.

The primary purpose of the conditions section of an insurance policy is to A) contain the statements made by the insured. B) define the duties and rights of both parties. C) add exclusions that eliminate coverage for certain periods. D) permit the inclusion of additional coverages.

The answer is define the duties and rights of both parties. The conditions section of an insurance policy outlines what is required of the insured and what rights the insured has under the policy. Statements of the insured are in the application riders or the policy itself and outline additional coverage provided. Exclusions are covered in the exclusion section.

All of the following are business property risks covered by packaged policies (a BOP or a CPP) except A) crime. B) accidental damage. C) errors and omissions. D) commercial auto.

The answer is errors and omissions. Errors and omissions insurance is a liability exposure sold outside of a package. The other choices are property exposures covered by a packaged policy for businessowners.

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) Farm-use vehicles generally have higher premiums. D) An automobile that is driven only for pleasure costs less to insure than one that is driven to work daily.

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) Psychiatrist B) Dentist C) Optician D) Financial planner

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).

Frank is severely injured in an automobile accident caused by another driver, Henry. At trial, the court orders Henry to pay Frank $100,000 as compensation for the pain and suffering resulting from his injuries. Which of the following types of damages for which the award was granted is CORRECT? A) Special B) Punitive C) Comparative D) General

The answer is general. General damages compensate an injured party for intangible losses, such as pain and suffering, which cannot be measured monetarily.

Your clients have a penthouse in New York where they spend several months per year, as well as a home in Virginia where they typically spend the winter. They regularly have their butler move their favorite art and collectibles between houses. In addition, they frequently travel for business overseas. Part of the business includes entertaining international guests and hosting formal events and yacht parties. The wife carries her expensive jewelry when they travel. While at hotels, they keep the jewelry in the hotel safe. Which combination of coverages should they consider that would best meet their needs? A) Homeowners and an umbrella policy with a personal property rider to protect their jewelry B) Homeowners coverage on both homes, watercraft coverage, an inland marine policy, and a large umbrella policy, at a minimum C) An inland marine policy to protect the yacht and homeowners coverage for both homes, with high personal property limits to protect their property D) Homeowners on both homes and a large umbrella policy

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

The law of agency implies that a financial planner A) can make recommendations to the client only after all members of the agency approve those recommendations. B) must be part of an agency in order to practice. C) does not work exclusively for any one firm, but represents several firms. D) may represent a firm; in this case, the firm is responsible for any promises the financial planner makes to the client.

The answer is may represent a firm; in this case, the firm is responsible for any promises the financial planner makes to the client. Under the law of agency, a financial planner is considered an agent/representative of the planning firm. As a result, the firm is liable for any promises the planner makes to the client.

Your clients have a penthouse in New York where they spend several months per year, as well as a home in Virginia where they typically spend the winter. They regularly have their butler move their favorite art and collectibles between houses. In addition, they frequently travel for business overseas. Part of the business includes entertaining international guests and hosting formal events and yacht parties. The wife carries her expensive jewelry when they travel. While at hotels, they keep the jewelry in the hotel safe. Which combination of coverages should they consider that would best meet their needs? A) Homeowners coverage on both homes, watercraft coverage, an inland marine policy, and a large umbrella policy, at a minimum B) Homeowners on both homes and a large umbrella policy C) An inland marine policy to protect the yacht and homeowners coverage for both homes, with high personal property limits to protect their property D) Homeowners and an umbrella policy with a personal property rider to protect their jewelry

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

All of the following are steps in the risk management process except A) monitoring the plan for any changes and/or updates. B) identifying the insurance required to cover every risk. C) analyzing and evaluating the information to identify risk exposures facing the client. D) identifying risk management goals.

The answer is identifying the insurance required to cover every risk. While insurance is certainly an option for handling risk, it is not and should not be the only option utilized to cover every risk.

Umbrella policies cover liability and are generally in addition to homeowners and auto coverage. Which one of the following statements about umbrella policies is CORRECT? A) If an item such as watercraft is not covered by an underlying policy, it may not be covered under the umbrella for liability issues. B) Policies will cover injuries to family members intentionally committed by a welcome guest while in the residence if there is a basic homeowners policy. C) Comprehensive liability is broader than umbrella policies. D) The umbrella policy covers the claims first, and if there are excess claims, the underlying homeowners or auto insurance will cover the balance.

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

Umbrella policies cover liability and are generally in addition to homeowners and auto coverage. Which one of the following statements about umbrella policies is CORRECT? A) If an item such as watercraft is not covered by an underlying policy, it may not be covered under the umbrella for liability issues. B) The umbrella policy covers the claims first, and if there are excess claims, the underlying homeowners or auto insurance will cover the balance. C) Comprehensive liability is broader than umbrella policies. D) Policies will cover injuries to family members intentionally committed by a welcome guest while in the residence if there is a basic homeowners policy.

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

What is the process of evaluating risks to determine if they are reasonable to accept and to what degree? A) Actuarial pricing B) Insurance underwriting C) Loss assessment D) Loss adjustment

The answer is insurance underwriting. A loss must occur for a loss assessment or loss adjustment. Actuarial pricing is a determination of how a insurance should be priced.

Which of the following statements regarding inland marine insurance is true? A) It is used for protection of property that is in transit. B) It is used for low-value personal property. C) It usually is written without open-perils coverage. D) It is available only as an endorsement to a homeowners policy.

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

Which of the following occupations would likely need errors and omissions insurance? A) Registered nurse B) Anesthetist C) Lawyer D) Family practice physician

The answer is lawyer. 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 definitions best describes vicarious liability? A) Legal responsibility for extraordinarily dangerous activities B) Legal responsibility for criminal acts C) Legal responsibility extended to someone other than the person who caused the injury D) Legal responsibility for acts under the negligence per se rule

The answer is legal responsibilities extended to someone other than the person who caused the injury. Vicarious liability is legal responsibility extended to someone other than the person who caused the injury. For example, parents may be liable for torts committed by their children, and employers can be liable for torts committed by their employees.

Which of the following types of risk is most suited to treatment by insurance? A) Low probability, high severity B) High probability, low severity C) High probability, high severity D) Low probability, low severity

The answer is low probability, high severity. Insurance (or the transference of risk) is most suited to those losses that have a low probability or frequency of occurring and potentially high severity.

