Lesson 3 quiz questions

Sandi purchased a $130,000 home three years ago and took out a $100,000 mortgage. Today her home is worth $150,000 and she still owes $55,000 on the home. The mortgage holder has an insurable interest of how much in Sandi's home? Select one: A. $55,000 B. $100,000 C. $130,000 D. $150,000

A. $55,000

Alice bought furniture for her home using store credit. There were no liens attached, and when Alice could not pay the full amount for the furniture, the store owner sued her. The store owner was Select one: A. An unsecured creditor. B. A bailor. C. A lessor. D. A secured creditor.

A. An unsecured creditor.

Generally, in a liability claim, the burden of proof regarding what bodily injury or property damage losses were proximately caused by the insured belongs to the Select one: A. Claimant. B. Jury. C. Insurer. D. Insured.

A. Claimant.

Jack and Susan own and manage a hotel. They are concerned about their responsibility for the property of their guests and whether they have an insurable interest in that property and thus could buy insurance to cover their responsibility. Most courts would hold that they do have an insurable interest in their guests' property based on which one of the following legal bases? Select one: A. Factual expectancy B. Contractual obligations C. Exposure to legal liability D. Representation of another party

A. Factual expectancy

Carla accepted an antique furniture item that was traded in an illegal drug deal. She later learned that it was extremely valuable and even though it was the result of an illegal transaction initially, Carla wanted to insure it. Carla lives in a state where she does not have to establish a specific property right, contractual right, or potential legal liability to prove her insurable interest. In this situation Carla only needs to demonstrate potential financial harm in the event a covered loss occurs. In her state, the focus is on Carla's financial position rather than on a legal interest. Carla's insurable interest is based on Select one: A. Factual expectancy. B. Representation of another party. C. Exposure to legal liability. D. Contractual obligations.

A. Factual expectancy.

Aaron finds 10 new laptop computers in the basement of his office building. The attached invoice indicates that each laptop was worth $1,500 four years ago. Hoping to sell them, Aaron was disappointed to learn he could obtain only $500 per unit. This discrepancy in valuation of the laptop computers is most likely due to Select one: A. Functional depreciation. B. Market value. C. Replacement cost value. D. Accounting depreciation.

A. Functional depreciation.

Which one of the following statements is correct regarding sources of recovery under insurance policies? Select one: A. In situations involving a loss covered by two similar policies with different insurers, the insurers usually share the loss. B. If an insured's loss is covered under two similar policies, the policy that was issued first must pay the loss. C. Policy provisions generally exclude coverage for items covered under a policy with another insurer. D. An insured cannot simultaneously hold two policies of the same type with two different insurers.

A. In situations involving a loss covered by two similar policies with different insurers, the insurers usually share the loss.

Customer Mary gave dry cleaner Ike her fur coat so he could remove a large stain. Ike could not eliminate the stain so he asked restoration specialist Peter to attempt to remove it. The bailor in this scenario is Select one: A. Mary. B. Ike. C. Peter. D. Both Ike and Peter.

A. Mary.

Property insurance policies using the agreed value method Select one: A. Pay the agreed value for total losses. B. Pay actual cash value for total losses. C. Pay replacement cost for total losses. D. Are contracts of indemnity.

A. Pay the agreed value for total losses.

Ella, the owner of a dry cleaning establishment, maintains insurance on customers' clothing and other property. She does so because she is acting as a bailee of customers' property while it is in her possession. In the event that a customer's property becomes damaged while in her care, Ella will pay any insurance proceeds to the customer. Which one of the following is the legal basis for insurable interest demonstrated by this example? Select one: A. Representation of another party B. Ownership interest in property C. Factual expectancy D. Contractual obligation

A. Representation of another party

Which one of the following is the name of the insurance policy provision that addresses the situation where recovery from a negligent third-party overlaps with first-party insurance coverage? Select one: A. Subrogation B. Other insurance C. Valuation D. Coinsurance

A. Subrogation

Alva and Mehmet are married and own their home, which is valued at $250,000. The combined interest of Alva and Mehmet is $500,000. In the event of loss, the insurer would pay no more than the value of the property. This type of ownership is referred to as Select one: A. Tenancy by the entirety. B. Tenancy in partnership. C. Joint tenancy. D. Tenancy in common.

