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AK Property & Casualty practice questions

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Question 1Insurance Principles and Concepts

An insurer is most willing to accept which of the following types of risk?

  1. The chance of loss from a casino wager
  2. The chance of loss from fire at a warehouse Correct answer.
  3. The chance of gain from a stock purchase
  4. The chance of gain from a currency trade

Explanation

Insurance is designed to handle pure risk, which involves only the chance of loss or no loss. Fire at a warehouse can produce a loss or no loss but never a gain, so it is insurable. Speculative risks, which carry the possibility of gain, are generally not insured.

Question 2Insurance Principles and Concepts

Which term describes the cause of a loss, such as fire or windstorm?

  1. Risk
  2. Exposure
  3. Peril Correct answer.
  4. Hazard

Explanation

A peril is the actual cause of a loss, such as fire, windstorm, or theft. Hazard refers to conditions that increase the chance or severity of a loss, and risk refers to the uncertainty of loss itself.

Question 3Insurance Principles and Concepts

A pile of oily rags stored next to a furnace is best described as which of the following?

  1. A physical hazard Correct answer.
  2. A speculative risk
  3. A pure peril
  4. A moral hazard

Explanation

A physical hazard is a tangible condition that increases the chance of loss, and combustible material beside a heat source is exactly that kind of condition. Moral and morale hazards arise from the conduct or attitude of people, not from the condition of the property itself.

Question 4Insurance Principles and Concepts

The principle of indemnity provides that an insured should be restored to:

  1. a position better than before the loss
  2. the financial position held just before the loss Correct answer.
  3. full replacement of every item, however old
  4. whatever amount the insured asks for in the claim

Explanation

Indemnity means the insured is restored to approximately the same financial position held before the loss, without profiting from it. That is why most property claims are settled at actual cash value or at replacement cost rather than at an amount chosen by the insured.

Question 5Insurance Principles and Concepts

In property insurance, insurable interest must exist at which point?

  1. At the time the claim is finally settled
  2. At the time the application is signed
  3. At the time the policy is first delivered
  4. At the time of the loss Correct answer.

Explanation

In property insurance the insured must have insurable interest at the time of loss, because that is when the financial loss is actually suffered. Life insurance is different, requiring insurable interest when the contract is formed.

Question 6Insurance Principles and Concepts

The law of large numbers allows an insurer to do which of the following?

  1. Estimate losses more reliably as similar units increase Correct answer.
  2. Eliminate the need for reinsurance on very large risks
  3. Charge every policyholder the same premium regardless of risk
  4. Guarantee that no single policy will ever produce a loss

Explanation

The law of large numbers holds that as the number of similar exposure units increases, actual results tend to approach expected results. That lets an insurer forecast aggregate losses more reliably, though it says nothing about any individual policy.

Question 7Insurance Principles and Concepts

A deductible in a property policy primarily serves to:

  1. Eliminate small claims and reduce premium Correct answer.
  2. Transfer the entire loss to the reinsurer
  3. Increase the premium charged for the coverage
  4. Waive the insurer's right of subrogation

Explanation

A deductible shifts small, predictable losses to the insured, which reduces the insurer's claims-handling expense and therefore the premium charged. It does not shift losses to a reinsurer or affect any insurer right.

Question 8Insurance Principles and Concepts

Purchasing an insurance policy is an example of which risk management technique?

  1. Loss reduction
  2. Transfer Correct answer.
  3. Retention
  4. Avoidance

Explanation

Buying insurance transfers the financial consequences of loss to an insurer in exchange for a premium. Retention leaves the risk with the insured, avoidance removes the exposure altogether, and loss reduction reduces the severity of a loss.

Question 9Insurance Principles and Concepts

A building with a replacement cost of $400,000 is destroyed by fire. It has depreciated 25 percent. Under an actual cash value settlement, the insurer pays:

  1. $100,000
  2. $300,000 Correct answer.
  3. $320,000
  4. $400,000

Explanation

Actual cash value equals replacement cost minus depreciation. Here $400,000 less 25 percent of $400,000, which is $100,000, leaves $300,000.