Which of the following types of risk is insurance typically used to manage? A) High probability, low severity B) Low probability, low severity C) Low probability, high severity D) High probability, high severity

The answer is low probability, high severity. Insurance is typically used to manage risks with a high severity of loss but a low probability of occurring.

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) Medical payments coverage is applicable, and liability coverage is applicable if Samantha is held legally liable. B) Samantha needed a personal liability umbrella policy for coverage of this type of risk. C) Only medical payments coverage applies, not liability coverage. D) There is no coverage under this policy because pets are excluded.

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.

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) Medical payments coverage is applicable, and liability coverage is applicable if Samantha is held legally liable. B) Samantha needed a personal liability umbrella policy for coverage of this type of risk. C) Only medical payments coverage applies, not liability coverage. D) There is no coverage under this policy because pets are excluded.

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.

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) There is no coverage under this policy because pets are excluded. B) Only medical payments coverage applies, not liability coverage. C) Samantha needed a personal liability umbrella policy for coverage of this type of risk. D) Medical payments coverage is applicable, and liability coverage is applicable if Samantha is held legally liable.

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.

Barbara left her car parked on top of a hill while visiting at a friend's house. Unfortunately, she forgot to apply her emergency brake, and her car rolled down the hill, injuring two children who were playing. Which of the following doctrines may influence Barbara's liability in this situation? A) Negligence B) Assumption of risk C) Strict liability D) Attractive nuisance

The answer is negligence. The doctrine of attractive nuisance is exemplified by a homeowner not fencing in a below-ground swimming pool and then children drowning in the pool. Barbara, by failing to apply her emergency brake at the top of a hill, was negligent.

Which of the following is NOT a provision frequently contained in the sections of insurance policies that address the insured's duties relating to loss settlement? A) Negotiation of settlement with a third party B) Protection of damaged property C) Notice of loss D) Proof of loss

The answer is negotiation of settlement with a third party. Negotiation of a settlement with a third party is not a duty of the insured that relates to loss settlement. Evidence, notice of loss, protection of damaged property, and proof of loss are all duties of the insured relating to loss settlement.

Which of the following statements regarding the primary forms of insurance company ownership are CORRECT? Mutual companies are owned by the employees of the insurance company. Stock companies are owned by stockholders, who are policyowners of the insurance company. A) II only B) I only C) Both I and II D) Neither I nor II

The answer is neither I nor II. Mutual companies are owned by policyowners. Stock companies, are owned by stockholders who are not necessarily policyowners.

Which of the following statements describing insurance terms are CORRECT? A misrepresentation is carelessness or indifference on the part of an individual pertaining to whether a loss occurs and/or the size of a loss if one does occur. A morale hazard is a false and material statement made by an applicant for insurance, providing a basis for the insurer to make the contract voidable. A) I only B) Both I and II C) II only D) Neither I nor II

The answer is neither I nor II. Neither statement I nor II is correct. Statement I is incorrect because it describes a morale hazard. Statement II is incorrect because it describes a misrepresentation.

Which of the following items are covered without a dollar limit under the personal property provision of a homeowners policy? A) Coin collections B) Furs C) Jewelry D) None of these

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 statements regarding malpractice insurance is CORRECT? A) Malpractice insurance policies exclude intentional acts of the professional from coverage. B) There is generally one standard form that is used for most professionals who need errors and omissions insurance. C) Only a limited number of companies issue professional liability insurance policies. D) Professional liability insurance is a good alternative to an umbrella liability policy.

The answer is only a limited number of companies issue professional liability insurance policies. Relatively few companies sell this product due to its highly specialized nature. The act for which a physician or dentist might be sued might well be the exact act the provider intended. The result may not be what the patient wanted, leading to a lawsuit. Thus, intentional acts are not excluded from malpractice insurance. There are generally different forms used for each type of professional under all forms of professional liability insurance. An umbrella policy may extend the limits of an underlying professional liability policy, but professional liability insurance does not replace an umbrella policy.

Debbie recently lost one of her diamond earrings, and she filed an insurance claim. Which of the following is NOT an option for the insurer? A) Replace the lost earring B) Pay the difference between the actual cash value of the earrings before and after the loss C) Require Debbie to surrender the remaining earring before receiving a check D) Replace both earrings

The answer is require Debbie to surrender the remaining earring before receiving a check. Options available to the insurer to settle a claim like this include replacing both earrings, replacing just the lost earring, or simpy issuing a check for an amount equal to the value of the lost earring. The insurance company can ask but cannot require Debbie to surrender the other earring. It can reduce the settlement amount by the salvage value of the single earring if she does not surrender it.

Which of the following statements regarding malpractice insurance is CORRECT? A) There is generally one standard form that is used for most professionals who need errors and omissions insurance. B) Professional liability insurance is a good alternative to an umbrella liability policy. C) Only a limited number of companies issue professional liability insurance policies. D) Malpractice insurance policies exclude intentional acts of the professional from coverage.

The answer is only a limited number of companies issue professional liability insurance policies. Relatively few companies sell this product due to its highly specialized nature. The act for which a physician or dentist might be sued might well be the exact act the provider intended. The result may not be what the patient wanted, leading to a lawsuit. Thus, intentional acts are not excluded from malpractice insurance. There are generally different forms used for each type of professional under all forms of professional liability insurance. An umbrella policy may extend the limits of an underlying professional liability policy, but professional liability insurance does not replace an umbrella policy.

A unilateral contract is one in which A) one party cannot transfer the contract to another. B) there is no legal enforcement. C) only one party makes a legally enforceable promise. D) both parties make legally enforceable promises.

The answer is only one party makes a legally enforceable promise. In a unilateral contract, only one party makes a legally enforceable promise. An insurance policy is a unilateral contract because only the insurer makes a legally enforceable promise to perform.

Which of the following is the role of the legislative branch in regulating the insurance industry within a state? A) Passing laws relative to the insurance industry B) Creating model legislation relative to the insurance industry C) Interpreting and applying the laws in place relative to the insurance industry D) Enforcing the laws in place relative to the insurance industry

The answer is passing laws relative to the insurance industry. The legislative branch votes on and passes laws relative to the insurance industry. These laws are enforced by the executive branch, and disputes concerning the interpretation or application of the law is handled by the judicial branch. The National Association of Insurance Commissioners provides model legislation that may or may not be enacted by the several states.