A. Tenancy by the entirety.

Spouses Ed and LeeAnn own a home. If Ed dies, LeeAnn will become the sole owner of the house. Both Ed and LeeAnn have an insurable interest in the property equal to the full value of the property. This is a Select one: A. Tenancy by the entirety. B. Life estate. C. Joint tenancy. D. Tenancy in common.

A. Tenancy by the entirety.

Deductibles in property insurance policies are most effective in reducing insurers' expenses when Select one: A. They are used with coverages in which small, partial losses are common. B. Their size does not have a noticeable financial effect on the insured. C. Their use provides no incentive for the insured to prevent losses. D. They are used with large property exposures.

A. They are used with coverages in which small, partial losses are common.

Which one of the following best describes the reason that many policies with replacement cost provisions give the insured the option of settling the claim based on actual cash value (ACV), and then allowing the insured 180 days to refile the claim on the replacement basis? Select one: A. This provision gives the insured the opportunity to obtain funds from the insurer at the time of the loss and collect full replacement cost upon completion. B. The insurer prefers this method because it gives the insurer more time to investigate the loss. C. The insurer prefers this method because it allows the insurer more time to adequately establish proper claim reserves. D. This provision allows the insured to profit from the loss by receiving the actual cash value payment for new property right away to replace old, used property.

A. This provision gives the insured the opportunity to obtain funds from the insurer at the time of the loss and collect full replacement cost upon completion.

Regarding the valuation and settlement of liability claims, which one of the following statements is true? Select one: A. With liability claims, both the claimant and the insurer have an incentive to reach an out-of-court settlement because of the uncertainty, time, and expense involved in a formal trial. B. Most liability claims go to a formal trial. C. Most liability insurance policies give the insured/defendant the right to prohibit the insurer and the claimant from reaching a settlement within policy limits. D. Juries are bound to confine an award to the limits of the applicable policy.

A. With liability claims, both the claimant and the insurer have an incentive to reach an out-of-court settlement because of the uncertainty, time, and expense involved in a formal trial.

In property insurance, the determination of underinsurance (not insuring to value) is made Select one: A. When the risk is assessed by the underwriter. B. At the time of loss. C. At post loss by the underwriter. D. At the time of application.

B. At the time of loss.

Furkan has purchased a new vehicle and financed it through Barnley's Finance Company. Furkan is unable to make payments and the car is repossessed by Barnley's Finance Company. This type of insurable interest is Select one: A. Representation of another party. B. Contractual obligations. C. Dual ownership. D. Multiple parties with insurable interests.

B. Contractual obligations.

The expensive and inefficient process of insuring low severity small claims is referred to as Select one: A. Stair-stepping. B. Dollar trading. C. Claim costs offset. D. Dollar cost averaging.

B. Dollar trading.

Jack and Susan own and manage a hotel. They have posted signs that they are not responsible for the property of hotel guests. However, if a court establishes that they do have to reimburse a guest for a property loss, it will most likely be decided on the legal basis of Select one: A. Contractual obligations. B. Factual expectancy. C. Representation of another party. D. Exposure to absolute or strict liability.

B. Factual expectancy.

Tom is insured under a Personal Auto Policy (PAP). He recently purchased a used car from an individual. Shortly after purchasing the car, it was stolen and Tom filed a claim with his insurance company. During the investigation, the claim representative discovered that the person from whom Tom purchased the car did not have legal title, and therefore Tom did not have legal title to the car. The insurer denied the claim based on the lack of an insurable interest. Many courts would hold that Tom did have an insurable interest in the value of the car based on the legal basis of Select one: A. Exposure to legal liability. B. Factual expectancy. C. Contractual obligations. D. Representation of another party.

B. Factual expectancy.

Chloe owns a 120 year-old historical building that she uses as an art studio. Rebuilding the structure in the event of loss could become difficult due to the antique fixtures and materials used in the original design of the building. Which one of the following valuation methods is an insurer most likely to use in the property policy covering this property? Select one: A. Replacement cost B. Functional valuation C. Actual cash value D. Agreed value

B. Functional valuation

In a jewelry purchase, buyer Connie told her sister Jennifer to purchase three dozen gemstone bracelets. Jennifer bought bracelets and necklaces from George who was a well-known silversmith. George, counting on the income, purchased silver from Tom, but when Connie refused to pay for the necklaces and returned them, George could not pay Tom. In this situation, the agent is Select one: A. Tom. B. Jennifer. C. Connie. D. George.