Question 10Insurance Principles and Concepts

A building valued at $500,000 is insured for $300,000 under a policy with an 80 percent coinsurance clause. A $100,000 covered loss occurs. Ignoring deductibles, the insurer pays:

  1. $75,000 Correct answer.
  2. $100,000
  3. $80,000
  4. $60,000

Explanation

The coinsurance requirement is 80 percent of $500,000, or $400,000, and the insured carries $300,000, which is 75 percent of that requirement. The insurer therefore pays 75 percent of the $100,000 loss, or $75,000.

Question 11Insurance Principles and Concepts

An insured collects the full amount of a covered loss from the insurer and then also recovers the same amount from the at-fault party. Under the principle of subrogation, the insured:

  1. forfeits all coverage under the policy
  2. may keep both payments because they came from different sources
  3. holds the third-party recovery for the insurer Correct answer.
  4. must return the entire premium for that policy term

Explanation

Subrogation puts the insurer in the insured's shoes after paying a claim, so a recovery from the responsible third party belongs to the insurer to the extent of its payment. The insured may not collect twice for the same loss.

Question 12Insurance Principles and Concepts

On a property insurance application, an applicant states that the building has a working sprinkler system. The statement is untrue, but the applicant honestly believed it. This statement is a:

  1. Concealment of a material fact
  2. Fraudulent misrepresentation
  3. Warranty, and any breach voids the policy automatically
  4. Representation, which is a statement believed true Correct answer.

Explanation

A representation is a statement of fact that the applicant believes to be true, and it generally need only be substantially true and not material to the risk. A warranty is a promise that the facts are exactly as stated, and a breach of warranty may affect coverage.

Question 13Insurance Principles and Concepts

An insurance contract is aleatory because:

  1. the values exchanged may be unequal Correct answer.
  2. both parties exchange promises of equal value
  3. only the insurer makes an enforceable promise
  4. the insured must accept the terms as written

Explanation

An insurance contract is aleatory because the amounts exchanged may be unequal depending on whether a loss occurs; a small premium can buy a very large payment. Contracts in which the parties exchange roughly equal values are commutative.

Question 14Insurance Principles and Concepts

An ambiguity in a standard insurance policy is generally resolved:

  1. in favor of the insured, who did not draft it Correct answer.
  2. by voiding the entire policy
  3. by submitting the dispute to a state regulator
  4. in favor of the insurer that drafted the form

Explanation

A standard policy is a contract of adhesion drafted by the insurer, so ambiguities are construed against the drafter and in favor of the insured. Clear language, however, is enforced as written.

Question 15Insurance Principles and Concepts

An adjuster tells an insured in writing that a late claim will be accepted, and the insurer later tries to deny the claim as untimely. The insurer is most likely barred by:

  1. Estoppel Correct answer.
  2. Abandonment
  3. Coinsurance
  4. Subrogation

Explanation

Waiver is the voluntary giving up of a known right, and estoppel prevents the insurer from later asserting that right when the insured relied on the waiver to its detriment. Together they can bar a denial based on a known policy defense.

Question 16Insurance Principles and Concepts

Two policies cover the same building on the same basis. Policy A has a $200,000 limit and Policy B has a $300,000 limit. A $50,000 covered loss occurs. Under pro rata apportionment, Policy A pays:

  1. $25,000
  2. $50,000
  3. $20,000 Correct answer.
  4. $30,000

Explanation

Under pro rata apportionment each policy pays the share of the loss that its limit bears to the total insurance covering the loss. Policy A's share is $200,000 divided by $500,000, or 40 percent of $50,000, which is $20,000.

Question 17Insurance Principles and Concepts

A liability policy covers bodily injury that occurs during the policy period, regardless of when the claim is reported. This is which type of form?

