Casualty And Property Insurance
Property and Casualty Insurance License Exam Cram
- 1.
Which of the following represents a pure risk?
- A.
Terry places a bet on the outcome of a basketball game.
- B.
Margaret's dog is temperamental. She's afraid that it will bite a neighbor someday and she will be held responsible.
- C.
Sam transfers all of his retirement funds into a stock that he expects to rise in value.
- D.
Cindy, along with 32 others, puts $100 into an Indy 500 race pool at work. The person holding the name of the winning driver will win the entire $3,300.
Correct Answer
B. Margaret's dog is temperamental. She's afraid that it will bite a neighbor someday and she will be held responsible.Explanation
B is correct. A pure risk is one that involves only the possibility of loss. Choices A, C, and D are examples of speculative risks in which there exists both the possibility of gain and the possibility of loss.Rate this question:
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- 2.
The law of large numbers
- A.
Prohibits insurance with extremely high premiums.
- B.
States that there must be a narrow spread of risk for insurance to be effective.
- C.
States that the more examples used to develop a statistic, the more reliable the statistic will be.
- D.
Requires all members of society with insurance exposures to purchase insurance.
Correct Answer
C. States that the more examples used to develop a statistic, the more reliable the statistic will be.Explanation
C is correct. The law of large numbers says that the more examples used to develop a statistic, the more reliable the statistic will be.Rate this question:
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- 3.
LaTonya purchases a house from John. She borrows $75,000 from First City Bank that, along with her $25,000 down payment, equals the $100,000 purchase price of the home. Who has an insurable interest in this home? Choose all that apply.
- A.
LaTonya
- B.
John
- C.
LaTonya's son, who would like to inherit the home some day
- D.
First City Bank
Correct Answer(s)
A. LaTonya
D. First City BankExplanation
A and D are correct. Insurable interest exists when there is an actual economic interest in the safety or preservation of the subject of the insurance from loss or destruction or financial damage or impairment. LaTonya has an insurable interest in the home because she owns it. First City Bank has an insurable interest as long as it carries a mortgage on the home.Rate this question:
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- 4.
Highpoint Industries has an automatic sprinkler system installed in its office building. This is an example of which risk management method?
- A.
Avoidance
- B.
Reduction
- C.
Retention
- D.
Transfer
Correct Answer
B. ReductionExplanation
B is correct. A sprinkler system can reduce the severity of fires, but it does not prevent them altogether.Rate this question:
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- 5.
Benson Pharmaceutical Company decides not to manufacture a new drug after determining that it has serious potential side effects. This is an example of which risk management method?
- A.
Transfer
- B.
Retention
- C.
Avoidance
- D.
Reduction
Correct Answer
C. AvoidanceExplanation
C is correct. By not producing the drug, Benson avoids the risk of being sued by consumers who are injured by the drug.Rate this question:
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- 6.
Because she has always been in good health, Donna decides to cancel her health insurance policy. This is an example of which risk management method?
- A.
Retention
- B.
Control
- C.
Avoidance
- D.
Transfer
Correct Answer
A. RetentionExplanation
A is correct. By not carrying health insurance, Donna is retaining the risk of financial loss from unexpected medical expenses.Rate this question:
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- 7.
The tread on Alan's automobile tires is very thin. This is an example of what type of hazard?
- A.
Physical
- B.
Moral
- C.
Morale
- D.
Obvious
Correct Answer
A. pHysicalExplanation
A is correct. Worn tread is a physical condition that reduces Alan's ability to control or stop his vehicle.Rate this question:
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- 8.
Which of the following is a hazard as opposed to a peril?
- A.
Fire
- B.
Lightning
- C.
Wet pavement
- D.
Flood
Correct Answer
C. Wet pavementExplanation
C is correct. Wet pavement is not by itself a cause of loss (or peril), but it increases the chances of automobile collisions, which are a cause of loss.Rate this question:
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- 9.
Which of the following is not a requirement for forming a valid contract?
- A.
Consideration
- B.
Offer and acceptance
- C.
Competent parties
- D.
Signatures of the parties involved
Correct Answer
D. Signatures of the parties involvedExplanation
D is correct. The four requirements for forming a valid contract are competent parties, a legal purpose, offer and acceptance, and consideration. Oral contracts are valid. Contracts do not have to be written or include signatures (although it is a good idea to do so).Rate this question:
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- 10.
