Chapter 2 - Policy Provisions and Contract Law

All of the following statements describe the concept of strict liability EXCEPT: - claimants may need to provide proof that a product defect caused an injury - its imposed regardless of fault - its applied in product liability cases - its imposed on defendants engaged in hazardous activities

- its imposed on defendants engaged in hazardous activities

An insured's building has an actual cash value of $200,000, and he has insured the property for $120,000 with an 80% coinsurance clause. A $40,000 loss occurs. How much will the policy pay?

$30,000 200,000 * .8 = 160,000 (120,000 / 160,000) * 40,000

An insured's roof cost $4,000 when installed 5 years ago. It has been damaged by hail and must be replaced. The new roof will cost $6,000 at today's prices. If the roof has been depreciating at $200 per year and his policy is ACV, how much will it pay toward the insured's new roof? - $1,000 - $4,000 - $5,000 - $6,000

$5,000

What type of liability would a person who owns wild animals have?

Absolute

Which of the following is a method of claims settlement used in casualty insurance when the insured and insurer cannot agree on how to settle a claim? - arbitration - proof of loss - restoration - appraisal

Arbitration

Insurable interest in a property policy must be proven - when a policyowner is changed - when a claim is paid - at the time of application - at the time of loss

At the time of loss

Insurable interest in a property policy must be proven: - at the time of loss - when a policyowner is changed - when a claim is paid - at the time of application

At the time of loss

The crime of forced entry into the premises of another by a person or persons with felonious intent is defined as a: A. Robbery B. Burglary C. Breaking and entering D. Theft

B. Burglary

In return for premium, an insurance company must - use standardized tables of coverage for specific risks to be excluded from coverage - give the insurer valuable consideration - be fair in underwriting and pay covered losses - provide the insured with coverage adequate for all potential losses

Be fair in underwriting and pay covered losses

An applicant is purchasing a homeowners policy. A producer comes to her home, fills out the paperwork, and tells the applicant that her home will be covered as soon she signs all of the paperwork, and that she will receive a new policy in the mail in 5 business days. Even though the policy is not issued, the applicant's home is temporarily covered until then. Which of the following makes that possible? - mortgagee clause - notice of claim - binder - loss settlement provision

Binder

Which of the following is used in the formula for calculating the ACV of a property? A. fair market value B. agreed value C. replacement cost D. stated value

C. replacement cost

Termination of an in-force insurance policy prior to the expiration date shown in the policy is known as: - cancellation - rescission - nonrenewal - cessation

Cancellation

Most insurance policies exclude losses by: A. Theft B. Burglary C. Robbery D. Mysterious disappearance

D. Mysterious disappearance

In property and casualty insurance, what is the term for the amount of a loss that the insured must cover out of pocket, and the insurer will only pay for the additional amount of the loss above this limit? - deductible - self-insured retention - coinsurance - premium

Deductible

Replacement cost is defined as - the market value of property of like kind and quality - full replacement of property with like kind and quality, less an allowance for physical deterioration and depreciation - payment of the full policy limits in the event of a total loss - full replacement of property at its current cost, new and without reduction for depreciation

Full replacement of property at its current cost, new and without reduction for depreciation

The pro rata liability clause is designed to protect the principle of - insurable interest - waiver and estoppel - indemnity - subrogation

Indemnity

For the reported losses of an insured group to become more likely to equal the statistical probability of loss for that particular class, the insured group must become - more active - larger - smaller - older

Larger

For a contract to be enforceable by law, the purpose of the contract must be - for the benefit of the general public - of pure intent - legal and not against public policy - for financial gain

Legal and not against public policy

Which of the following is the basis for a claim against an insurance policy? - misrepresentation - loss - material change - hazard

Loss

A situation in which a person can only lose or have no change represents?

Pure Risk

The Federal Fair Credit Reporting Act - regulates consumer reports - protects customer privacy - regulates telemarketing - prevents money laundering

Regulates consumer reports

In case of a loss, the indemnity provision in insurance policies?