B. Jennifer.

James made settlement on a new house and purchased a homeowners policy to protect it effective June 1st. The new house needed some work, so James did not plan on moving in until July 1st. He maintained his apartment lease and rental insurance for the month. Which one of the following additional sources of recovery did this situation present for James' personal property? Select one: A. Noninsurance agreements B. Other insurance in a similar policy C. Other insurance in dissimilar policies D. Other insurance in the same policy

B. Other insurance in a similar policy

Which one of the following statements relating to the use of property insurance deductibles is correct? Select one: A. Small property insurance deductibles help eliminate dollar trading. B. Property insurance deductibles reduce premium costs by encouraging insureds to prevent or reduce losses. C. For most property insurance policies, the premium reduction is directly proportional to the size of the deductible. D. Risk transfer mechanisms such as insurance are designed to cope with low-severity property losses.

B. Property insurance deductibles reduce premium costs by encouraging insureds to prevent or reduce losses.

Which one of the following statements is correct? Select one: A. A party who is injured or whose property is damaged by a negligent third party has a right to recover only if the wrongdoer has liability insurance. B. Subrogation provisions in policy wordings prevent insureds from collecting from both negligent third parties and their own insurer. C. If a negligent third party causes injury and the injured party accepts settlement from his or her own insurer, the negligent party's responsibility to pay damages is eliminated. D. Insureds who are injured by negligent third parties cannot recover from their own insurer under their own policy.

B. Subrogation provisions in policy wordings prevent insureds from collecting from both negligent third parties and their own insurer.

To reduce the moral hazard associated with property insurance policies written on a replacement cost basis, most replacement cost policies pay only after Select one: A. The insured has waited 30 days. B. The insured has actually replaced the damaged or destroyed property. C. It has been determined that the loss is a relatively high value. D. The insured has met the deductible.

B. The insured has actually replaced the damaged or destroyed property.

Which one of the following is the primary reason that insurers restrict the use of deductibles in liability policies? Select one: A. Liability policies have a high frequency of small claims. B. The insurers want to control liability claims from the outset. C. The full policy limit is payable on top of the deductible amount. D. The corresponding premium reductions are too large.

B. The insurers want to control liability claims from the outset.

Which one of the following statements is true regarding the relationship between the size of the property policy deductible and the premium reduction? Select one: A. The premium credits tend to encourage the use of small deductibles and the practice of dollar trading. B. The premium credit increases much more slowly than the size of the deductible. C. The premium reduction is directly proportional to the size of the deductible. D. The premium credit increases much more rapidly than the size of the deductible.

B. The premium credit increases much more slowly than the size of the deductible.

An important goal of insurers that sell property insurance is to motivate each insured to buy a limit of insurance that approximates the full value of the covered property. The benefit to the insured of buying insurance to value is that it ensures Select one: A. Insureds are able to obtain prompt, efficient, and effective claim coverage from their insurers. B. There are sufficient funds available in the event of a total loss. C. Insurers are compliant with state regulations. D. That premiums are high enough to guarantee insurer profits and low enough that insurance is affordable.

B. There are sufficient funds available in the event of a total loss.

The United States common-law system requires the amount of damages awarded to a claimant in a liability claim to compensate the claimant for loss incurred as of the Select one: A. Date the claim is reported. B. Trial date. C. Settlement date. D. Date of loss.