What is meant by a contract of adhesion?
- A.
Both parties are required to provide services for the other.
- B.
One party draws up the contract provisions, and the other party adheres to the terms.
- C.
The contract can be revoked by any party at any time for any reason.
- D.
A contract that is formed without any consideration by either party.
Correct Answer
B. One party draws up the contract provisions, and the other party adheres to the terms.Explanation
B is correct. Insurance policies are contracts of adhesion because the insurance company drafts the policy provisions and the insured adheres to the policy terms.Rate this question:
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- 11.
Which of the following describes the principle of indemnity?
- A.
After a loss, an insured should be restored to approximately the same condition that existed before the loss.
- B.
Every insured will receive full compensation for all losses in all cases.
- C.
When property is damaged or destroyed, the insurance company must pay the full replacement cost.
- D.
In the case of bodily injuries, liability coverage must be available without regard to any policy exclusions.
Correct Answer
A. After a loss, an insured should be restored to approximately the same condition that existed before the loss.Explanation
A is correct. The principle of indemnity states that when a loss occurs, an individual should be restored to the approximate financial condition he or she was in before the loss.Rate this question:
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- 12.
Which part of an insurance policy describes what property and/or perils will be covered by the contract?
- A.
Definitions
- B.
Exclusions
- C.
Insuring agreement
- D.
Conditions
Correct Answer
C. Insuring agreementExplanation
C is correct. The insuring agreements state what types of losses the insured will be indemnified for. This section also describes the type of property covered and the perils against which it is insured.Rate this question:
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- 13.
What is the consideration that an insurer gives to the insured under an insurance contract?
- A.
Stated benefits and the dates on which they are to be paid
- B.
The premium
- C.
A promise to pay for certain losses if they occur
- D.
A promise to be conscientious about the customer's situation
Correct Answer
C. A promise to pay for certain losses if they occurExplanation
C is correct. Consideration is the thing of value exchanged under a contract. The insured's consideration is the premium; in return, the insurer promises to pay for certain losses if they occur.Rate this question:
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- 14.
Under an insurance contract, the uncertainty of events can lead to unequal financial results for the two parties. This means that insurance is what kind of contract?
- A.
Unilateral
- B.
Aleatory
- C.
Conditional
- D.
Utmost good faith
Correct Answer
B. AleatoryExplanation
B is correct. If no loss occurs, the insured will receive no benefits although he or she paid premiums, but if a large loss occurs, the insured might receive benefits that far exceed the premium payments.Rate this question:
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- 15.
The "ground rules" are described in which part of an insurance policy?
- A.
Definitions
- B.
Exclusions
- C.
Insuring agreement
- D.
Conditions
Correct Answer
D. ConditionsExplanation
D is correct. The conditions describe the responsibilities and obligations of the insurer and the insured.Rate this question:
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- 16.
A mutual insurance company
- A.
Is managed by an attorney-in-fact.
- B.
Pays dividends to its stockholders.
- C.
Is owned by its insureds.
- D.
Is a voluntary association of individuals that shares in writing insurance contracts for a variety of risks.
Correct Answer
C. Is owned by its insureds.Explanation
C is correct. In a mutual company, insureds are also owners of the company. They can vote to elect the management of the company. Profits are returned to insureds in the form of dividends or reductions in future premiums.Rate this question:
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- 17.
A nonexclusive agent
- A.
Represents a single insurance company.
- B.
Works for a direct writer.
- C.
Is an independent businessperson.
- D.
Does not collect commissions.
Correct Answer
C. Is an independent businessperson.Explanation
C is correct. A nonexclusive, or independent, agent represents more than one company. This type of agent collects commissions on the policies sold, but collects no salary from the companies he or she represents.Rate this question:
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- 18.
Solicitors may not
- A.
Issue or countersign policies.
- B.
Sell insurance.
- C.
Collect premiums.
- D.
Sign an application.
Correct Answer
A. Issue or countersign policies.Explanation
A is correct. A solicitor, who often works with or for an agent, has more limited authority than the agent. A solicitor sells insurance and might even be authorized to collect premiums. However, a solicitor cannot issue or countersign policies.Rate this question:
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- 19.