Ronnie has been working and saving for a car since he was 13. He recently turned 16, obtained a driver's license, and purchased a car for which he paid cash. He went to his insurance agent's office and purchased the required car insurance. The agent did not notice that he is only 16. In the event of a claim, which option is available to the insurance company? A) Refuse to pay the claim because the contract is voidable. B) Void the contract because Ronnie is a minor. C) Pay the claim. D) Tell Ronnie to submit the claim on his parents' auto insurance policy.

The answer is pay the claim. The company must pay the claim. A voidable contract is a contract where one party has the option of voiding the contract, but the other party is bound. In this case, where a contract is made with a minor, the contract is voidable by the minor, but if it isn't voided, it remains a legal contract. The insurance company cannot void the contract and must pay the claim.

Which of the following states that the insured should not profit from a covered loss, but should be restored to approximately the same financial position before the occurrence of the loss? A) Collateral source rule B) Principle of insurable interest C) Rule of adhesion D) Principle of indemnity

The answer is principle of indemnity. The principle of indemnity has two purposes: to prevent the insured from profiting from insurance claims and to reduce moral hazards.

A homeowners insurance policy can be endorsed with an HO-15 to A) absorb the deductible. B) cover the homeowner's automobiles. C) provide flood insurance. D) provide open-peril coverage for personal property owned, used, or worn by the insured.

The answer is provide open-peril coverage for personal property owned, used, or worn by the insured. The HO-15 provides open-peril coverage for personal property owned, used, or worn by the insured.

A homeowners insurance policy can be endorsed with an HO-15 to A) absorb the deductible. B) provide open-peril coverage for personal property owned, used, or worn by the insured. C) provide flood insurance. D) cover the homeowner's automobiles.

The answer is provide open-peril coverage for personal property owned, used, or worn by the insured. The HO-15 provides open-peril coverage for personal property owned, used, or worn by the insured.

A homeowners insurance policy can be endorsed with an HO-15 to A) cover the homeowner's automobiles. B) provide open-peril coverage for personal property owned, used, or worn by the insured. C) absorb the deductible. D) provide flood insurance.

The answer is provide open-peril coverage for personal property owned, used, or worn by the insured. The HO-15 provides open-peril coverage for personal property owned, used, or worn by the insured.

Which of the following professionals would likely need malpractice insurance? A) Attorney B) Financial advisor C) Accountant D) Registered nurse

The answer is registered nurse. 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).

The pairs and sets option of loss settlement under a homeowners policy allows the insurance company to A) sell the damaged property as a pair or set only. B) sell the pair or set for its salvage value. C) pay the full replacement cost of the pair or set. D) repair or replace any part of the pair or set to its value before the loss.

The answer is repair or replace any part of the pair or set to its value before the loss. This option allows the insurer to repair or replace any part of a set or pair, or pay the insured the difference between the actual cash value of the pair or set before and after the loss.

Using a seatbelt when driving, wearing a helmet when riding a bicycle, and installing a home security system are all examples of which risk management method? A) Risk retention B) Risk reduction C) Risk transfer D) Risk avoidance

The answer is risk reduction. These are all examples of risk reduction. Risk avoidance would not involve avoiding driving or riding a bicycle at all. Risk retention would be choosing not to use a seatbelt or wear a helmet, or not installing a security system and taking one's chances. Risk transfer often involves insurance.

Which of the following is true for property coverage in a commercial package policy (CPP)? A) No customization is needed, as all potential risks are covered in the standard CPP. B) The CPP provides liability coverage, and any property coverage needs to be added by endorsement. C) The standard CPP includes building, contents, and commercial automobile coverage. D) The CPP is designed for larger businesses and is offered at a discount from a collection of monoline forms.

The answer is the CPP is designed for larger businesses and is offered at a discount from a collection of monoline forms. 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 can be provided by endorsement, but are not included in the standard 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 the full $13,500 in rental expenses but does not cover the $4,000 for meals. B) The HO-3 policy does not cover any of their living expenses while their house is uninhabitable. C) The HO-3 policy covers the entire $17,500 in expenses. D) The HO-3 policy covers only the first $15,000 of the $17,500 in expenses.

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 HO policy forms provides the highest level of building and personal property coverage? A) HO-3 B) HO-2 C) HO-5 D) HO-15

The answer is the HO-5. The HO-5 policy form provides open-perils coverage on buildings and personal property. The HO-2 policy form only provides broad form coverage on buildings and personal property. The HO-3 policy form provides open form coverage on buildings and broad form coverage on personal property. The HO-15 is technically an endorsement and not a form, and provides open-peril coverage to personal property. A combination of the HO-3 form and the HO-15 personal property endorsement is the equivalent of the HO-5.

Which of the following established that regulation of the insurance industry would be left up to the states? A) HIPAA B) ERISA C) The McCarran Ferguson Act of 1945 D) The Department of Labor

The answer is the McCarran Ferguson Act of 1945. The McCarran Ferguson Act of 1945 left direct regulation of the insurance industry to the states.

Which of the following gave states the authority to regulate the insurance industry? A) The McCarran-Ferguson Act of 1945 B) The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) C) The National Association of Insurance Commissioners (NAIC) D) The state insurance commissioners

The answer is the McCarran-Ferguson Act of 1945. Under the McCarran-Ferguson Act of 1945, insurance is regulated primarily at the state level. The NAIC issues model insurance legislation that individual states are free to adopt if they choose, but the NAIC has no legislative authority in any state. COBRA requires certain employers to provide previously covered individuals (including spouses and dependents) with the same health insurance coverage they received while employed after the occurrence of a qualifying event.

All of the following provide indirect federal regulation of the insurance industry except A) the Dodd-Frank Act. B) HIPAA. C) the IRS. D) the NAIC.

The answer is the NAIC. The National Association of Insurance Commissioners and does not regulate the insurance industry, but rather, provides model legislation that may or may not be enacted by the several states. It is not a federal agency.

Which of the following provides model legislation that may or may not be enacted by several states? A) The IRS B) The Dodd-Frank Act C) The National Association of Insurance Commissioners (NAIC) D) HIPAA

The answer is the National Association of Insurance Commissioners (NAIC). The NAIC does not regulate the insurance industry, but rather, provides model legislation that may or may not be enacted by several states. It is not a federal law or agency.