  1. Claims-made
  2. Valued
  3. Reporting
  4. Occurrence Correct answer.

Explanation

An occurrence form responds to injury or damage that takes place during the policy period, even if the claim is reported years later. A claims-made form instead covers claims first made during the period, regardless of when the injury happened.

Question 18Insurance Principles and Concepts

An insured deliberately burns down an unprofitable building in order to collect the insurance. This conduct presents which type of hazard?

  1. Morale hazard
  2. Legal hazard
  3. Moral hazard Correct answer.
  4. Physical hazard

Explanation

A moral hazard arises from dishonest or intentional conduct by an insured, such as destroying property to collect insurance. A morale hazard, by contrast, is carelessness or indifference that grows from the awareness of being insured.

Question 19Insurance Principles and Concepts

Adverse selection occurs when:

  1. those most likely to have losses buy coverage most eagerly Correct answer.
  2. a policyholder allows coverage to lapse for nonpayment
  3. an insurer selects only the best risks in its underwriting
  4. a reinsurer refuses to accept part of a risk

Explanation

Adverse selection is the tendency of those who expect losses to seek or keep insurance more readily than those who do not, which can distort an insurer's loss experience. Underwriting and rating classify risks in order to limit this tendency.

Question 20Insurance Principles and Concepts

A carrier pays a total loss of $80,000 on a machine and then sells the wreckage for $6,000. The $6,000 is best described as:

  1. Salvage Correct answer.
  2. Abandonment
  3. Subrogation
  4. Contribution

Explanation

Salvage is the value of damaged property remaining after the insurer has paid a loss; the insurer may sell it and keep the proceeds. This reduces the net cost of the claim to the insurer.

Question 21Insurance Principles and Concepts

A large retailer forms a wholly owned subsidiary that issues policies to the parent for its property exposures. This arrangement is best described as:

  1. A self-insurance pool sponsored by the state
  2. A captive insurer, a formalized retention of risk Correct answer.
  3. A reinsurance treaty that transfers risk to a third party
  4. An assumption of risk by the retailer's customers

Explanation

A captive insurer is a subsidiary formed by an organization to insure its own risks. Because the loss exposure remains inside the corporate family, a captive is a formalized retention of risk rather than a transfer to an unrelated insurer.

Question 22Insurance Principles and Concepts

An insured suffers a $2 million covered loss. The primary insurer had ceded 60 percent of the risk to a reinsurer. Which statement is correct?

  1. The reinsurer pays the insured directly for its 60 percent share
  2. The primary insurer owes only 40 percent of the loss to the insured
  3. The primary pays the claim, then is reimbursed Correct answer.
  4. The insured must file separate claims with both companies

Explanation

Reinsurance is a transaction between insurers; the original insured deals only with the primary insurer, which pays the full claim and then seeks reimbursement for the ceded share. The insured's rights are not reduced by the amount reinsured.

Question 23Insurance Principles and Concepts

An agent issues a binder on Monday for a property policy. The policy is issued Friday with a water-damage exclusion, and a water-damage loss occurs on Wednesday. The insurer most likely:

  1. owes nothing because the policy was not yet issued
  2. owes nothing because binders cover only liability
  3. owes only the premium refund for the unearned period
  4. owes for the loss under the terms of the binder Correct answer.

Explanation

A binder provides temporary evidence of coverage, effective immediately, while the policy is being issued. The later policy cannot retroactively narrow coverage for a loss that occurred while the binder was in force.

Question 24Insurance Principles and Concepts

An insured argues that a loss must be covered because it is not listed among the policy's exclusions. Coverage is actually granted by which part of the policy?

  1. The insuring agreement Correct answer.
  2. The exclusions
  3. The declarations
  4. The conditions

Explanation

The insuring agreement is the section that grants coverage by stating the insurer's promise to pay for covered losses. A loss is not covered merely because it is not excluded, since exclusions only narrow coverage that the insuring agreement has already granted.