Restores an insured person to the same financial state as before the loss

A property insurance policy that is not subject to any coinsurance requirements but has a set amount of insurance scheduled for the property would use what loss valuation method? - ACV - replacement cost - reproduction cost - stated amount

Stated amount

When the amount of insurance written in a property policy is not subject to any coinsurance provision and that amount is paid in the event of a covered loss, the coverage is said to be written as: - replacement cost - ACV - specific insurance - stated amount

Stated amount

Which of the following best expresses the purpose of a stated value contract? - to establish the value of property subject to loss by theft or robbery - to provide maximum limit for which the insurance company may become liable in casualty losses - to pre-establish the amount of coverage available for property items that are difficult to value - to ensure that the principle of indemnification applies

To pre-establish the amount of coverage available for property items that are difficult to value

A building is insured, but no one has lived or worked in it for 10 yrs. The building is completely empty of any furniture or personal belongings. From an insurance standpoint, the building is considered? - unoccupied - condemned - closed - vacant

Vacant

Which part of an insurance policy covers claims-related expenses, reasonable expenses incurred by an insured to protect damaged property from further loss, or defense expenses? - additional coverage - exclusions - declarations - insuring agreement

Additional coverage

A person who is not named as an insured on the declarations page of a policy but is protected by the policy is known as the - additional insured - policyowner - named insured - first name insured

Additional insured

Which of these is defined as the maximum limit of coverage available under a liability policy during a policy year, regardless of the number of claims that may be made or the number of accidents that may occur? - aggregate limit of liability - combined single limit of liability - per occurrence limit of liability - split limit of liability

Aggregate limit of liability

When a mortgagee is named in a mortgagee clause attached to a fire or other direct damage policy - the loss reimbursement will be paid to the mortgagee as their interest may appear - the mortgagee's rights of recovery will not be defeated by any act or neglect of the insured - the mortgagee may bring a suit in their own name to recover damages to covered property - all the above

All the above

A policy condition that stipulates how the amount of damaged or lost property will be determined if the insured and the principal do not agree on the value of a property loss is known as: - coinsurance - loss valuation - third-party provision - appraisal

Appraisal

A policy that insures all property at multiple locations for a single amount is referred to as? - specific - blanket - reporting - special

Blanket

What type of insurance policy provides coverage for more than one property with a single limit of coverage? - special - specific - schedule - blanket

Blanket

Which of the following is NOT an essential element of an insurance contract? - consideration - agreement - legal purpose - counteroffer

Counteroffer

An insured has four separate but identical policies written by different insurers to cover her $100,000 building. Each policy is written for $100,000, and each has the pro rata liability other insurance clause. In the event of a total loss to the building, what would each insurer pay? - the first policy written will pay $75,000, and the other three policies will contribute proportionately to pay for the remaining $25,000 - the policy with the earliest effective date will pay the entire loss, and the other policies will pay nothing - each policy will pay $25,000 of the loss - each policy will pay the total policy limits of $100,000

Each policy will pay $25,000 of the loss

Which insurance principle states that if a policy allows for greater compensation than the financial loss incurred, the insured may only receive benefits for the amount lost? - stop-loss - consideration - reasonable expectations - indemnity

Indemnity

To purchase insurance, the policyowner must have financial interest in the property being insured. This is known as - indemnity - insurable interest - pure loss - loss valuation

Insurable interest

Burglary is defined as? - taking of property by use of force, violence, or fear - taking of property from within the premises leaving visible signs of forced entry - taking of property from the care of a person in a violent act - any act of stealing

Taking property from within the premises leaving visible signs of forced entry

Which of the following would qualify as a competent party in an insurance contract? - the applicant is a 12-year-old student - the applicant is under the influence of a mind-impairing medication at the time of application - the applicant has prior felony conviction - the applicant is intoxicated at the time of application

The applicant has a prior felony conviction

When a direct chain of events resulting from a negligent act causes injury or damage, the act is considered to be - the proximate cause - the direct cause - strict liability - an intervening cause