All of the following are rating services that rate the financial strength of insurance companies except A) the National Association of Insurance Commissioners (NAIC). B) Moody's. C) Standard & Poor's. D) A.M. Best.

The answer is the National Association of Insurance Commissioners (NAIC). The NAIC is an organization made up of state insurance regulators that develops model legislation.

What is adverse selection? A) The concept that a broker represents insureds, while agents represent insurance companies B) Choosing an insurance company that is in poor financial shape C) The concept that people who expect to have claims will want insurance more than people who expect to have few or no claims D) Choosing an insurance agent who does not properly service her clients

The answer is the concept that people who expect to have claims will want insurance more than people who expect to have few or no claims. Adverse selection is the concept that those who are more likely to have claims will want insurance more than someone who may have few, if any, claims. For example, a person who believes he is very likely to develop Alzheimer's disease is more likely to want long-term care insurance than someone who has no such expectation. Insurance companies want to limit the number of high-risk candidates so the pool of insureds is more representative of the population as a whole.

Which of the following statements best defines open-perils coverage? A) The coverage is designed to protect against all perils except those specifically excluded from coverage. 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 for the repair or replacement of an intentionally damaged structure or attachment.

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.

Which section of an insurance contract includes information provided by the applicant? A) The exclusions section B) The insuring agreement C) The conditions section D) The declarations section

The answer is the declarations section. The declarations section includes information provided by the applicant, and it may be transcribed from the application, or the application itself may be attached. The insuring agreement identifies what is insured, for what amount, and under what conditions. The exclusions section identifies circumstances or situations that would preclude the company from paying a claim. The conditions section states the rights and duties of the insurance company and the policy owner.

Which of the following individuals are NOT insured under Section II of homeowners policies? A) The named insured and spouse B) Other persons under 21 years of age in the care of an insured C) The friends of the insured who are not in the care of the insured D) A family member residing in the household

The answer is the friends of the insured who are not in the care of the insured. The insured persons include the named insured and spouse, family members residing in the household, and other persons under age 21 in the care of an insured.

Which of the following persons are NOT insured under Section II of homeowners policies? A) Other persons under 21 years of age in the care of an insured B) A family member residing in the household C) The friends of the insured who are not in the care of the insured D) The named insured and spouse

The answer is the friends of the insureds who are not in the care of the insured. The insured persons are the named insured and spouse, family members residing in the household, and other persons under age 21 in the care of an insured.

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 insurance companies couldn't afford the loss of a very high-value home. B) Most owners of very high-value homes self-insure. 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 statements pertaining to insurance concepts is CORRECT? A) Insurance is the dispersion of actual from expected results. B) The law of large numbers theory asserts that with more members in a group, the probability that the actual loss experience will equal the expected loss experience is greater. C) A peril is the indifference to loss that creates carelessness and increases the chance of loss because of the existence of insurance. D) A morale hazard is the cause of a financial loss.

The answer is the law of large numbers theory asserts that with more members in a group, the probability that the actual loss experience will equal the expected loss experience is greater. A peril is the cause of a financial loss. A morale hazard is the indifference to loss that creates carelessness and increases the chance of loss because of insurance. Risk is the dispersion of actual from expected results.

Which of the following terms best describes the probability of an insured becoming disabled? A) Accident and sickness rate B) Disability rate C) Morbidity rate D) Mortality rate

The answer is the morbidity rate. Morbidity rate is the probability of a person becoming disabled.

Which of the following is true about the various HO forms? A) Clients may still add the HO-15 to an HO-3 form to essentially have the same open-peril coverage as an HO-5. B) Open-perils forms cover all perils unless specifically excluded. C) The broad form of coverage covers the seven basic perils plus three more. D) The basic form covers just the seven basic perils.

The answer is the open-perils forms cover all perils unless specifically excluded. The basic form covers the 12 basic perils. The broad form covers the 12 basic perils and adds coverage for seven additional perils. The HO-15 endorsement was withdrawn as part of the ISA HO-2000 program and is no longer available for purchase.

A fire destroyed the county municipal civic center. The fire would be considered A) the peril. B) the hazard. C) the liability. D) the risk.

The answer is the peril. A peril is the cause of a financial loss. A hazard is a condition that increases the probability that a peril will occur.

Tamika incurs substantial medical bills as a result of an automobile accident caused by the negligence of another driver. Tamika's insurance company pays her medical bills, and the policy requires that she assign her right to sue the other driver for the medical bills to the insurance company. Which of the following concepts specify the insurance company's right to sue the other driver for Tamika's medical bills? A) The aleatory nature of insurance contracts B) The right of subrogation C) The duty of utmost good faith D) Adverse selection

The answer is the right of subrogation. The right of subrogation means that if the insurance company pays for a loss caused by a third party, the insured must assign the right of recovery against a third party to the insurance company.

Which of the following is the CORRECT definition of the term adverse selection? A) The tendency of persons with the lowest risk of loss to also be the most likely to purchase insurance, thereby causing the insurer the greatest profit B) The tendency of persons with the highest risk of loss to also be the most likely to purchase insurance, thereby causing the insurer the greatest cost in terms of claims C) The tendency of persons with the highest risk of loss to also be the most likely to purchase insurance, thereby causing the insurer the greatest profit D) The tendency of persons with the lowest risk of loss to also be the most likely to purchase insurance, thereby causing the insurer the greatest cost in terms of claims

The answer is the tendency of persons with the highest risk of loss to also be the most likely to purchase insurance, thereby causing the insurer the greatest cost in terms of claims. Adverse selection is the tendency for those most likely to incur losses to seek insurance.

Alec is an insurance agent and meets with Tina to arrange for her to purchase a homeowners insurance policy. They agree to the terms, and Tina writes a check for the initial premium, but no paperwork is completed. For which of the following reasons would this verbal agreement to insure a home make it a void contract? A) There was no consideration. B) There was no legal object. C) There was no legal form. D) There was no offer and acceptance.

The answer is there was no legal form. Insurance contracts are required by law to be in writing in order to be of legal form.