Question 25Insurance Principles and Concepts

Under a valued policy, a total loss of the insured property requires the insurer to pay:

  1. the policy limit, reduced by any salvage the insurer sells
  2. the amount written in the policy for the property Correct answer.
  3. the replacement cost less depreciation at the time of loss
  4. the market value of the property on the date of loss

Explanation

A valued policy states a fixed amount that the insurer will pay if the property is totally destroyed, and that value is agreed in advance. This avoids a dispute about the property's worth at the time of loss.

Question 26Insurance Principles and Concepts

Which of the following is an example of a pure risk?

  1. Betting on a horse race
  2. Investing in the stock market
  3. A fire damaging a warehouse Correct answer.
  4. Launching a new product line

Explanation

A pure risk involves only the chance of loss or no loss, with no possibility of gain. Fire can only harm the warehouse owner, so it is a pure risk. Investment, gambling, and a new product launch all carry a chance of gain and are speculative risks.

Question 27Insurance Principles and Concepts

Which of the following is a peril?

  1. Oily rags stored in a closet
  2. Defective wiring
  3. A fire Correct answer.
  4. An icy sidewalk

Explanation

A peril is the actual cause of a loss, such as fire. Oily rags, defective wiring, and ice are hazards because they increase the chance or severity of a loss. They are conditions surrounding the risk, not the cause of loss itself.

Question 28Insurance Principles and Concepts

In property insurance, an insurable interest must exist at which point?

  1. At the time of the loss Correct answer.
  2. Only when the application is signed
  3. Continuously from application through expiration
  4. Only when the policy is delivered

Explanation

Property insurance requires insurable interest at the time of loss so that the insured actually suffers financial harm. Life insurance is different because it requires insurable interest when the policy is issued. Continuous interest is not required in property insurance.

Question 29Insurance Principles and Concepts

The principle of indemnity is intended to do which of the following?

  1. Allow the insured to profit from a covered loss
  2. Punish the party that caused the loss
  3. Guarantee new-for-old replacement in every claim
  4. Restore the insured to the pre-loss financial position Correct answer.

Explanation

Indemnity means the insured is made whole financially, no better and no worse. It prevents a recovery that exceeds the actual loss. Replacement cost coverage may pay more than actual cash value, but it is not guaranteed by the indemnity principle.

Question 30Insurance Principles and Concepts

The principle that requires an applicant and an insurer to disclose all material facts about a risk is known as:

  1. Adhesion
  2. Indemnity
  3. Utmost good faith Correct answer.
  4. Subrogation

Explanation

Utmost good faith imposes a duty of honesty and full disclosure on both parties. It supports the insurer's ability to evaluate and rate the risk accurately. Indemnity limits recovery, subrogation allows third-party recovery, and adhesion describes who drafted the contract.

Question 31Insurance Principles and Concepts

An insurance policy is called a contract of adhesion because:

  1. The insured negotiates each policy term individually
  2. The policy is enforceable only after a court approves it
  3. Both parties may rewrite the terms after a loss
  4. The insurer drafts the terms and the insured accepts them Correct answer.

Explanation

In a contract of adhesion, one party drafts the terms and the other takes them as offered. This is why ambiguities are generally construed against the insurer. Insurance terms are not individually negotiated and do not require court approval to be enforceable.

Question 32Insurance Principles and Concepts

An icy sidewalk in front of a retail store is best classified as which type of hazard?

  1. Moral hazard
  2. Legal hazard
  3. Morale hazard
  4. Physical hazard Correct answer.

Explanation

A physical hazard is a tangible condition that increases the chance or severity of a loss, such as ice on a sidewalk. Moral hazard involves dishonest conduct, while morale hazard involves carelessness because insurance exists. Legal hazard arises from laws or regulations.

Question 33Insurance Principles and Concepts

Which risk management technique eliminates an exposure entirely?

  1. Transfer
  2. Loss reduction
  3. Retention
  4. Avoidance Correct answer.

Explanation

Avoidance means not undertaking the activity that creates the exposure, so the risk is removed. Retention keeps the risk, transfer shifts it to another party, and loss reduction only lessens its severity. Avoidance is the only technique that eliminates the exposure itself.

