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AMF Damage Insurance practice questions

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Question 1Damage insurance fundamentals and the regulatory framework

Under Japan's Insurance Business Act, which entity holds the primary responsibility for supervising damage insurance companies' solvency and business conduct?

  1. The Ministry of Economy, Trade and Industry
  2. The Japan Chamber of Commerce and Industry
  3. The Financial Services Agency, working with local finance bureaus Correct answer.
  4. The Policyholders Protection Corporation alone

Explanation

The Financial Services Agency is the principal regulator of insurance companies in Japan, and it delegates on-site inspection and local supervision to regional finance bureaus. The Act gives these authorities the power to license, inspect, and sanction insurers. Other bodies may support policyholder protection but do not hold supervisory authority.

Question 2Damage insurance fundamentals and the regulatory framework

Which law is the principal statute governing the conduct and licensing of damage insurance companies in Japan?

  1. The Banking Act
  2. The Civil Code
  3. The Insurance Business Act Correct answer.
  4. The Consumer Contract Act

Explanation

The Insurance Business Act sets out licensing, solvency, conduct-of-business, and policyholder-protection rules for insurers and intermediaries. The Civil Code and Consumer Contract Act provide general contract principles but do not license insurers. The Banking Act applies to banks, not insurance companies.

Question 3Damage insurance fundamentals and the regulatory framework

A customer asks why their fire policy premium includes a load for unexpected large losses. Which component of the gross premium does this load represent?

  1. The expense loading
  2. The risk (pure) premium
  3. The surrender value
  4. The safety or contingency loading Correct answer.

Explanation

The gross premium combines the pure risk premium, expense loading, and a safety or contingency margin for deviations from expected losses. The contingency loading protects solvency against unexpectedly severe or frequent claims. Expense loading covers acquisition and administration costs, not loss variability.

Question 4Damage insurance fundamentals and the regulatory framework

What does the principle of indemnity require when a damaged building is repaired?

  1. The insured must replace the property with a brand-new equivalent
  2. The insured receives a fixed sum regardless of loss
  3. The insured is restored to roughly the pre-loss financial position, no better Correct answer.
  4. The insurer pays the full sum insured automatically

Explanation

Indemnity aims to place the insured in approximately the same financial position as before the loss, neither enriched nor impoverished. Payment is therefore tied to the actual loss, subject to policy limits. Paying a fixed sum or the full sum insured regardless of loss would breach this principle.

Question 5Damage insurance fundamentals and the regulatory framework

An insured building worth 40 million yen is insured for 20 million yen under a policy with a proportional (average) condition. A covered loss of 4 million yen occurs. What indemnity is payable?

  1. 1 million yen
  2. 4 million yen
  3. 2 million yen Correct answer.
  4. 20 million yen

Explanation

Under proportional condition, the claim is reduced by the ratio of sum insured to insured value: 20/40 equals one half, so 4 million yen becomes 2 million yen. This penalises underinsurance and preserves the indemnity principle. Paying the full loss would over-indemnify a substantially underinsured risk.

Question 6Damage insurance fundamentals and the regulatory framework

Which concept explains that an insured must have a financial relationship with the subject matter for a damage policy to respond?

  1. Subrogation
  2. Insurable interest Correct answer.
  3. Utmost good faith
  4. Contribution

Explanation

Insurable interest is the legal or economic relationship that means the insured benefits from the property's preservation and suffers from its loss. Without it, the contract would resemble a wager. Subrogation and contribution are post-loss mechanisms, and utmost good faith is a disclosure duty.

Question 7Damage insurance fundamentals and the regulatory framework

An insured deliberately conceals a known fire-safety violation when applying for property cover. Which contractual principle is most directly engaged?

  1. The principle of contribution
  2. The duty of utmost good faith and disclosure Correct answer.
  3. The doctrine of proximate cause
  4. The principle of salvage

Explanation

Insurance contracts require the proposer to disclose material facts that would influence the insurer's underwriting decision. Concealing a known fire-safety violation is a material non-disclosure that may entitle the insurer to avoid the contract or reduce a claim. The other doctrines operate at the time of loss, not at proposal.