Which of the following is the role of the executive branch in regulating the insurance industry within a state? A) To interpret and apply the laws in place relative to the insurance industry B) To create model legislation relative to the insurance industry C) To pass laws relative to the insurance industry D) To enforce the laws in place relative to the insurance industry

The answer is to enforce the laws in place relative to the insurance industry. The legislative branch votes on and passes laws relative to the insurance industry. These laws are enforced by the executive branch, and disputes concerning the interpretation or application of the law is handled by the judicial branch. The National Association of Insurance Commissioners provides model legislation that may or may not be enacted by the several states.

Which of the following is the role of the judicial branch in regulating the insurance industry within a state? A) To interpret and apply the laws in place relative to the insurance industry B) To enforce the laws in place relative to the insurance industry C) To pass laws relative to the insurance industry D) To create model legislation relative to the insurance industry

The answer is to interpret and apply the laws in place relative to the insurance industry. The legislative branch votes on and passes laws relative to the insurance industry. These laws are enforced by the executive branch, and disputes concerning the interpretation or application of the laws is handled by the judicial branch. The NAIC provides model legislation that may or may not be enacted by several states.

The main purposes of regulating the insurance industry include all of the following except A) to minimize market failures. B) to minimize costs to consumers. C) to prevent abuse of consumers. D) to maintain competition.

The answer is to minimize costs to consumers. The purposes of regulation do not include minimizing costs to consumers. While that can be an indirect result of increased competition, it is not a stated purpose. The other options are the main purposes of regulation.

Which homeowners policy covers the tenant's personal property against loss or damage and also provides personal liability insurance? A) HO-3 B) HO-6 C) HO-2 D) HO-4

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.

Which of the following statements would be appropriate in explaining the underwriting process? A) Underwriting is the process of selecting and classifying risk exposures. B) The underwriting process involves nothing more than accepting or rejecting an application for insurance. C) The underwriting process attempts to eliminate all risks that might result in a loss. D) Underwriting is a formality and is generally an unimportant part of the insurance purchasing process.

The answer is underwriting is the process of selecting and classifying risk exposures. Selecting and classifying risk exposures is the specific purpose of underwriting. The underwriting process is not limited to simple yes or no decisions because the process allows for special rates for risks that are better or worse than average risks. The underwriting process is a key function carried out by an insurance company. Inadequate underwriting may lead to inadequate rates, thus leading the company into unacceptable losses. The process of underwriting attempts to match actual losses with expected losses, supported by adequate premiums. If the process were to eliminate all potential losses, no life insurance would ever be sold. The goal is to avoid having too many bad risks.

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) Vicarious liability B) Comparative negligence C) Contributory negligence D) Strict liability

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.

Which of the following types of insurance provides benefits to employees who are injured on the job? A) Workers' compensation insurance B) Unemployment insurance C) Malpractice insurance D) Errors and omissions insurance

The answer is workers' compensation insurance. Workers' compensation benefits are funded through premiums paid by the employer. The insurer is the state, and benefits paid are usually a percentage of the employee's average weekly pay (subject to certain maximums).

Businessowners Policy (BOP)

The basic businessowner's policy (BOP) includes these four parts: Part One—Businessowner's Common Policy Conditions Part Two—Businessowner's Property Coverage Part Three—Businessowner's Causes of Loss and Exclusions Part Four—Businessowner's Liability Coverage The BOP combines both property and liability coverages. An insurance company will generally have a package of coverages that constitutes its version of the BOP. To that package is added any coverages needed by the specific business. PROFESSOR'S NOTE The standard BOP is anything but standard because each insurance company is likely to have a different set of coverages in its standard BOP. As a result, it is important to include a competent, licensed commercial lines agent on the financial planning team when a client needs commercial forms of insurance.

Commercial Package Policy (CPP)

The commercial package policy (CPP) operates in a similar fashion to the BOP. It is a package of monoline forms that can be modified (to some extent) as needed by the individual company (which typically will be larger than companies using the BOP). The CPP usually includes coverage for buildings and contents, along with general liability coverage. Most package prices provide a discount compared with purchasing the same coverages as individual policies. Additional coverages, including commercial automobile exposures, can be added. Commercial property coverage forms define the property to be insured and describe the additional coverages and coverage extensions that are applicable. (These only apply when the insured complies with the 80% coinsurance requirement.) The available commercial property coverage forms available include the following: Building and personal property coverage form Glass coverage form Condominium association coverage form Condominium commercial unit owner's coverage form Builders' risk coverage form Business income coverage (and extra expense) form Legal liability coverage form Extra expense coverage form Leasehold interest coverage form Mortgage holder's errors and omissions coverage form Tobacco sales warehouses coverage form Causes of loss forms—specify the perils insured against

Guidelines for Underwriters

The company creates risk categories and establishes guidelines that, if followed when selecting risks to be insured, will minimize the possibility of issues. Note that these are guidelines and that deviation from them may be appropriate in some situations.

PAP Policy Conditions

The conditions portion of the policy includes Part E: Duties After an Accident or Loss, and Part F: General Provisions.

Cost of Liability Insurance

The cost of personal liability insurance is low relative to the amount of coverage provided. Thus, a high amount of coverage can be purchased for a relatively low premium.

Duties After an Accident or Loss

The duties after an accident or loss are similar to those under the homeowners forms. - Providing prompt notice to the insurer of a claim, including how, when, and where the loss occurred - Cooperating in any investigation, settlement, or defense - Sending the insurance company copies of any notices or legal papers related to the claim - Submitting to a physical exam if claiming injury, and agreeing to submit to a verbal exam under oath for any claim - Providing the insurer with authorization to examine medical records and any other pertinent records - Submitting any required proof of loss - Taking reasonable steps to prevent further damage to the vehicle - Notifying police of any hit-and-run accident or theft of a covered auto - Permitting the insurer to inspect damage prior to repair or other disposition

Which of the following includes the five elements of an insurance contract? A) Offer and acceptance, measurable risk, legal object, legal capacity, and legal form B) Offer and acceptance, consideration, legal object, legal capacity, and legal form C) Offer and acceptance, consideration, legal object, accidental loss, and legal form D) Offer and acceptance, consideration, legal object, legal capacity, and catastrophic loss

The five elements of an insurable contract are offer and acceptance, consideration, legal object, legal capacity, and legal form.

