PROPERTY INSURANCE CONCEPTS

A commercial building with a replacement cost value of $400,000 is insured under a Commercial Property policy for $240,000. An 80% coinsurance clause applies according to the policy conditions. A $20,000 loss to the building has occurred. Disregarding any deductible, how much will the insured receive on this claim?

$15,000 The insured should have carried $320,000 to be in compliance with the 80% coinsurance clause. (80% of $400,000 is $320,000.) Therefore, we would divide $240,000 (Amount Carried) by $320,000 (Amount Should Have Carried) to equal .75. We then multiply $20,000 (Amount of Loss) by .75 to equal $15,000, the amount the insurer will pay on the loss. In this situation, the insured is penalized $5,000 for not complying with the 80% coinsurance requirement.

An insured carries property insurance with a limit of $25,000 and an 80% coinsurance requirement. The covered building, however, is worth $40,000. How much would she collect in the event of a total loss?

$25,000 Coinsurance only affects partial losses and not a total loss. In the event of a total loss when the limit of insurance is less than 80% of the value of the building, the insured will receive a claim payment equal to the policy limit.

Hamish has covered his antique automobile with a loss settlement amount that is stated in the policy of $55,000. The ACV of the vehicle is $32,000, but Hamish insured it for more because of his emotional attachment to the car. The policy deductible is $1,000. Hamish is driving his beloved automobile to an antiques car show one afternoon, when he is distracted by another antique vehicle and crashes into a brick retaining wall. Hamish's antique car is a total loss. Which of the following is the amount he should receive for his claim?

$31,000. With a loss settlement that is a "stated amount" the insured will collect the value stated in the policy or the ACV, whichever is less, minus the deductible. Therefore, the correct answer would be $31,000.

All of the following may have insurable interest in property covered by an insurance policy, EXCEPT:

A neighbor whose property is adjacent to the insured's property for loss to their dwelling when siding from the insured's house hits and damages the neighbor's house. A neighbor whose property is adjacent would NOT have insurable interest in the insured's property. This is because the neighbor would not suffer financially if the insured's property was damaged.

When the property covered under an insurance policy is destroyed beyond repair and nothing of value remains, it is considered a(n):

Actual total loss. When the property covered under an insurance policy is destroyed beyond repair and nothing of value remains, it is known as an "actual total loss".

A dwelling or building constructed of modified fire resistive materials has a fire resistance rating of:

At least 1 hour.

Which of the following is NOT typically covered under a property insurance policy?

Flood

Monique's house is covered in brick veneer. Monique's house is which of the following types of construction?

Frame Brick or any other type of veneer is placed over "frame" construction.

A method of replacing damaged property with something not exactly like the damaged item, but will perform in a similar fashion is known as:

Functional replacement cost. Functional replacement cost will replace the damaged item, but with something that might not be exactly the same. However, it will serve the same FUNCTION.

Which of the following is a type of "voluntary loss" taken to save the property from further loss?

General Average Loss A "General Average Loss" is a partial loss that is "voluntary". This type of loss is taken to save the property from further loss, such as an insured who uses a garden hose to extinguish a fire that has started on her couch. The water damage is "voluntary" but it prevented further loss to the house.

All of the following are functions of the standard mortgage clause in a property insurance policy, EXCEPT:

Guarantees that the mortgage payments will be made by an insurance policy, if the insured does not make the payments. The standard mortgage clause, does NOT guarantee that the mortgage payments will be made by an insurance policy if the insured does not make the payments.

The insured has several business locations and would like to insure both the structures, and the inventory (contents). His agent advises him to complete a statement of values form and a policy with one limit to cover all locations is issued. This is an example of:

Insuring on a blanket basis. This is an example of "blanket" coverage where all locations are covered under one limit.

A separate limit listed "per type of property" on an insurance policy, is known as:

Insuring on a specific basis. Limits that are scheduled per type of property on the coverage form is known as insuring on a "specific or scheduled basis".

Which of the following statements is TRUE regarding an "open peril" property insurance policy?

It provides coverage for all perils, unless that peril is specifically excluded.

Dana lives in a state that has passed a Valued Policy Law (VPL). This means that insurers issuing property policies in the state:

Must pay the full limit of the policy, stated on the Declarations page, in the event of a total loss.

