Property and Casualty Chapter 1: Insurance Terms and Related Concepts

An insured owns a building that is valued at $400,000. To comply with the 80% coinsurance provision of his insurance policy, how much should he insure the property for? A 80% of the property's replacement cost or more B 100% of the market value C $400,000 D $32,000

A 80% of the property's replacement cost or more The coinsurance clause states that in consideration of a reduced rate, the insured agrees to maintain a certain minimum amount of insurance on the insured property. In the event of a covered loss, insurance is designed to pay replacement cost minus depreciation.

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? A Combined single B Split C Aggregate D Per occurrence

A Combined single Combined single is a single dollar limit of liability applying to the total of damages for bodily injury and property damage combined resulting from one accident or occurrence.

Events or conditions that increase the chances of an insured loss occurring are referred to as A Hazards B Exposures. C Risks. D Perils.

A Hazards Hazards are conditions or situations that increase the probability of an insured loss occurring.

The reduction, decrease, or disappearance of value of the person or property insured in a policy by a peril insured against is known as A Loss. B Exposure. C Hazard. D Risk.

A Loss. Loss is the reduction, decrease, or disappearance of value of the person or property insured in a policy by a peril insured against.

What type of insurance policy insures against all risks of loss that are not specifically excluded by the policy? A Open peril policy B Specified peril policy C Binder policy D Named peril policy

A Open peril policy Open peril (special) policies cover everything except what they say they don't. Named peril policies cover only perils named in them.

An insured has a liability policy that sets the amount for all claims that arise from a single incident at $50,000. Which type of limit of liability does this insured's policy have? A Per occurrence B Per person C Aggregate D Split

A Per occurrence Per occurrence sets the amount for all claims that arise from a single incident at a certain number.

A situation in which a person can only lose or have no change represents A Pure risk B Speculative risk C Adverse selection D Hazard

A Pure risk Pure risk refers to situations that can only result in a loss or no change. Pure risk is the only type insurance companies are willing to accept.

The policy provision found in property insurance policies that prevents the insured from collecting twice for the same loss is called A Subrogation. B Consent to settle loss C Right of salvage D Appraisal

A Subrogation 轉移, 代位權 When insureds accept loss payment from the insurance company, they must transfer their rights to recovery to the insurer. This prevents the insured from collecting twice for the same loss and allows the insurer to indemnify the insurance company.

All of the following statements concerning coinsurance are true EXCEPT A The coinsurance formula will also be applied to total losses. B It is used to help adequacy and equity in rates. C The insured agrees to maintain insurance equal to some specified percentage of the value of the property. D If the insurance carried is less than required, the insurance may not cover the whole loss.

A The coinsurance formula will also be applied to total losses. In the event of a total loss, the coinsurance clause does not operate and the face amount of the policy is paid.

Negligence may be defined as A The failure to use reasonable and prudent care. B A situation that creates a probability of loss. C A latent defect or fault in property. D The inability to meet the burden of proof.

A The failure to use reasonable and prudent care 審慎的，小心的 Just because something bad happens does not mean there was negligence. Negligence is when the failure to use proper care results in injury or damage.

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? A Combined single limit of liability B Per occurrence limit of liability C Split limit of liability D Aggregate limit of liability

Aggregate limit of liability Aggregate limit is 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.

If a liability policy had split limits of 100/300/100, what is the maximum amount that would be payable in the event of injury to a single person? A $500,000 B $100,000 C $200,000 D $300,000

B $100,000 The first limit shown, $100,000, is the most the policy will pay for bodily injury to any one person.

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? A $0 B $30,000 C $32,000 D $40,000

B $30,000 This insured only carried 75% of the amount of insurance he had agreed to carry ($120,000 of the agreed $160,000), so the insurer will pay only 75% of the loss, or $30,000. If the insured had carried the required amount of insurance, partial losses would be paid in full. In the event of a total loss, the face of the policy would be paid. If the full amount is not carried, divide the actual amount carried by the amount that should be carried (the coinsurance amount), and multiply it by the loss.

In which of the following types of property valuation will the policy pay the full value as specified on the policy schedule, regardless of the insured property's appreciation or depreciation? A Market value B Agreed value C Replacement cost D Stated amount

B Agreed value Agreed value is a property policy with a provision agreed upon by the insurer and insured as to the amount of insurance that represents a fair valuation for the property at the time the insurance is written. When a loss occurs, the policy pays the agreed value as specified on the policy schedule, regardless of the insured property's appreciation or depreciation. 同意價值是財產政策，保險人同意的條款和被保險人在保險書面時對該財產進行公允估值的保險金額。 當發生損失時，無論保險資產的升值或折舊如何，政策都會按照政策時間表規定支付約定的價值。

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? A Additional B Consequential C Direct D Special

B Consequential Consequential loss, also known as indirect loss, is a second financial loss caused by a covered direct loss.

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? A Primary amount B Deductible C Self-insured retention D Coinsurance

B Deductible

Replacement cost is defined as A Payment of the full policy limits in the event of a total loss. B Full replacement of property at its current cost, new and without reduction for depreciation. C The market value of property of like kind and quality. D Full replacement of property with like kind and quality, less an allowance for physical deterioration and depreciation.