Your client, Margarita, had an upstairs window of her home broken by hail. She reported the claim, and for the two weeks following the storm, the weather had been quite nice. She rarely went into the room with the broken window and did nothing to cover the opening. During the third week following the incident, there was a severe rainstorm, and water came into the opening, damaging the floor of the room with the broken window and the ceiling of the room beneath it. On what grounds could the insurance company refuse to pay for the damaged floor and ceiling? A) Margarita is estopped from collecting for damages. B) Margarita waived her right to collect for damages. C) Margarita failed to protect the property when she had adequate time to do so. D) Margarita failed to provide assistance and to cooperate with the insurance company.

The insurance company will pay for the broken window and any other damage from the hail storm, but could deny the claim for the damaged floor and ceiling since Margarita failed to protect the property when she had ample time to do so.

Assistance and Cooperation

The insured is required to cooperate with and provide assistance to the insurer when a loss occurs. Cooperation and assistance include attending hearings and trials, presenting evidence, and supplying medical reports.

Notice of loss

The insured is required to give notice of a loss to allow the insurer to investigate it.

Evidence

The insured may be required to show the damaged property to the insurer as often as is reasonably required.

Contract of Indemnity

The insurer must restore the insured to the same financial position they were in before the loss occurred. (replacing rug for example)

The personal auto policy (PAP) provides coverage under the liability section for A) pleasure use of nonowned motorcycles by the named insured. B) the owner of an auto being used by the named insured and not owned by the named insured. C) nonresidents operating the owned auto with permission. D) any four-wheeled, off-road, sport all-terrain vehicle.

The personal auto policy (PAP) provides coverage under the liability section for A) pleasure use of nonowned motorcycles by the named insured. B) the owner of an auto being used by the named insured and not owned by the named insured. C) nonresidents operating the owned auto with permission. D) any four-wheeled, off-road, sport all-terrain vehicle.

Risk

The possibility of a financial loss

Subrogation

The process by which an insurer can, after it has paid a loss under the policy, recover the amount paid from any party (other than the insured) who caused the loss or is otherwise legally liable for the loss.

Process of Underwriting

The process of underwriting today is essentially the same. Those who are functioning as underwriters have the job of determining whether a risk is reasonable, and the degree to which the insurer is willing to accept it.

Insurer

The selected insurer makes a difference. Some insurance companies offer a discount to those who also have their automobile insurance with them.

Which of the following statements regarding self-insurance by a business is CORRECT? A) Self-insurance is a method of risk transfer. B) Most firms are good candidates for self-insurance. C) The organization should have enough homogeneous exposure units to make losses unpredictable. D) The self-insurer must be able to competently manage the investment of the self-insurance fund.

The self-insurer must be able to competently manage the investment of the self-insurance fund. Relatively few firms are good candidates for self-insurance, which is a method of risk retention. The organization that self-insures should have enough homogeneous exposure units to make losses somewhat predictable.

Once you have analyzed and evaluated the information to identify a client's risk exposures, what is the next step in the risk management process? A) Gather pertinent data to determine risk exposure. B) Monitor the plan for needed changes. C) Develop a risk management plan. D) Identify risk management goals.

The steps in the risk management process are to: 1) identify and establish risk management goals, 2) gather pertinent data to determine risk exposures, 3) analyze and evaluate the information to identify risk exposures, 4) develop a risk management plan, 5) communicate the recommendations, 6) implement the recommendations, and 7) monitor the recommendations for needed changes.

Traditional System of Auto Claims

The traditional way to address automobile claims is through the tort system. If one driver is found to be at fault in an accident, his insurance carrier is obligated to pay for losses of the other driver. In some cases, an injured party may receive no payment for losses, or only partial payment if the at-fault driver has no insurance or inadequate assets.

Type of Vehicle

The type of automobile will affect rates. High performance cars and sports cars tend to have higher premiums. Sport utility vehicles also tend to have higher than average premiums due to the increased amount of damage they can inflict. Generally, when an insured purchases insurance on more than one vehicle, the premium per vehicle is lower than if the same vehicles were insured by different companies.

Policy Type

The type of policy affects rates. An HO2 form costs less than an HO3 because the HO2 insures against fewer perils (i.e., Broad Form vs. Open Perils). Endorsements, or attachments, added to the policy to modify the coverage often change the premium.

NAIC Criteria

There are 12 financial ratios that were chosen by the NAIC (www .NAIC.org) to help it keep tabs on insurance companies. They were designed to be used by insurance departments only, and confidentiality was to be maintained to protect insurance companies from having problems. The information is kept in the Insurance Regulatory Information System. The belief is that if the names of companies on what is unofficially called the NAIC watchlist were publicized, there might be a "run on the bank" that could cause a company to fail. However, the ratios themselves often found their way into public forums anyway, so they are now made public. This means that an individual consumer can gather information on which ratios NAIC is examining and what NAIC considers to be "good" ratio results. These are all public information.

You have a meeting with Oscar, 26, and his wife Judith, 25, this afternoon to review their risk management plan. They have two children, two cars, a home, and a boat. Oscar is a business banker and Judith is an office manager. Which of the following statements regarding their risk management plan is CORRECT? They have a limited amount of liability exposure. They have a higher probability of becoming disabled versus experiencing premature death. Having liability insurance on their cars is more important than collision coverage. Long-term care insurance need not be an immediate priority within their risk management plan. A) I, II, and III B) IV only C) III and IV D) II, III, and IV

They have unlimited liability exposure. A car accident could lead to an unlimited amount of liability depending on the circumstances, as well as the possibility of negligence occurring on their property. There is a higher probability of becoming disabled than of experiencing premature death, and it is much more important to have liability insurance on a vehicle than collision coverage. Liability claims may be much higher than any type of collision damage to a vehicle. Both Oscar and Judith are too young to consider long-term care insurance at this time.

Power failure

This denies coverage for losses resulting directly from an interruption of power or other utility service (i.e., a neighborhood power outage as opposed to a specific outage at the home).

Which of the following describes the tendency of persons with a higher-than-average chance of loss to seek insurance at standard rates, which, if not controlled by underwriting, results in higher-than-expected loss levels? A) Contributory negligence B) Physical hazard C) Adverse selection D) Moral hazard

This describes adverse selection. Physical hazard is a physical condition that increases the chance of loss. Under the doctrine of contributory negligence, if any negligence on the part of the injured party contributes to the injury, it absolves the other party of liability. A moral hazard is a result of individuals being unethical or misrepresenting themselves to obtain insurance or to induce the payment of claims.

