Quiz 2

Which of the following homeowners coverage amounts are specified as a percentage of the Coverage A amount? I. Coverage B II. Coverage C III. Coverage D IV. Flood insurance rider A) I and IV B) I, II, and III C) II and III D) I, II, III, and IV

B The answer is I, II, and III. If a homeowner has flood insurance, it is under a separate policy and not stated as a percentage of Coverage A in the homeowners insurance policy.

Which of the following policies does NOT include liability coverage? A) Automobile policies B) Inland marine policies C) Businessowners policies D) Homeowners policies

B The answer is inland marine policies. Auto, home, businessowners policy, and liability umbrella policies all include liability coverage, while an inland marine policy does not. Inland marine policies only provide coverage on the listed property.

In which of the following situations would a personal automobile policy (PAP) NOT provide coverage under the liability section of the policy? A) The named insured uses his trailer, which is hitched to his brother's truck, to move furniture. B) The named insured uses his car to regularly transport executives to the airport for a fee. C) A resident relative, with permission, borrows a truck to haul some sod to his house. D) The named insured borrows a van while his covered auto is being repaired.

B The answer is the named insured uses his car to regularly transport executives to the airport for a fee. The PAP contains an exclusion for vehicles used to transport people or property for a fee.

Which of the following policy sections do homeowners and auto policies share? I. Liability coverage II. Comprehensive coverage III. Medical payments coverage IV. Duties after a loss A) I and III B) I, II, III, and IV C) I only D) I, III, and IV

D With the exception of comprehensive coverage (auto policies only), all of these are sections are shared by homeowners and auto policies.

Most automobile insurance companies use a classification system to determine premiums. Which of the following factors is traditionally used in a classification system? I. The location of the auto II. The age of the driver III. The gender of the driver IV. The driving record of the driver A) II and IV B) I, II, and III C) I, II, III, and IV D) I only

C All of these factors are used in classification systems to determine automobile insurance premiums.

Which of the following is covered under the uninsured motorist coverage of a personal auto policy (PAP)? I. A hit-and-run driver. II. A car that is operated without liability insurance. A) II only B) Neither I nor II C) Both I and II D) I only

C Both hit-and-run drivers and cars operated without liability insurance are insured under uninsured motorist coverage.

All of the following are exclusions from Coverage C: Personal Property of a homeowners policy except A) animals, birds, and fish. B) credit cards. C) jewelry. D) property of roomers or boarders.

C Jewelry is covered under Coverage C; however, coverage is typically limited to a maximum dollar amount of $1,500. The addition of an endorsement can increase the coverage limit for jewelry and other personal property items.

Which of the following is a principle of the workers' compensation laws? I. In exchange for benefits, an employee gives up the right to sue the employer. II. The costs for workers' compensation benefits are funded through payroll taxes, and the employee is expected to contribute. III. The injured employee is not required to prove negligence on the part of the employer. IV. Many states permit, or require, individuals who have domestic help to obtain workers' compensation insurance.

C The answer is I, III, and IV. Workers' compensation insurance is paid through premiums paid solely by the employer.

Under a standard personal auto policy (PAP), damages are based on which of the following criteria? A) Stated value B) Replacement cost C) Actual cash value D) Appraisal value

C Under a standard PAP, coverage for damages is paid on an actual cash value basis, which is the replacement cost minus depreciation. There is no replacement cost coverage under a standard PAP.

Zhang has a personal auto policy, and the liability coverage is displayed as 100/300/50. How much property damage liability coverage does Zhang have? A) $350,000 B) $300,000 C) $100,000 D) $50,000

D The answer is $50,000. 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 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, Zhang has $100,000 in bodily injury liability coverage per person, $300,000 in bodily injury liability coverage per accident, and $50,000 in property damage coverage per accident.

Which of the following is true for property coverage in a commercial package policy (CPP)? I. A CPP provides broader coverage but is a bit more expensive than a collection of monoline forms. II. No customization is allowed, as all potential risks are covered in the standard CPP. III. The standard CPP includes building, contents, and commercial automobile coverage. IV. The CPP is designed for larger businesses. A) III and IV B) I, II, III, and IV C) IV only D) I, II, and III

C The answer is IV only. 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 business owner policy is designed for smaller businesses.