Question 8Damage insurance fundamentals and the regulatory framework

Which statement best describes subrogation after an insurer pays a property claim caused by a negligent third party?

  1. The insured may still recover the full loss from the third party and keep the insurance payment
  2. The insurer automatically acquires all of the insured's assets
  3. The insurer may step into the insured's legal rights against the third party up to the amount paid Correct answer.
  4. The third party is released from all liability once the insurer pays

Explanation

Subrogation transfers the insured's right of recovery against the responsible third party to the insurer, limited to the amount the insurer has paid. This prevents the insured from recovering twice and allocates the cost to the party at fault. The insured retains any uninsured portion of the loss.

Question 9Damage insurance fundamentals and the regulatory framework

Two property policies with the same cover and period both insure the same building, and each contains a rateable contribution clause. How is a covered loss shared?

  1. The insurer that issued its policy first pays everything
  2. The insured chooses one insurer to pay in full
  3. Neither insurer pays because cover is duplicated
  4. Each insurer pays in proportion to the sums it insured Correct answer.

Explanation

Rateable contribution requires each insurer to bear a share of the loss proportional to the amount of cover it provided. This prevents the insured from recovering more than the loss and shares the burden fairly. The insured cannot select one insurer to bear the whole claim.

Question 10Damage insurance fundamentals and the regulatory framework

What is the primary purpose of the policyholders protection scheme for damage insurance in Japan?

  1. To compensate policyholders when an insurer becomes insolvent Correct answer.
  2. To arbitrate disputes between insurers and agents
  3. To guarantee insurers a minimum profit
  4. To set premium rates for all insurers

Explanation

The policyholders protection scheme provides a safety net by paying covered claims, within limits, when an insurer fails. It protects insureds from the insolvency risk of their insurer. It does not set prices, guarantee profits, or resolve commercial disputes between market participants.

Question 11Damage insurance fundamentals and the regulatory framework

Which document must a damage insurer provide to a prospective customer before contracting, summarising key policy terms and exclusions?

  1. The insurer's internal audit plan
  2. The reinsurance treaty
  3. The annual solvency report
  4. The pre-contract explanation document (important matters explanation) Correct answer.

Explanation

Japanese conduct rules require insurers and intermediaries to deliver a pre-contract explanation of important matters, covering cover, exclusions, and key conditions, so the customer can make an informed decision. Solvency reports, audit plans, and reinsurance treaties are internal or regulatory documents not given to retail customers.

Question 12Damage insurance fundamentals and the regulatory framework

An intermediary recommends a commercial property policy without asking about the client's existing cover, resulting in gaps. Which conduct obligation has most likely been breached?

  1. The duty to set the premium rate
  2. The duty to reinsure the risk
  3. The duty to provide a suitable recommendation and confirm the client's needs Correct answer.
  4. The duty to inspect the building physically

Explanation

Intermediaries must gather relevant information, identify the client's needs, and recommend suitable cover, explaining why it fits. Failing to check existing cover can leave gaps and breaches this suitability obligation. Reinsurance, rate-setting, and physical inspection are not duties of the intermediary in this context.

Question 13Damage insurance fundamentals and the regulatory framework

Which of the following is the best example of a moral hazard that a damage insurer seeks to control through policy terms?

  1. An insured neglecting maintenance because cover exists Correct answer.
  2. An increase in construction costs
  3. A change in building regulations
  4. A storm damaging a roof

Explanation

Moral hazard is the behavioural change that insurance may encourage, such as reduced care because losses are covered. Insurers counter it with deductibles, conditions, and warranties. Storms, regulation changes, and cost inflation are external perils or economic factors, not behavioural hazards.

Question 14Damage insurance fundamentals and the regulatory framework

What does the doctrine of proximate cause require when determining whether a loss is covered?