Earth Movement

This excludes coverage for a loss caused by earth movement, except direct loss by fire, explosion, theft, or breakage of glass. Within most states, companies will offer an endorsement to the homeowners policy to add this coverage back. High-risk states, such as California, are the exception and would have a separate policy available.

Water Damage

This excludes coverage for a loss caused by flood, water backing up in sewers or drains, water below the ground surface seeping through basement walls, foundation, floors, etc. The key differentiator here is damage from external water, i.e., ground water. Damage from internal water (e.g., pipe burst) would generally be covered.

Intentioanl loss

This excludes intentional damage to one's own property.

War

This excludes losses caused by war in all forms.

Nuclear hazard

This excludes losses from nuclear reactions, radiation, and radioactive contamination.

Neglect

This excludes losses resulting directly or indirectly from neglect of the property by the insured and failure to use reasonable means at or after a loss to save the property.

You cannot be liable to yourself

This exclusion prevents one member of the family from suing another member of the family for injuries sustained in an accident. It also does not allow an insured to collect from liability coverage for damage the insured caused to her own vehicle.

Market Value

This is the price that a willing buyer and willing seller, under no compulsion, would exchange property.

Assessed Value

This is the value taxing authority places on the property and upon which they base property taxes. Depending on the community, this is typically 60% to 80% of the market value and is usually redetermined every three to five years.

Replacement Cost Value

This is what it would cost to rebuild the home as is.

Medical Payments to Others (Coverage F)

This section of the liability policy provides that if someone who is not living at the insured's residence is injured there due to an act of the insured, the company will pay for medical care related to that injury. Negligence is not required. Household members cannot receive medical payments under this section of the policy. The rationale for this exclusion is logical, as insureds cannot be liable to themselves. All household members are considered to be insureds. Therefore, no household member qualifies for medical liability payments. All exclusions generally applicable to the CPL policy also apply to the medical payments section.

Auto Liability Coverage

This third-party coverage protects others from suffering a financial loss if the policyholder causes them bodily injury or property damage. The policy generally includes a single insuring agreement that provides for split limits. As discussed before, the limits are often stated in the format 25/50/10. Some coverage also is extended to pay for legal defense.

Inflation Guard Endorsement

To acknowledge the effects of inflation, insurance companies generally offer an inflation guard endorsement. This endorsement automatically increases the dwelling coverage each year by an amount that is usually tied to an index. A periodic review by the property and casualty agent, the insurance company, or a contractor can be used to confirm the replacement value.

Who is an insured in auto insurance?

Under the liability agreement, it is important to know who is an insured person. The following generally are considered to be insureds under a PAP: The named insured, spouse, and resident relative(s) (e.g., children) Anyone allowed to drive the insured's covered auto Any person or organization legally responsible for any insured's use of a covered auto on behalf of that person or organization Any person or organization legally responsible for the named insured's or family members' use of any auto or trailer (other than a covered auto or one owned by that person or organization)

Augusto is not paying attention when driving to work and runs a stop sign, narrowly missing Regena. Although frightened by the event, Regena continues driving and uses her cell phone to call her spouse to tell him what just happened. While dialing the phone, she crashes into a telephone pole. Would she be able to hold Augusto liable for the damage to her car? A) No, because Augusto's actions were not the proximate cause of Regena's loss. B) Yes, because Augusto breached his duty to avoid damaging Regena's car. C) Yes, because there were actual damages as a result of Augusto's actions. D) No, because Augusto did not owe Regena a duty to drive his car in a safe manner

To be liable for an unintentional tort, four elements of negligence must exist. First, a duty is owed, and second, that duty is breached. Then, there must be actual damages and, finally, the breach must be the proximate cause for the damage. In this case, Augusto had a duty to drive his car in a safe manner, and he and breached that duty when he ran the stop sign. While Regena's car did, in fact, have actual damages, the proximate cause of the damage was her trying to use her cell phone while driving. Proximate cause is an uninterrupted sequence of events that brings about damage, and Regena using her cell phone interrupted that sequence. Had she swerved to avoid Augusto and hit a telephone pole, then the proximate cause would have been Augusto's actions and he could be found negligent.

Proof of loss

To document a loss, most insurers supply the insured with proof of loss forms for completion.

Mortality and Morbidity are...

Two concepts—mortality and morbidity—are the cornerstones of the actuarial basis of life and health policies.

Contributory Negligence

Under the doctrine of contributory negligence, if any negligence on the part of the injured party contributes to the injury, it absolves the other party of liability. This is the strictest approach and has been replaced by comparative negligence

Claim Settlement: Replacement

Under the replacement option, the insurer may repair or replace damaged property with that of like kind and quality rather than pay the ACV or replacement cost of the loss

Which of the following refers to the process of evaluating and classifying the risk level of applicants for insurance? A) Adverse selection B) Group insurance C) Liability review D) Underwriting

Underwriting is the process of evaluating and classifying the risk level of applicants for insurance. Underwriting may also help insurers control adverse selection.

Uninsured and Underinsured Motorist Coverage

Uninsured motorist coverage provides protection for an insured who is involved in an accident with another driver who has no insurance. It covers the same insureds as the rest of the policy. In addition to the normal insureds, this section also covers any person who is entitled to recover damages because of an injury to a covered person (e.g., the spouse of an injured party). When another driver is at fault and has no insurance, or if an accident is a hit and run, this coverage provides payment for the loss. Uninsured motorist coverage is often combined with underinsured motorist coverage. Underinsured motorist coverage is necessary in situations where an at-fault driver has insurance, but with very low limits. This coverage is added to the PAP by endorsement. Technically, uninsured motorist coverage will not pay in this circumstance because the negligent driver actually does have insurance. To allow the injured driver to be made whole, underinsured coverage is needed. Many policies automatically include underinsured coverage when uninsured motorist coverage is selected. However, because this is not always true, it's best to check.