Your client, Carol, has brought her declaration page and the following information to you. The market value of the residence is $468,000. Her builder advised her that to rebuild her house today, it would cost $450,000. According to the declarations page of the policy, it is HO-5 insured for $425,000 with a $1,000 deductible. The value of the land is $55,000. Which of the following statements is true regarding a total loss of Carol's house? A) The value of the land deducted from the residence's market value is less than the amount insured ($425,000); therefore, Carol's only out-of-pocket cost will be her deductible. B) She will have an out-of-pocket cost of $44,000 if she has the house rebuilt exactly the way it is today. C) Because it is an HO-5 policy, it covers replacement, so she will have no out-of-pocket costs other than her deductible. D) She will have an out-of-pocket cost of $26,000 if she rebuids the house exactly the way it is today.

D Just because a policy is one of replacement, it does not mean it will pay more than the insured amount. In this case, the maximum the company will pay is $425,000. The true statement is that her loss would be $26,000. ($425,000 coverage less $450,000 cost to rebuild, less the $1,000 deductible: $425,000 − $450,000 −$1,000 = −$26,000. The market price and land price are irrelevant. What is important is cost to rebuild minus insured amount.

Which of the following are the perils covered under basic coverage in a homeowners policy? I. Smoke II. Theft III. Falling objects IV. Earthquake A) II and III B) II, III, and IV C) I, II, and III D) I and II

D The answer is I and II. Basic coverage provides benefits for financial loss to the policyowner's home due to fire, lightning, windstorm, hail, riot or civil commotion, aircraft, vehicles, smoke, vandalism or malicious mischief, explosion, theft, and volcanic eruption. Loss or damage due to falling objects is covered under broad coverage. Loss from an earthquake is excluded from most homeowners policies.

Which of the following covered losses are included in a personal automobile policy? I. Injuries to the insured or family members II. Damage to the insured's vehicle A) II only B) Neither I nor II C) I only D) Both I and II

D The answer is both I and II. Another covered loss is legal liability for injuries and damages to other persons.

Raul is in the process of purchasing homeowners insurance for his new residence. Which of the following factors may affect Raul's premium? I. The policy form and coverage provided II. The location of the property III. The amount of the deductible IV. The level of fire protection provided by the city or municipality A) I, II, III, and IV B) I only C) I, II, and III D) II and IV

A The answer is I, II, III, and IV. All of these are factors used in classifying and pricing a homeowners policy. Other factors include the construction type of the residence and the amount of insurance requested by the applicant.

Which of the following is a common property coverage that can be included in a commercial package policy? A) Theft by customers B) Workers' compensation C) Employer's liability D) Commercial liability

A The answer is theft by customers. Coverage for theft by customers is a property coverage, while the other answer choices provide liability coverage.

All of the following are covered under a personal automobile policy's other-than-collision (comprehensive) coverage except A) earthquake. B) colliding with a mailbox. C) flood. D) theft.

B Collision is defined as "the upset of your covered auto or its impact with another vehicle or object." Other examples of losses covered under other-than-collision coverage include vandalism, hail, and breakage of glass.

Coverage C in a homeowners policy insures the personal belongings of the policyowner and any resident family members. Which of the following is the typical limit on this coverage? A) 50% of the Coverage B limit B) 50% of the Coverage A limit C) 80% of the Coverage B limit D) 80% of the Coverage A limit

B The limit on Coverage C coverage is typically 50% of the Coverage A limit.

Donald has an HO-3 homeowners policy. His policy limit under Coverage E is $300,000. He is entertaining friends at his house one evening for a barbeque. Donald carelessly tries to start the grill with gasoline instead of lighter fluid, and one of his guests is severely burned as a result. The fire also causes $5,000 in damage to the guest's car. The burned guest sues Donald for negligence. The cost of Donald's legal defense is $20,000. At trial, the court orders Donald to pay the guest $60,000 for his medical expenses and $5,000 for the damage to his car. What amount will Coverage E of Donald's HO-3 policy pay as a result of this occurrence? A) $5,000 B) $80,000 C) $85,000 D) $60,000