The proximate cause

Which of the following definitions best defines the term "accident"? - physical damage to tangible property of others caused by the negligence of an insured - the negligent or purposeful act or omission by an insured that results in physical trauma or death to a person - a sudden, unplanned and unexpected event, not under the control of the insured, resulting in injury or damage neither expected nor intended - injury to the character of another person caused by libel, slander, false arrest, invasion of privacy and other acts

A sudden, unplanned and unexpected event, not under the control of the insured, resulting in injury or damage neither expected nor intended

An applicant knowingly fails to communicate information that would help an underwriter make a sound decision regarding coverage. This is an example of? - breach of warranty - concealment - waiver - fraud

Concealment

When applying for an individual life insurance policy, an applicant states that he went to the doctor for nausea, but fails to mention that he was also having severe chest pains. This is an example of - concealment - misrepresentation - fraud - warranty

Concealment

An insured is applying for a casualty insurance policy. One of the conditions of the policy allows the insurance company to inspect the insured's books at the end of the policy term to make sure sufficient premium has been collected for the exposure she plans to insure. Which condition is part of the insured's policy? - excess liability coverage - contract bond - errors and omissions insurance - deposit premium audit

Deposit premium audit

A beauty parlor burns to the ground. What type of loss is this to the owner? - consequential - specific - consecutive - direct

Direct

Which of the following would be covered under the personal injury liability? - a broken arm - a concussion - death - slander

Slander

An insured owns several buildings, each at a different location and insured on a separate policy. What type of coverage does the insured have? - special - specific - schedule - blanket

Specific

Property insurance that provides $100,000 coverage for a building and $50,000 coverage for personal property at a single location is called - described coverage - specific coverage - schedule coverage - blanket coverage

Specific Coverage

Events in which a person has both the chance of winning or losing are classified as? - insurable - pure risk - retained risk - speculative risk

Speculative risk

A homeowner sells his house to a friend. The friend wants to keep the homeowner's current policy in effect. Under the assignment provision, which of the following is most likely? - the policy will have to be cancelled - the homeowner should let the friend take over the premium payments - the friend will have to apply for coinsurance from another insurance company - the homeowner will need to get written consent from the insurer before the policy can be reassigned

The homeowner will need to get written consent from the insurer before the policy can be reassigned

An insured relocated to another state for work. However, she still owns and insures a house in this state, but has had no one living in it for 3 months. She is also storing some of furniture and clothes in the house. From an insurance standpoint, the insured's house is considered? - unoccupied - condemned - under repair - vacant

Unoccupied

For insurance purposes, when an insured loses property to another because the person used violence or threat of violence to gain the property, this is defined as: - robbery - a theft - a burglary - false pretense

Robbery

When in insured makes truthful statements on the application for the insurance and pays the required premium, it is known as which of the following? - contract of adhesion - acceptance - consideration - legal purpose

Consideration

All of the following are considered parts of the policy structure EXCEPT: - conditions - provisions - exclusions - insuring clause

Provisions

What type of damages may be awarded by the court to create disincentives that discourage behavior that is deemed highly undesirable by society? - compensatory - specific - punitive - general

Punitive

What type of damages may be awarded by the court to create disincentives that discourage behavior that is deemed highly undesirable by society? - general - compensatory - specific - punitive

Punitive

A situation in which a person can only lose or have no change represents - speculative risk - adverse selection - hazard - pure risk

Pure risk

The transfer of an insured's right to seek damages from a negligent party to the insurer is found in which of the following clauses?

Subrogation

Negligence is defined as?