At DEF Insurance Company, agents are employees of the company who are paid a salary plus commissions. This is an example of what type of insurance marketing system?
- A.
Captive
- B.
Independent
- C.
Direct writer
- D.
Direct response
Correct Answer
C. Direct writerExplanation
C is correct. In the direct writer system, the insurer's agents are actually employees. They can receive a salary, be paid on commission, or both.Rate this question:
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- 20.
Which insurance company department is responsible for accepting and rejecting applications based on company standards?
- A.
Underwriting
- B.
Loss Control
- C.
Claims
- D.
Agency
Correct Answer
A. UnderwritingExplanation
A is correct. Underwriting is the process of selecting certain types of risks and rejecting others so that the insurer will have a profitable book of business.Rate this question:
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- 21.
Which insurance company department is responsible for paying insureds' covered losses?
- A.
Audit
- B.
Claims
- C.
Underwriting
- D.
Reinsurance
Correct Answer
B. ClaimsExplanation
B is correct. The claims department sees that the company's insureds are adequately indemnified for their losses. Claim adjusters determine the cause of loss, whether the loss is covered by the policy, the value of the loss, and the amount of loss payable by the policy.Rate this question:
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- 22.
Who is responsible for licensing insurance agents?
- A.
Lloyd's Associations
- B.
State insurance department
- C.
Interstate Commerce Commission
- D.
Insurance Services Office
Correct Answer
B. State insurance departmentExplanation
B is correct. State insurance departments devote much of their time to working with insurance agents. One of their most important duties is agent licensing.Rate this question:
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- 23.
Agent Blondell is offering a free television to every applicant who agrees to buy insurance through his agency. In most states, this is an illegal practice known as
- A.
Rebating.
- B.
Twisting.
- C.
Misrepresentation.
- D.
Failure of fiduciary responsibility.
Correct Answer
A. Rebating.Explanation
A is correct. Rebating is giving or offering some benefit other than those specified in the policy, such as cash, gifts, or securities, to induce a customer to buy insurance. Rebating is illegal in all but two states.Rate this question:
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- 24.
J&M Industries does not have a group health insurance plan for its employees. Instead, it pays employees' medical expenses out of a fund specifically created for this purpose. This is an example of
- A.
Fraternal insurance.
- B.
Self-insurance.
- C.
Reinsurance.
- D.
Government insurance.
Correct Answer
B. Self-insurance.Explanation
B is correct. With self-insurance, part or all of the risk of loss is borne without the benefit of insurance coverage to fall back on if a loss occurs.Rate this question:
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- 25.
Which of the following statements concerning regulation of the insurance industry is correct?
- A.
The insurance industry is regulated exclusively by the federal government.
- B.
The insurance industry is very loosely regulated.
- C.
The state insurance department is responsible for controlling insurance matters within the state.
- D.
The state insurance department serves only the interests of the insurance industry.
Correct Answer
C. The state insurance department is responsible for controlling insurance matters within the state.Explanation
C is correct. Insurance is regulated primarily by the states. It is closely regulated for the good of the insurance industry and the general public.Rate this question:
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- 26.
Which of the following is not one of the duties of an agent?
- A.
Making appropriate coverage recommendations to prospective customers
- B.
Writing the provisions of a customer's policy
- C.
Helping prospective customers complete the application
- D.
Assuring that customers understand the coverage they are purchasing
Correct Answer
B. Writing the provisions of a customer's policyExplanation
B is correct. Agents have a responsibility to interact effectively with customers in regard to the insurance transaction, but they do not determine the provisions of the policies the insurer issues.Rate this question:
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- 27.
The written agency contract between an insurer and an agent constitutes the agent's
- A.
Express authority.
- B.
Implied authority.
- C.
Assertive authority.
- D.
Apparent authority.
Correct Answer
A. Express authority.Explanation
A is correct. The specific provisions of the written agency contract constitute the authority expressly given to the agent by the insurer.Rate this question:
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- 28.
The Excel Insurance Company is incorporated in the state of Tennessee. It is also authorized to do business in Georgia. In Georgia, Excel is known as what type of company?
- A.