C

Dana owns a building that she purchased for $600,000. Its current replacement cost is $1.5 million. The building is covered up to $900,000 for fire-related perils by ZRP Insurance Company, with an 80% coinsurance provision and a $2,000 deductible. Last week, a fire broke out in the building, causing $800,000 in covered damage. What amount will ZRP Insurance Company pay for this loss? A) $798,000 B) $478,000 C) $598,000 D) $800,000

C The answer is $598,000. It is computed as follows: amount of insurance required = $1,500,000 × .8 = $1,200,000 percentage of current insurance vs. insurance required = $900,000 ÷ $1,200,000 = .75 (percentage of insurance × loss incurred) − deductible = (.75 × $800,000) − $2,000 = $598,000

Which of the following are true for a businessowners policy (BOP)? I. A BOP includes property and liability coverage. II. There are four parts to a BOP. III. BOPs are a specific, standard package of coverage. IV. BOPs can be customized to a specific business. A) II and IV B) I and III C) I, II, and IV D) I, II, and III

C The answer is I, 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 forms insures the dwelling and other structures on an open-perils basis? A) HO-1 B) HO-2 C) HO-3 D) HO-4

C The answer is under HO-3. All direct physical losses are covered, unless specifically excluded.

Liability insurance is primarily concerned with the financial consequences of A) intentional torts. B) all torts. C) felony crimes. D) negligence.

D Liability insurance is primarily concerned with negligence. It does not cover intentional acts.

Errors and omissions (E&O) insurance provides protection A) for businessowners in the event of disability. B) for individuals whose liability could result in bodily harm. C) when a business transports goods domestically. D) against the deficient acts of a professional who handles money.

D The answer is against the deficient acts of a professional who handles money. E&O insurance provides protection against the deficient acts of a professional who handles money. Malpractice insurance is generally used where the deficient conduct of the insured may result in bodily harm (e.g., a physician, surgeon, or dentist). Inland marine insurance covers businesses that transport goods domestically. Business overhead expense insurance provides coverage for businessowners in the event of disability.

Which of the following statements concerning a personal liability umbrella policy (PLUP) is CORRECT? I. A PLUP is designed primarily to provide liability coverage for catastrophic legal claims or judgments. II. A PLUP requires the policyowner to carry certain underlying liability coverages of specified minimum amounts. A) II only B) I only C) Neither I nor II D) Both I and II

D The answer is both I and II. A PLUP is structured to provide a layer of liability insurance coverage for catastrophic legal claims or judgments, on top of the individual's homeowners and automobile insurance policies. To be eligible for umbrella coverage, an insurer may require the insured to maintain minimum amounts of underlying liability coverage.

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) Professional liability D) Inland marine

D The answer is inland marine. Inland marine coverage is a property coverage, while the other answer choices provide liability coverage.

Which of the following types of loss is NOT covered in a standard personal auto policy (PAP)? A) Injury to the insured and her family B) Legal liability C) Damage to the vehicle D) Personal property damaged in an auto accident

D The answer is personal property damaged in an auto accident. Damage to personal property in an auto accident is not covered in a standard PAP. This type of loss would normally be covered in a homeowners policy.

The principal difference among the various homeowners forms is A) the extensions of coverage in each form. B) the liability coverage under Section II. C) the definition of dwelling in each form. D) the perils insured against in Section I.

D The answer is the perils insured against in Section I. The principal difference among the various homeowners forms are the perils insured against in Section I of the policy. Specifically, some policies cover only basic perils, some cover broad perils, and others are written as open perils.

Which of the following statements regarding typical personal liability umbrella policies is NOT true? A) The individual seeking the coverage is usually required to have increased levels of homeowners and automobile insurance liability. B) There are no standard policies. C) They generally have liability limits of at least $1 million. D) They commonly require a base policy with a minimum of $1 million of liability coverage.

D Umbrella policies normally have liability limits of $1 million or more. Base policies normally include a minimum of $300,000 of liability coverage.

Elise has been working for a national dental firm as a dentist and recently left to start her own practice. Which of the following should she purchase to protect herself from business-related liability risks? I. Malpractice insurance II. Errors and omissions insurance III. A businessowners policy (BOP) IV. A personal liability umbrella policy (PLUP) A) I, II, and III B) I, II, III, and IV C) II and IV D) I and III

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