B. Trial date.

Assume a covered settlement amount of $1,300,000 under a liability insurance policy including a limit of $1,000,000, and a self-insured retention (SIR) of $100,000. Under normal circumstances, the insurer will pay which one of the following amounts for this settlement? Select one: A. $300,000 B. $900,000 C. $1,000,000 D. $1,100,000

C. $1,000,000

Company T has a liability policy with Insurer A with a $1 million policy limit. Company T was found liable for a $700,000 judgment. Defense costs amounted to $400,000. Assuming the insurer's payments for defense costs are applied to reduce the policy limit, how much would Insurer A pay toward the $700,000 judgment? Select one: A. $0 B. $400,000 C. $600,000 D. $700,000

C. $600,000 (1M-$400K)

Which one of the following statements regarding the extent of damages in liability claims is true? Select one: A. The insured/defendant usually has the burden of proof regarding bodily injury and property damage proximately caused by his or her acts. B. Unlike property damage claims, evaluation of bodily injury claims considers a narrow range of damage elements for the claimant. C. A claimant in a bodily injury or property damage liability claim has a duty to mitigate loss after an accident. D. A claimant generally may not recover damages to compensate for loss of use of damaged property.

C. A claimant in a bodily injury or property damage liability claim has a duty to mitigate loss after an accident.

Which one of the following is an example of a noninsurance agreement that may overlap with insurance coverage of losses? Select one: A. A responsible party agreement B. A lease payment plan C. A home warranty D. A business warranty agreement

C. A home warranty

Which one of the following types of loss exposures is most likely to be covered by a valued policy? Select one: A. Restaurant exposures B. Professional liability loss exposures C. Commercial watercraft D. Exposures subject to wind loss

C. Commercial watercraft

Which one of the following would be considered supplementary payments under liability insurance policies? Select one: A. Judgments against the insured B. Claimant's compensable damages C. Cost of surety bonds D. Defense costs

C. Cost of surety bonds

Generally, it is difficult to establish market value on property when the property Select one: A. Has many sellers in the market. B. Has a diverse range of prices for like kind and quality. C. Has had few recent transactions involving comparable property. D. Has many buyers in the market.

C. Has had few recent transactions involving comparable property.

In deciding among a variety of deductible levels under property insurance policies, an insured must balance the benefits of premium reduction with the need to Select one: A. Insure low value losses. B. Trade dollars. C. Have insurance protection for large losses. D. Have insurance protection for loss frequency.

C. Have insurance protection for large losses.

Which one of the following statements is true regarding the agreed value method of property valuation used in some property insurance policies? Select one: A. At the time the policy is written, only the insurer must agree to the value specified in the policy. B. The agree value method in property insurance policies illustrates the principle of indemnity. C. If a total loss occurs, the insurer will pay the agreed value specified in the policy. D. The agreed value method stipulates what the agreed value has to be relative to the true value of the property.

C. If a total loss occurs, the insurer will pay the agreed value specified in the policy.

In terms of insurance to value principles applying to liability insurance policies, which one of the following statements is true? Select one: A. It is not important for insureds to estimate the potential severity of their liability loss exposures because insurers do not seek insurance to value for liability policies. B. Insurers generally seek insurance to value for liability policies. C. Liability insurers seek to use insurance rates that are adequate for whatever "layer" of coverage they are insuring. D. The law generally limits the dollar amount of damages that a court can award to an injured party, allowing insurers to determine the maximum possible loss for most liability loss exposures.

C. Liability insurers seek to use insurance rates that are adequate for whatever "layer" of coverage they are insuring.

With most types of property insurance policies, premium credits tend to encourage the use of Select one: A. Percentage deductibles. B. Large-sized deductibles. C. Medium-sized deductibles. D. Small deductibles.

C. Medium-sized deductibles.

Ren was married to Anna but they have since divorced. Because Ren is aware of Anna's financial status, he wants to take out a life insurance policy on her. In terms of insurable interest, Ren may Select one: A. Purchase a life insurance policy on Anna with any face amount. B. Purchase a life insurance policy on Anna, but it cannot exceed one half of Anna's net worth. C. Not purchase a life insurance policy on Anna since he does not have an insurable interest in her life. D. Not purchase a life insurance policy on Anna since he has no right to her assets after the divorce.

C. Not purchase a life insurance policy on Anna since he does not have an insurable interest in her life.

While on her way to a business appointment, Sara is involved in an automobile accident. She suffers minor injuries as a result and is not sure which insurance policy should cover her expenses. She may be able to recover from her personal auto insurer or from her employer's workers compensation insurer. This is an example of which one of the following other sources of recovery? Select one: A. Noninsurance agreements B. Other insurance in a similar policy C. Other insurance in dissimilar policies D. Other insurance in the same policy

C. Other insurance in dissimilar policies

Brenda wrote a poem that she sent to her sister who sold the poem to a recording company. Learning of the sale, Brenda became upset. If Brenda has an insurable interest in the poem she wrote as a type of "property," the legal basis of her insurable interest arises out of Select one: A. Contractual obligations. B. Representation of another party. C. Ownership interest in property. D. Factual expectancy.