B Full replacement of property at its current cost, new and without reduction for depreciation. Replacement cost policies do not consider depreciation if the proper amount of insurance is maintained. Policies that provide replacement cost coverage require that the amount of insurance written

What type of compensatory damages will pay for pain and suffering and disfigurement? A Normal B General C Special (specific) D Tort

B General General compensatory damages are for intangible elements that cannot be specifically measured in terms of dollars.

Which of the following policies does NOT contain an automatic reinstatement provision? A Homeowners B General liability written with an aggregate limit C Business automobile liability D Personal automobile liability with split limits

B General liability written with an aggregate limit 與總限額書面一般責任 An aggregate limit is reduced by the payment of claims. It is possible for an insured to run out of coverage before the expiration of the policy. Aggregate limits are restored on the anniversary date of the policy.

All of the following statements describe the concept of strict liability EXCEPT A It is applied in product liability cases. B It is imposed on defendants engaged in hazardous activities. C Claimants may need to provide proof that a product defect caused an injury. D It is imposed regardless of fault.

B It is imposed on defendants engaged in hazardous activities Strict liability is commonly applied in product liability cases. The business is then liable for defective products, regardless of fault or negligence. .

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 A More active. B Larger. C Smaller. D Older.

B Larger. According to the law of large numbers, the larger a group becomes, the easier it is to predict losses. Insurers use this law in order to predict certain types of losses and set appropriate premiums.

The insured's house is located one mile from the county's new landfill and across the road from the entrance of a rock quarry. It would cost $150,000 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? A Functional replacement cost B Market value C Actual cost value D Replacement cost

B Market value When insured for market value, it is insured for what a willing buyer would pay prior to a loss. This is different from actual cash value or replacement cost.

The first limit shown, $100,000, is the most the policy will pay for bodily injury to any one person. Most insurance policies exclude losses by A Robbery. B Mysterious disappearance. C Theft. D Burglary.

B Mysterious disappearance Losses by mysterious disappearance are excluded by most insurance policies.

The risk of loss may be classified as A High risk and low risk B Pure risk and speculative risk C Certain risk and uncertain risk D Named risk and un-named risk

B Pure risk and speculative risk Pure risks involve the probability or possibility of loss with no chance for gain. Pure risks are generally insurable. Speculative risks involve uncertainty as to whether the final outcome will be gain or loss. Speculative risks are generally uninsurable.

What are the two types of compensatory damages? A Normal and punitive B Special and general C Pure and speculative D Tort and general

B Special and general Compensatory damages are intended to compensate someone for both tangible and intangible elements of a loss. Special damages are for the actual measurable losses, such as value of property or medical bills. General damages cannot be specifically measured in dollars, such as pain and suffering.

Property insurance that provides $100,000 coverage for a building and $50,000 coverage for personal property at a single location is called A Described coverage. B Specific coverage. C Schedule coverage. D Blanket coverage.

B Specific coverage. One location is insured for a specific amount of insurance on the structure and contents.

Events in which a person has both the chance of winning or losing are classified as A Retained risk. B Speculative risk. C Insurable. D Pure risk.

B Speculative risk. Speculative risk involves the chance of gain or loss and is not insurable.

Robbery is A Taking of property from within the premises leaving visible signs of forced entry. B Taking of property by use of force, violence, or fear. C Taking of property without causing property damage or bodily harm. D Any act of stealing.

B Taking of property by use of force, violence, or fear. When one's property is taken by another by use of force, violence, or fear, it is robbery.

Peril is most easily defined as A Something that increases the chance of loss. B The cause of loss insured against. C An unhealthy attitude about safety. D The chance of a loss occurring.

B The cause of loss insured against. Perils are the causes of loss insured against in an insurance policy.

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

B To pre-establish the amount of coverage available for property items that are difficult to value The value of the insured items is determined at the time the policy is written, not at the time of loss.

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 A Absolute liability. B Vicarious liability. C Intervening cause. D Juvenile delinquency.

B Vicarious liability. Under vicarious liability, an insured may be held responsible for the acts of other family members or independent contractors engaged by the insured to perform work.

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 the insured's policy is written on the actual cash value(ACV), how much will the policy pay toward the insured's new roof? A $1,000 B $4,000 C $5,000 D $6,000

C $5,000 ACV is calculated as replacement cost less depreciation.

What type of liability would a person who owns a swimming pool have? A Implied B Direct C Absolute D Vicarious

C Absolute Any conduct that is inherently dangerous (swimming pools, using explosives, keeping wild animals) imposes absolute liability. The claimant does not have to prove anything

What term includes damage where the insured peril was the proximate cause of loss? A Consequential loss B Negligent loss C Direct loss D Indirect loss

C Direct loss Direct loss is direct, physical damage to buildings and/or personal property. Direct loss also includes other damage where the insured peril was the proximate cause of loss.