The penalty for failure to satisfy a coinsurance requirement of a property insurance policy is that:

Only a portion of a partial loss will be paid. If the insured's policy contains a coinsurance clause and the insured carries less than 80% of the value of the property, a penalty will occur in case of partial losses. This "penalty" is that the insured will not receive as much in their claim payment as they would have if the coinsurance requirement had been met.

Many states amend property insurance coverage additions and extensions by statute due to insufficient coverage amounts or time limits. All of the following are property insurance additions or extensions that are frequently amended by state statute, EXCEPT:

Other Structures. "Other Structures" is NOT a coverage addition or extension under a property policy, therefore, this is the correct answer.

Which of the following best defines a "direct loss" under a property insurance policy?

Physical harm to property that is the direct result of a peril.

The types of property that can be covered under an insurance policy falls into two categories. They are:

Real property and personal property.

Which of the following loss valuations can be stated as "we agree to pay the cost to repair or replace without deduction for depreciation?"

Replacement cost. Replacement cost may be defined as "the cost to repair or replace without deduction for depreciation."

A threat of violence or injury in the act of stealing is called:

Robbery

The purpose of the appraisal clause in a property insurance policy is to:

Settle disputes concerning the amount of a loss.

Which of the following statements defines a "bailee"?

Someone, other than the insured, to whom the insured temporarily entrusts their property. A "bailee" is a person or business entity that has temporary possession of the insured property usually while performing a service. For example, a TV repair shop may have temporary custody of an insured television while it is being repaired.

Which of the following cause of loss forms provides named peril coverage?

The basic and broad forms only.

The peril of "wind" is covered by all of the following causes of loss forms, EXCEPT:

The basic form.

Kathryn is covered under a property insurance broad cause of loss form. Which of the following statements is true for Kathryn?

The burden of proof lies with Kathryn to prove that a named peril in her policy caused her loss. With the broad cause of loss form, the burden of proof lies with the INSURED to prove that a named peril caused the loss. All of the other answer choices are not true of the broad cause of loss form.

When the loss settlement condition under a property insurance policy indicates that the claim will be settled at the "agreed value", which of the following is TRUE?

The insurer will pay the value that was agreed upon and scheduled in the policy. With an "agreed value" (also known as an "agreed amount") loss settlement under a property policy, the insurer will pay the value that was agreed upon and scheduled in the policy.

For coverage to apply under a property insurance policy, all of the following must be true, EXCEPT:

The loss must have caused damage to a third party.

Brian owns a commercial building worth $600,000. When Brian purchases insurance to cover his building, he sees that the policy includes an 80% coinsurance clause. Brian must purchase at least _________ of coverage in order to be paid the full amount in case of a partial loss.

$480,000. $480,000 is 80% of $600,000. Therefore, Brian must purchase at least $480,000 in insurance coverage to meet the coinsurance requirement.

The ACV settlement under a property insurance policy may be determined using "broad evidence rule", which means that the loss is valued:

By establishing the value of the property using any evidence a court finds relevant.

Patrice has received a reduced payment for her insurance claim and the explanation states that the reduction was due to the "obsolescence" of the damaged property. Which of the following best describes the reason for the reduction in the claims payment?

The property that was destroyed was obsolete. A reduced claims payment may be made by the insurance company due to the reduced market value of the property because it has become obsolete (no longer used or available). The reason provided by the insurer for the reduced payment would be "obsolescence".

Which of the following property insurance cause of loss forms provides coverage for all risks of loss?

The special form. The special cause of loss form provides open perils coverage, which means it covers all risks of loss unless specifically excluded.

A FAIR Plan is created in a state:

To provide property policies for purchase in the residual insurance markets to those whose properties are located in "high risk" areas preventing them from obtaining insurance in the usual markets. A FAIR Plan is created to make property insurance available for purchase to those who own or rent property in "high risk" risk areas and cannot obtain property insurance in the standard market.

Which of the following would meet the definition of "concurrent causation"?

Two or more perils that are independent of each other but combine to cause a single loss. Concurrent causation is defined as a single loss caused by two or more perils, occurring simultaneously or in succession. The perils are independent of each and on their own, would not have caused the loss. However, when the perils were combined simultaneously or in an unbroken chain of events (succession), they created the loss.