C. Ownership interest in property.

Property insurance policies using the agreed value method Select one: A. Are contracts of indemnity. B. Pay replacement cost for total losses. C. Pay the agreed value for total losses. D. Pay actual cash value for total losses.

C. Pay the agreed value for total losses.

Jeremy is a bailee who insures bailor Sam's property for Sam's benefit. Jeremy has an insurable interest in the property, but if Sam's property becomes damaged or destroyed, Jeremy Select one: A. Has no right to any insurance proceeds because it is not his property. B. Splits the proceeds from any insurance settlement with Sam. C. Pays any awarded insurance proceeds to Sam. D. Retains all payable insurance proceeds.

C. Pays any awarded insurance proceeds to Sam.

Under which one of the following types of insurance policies are the insurer's payments for defense costs and supplemental payments typically applied to reduce the policy limits? Select one: A. Commercial auto B. CGL C. Pollution liability D. Homeowners

C. Pollution liability

Significant deductibles are most common with which one of the following types of liability policies? Select one: A. General liability B. Auto liability C. Professional liability D. Personal liability

C. Professional liability

All of the following are reasons insurers restrict the use of deductibles in liability insurance policies, EXCEPT: Select one: A. The insurer must pay third-party claimants in full and then recover the amount of the deductible from the insured. B. Insureds may not report seemingly minor incidents to the insurer until the situation has escalated. C. The insurer loses its right to provide a defense under liability insurance policies that include a deductible. D. Liability deductibles do not noticeably reduce premiums for most liability insurance policies.

C. The insurer loses its right to provide a defense under liability insurance policies that include a deductible.

Which one of the following correctly describes how liability policies that include a deductible usually handle the defense of claims? Select one: A. The insurer bills the insured for defense costs less than the deductible amount. B. The insurer provides a defense only for losses that exceed the deductible amount. C. The insurer pays all defense costs without contribution from the insured. D. The insurer pays a stated amount which reduces the limit available under the policy.

C. The insurer pays all defense costs without contribution from the insured.

Oliver has a commercial property policy covering his retail store. The policy has an 80 percent coinsurance clause, and the insurable value of the store is its replacement cost. When the policy was written, the value of the store was $160,000. Assuming the current replacement cost of the store is $150,000, and that it is insured for $120,000, how much will Oliver recover under his insurance policy if the store suffers a $30,000 covered loss? Select one: A. $0 B. $22,500 C. $24,000 D. $30,000

D. $30,000 (12/15*.8 x 3)

Oliver has a commercial property policy covering his retail store. The policy has an 80 percent coinsurance clause, and the insurable value of the store is its replacement cost. When the policy was written, the value of the store was $320,000. Assuming the current replacement cost of the store is $300,000, and that it is insured for $240,000, how much will Oliver recover under his insurance policy if the store suffers a $50,000 covered loss? Select one: A. $0 B. $37,500 C. $40,000 D. $50,000

D. $50,000 (24/32*.8 x 5)

Company Z carries a pollution liability policy with a $5,000,000 limit. The policy provides for the payment of defense costs in addition to the policy limit. If Company Z is found liable for a $4,500,000 judgment, and the insurer incurs $2,000,000 in defense costs, how much in total will the insurer pay for this claim? Select one: A. $2,000,000 B. $4,500,000 C. $5,000.000 D. $6,500,000

D. $6,500,000 ($4.5M+2M)

Insurer A knows the expected value of a severity distribution for dwelling property losses is $3,280, and assumes a simple frequency distribution that has only the two possibilities- 70 percent of the time no loss would occur and 30 percent of the time one loss would occur. Which one of the following represents the approximate expected loss? Select one: A. $468 B. $689 C. $780 D. $984

D. $984

As an incentive for insuring to value, many policies include insurance to value provisions that reduce the amount payable for both partial and total losses if the insured has not purchased adequate limits of coverage. Coinsurance clauses, one such type of provision, are found in many commercial property insurance policies. The most common coinsurance percentages for buildings and business personal property are 90 percent, 100 percent, and Select one: A. 50 percent. B. 60 percent. C. 75 percent. D. 80 percent.