Alien
- B.
Foreign
- C.
Domestic
- D.
Non-admitted
Correct Answer
B. ForeignExplanation
B is correct. Insurance companies are known as domestic companies in their home states, foreign companies in other states in which they are admitted to do business, and alien companies if their home office is located in a country other than the United States.Rate this question:
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- 29.
Can states require insurance companies to use certain forms or rates in connection with certain types of insurance?
- A.
No, that would be a violation of the principle of open competition.
- B.
No, they can only require that forms and rates be subject to prior approval.
- C.
No, insurers can always begin using forms and rates as soon as they are properly filed with the state.
- D.
Yes, some states have mandatory forms or rates for certain coverages.
Correct Answer
D. Yes, some states have mandatory forms or rates for certain coverages.Explanation
D is correct. In addition to open competition, prior approval, and file-and-use rules, some states mandate the forms or rates for certain coverages.Rate this question:
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- 30.
Which of the following statements concerning binders is correct?
- A.
They guarantee that a policy will be issued.
- B.
They can be issued by insurance companies, but not agents.
- C.
They expire on the effective date of the policy to which they apply, or on the expiration date of the binder if the policy is not issued.
- D.
They show an intent to consider issuing insurance, but do not include any commitment to provide coverage.
Correct Answer
C. They expire on the effective date of the policy to which they apply, or on the expiration date of the binder if the policy is not issued.Explanation
C is correct. An agent or an insurance company can issue a binder. A binder does not guarantee that a policy will be issued; it only guarantees temporary coverage. If the company decides to not issue the policy, coverage under the binder may be cancelled by a formal cancellation notice; however, if no formal cancellation is made, coverage remains in effect until the binder expires. If a policy is issued, coverage under the binder ceases as of the effective date of the policy.Rate this question:
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- 31.
Judgment rating is based on which of the following?
- A.
An evaluation of the characteristics of the individual risk
- B.
Manual rates developed from statistical data
- C.
Calculation and evaluation of the insured's past loss experience
- D.
Loss information reported by other states
Correct Answer
A. An evaluation of the characteristics of the individual riskExplanation
A is correct. This is the oldest form of rating. The premium is determined by considering the individual risk. No books or tables are used; premiums are established through careful judgment.Rate this question:
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- 32.
What rating method makes modifications to manual rates to reflect the unique characteristics of each risk?
- A.
Judgment
- B.
Merit
- C.
Certification
- D.
Manual
Correct Answer
B. MeritExplanation
B is correct. Experience rating, retrospective rating, and schedule rating are all types of merit rating.Rate this question:
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- 33.
To void a policy, misrepresentation or concealment must be which of the following?
- A.
Concern material facts.
- B.
Be intentional.
- C.
Both A and B are correct.
- D.
Neither A nor B are correct.
Correct Answer
A. Concern material facts.Explanation
A is correct. Misrepresentation is a written or verbal misstatement of a material fact. It can be either intentional or unintentional.Rate this question:
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- 34.
An agreement between the insured and the insurer that certain conditions will be met is which of the following?
- A.
Misrepresentation
- B.
Warranty
- C.
Estoppel
- D.
Certificate of insurance
Correct Answer
B. WarrantyExplanation
B is correct. A warranty becomes part of the policy. If it is breached, the insurer can void the policy.Rate this question:
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- 35.
When an insured decides to cancel an insurance policy prior to the expiration date, the unearned premium is returned on what basis?
- A.
Flat basis
- B.
Pro rata basis
- C.
Short rate basis
- D.
Negotiated basis
Correct Answer
C. Short rate basisExplanation
C is correct. This means that the insurer can keep an allowance for expenses. When the insurance company cancels, unearned premium is returned on a pro rata basis, which means that the company retains only the earned premiumRate this question:
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- 36.
Which one of these statements about the Fair Credit Reporting Act is not correct?
- A.
Prenotification is required for both regular and investigative reports.
- B.
Postnotification is required when insurance coverage is denied because of adverse information in a credit report.
- C.
An agent who obtains information from a reporting agency under false pretenses can be sent to jail and fined.
- D.
Consumers have the right to challenge information in investigative reports and to have incorrect information removed.