Medical Payments Coverage (Auto)

Unlike the medical payments to others coverage under a homeowners policy, this coverage provides benefits to the insured, any family member, and anyone else occupying the insured vehicle. Occupying is defined to include "in, on, or about; upon; getting in, on, out of, or off of" the vehicle. The benefits must be required because of an accident and the benefit payment must be needed within a limited period of time (e.g., two or three years) depending on the state. Funeral expenses are included as benefits. Benefits also extend to injuries received while a covered person is a pedestrian or riding a bicycle if he is struck by a licensed vehicle or trailer.

Unintentional Torts

Usually involves negligence.

Duties After a Loss

When a loss occurs, the insured has an obligation to cooperate with the insurance company. The insured must notify the insurance company of the loss, provide any required information, give names of witnesses if appropriate, provide copies of any legal documents that relate to the loss, attend any related trials, and cooperate in any settlement discussions. Additionally, the insured may not make any payment, admit liability, or assume other obligations related to the damages or injury that will obligate the insurance company.

Indemnification

When individuals suffer a financial loss, they generally expect their insurance company to make them whole. This involves the loss adjustment process.

Coinsurance Provision

When insurance companies price policies, their expectation is that the policyholders will insure their home for the full value. Comparatively few people ever suffer a total loss of their home. Most losses are partial and the majority of claims are for a relatively small percentage of the full replacement cost of a home. If most of the insureds determine the likelihood of having a total loss is extremely low and decide to insure their home at 50% of the replacement cost, the premiums collected by the insurance company would not be enough to cover all the losses. To that end, the coinsurance provision was added to policies. To ensure that premiums received are sufficient to cover claims, insurance companies usually include a coinsurance provision that requires a home to be insured for at least 80% of its replacement cost in order for partial losses to be covered completely. If an individual does not maintain insurance equal to 80% of the replacement cost at the time of loss, a partial loss will be covered at either the actual cash value (ACV) (i.e., replacement cost minus depreciation) or according to the coinsurance penalty formula (or partial loss formula), whichever amount is greater.

Guaranteed Replacement Cost

While homeowners may not be in coinsurance situations by having insurance equal to 80% of the replacement cost of the home, they may have substantial out-of-pocket expenses if their homes are destroyed. There also are circumstances in which even 100% coverage may not be adequate. When a natural disaster strikes, such as a hurricane, the cost of rebuilding may increase due to the lack of building materials and/or shortage of skilled labor. When this happens, the replacement cost is often higher than the insurance amount. In the aftermath of Hurricane Andrew, which struck south Florida in 1992, many companies eliminated the guaranteed replacement cost option. Instead, homeowners are offered a rider to pay up to a certain amount (e.g., 115% or 125%) above the replacement value to cover those types of fluctuations.

BOP 'standard package'

While there is no specific standard package, coverages under this program can include the following forms of insurance: Fire and allied lines Plate glass Boiler and machinery Crime Inland marine Auto General liability

Example: Coinsurance Penalty Formula (partial loss formula)

Zachary's home would cost $400,000 to rebuild. Insurance on his home is $300,000 with a $1,000 deductible. A kitchen fire causes $20,000 in damage. What amount will the insurance company pay to Zachary for his loss? Amount of insurance, $300,000 ÷ $320,000 (amount of insurance required, which is $400,000 × 80%) = 0.9375 × $20,000 = $18,750; $18,750 - $1,000 deductible = $17,750 to be paid by the insurance company.

Coverage E

comprehensive liability insurance,

Absolute liability

is the standard imposed when a person or organization is held responsible for any damages, even when there has been no negligence. This generally is a case in which people cause extra-hazardous situations through their activities (e.g., keeping wild animals, blasting). This is also known as strict liability

Vicarious liability

is when someone is held liable for the acts of another (e.g., the person's child, employee, or agent). While this aspect is usually seen with parents and children, it essentially extends to anyone acting as your agent.

Negligence per se

is where the duty of care owed by the defendant in a lawsuit is determined by reference to a statute. This can happen where there is a statute that was enacted to protect the class of people to which the plaintiff belongs against the type of harm that occurred. The other elements of a tort still must be proved.

HO-3

most commonly purchased policy // open perils policy that covers any DIRECT DAMAGE TO HOUSE OR OTHER STRUCTURES ON PROPERTY unless it is specifically excluded. INCLUDES PEOPLE INJURIES. An HO-3 policy covers all of the perils listed in an HO-2 policy and any other peril not excluded. The value of the HO-3 is that this form will cover certain unusual losses not specifically named as perils in the HO-2. For example, suppose an insured homeowner with an HO-2 policy, who lives in a rural area, owns a shed that is damaged when a neighbor's livestock gets loose. Because none of the named perils addresses this particular situation, the loss will not be covered. However, had the shed been insured under an HO-3 policy, the damage would have been covered because an HO-3 policy generally has no such exclusions.

Mortality

refers to the incidence of death. This is measured by the rate of disability. Life insruance underwriters are concerned with mortality rates

Stock Companies

owned by stockholders. A stock company has outsiders keeping an eye on its operations, which, some contend, leads to better overall management. While it is true that mutual company policies generally have a lower net cost than stock company policies, this is not always the case.

Mutual Companies

owned by the policyowners. Mutual companies have no shareholders, so any profits are paid to policyowners. The assumption is that mutual policyowners get a better product at a lower net cost. While it is true that mutual company policies generally have a lower net cost than stock company policies, this is not always the case.

Morbidity

refers to the incidence of losing one's health through illness or injury. Mortality rates are statistical figures that show an average life expectancy for a given group of people. Morbidity rates affect the cost of premium waiver riders on life insurance as well as the premiums for disability income insurance. Disability insurance underwriters are concerned with morbidity rates.

HO-8

policy is for OLDER HOMES that have a replacement cost that is much higher than its market value HO-8: Modified Form for Special Risks The HO-8 policy provides coverage for those who live in an older home that has a replacement cost exceeding its market value. The HO-8 policy uses a functional replacement cost provision for loss. Under the functional replacement cost, the insurance company agrees to pay the amount necessary to repair damage, but the coverage cannot be more than the materials and labor that make the dwelling functionally equivalent to its original style. The HO-8 policy covers basic perils only. Liability and medical payments coverage are also part of the policy.

Loss Adjustment Process

series of steps that are taken when an insured property loss occurs

Peril

the event or circumstance that is the direct cause of the loss