Question 34Insurance Principles and Concepts

Leaving a car unlocked in a high-crime area because the owner knows insurance will pay for a theft is an example of:

  1. Morale hazard Correct answer.
  2. Physical hazard
  3. Adverse selection
  4. Moral hazard

Explanation

Morale hazard is indifference or carelessness toward loss because insurance is in place. Moral hazard, by contrast, involves intentional dishonest conduct. Physical hazard is a tangible condition, and adverse selection concerns risk selection at underwriting.

Question 35Insurance Principles and Concepts

Which of the following risks is generally considered uninsurable by private insurers because it involves the chance of gain as well as loss?

  1. A new business venture Correct answer.
  2. Fire damage to a home
  3. Liability for bodily injury
  4. Theft of business property

Explanation

Speculative risks involve the possibility of gain, so private insurers generally do not insure them. Fire, liability, and theft are pure risks that can produce only loss or no loss. A new venture can produce a profit, making it speculative.

Question 36Insurance Principles and Concepts

A windstorm blows down a power line, and the resulting electrical fire destroys a home. The policy covers windstorm but excludes electrical damage. The proximate cause of the loss is:

  1. The electrical fire
  2. The windstorm Correct answer.
  3. The utility company's negligence
  4. The power line failure

Explanation

Proximate cause is the dominant, efficient cause that sets the loss in motion without a break. The windstorm caused the line to fall and the fire to follow, so the windstorm is the proximate cause. The power line failure and fire are intermediate events in the chain.

Question 37Insurance Principles and Concepts

A single limit of insurance that applies to two or more covered locations is known as:

  1. Specific insurance
  2. Blanket insurance Correct answer.
  3. Scheduled insurance
  4. Valued insurance

Explanation

Blanket insurance uses one limit to cover multiple locations or items, allowing the limit to be shared. Specific insurance applies a separate limit to each described property. Scheduled insurance lists separate limits per item, and valued insurance pays a stated amount for a total loss.

Question 38Insurance Principles and Concepts

Which section of an insurance policy contains the insurer's promise to pay for covered losses?

  1. Declarations
  2. Insuring agreement Correct answer.
  3. Conditions
  4. Exclusions

Explanation

The insuring agreement states the insurer's core promise and describes the coverage granted. Declarations identify the insured and property, conditions set duties, and exclusions remove coverage. The promise to pay is found in the insuring agreement.

Question 39Insurance Principles and Concepts

An insured's duty to submit a sworn statement detailing a loss appears in which part of the policy?

  1. Declarations
  2. Conditions Correct answer.
  3. Insuring agreement
  4. Definitions

Explanation

Duties after a loss, including providing a proof of loss, are policy conditions the insured must satisfy. The insuring agreement grants coverage, while definitions explain terms. Declarations give risk information rather than duties.

Question 40Insurance Principles and Concepts

A document attached to an insurance policy that changes its terms is called a(n):

  1. Endorsement Correct answer.
  2. Declarations
  3. Binder
  4. Certificate

Explanation

An endorsement, sometimes called a rider, modifies the terms of an insurance policy. A binder is temporary evidence of coverage, a certificate summarizes coverage, and declarations identify the risk. The endorsement is the document that actually changes policy wording.

Question 41Insurance Principles and Concepts

A statement made by an applicant on an insurance application that is believed to be true to the best of the applicant's knowledge is a:

  1. Representation Correct answer.
  2. Warranty
  3. Condition
  4. Binder

Explanation

A representation is a statement of fact believed true when made; it need not be literally perfect. A warranty is a promise or statement that must be exactly true. A condition is a policy duty, and a binder is temporary evidence of coverage.

Question 42Insurance Principles and Concepts

An applicant intentionally fails to disclose a prior fire loss when applying for property insurance. This conduct is best described as:

  1. Concealment Correct answer.
  2. Misrepresentation
  3. Estoppel
  4. Waiver

Explanation

Concealment is the intentional withholding of a material fact that the insurer needs to evaluate the risk. Misrepresentation involves an affirmative false statement. Waiver and estoppel concern giving up or being barred from asserting rights.