Correct Answer
A. Prenotification is required for both regular and investigative reports.Explanation
A is correct. The question asks for the statement that is not correct. Prenotification is required for investigative reports, but not regular reports. The other choices are provisions contained in the Fair Credit Reporting Act.Rate this question:
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- 37.
The insured's policy is nearing the expiration date. The insurance company doesn't want to continue the insured's coverage, so it sends the insured a notice that the policy will not continue beyond the expiration date of the policy. This is considered which of the following?
- A.
Flat cancellation
- B.
Nonrenewal
- C.
Pro rata cancellation
- D.
Unearned renewal
Correct Answer
B. NonrenewalExplanation
A8: B is correct. Nonrenewal occurs when the insured or the insurer decides to not continue coverage for another policy period after the current policy period expires. Flat cancellation means to cancel a policy on its effective date. Pro rata cancellation means to cancel a policy midterm so that a refund is made of unearned premium.Rate this question:
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- 38.
Walt and Joanna are co-owners of a bagel shop. Both Walt and Joanna are listed in the declarations of the policy that insures the business, with Joanna's name appearing first. The declarations also list First State Bank, which has an outstanding loan on the business. Who is considered a named insured on the policy?
- A.
Walt only
- B.
Joanna only
- C.
Both Walt and Joanna
- D.
First State Bank
Correct Answer
C. Both Walt and JoannaExplanation
C is correct. The named insured is the person, business, or other entity named in the declarations to whom the policy is issued. First State Bank has an insurable interest as the mortgagee, but is not a named insured.Rate this question:
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- 39.
Renata's home is demolished in a fire that started when a neighbor misdirected the fireworks he set off to celebrate the Fourth of July. Renata's insurance company pays her for the damage, and then files suit against the neighbor to recover the amount it paid for the loss. This is an example of the application of what policy condition?
- A.
Liberalization
- B.
Subrogation
- C.
Abandonment
- D.
Salvage
Correct Answer
B. SubrogationExplanation
B is correct. The subrogation condition transfers the insured's right to collect from a responsible third party to the insurance company.Rate this question:
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- 40.
Byron sells his car to his friend Annette, but does not notify his insurance company. Assuming that Byron's policy will transfer to her automatically, Annette doesn't buy insurance for the car. When the car is stolen, Annette files a claim with Byron's former insurer. The insurer denies the claim. This is an example of the application of what policy condition?
- A.
Assignment
- B.
No benefit to bailee
- C.
Coinsurance
- D.
Other insurance
Correct Answer
A. AssignmentExplanation
A is correct. The Assignment condition specifies that a policy cannot be transferred to anyone else without the written consent of the insurer, except in the event of the death of the named insured.Rate this question:
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- 41.
A heavy snowfall causes the roof over Amaya's living room to collapse. The insurance company asks her to move her belongings out of the living room to protect them from further damage and put a tarp over the roof until it can be repaired. It also asks her to complete a proof of loss form listing the items that were damaged. This is an example of the application of what policy condition?
- A.
Appraisal
- B.
Arbitration
- C.
Duties after loss
- D.
Subrogation
Correct Answer
C. Duties after lossExplanation
C is correct. Most insurance policies include conditions that specify what the insured and insurer must do when a loss occurs. The insured's responsibilities after a loss include giving notice of claim to the agent or company, protecting property from further damage, and completing a proof of loss form.Rate this question:
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- 42.
Three policies, totaling $300,000 in coverage, apply to an $80,000 loss. Policy A's limit of insurance is $100,000, policy B's limit is $50,000, and policy C's limit is $150,000. Use the pro rata method to determine how much policy C would pay for this loss.
- A.
$26,640
- B.
$40,000
- C.
$13.280
- D.
$60,000
Correct Answer
B. $40,000Explanation
B is correct. Because total coverage is $300,000 and policy C provides 50% of this amount ($150,000) it is obligated to pay 50% of the loss.Rate this question:
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- 43.
Which of the following would not normally be excluded under a property insurance contract?
- A.
Catastrophic losses
- B.
Nonaccidental losses
- C.
Losses to personal property
- D.
Extra-hazardous perils
Correct Answer
C. Losses to personal propertyExplanation
C is correct. Property insurance policies typically exclude nonaccidental losses, losses controllable by the insured, extra-hazardous perils, catastrophic losses, and property covered in other policies.Rate this question:
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- 44.