D. 80 percent.

With insurance-to-value provisions under homeowners (HO) and businessowners (BOP) policies, the amount payable by the insurer will never be less than the Select one: A. Replacement cost of the damaged property, subject to policy limits. B. Repair cost of damaged property, subject to policy limits. C. Policy limits less the deductible. D. Actual cash value (ACV) of the damaged property, subject to policy limits.

D. Actual cash value (ACV) of the damaged property, subject to policy limits.

Alex sold his insured auto to Harry, but Alex did not cancel his insurance on the auto. Harry was subsequently involved in an accident and asked Alex to make a claim under his policy for the damages to the auto, knowing that Alex had not yet canceled his policy. The insurance coverage will be denied because Select one: A. Alex did not property assign his policy to Harry. B. Harry has no factual expectancy that coverage will apply. C. Harry has no insurable interest in the auto. D. Alex no longer has an insurable interest in the auto.

D. Alex no longer has an insurable interest in the auto.

The depreciation amount used in calculating actual cash value (ACV) under property insurance policies is based on Select one: A. Technical depreciation. B. A standard depreciation table. C. Accounting depreciation. D. Economic depreciation.

D. Economic depreciation.

Benny borrowed a riding lawnmower from his brother Kyle who used it to mow his neighbor's lawn. The neighbor then loaned it to his friend, Frank, before he returned it to Kyle. In this situation, the bailor is Select one: A. Frank. B. The neighbor. C. Benny. D. Kyle.

D. Kyle.

Assume that a jewelry store has theft coverage for customers' jewelry left on their premises for repair. Further assume that homeowners leaving jewelry for repair also have coverage under their homeowners policies for this type of loss. This duplication of coverage is an example of which one of the following other sources of recovery involved in post-loss coverage analysis? Select one: A. Other insurance in a similar policy B. Negligent parties C. Subrogation D. Other insurance in a dissimilar policy

D. Other insurance in a dissimilar policy

Which one of the following types of overlaps in coverage is usually the most difficult to resolve? Select one: A. Other insurance in the same policy B. Other insurance in a similar policy C. Noninsurance agreements D. Other insurance in dissimilar policies

D. Other insurance in dissimilar policies

Charlotte, Chloe, and Jessica have concurrent ownership in a restaurant, each owning one third. Their combined interests equal the value of the restaurant. If one of them should die, her share would pass to her heirs. This type of ownership is referred to as Select one: A. Tenancy by entirety. B. Joint tenancy. C. Tenancy by partnership. D. Tenancy in common.

D. Tenancy in common.

If a liability claim goes to trial, although the policy limits restrict the insurer's liability, the jury and judge are not bound to confine an award to the amount of such policy limits. If the court awards a judgment that exceeds policy limits, which one of the following parties is responsible for paying the excess award? Select one: A. The surety on a court bond B. The state guaranty fund C. The insurer D. The insured/defendant

D. The insured/defendant

Regarding the use of deductibles on liability insurance policies, which one of the following statements is true? Select one: A. Under liability policies that include a deductible, insurers typically do not want to be notified of incidents that insureds deem to be minor. B. Before making payments to third-party claimants, liability insurers must first subtract the deductible amount from the agreed-upon settlement. C. Typically, the use of liability policy deductibles substantially reduces policy premium. D. Under liability policies that include a deductible, the insurer usually pays all defense costs on a first-dollar basis.

D. Under liability policies that include a deductible, the insurer usually pays all defense costs on a first-dollar basis.

Which one of the following statements is correct regarding a liability insurance policy with a self-insured retention (SIR)? Select one: A. With an SIR, the insurer pays all covered losses, and then bills the insured for the amount up to the SIR. B. With an SIR, the insured must report every claim to the insurer. C. With an SIR, the insurer defends all claims on a first dollar basis. D. With an SIR, the full policy limit is payable on top of the SIR.

D. With an SIR, the full policy limit is payable on top of the SIR.