Question 43Insurance Principles and Concepts

Installing a fire door to limit the spread of fire after it starts is an example of:

  1. Loss reduction Correct answer.
  2. Risk transfer
  3. Risk retention
  4. Risk avoidance

Explanation

Loss reduction lessens the severity of a loss after it occurs. A fire door does not prevent the fire from starting, but it limits the damage. Avoidance eliminates the exposure, transfer shifts it, and retention keeps it.

Question 44Insurance Principles and Concepts

The maximum amount an insurer will pay for all covered claims during a policy period is the:

  1. Per-occurrence limit
  2. Deductible
  3. Coinsurance requirement
  4. Aggregate limit Correct answer.

Explanation

An aggregate limit caps total payments for all covered losses during the policy period. A per-occurrence limit applies to each single loss event. A deductible is the insured's share, and coinsurance is a percentage requirement.

Question 45Insurance Principles and Concepts

A landlord requires a tenant to add the landlord to the tenant's liability policy. The landlord then becomes a(n):

  1. Loss payee
  2. Beneficiary
  3. Additional insured Correct answer.
  4. Named insured

Explanation

An additional insured is a party added to a liability policy who is protected under the named insured's coverage. A named insured is the primary party on the policy. A loss payee receives property claim payments, and a beneficiary receives life insurance proceeds.

Question 46Insurance Principles and Concepts

When the cost to repair a damaged vessel exceeds its repaired value, the loss is treated as:

  1. A general average loss
  2. A constructive total loss Correct answer.
  3. A valued loss
  4. A partial loss

Explanation

A constructive total loss occurs when repair cost exceeds the repaired value, allowing the insured to treat it as a total loss. A partial loss is less than total, and a valued loss is based on an agreed value. General average is a maritime sharing of sacrifice.

Question 47Insurance Principles and Concepts

An insurer may rescind a policy based on a misrepresentation only if the misrepresentation is:

  1. About a condition unrelated to the loss
  2. Discovered within 30 days of issuance
  3. Written rather than oral
  4. Material to accepting the risk Correct answer.

Explanation

A misrepresentation must be material, meaning it would have affected the insurer's decision to issue the policy or its terms. Immaterial statements generally do not support rescission. Oral misstatements can also be material, and there is no universal 30-day discovery limit.

Question 48Insurance Principles and Concepts

An insurer's duty to defend is generally broader than its duty to indemnify because the duty to defend:

  1. Is limited to the policy limit
  2. Arises when a claim is potentially covered Correct answer.
  3. Applies only after a judgment is entered
  4. Ends automatically when the insured hires counsel

Explanation

The duty to defend is triggered when a claim is potentially covered, even if indemnity is ultimately not owed. Defense costs can exceed policy limits in some policies. The duty does not wait for a judgment or end merely because the insured hires counsel.

Question 49Insurance Principles and Concepts

In life insurance, insurable interest must exist at which time?

  1. When the beneficiary files a claim
  2. When the policy is issued Correct answer.
  3. When the insured dies
  4. Continuously throughout the policy period

Explanation

Life insurance requires insurable interest at policy inception to prevent wagering on a human life; it need not continue afterward. Property insurance, by contrast, requires interest at the time of loss. Death, continuous coverage, and claim filing are not the tests for life insurance insurable interest.

Question 50Insurance Principles and Concepts

An insured has a replacement cost policy but decides not to repair or replace damaged property after a covered loss. The insurer will generally pay:

  1. The actual cash value Correct answer.
  2. Nothing, because the claim is void
  3. The policy limit regardless of loss
  4. The full replacement cost

Explanation

Replacement cost coverage typically requires the insured to repair or replace the property before the full replacement cost is paid. If the insured does not, the insurer pays actual cash value, which reflects depreciation. The claim is still covered, but the policy limit is only a cap.