  1. Ignoring exclusions if any covered peril was involved at any point
  2. Selecting the last event before the loss regardless of its role
  3. Identifying the dominant, effective cause of the loss in the chain of events Correct answer.
  4. Finding every possible cause and paying for each

Explanation

Proximate cause is the dominant and effective cause that sets the loss in motion, determined by a common-sense judgment of the chain of events. If the proximate cause is an excluded peril, the loss is generally not covered even if a covered peril contributed. It is not simply the last event or any incidental factor.

Question 15Damage insurance fundamentals and the regulatory framework

An insured's factory is damaged by an earthquake, and the ensuing fire destroys stock. The policy covers fire but excludes earthquake. How is coverage typically analysed?

  1. Coverage depends only on which peril occurred last
  2. Both perils are covered because two events occurred
  3. The loss is generally excluded where earthquake is the proximate cause of the fire Correct answer.
  4. The fire is covered because fire is a listed peril

Explanation

Where the excluded earthquake is the dominant, effective cause that set the fire in motion, the loss is generally excluded under the proximate cause rule. Fire following an earthquake is commonly addressed through specific earthquake extensions rather than the basic fire cover. The mere presence of fire does not automatically restore cover.

Question 16Damage insurance fundamentals and the regulatory framework

Which term describes the insurer's right to take over and sell damaged property to reduce the claim cost?

  1. Average
  2. Salvage Correct answer.
  3. Reinstatement
  4. Abandonment

Explanation

Salvage refers to the residual value of damaged property, which the insurer may take over or sell to offset the loss. Abandonment is the insured's attempt to surrender property to the insurer, which insurers typically refuse. Average relates to underinsurance, and reinstatement restores sums insured after a loss.

Question 17Damage insurance fundamentals and the regulatory framework

What is the main function of a deductible in a damage insurance policy?

  1. To share small losses with the insured and reduce moral hazard and administration cost Correct answer.
  2. To increase the sum insured automatically
  3. To extend cover to excluded perils
  4. To guarantee renewal of the policy

Explanation

A deductible is the first portion of each loss borne by the insured, which removes small claims, lowers administration costs, and encourages loss prevention. It does not extend cover or change the sum insured. Renewal guarantees are separate contractual matters.

Question 18Damage insurance fundamentals and the regulatory framework

Which statement correctly distinguishes a warranty from a representation in a damage insurance contract?

  1. A representation is always written into the policy as a condition precedent
  2. A warranty and a representation are the same thing
  3. A warranty is a promise or condition that must be met for cover to apply, while a representation is a statement made before contract Correct answer.
  4. A warranty is made only after a loss occurs

Explanation

A warranty is a contractual promise or condition that the insured must comply with, and breach may entitle the insurer to refuse a claim. A representation is a statement of fact made during negotiations that induces the contract. The two operate at different stages and carry different consequences.

Question 19Damage insurance fundamentals and the regulatory framework

Which method of handling risk involves a business deliberately accepting a small, frequent loss exposure without insurance?

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

Explanation

Risk retention occurs when an organisation consciously keeps a risk and funds losses itself, often for small or predictable exposures. Avoidance eliminates the activity, transfer moves the risk to an insurer, and reduction lowers frequency or severity. Retention is a deliberate financing choice.

Question 20Damage insurance fundamentals and the regulatory framework

A broker places a large industrial risk with several insurers, each accepting a stated percentage of the whole. What is this arrangement called?

  1. Co-insurance (subscription market placement) Correct answer.
  2. Reinsurance
  3. Fronting
  4. Retrocession

Explanation

In a co-insurance placement, several insurers each subscribe to a percentage of the same risk under common terms, sharing premiums and claims proportionally. Reinsurance is cover bought by an insurer for its own exposure, and retrocession is reinsurance of reinsurance. Fronting involves one insurer issuing a policy and passing most of the risk to others.

Question 21Damage insurance fundamentals and the regulatory framework

Which of the following best describes facultative reinsurance?

  1. A government-backed pool for catastrophe risks
  2. An automatic arrangement covering all risks within a defined class
  3. A treaty that requires the reinsurer to accept every ceded risk
  4. A case-by-case arrangement where the reinsurer may accept or decline each risk Correct answer.