Which method of loss valuation is contrary to the basic concept of indemnity? A Market value B Agreed value C Replacement cost D Functional replacement cost

C Replacement cost The replacement cost method of loss valuation is contrary to the basic concept of indemnity because following a loss it may provide the insured with a settlement in excess of the property's actual cash value.

In property insurance, actual cash value is defined as which of the following? A Stated value of the property as shown on the declaration B The actual amount of a loss payable, less the policy deductible C Replacement cost at the time of the loss, less depreciation D Market value of the property at the time of the loss

C Replacement cost at the time of the loss, less depreciation A loss valuation method used in many property forms is determined by today's replacement cost minus depreciation for age and obsolescence.

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 A A burglary. B False pretense. C Robbery. D A theft.

C Robbery. Robbery coverage requires that the insured property was taken by the use of violence or threat of violence.

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 A Actual cash value. B Specific insurance. C Stated amount D Replacement cost.

C Stated amount In stated amount coverage, the value of the insured property is determined at the time the policy is written. In the event of a loss, that amount is paid without regard to any coinsurance provision. However, if the loss is less than total, the insurer has salvage rights with the insured having first right of refusal of the salvage.

Which of the following is most likely to occur if it is determined by the audit that the deposit premium was too high? A The insurer will have to pay a fine. B Nothing; the premium cannot be adjusted. C The insured will receive a return premium. D Additional premium will be collected.

C The insured will receive a return premium. If the audit shows that the initial (deposit) premium to the insured was too high (the exposures were over-estimated), the insured will receive a return premium.

Three years ago, an insured moved to an unfurnished apartment. She bought new furniture that cost $9,000. Last week, there was a fire in the apartment that destroyed the furniture. Replacement cost is $10,500. The adjuster told the insured her furniture depreciated $2,500. If insurance is written on an actual cash value basis, how much will it pay for the loss? A $9,000 B $10,500 C $6,500 D $8,000

D $8,000 When insurance coverage is written on an actual cash value basis, losses paid are for the replacement cost (at the time of loss), minus depreciation.

What is a Certificate of Insurance? A A written document obligating the insurer to the person to which the insurance was issued B A written document naming the insured's beneficiary C A written document allowing the insurer to inspect the insured's books D A written document showing the types and amounts of insurance that have been issued to the insured

D A written document showing the types and amounts of insurance that have been issued to the insured A Certificate of Insurance is a written document showing the types and amounts of insurance purchased by the insured; it does not obligate the insurer to the person to which the certificate was issued.

Which of the following types of valuation works best for property whose value does not fluctuate much? A Market value B Stated amount C Inflation guard D Agreed value

D Agreed value Agreed value works best for items whose value does not fluctuate much. When a loss occurs, the policy pays the agreed value as specified on the policy schedule, regardless of the insured item's appreciation or depreciation.

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? A Stop-loss B Consideration C Reasonable expectations D Indemnity

D Indemnity The principle of indemnity stipulates that the insured can only collect for the amount of the loss even if the policy is written with greater benefit limits.

Which of the following does the term proximate cause refer to? A Injury that leads to monetary compensation B Duty of the defendant to act C Reason for filing a lawsuit D Negligence that leads to an injury

D Negligence that leads to an injury Proximate cause is the reasonably foreseeable act or event that results in an injury or damage. Negligence may often be the proximate cause of the damage; without it, the accident would not have happened. This is also called direct liability.

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? A Peril B Hazard C Accident D Occurrence

D Occurrence An occurrence includes those losses caused by continuous or repeated exposure to conditions resulting in injury persons or damage to property that is neither intended nor expected.

Which of the following is used in the formula for calculating the actual cash value of a property? A Stated value B Fair market value C Agreed value D Replacement cost

D Replacement cost The actual cash value (ACV) method of valuation reinforces the principle of indemnity because it recognizes the reduction of value of property as it ages. To calculate ACV, depreciation is subtracted from the current replacement cost.

In case of a loss, the indemnity provision in insurance policies A Allows the insured to collect 20% more than the actual loss. B Pays the insured a percentage of the loss above and beyond the loss. C Pays the insured as much as 95% of the loss. D Restores an insured person to the same financial state as before the loss.

D Restores an insured person to the same financial state as before the loss. Indemnity (sometimes referred to as reimbursement) is a provision in an insurance policy that states that in the event of loss, an insured or a beneficiary is permitted to collect only to the extent of the financial loss, and is not allowed to gain financially because of the existence of an insurance contract.

The legal process that gives the insurer, after payment of a loss, the right to seek recovery from a third party that was responsible for the loss is known as A Adverse selection. B Right of rescission. C Principle of indemnity. D Subrogation

D Subrogation 代位 Subrogation is a provision found in most insurance policies that gives the insurer, after payment of a loss caused by a third party, the insured's rights to recovery against that third party. The insurer's rights are only to the extent of the loss payment.

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 A Condemned B Under repair C Vacant D Unoccupied

D Unoccupied Unoccupancy refers to an insured structure in which no people have been living or working within the required period of time, but the structure contains contents.