An indirect loss is which of the following?
- A.
The cause of a direct loss
- B.
A type of loss that results from a direct loss
- C.
An insignificant property loss
- D.
Not a type of property loss
Correct Answer
B. A type of loss that results from a direct lossExplanation
B is correct. An indirect loss is one that comes as a result, or consequence, of the original loss.Rate this question:
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- 45.
Consuela's Homeowners policy has an 80% Coinsurance condition. Her home's value is $125,000. What is the minimum amount of coverage she must carry to avoid a coinsurance penalty for partial losses?
- A.
$125,000
- B.
$100,000
- C.
$80,000
- D.
$75,000
Correct Answer
B. $100,000Explanation
B is correct. A Coinsurance condition requires an insured to carry a certain amount of insurance, which is expressed as a percentage of the insured property's value, in order to avoid a coinsurance penalty for partial losses. In this case, Consuela must carry insurance at least equal to 80% of the home's value, or $100,000, in order to satisfy the requirement.Rate this question:
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- 46.
According to the terms of the Mortgage condition, which of the following does not apply to the rights and duties of the mortgagee?
- A.
The mortgagee might have to pay the premium if the insured doesn't.
- B.
The mortgagee can file a proof of loss when the insured fails to do so to protect its rights under the policy.
- C.
The mortgagee might have coverage under the policy even if something the insured does causes a claim to be denied.
- D.
The mortgagee has no insurable interest in the covered property.
Correct Answer
D. The mortgagee has no insurable interest in the covered property.Explanation
D is correct. Lenders or mortgagees do have an insurable interest in property. The Mortgage condition specifies the rights and duties of the mortgagee under the policy. For instance, if an insured fails to file a proof of loss, the mortgagee must do so after being notified by the insurer to protect its rights under the policy. In addition, the mortgagee might be expected to pay the premium if the insured fails to do so. The policy might provide that if some condition caused by the insured would result in the insurer denying coverage for a loss it would otherwise have covered, the mortgagee might still have protection under the policy.Rate this question:
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- 47.
Jake has two insurance policies on his house. They are issued by different companies, but they are otherwise identical. The term for this is
- A.
Concurrent causation
- B.
Fraud
- C.
Concurrent coverage
- D.
Double indemnity
Correct Answer
C. Concurrent coverageExplanation
C is correct. Concurrent coverage refers to two policies that offer the same coverage against the same perils. Concurrent causation is when two perils contribute to the same loss. Having concurrent coverage is not fraudulent. Double indemnity is a provision of life insurance policies that pays an extra benefit if death results from an accident rather than an illness.Rate this question:
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- 48.
Deirdre has a complete 12-piece tea service valued at $20,000. In an explosion covered by her insurance policy, most of the tea service comes through intact, but one of the tea cups is broken beyond repair. The cup by itself would be valued at $400, but the value of Deirdre's tea service without the broken cup is $17,000. How much will Deirdre's insurance company pay for the broken cup?
- A.
$400
- B.
$3,000
- C.
$17,000
- D.
$20,000
Correct Answer
B. $3,000Explanation
B is correct. Under the Pair and Set Clause, Deirdre will be compensated for the loss in the value of the set.Rate this question:
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- 49.
Under the Appraisal condition, the insured and the insurance company each chooses an appraiser. If the appraisers do not agree, the dispute is submitted to a third individual agreed upon jointly by the insured and the insurance company. That third party is called the
- A.
Attorney-in-fact
- B.
Judge
- C.
Super-appraiser
- D.
Umpire
Correct Answer
D. UmpireExplanation
D is correct. The umpire is selected jointly by the insured and the insurance company and settles the dispute if the appraisers selected by the insured and the insurance company do not agree on the value of the loss.Rate this question:
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- 50.
Failure to use the care that is required to protect others from the unreasonable chance of harm is called what?
- A.
Proximate cause
- B.
Negligence
- C.
A criminal act
- D.
An intervening cause
Correct Answer
B. NegligenceExplanation
B is correct. Negligence is the lack of reasonable care that is required to protect others from the unreasonable chance of harm.Rate this question:
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