The failure to do what a reasonable prudent person would do under given circumstances

The part of the insurance contract that describes the covered perils and the nature of coverage of the contractual agreement between the insurer and the insured is called the - exclusions - declarations - insuring agreement - conditions

Insuring agreement

All of the following are true regarding deposit premium EXCEPT - it could be adjusted by the audit - it must be paid in advance - it is an estimated premium paid at the policy issue - it is 50% of the actual premium

It is 50% of the actual premium

Which of the following coverages in dwelling and homeowners policies is for indirect losses? - structures - contents - loss of use - dwelling

Loss of use

The process of determining the premium charged and how much insurance is required for a particular loss is called? - coinsurance - loss valuation - agreed value - loss payment

Loss valuation

An insured's 9-year-old son threw a ball, accidentally breaking a neighbor's plate glass window. The insured was found legally liable for the cost of replacing the window. This is an example of - absolute liability - vicarious liability - intervening cause - juvenile delinquency

Vicarious liability

Which of the following is a statement that is guaranteed to be true, and if untrue, may breach an insurance contract? - concealment - indemnity - representation - warranty

Warranty

All of the following statements concerning coinsurance are true EXCEPT: - the coinsurance formula will also be applied to total losses - its used to help adequacy and equity rates - the insured agrees to maintain insurance equal to some specified percentage of the value of the property - if the insurance carried is less than required, the insurance may nor cover the whole loss

- the coinsurance formula will also be applied to total losses

All of the following are factors in the determination of actual cash value EXCEPT: - type and quality of property - age of property - replacement cost - insurance premium paid

Insurance premium paid

The policy provision found in the property insurance policies that prevents the insured from collecting twice for the same loss is called? - appraisal - subrogation - consent to settle loss - right of salvage

Subrogation

Which of the following is most likely to occur if it is determined by the audit that the deposit premium was too high? - nothing; the premium cannot be adjusted - the insured will receive a return premium - additional premium will be collected - the insurer will have to pay a fine

The insured will receive a return premium

In terms of parties to a contract, which of the following does NOT describe a competent party? - the person must not be under the influence of drugs or alcohol - the person must be of legal age - the person must be mentally competent to understand the contract - the person must have at least completed secondary education

The person must have at least completed secondary education

When a parents is required to pay for damages caused by his or her children, this is an example of? - strict liability - intervening cause - assumption of risk - vicarious lability

Vicarious liability

Before an insurer will pay any loss under a policy, what is usually required from the insured? - a binder - a claims-made form - proof of loss - notice of claim

Proof of loss

A man is working on the roof of his house, and his neighbor is watching from the ground. When roof shingles are thrown off the roof, they hit the neighbor in the face, injuring his eye. Which best classifies the homeowner's legal liability? - bodily injury - contributory negligence - property damage - personal injury

Bodily injury

For the purpose of insurance, risk is defined as: - an event that increases the amount of loss - the uncertainty or chance of loss - the certainty of loss - the cause of loss

the uncertainty or chance of loss

The part of a policy that clarifies terms in the policy is the? - exclusions - definitions - insuring agreement - conditions

Definitions

An insured is driving her car through a residential area when she loses control and crashes into a neighbor's front porch. The neighbor, who was sitting on the porch, is injured. The insured's liability policy has a limit of $500,000. This amount applies to the total of damages for any bodily injury and property damage resulting from one accident. Which type of limit of liability does the insured have?

Combined Single

An insured's business is damaged because of a fire, and he is forced to close the business temporarily for repairs. As a result, the insured lost income. What type of loss is this? - consequential - direct - special - additional

Consequential

An insurer neglects to pay a legitimate claim that is covered under the terms of the policy. Which of the following insurance principles has the insurer violated? - consideration - good faith - representation - adhesion

Consideration

The insured's house is located one mile from the country's new landfill and across the road from the entrance of a rock quarry. It would cost $15,000 to rebuild the house if something happened to it, but when the insured tried to sell it. the best offer he received was $80,000. The insurance company will insure the house for only $80,000. What method of valuation is used to insure this property? - replacement cost - functional replacement cost - market value - actual cost value

Market Value

Losses caused by continuous or repeated exposure to conditions resulting in injury persons or damage to property that is neither intended nor expected is the definition of which of the following terms?

Occurrence