Explanation

Facultative reinsurance is negotiated risk by risk, giving the reinsurer the right to accept or decline each submission and the cedent the choice to cede. Treaty reinsurance, by contrast, obliges the reinsurer to accept risks falling within its terms. This flexibility suits unusual or large individual risks.

Question 22Damage insurance fundamentals and the regulatory framework

What is the key feature of a claims-made liability policy compared with an occurrence policy?

  1. Cover responds only to property damage claims
  2. Cover responds only after the insured is declared insolvent
  3. Cover responds to claims first made during the policy period, regardless of when the incident occurred Correct answer.
  4. Cover responds only if the incident occurred during the policy period

Explanation

A claims-made policy triggers on the date a claim is first made against the insured, subject to any retroactive date, rather than the date of the incident. An occurrence policy triggers on when the injury or damage happened. This distinction matters greatly for long-tail exposures such as professional liability.

Question 23Damage insurance fundamentals and the regulatory framework

Which of the following is a regulatory capital requirement designed to assess an insurer's ability to meet obligations?

  1. The solvency margin ratio Correct answer.
  2. The expense ratio
  3. The loss ratio
  4. The combined ratio

Explanation

The solvency margin ratio compares available capital to the risk-weighted capital required, indicating whether the insurer can absorb unexpected losses. Loss, expense, and combined ratios measure underwriting performance rather than capital adequacy. Regulators use the solvency margin to monitor financial strength.

Question 24Damage insurance fundamentals and the regulatory framework

A customer cancels a damage policy shortly after inception and the insurer refunds part of the premium. Which principle governs the calculation of the refund?

  1. The rule of proximate cause
  2. The doctrine of subrogation
  3. The pro rata or short-period cancellation terms in the policy Correct answer.
  4. The principle of indemnity applied to premiums

Explanation

Refunds on cancellation follow the policy's cancellation clause, which may provide pro rata return for insurer cancellation or short-period return for cancellation at the insured's request. These terms allocate the earned premium for the time on risk. Subrogation and proximate cause concern claims, not refunds.

Question 25Damage insurance fundamentals and the regulatory framework

Which practice is most consistent with the fair treatment of customers in damage insurance sales?

  1. Withholding the complaints procedure to avoid disputes
  2. Presenting only the cheapest option without discussing cover limitations
  3. Explaining exclusions and conditions clearly before the customer decides Correct answer.
  4. Completing the proposal form on the customer's behalf without confirmation

Explanation

Fair treatment requires clear, balanced information so customers understand what is and is not covered before they commit. Hiding exclusions, completing forms without confirmation, or concealing complaint routes undermines informed choice. Transparency about limitations is a core conduct expectation.

Question 26Damage insurance fundamentals and the regulatory framework

Which party to a damage insurance contract is legally obliged to disclose to the insurer, before cover begins, every material fact that could affect the insurer's decision to accept the risk?

  1. The loss adjuster
  2. The policyholder or insured Correct answer.
  3. The insurance agent
  4. The reinsurer

Explanation

The duty of utmost good faith places the disclosure obligation on the party seeking cover, namely the policyholder and, where different, the insured. Material facts are those a prudent underwriter would regard as influencing acceptance or rating. The insurer, adjuster and reinsurer do not owe this pre-contract duty to themselves.

Question 27Damage insurance fundamentals and the regulatory framework

In damage insurance, what does the principle of indemnity require when a building insured for its full value is damaged?

  1. The insured is restored to the same financial position as before the loss, no better Correct answer.
  2. The insured profits from the loss to discourage underinsurance
  3. The insured receives a fixed sum agreed at inception regardless of loss size
  4. The insured receives new-for-old replacement in every case

Explanation

Indemnity means the insured is placed in the same financial position after the loss as before it, neither better nor worse. The payout is therefore tied to the actual loss, subject to policy limits and deductibles. This principle prevents insureds from gaining from misfortune.

Question 28Damage insurance fundamentals and the regulatory framework

Which of the following describes the role of an insurance agent acting for a damage insurer?

  1. Independently surveying losses and settling them for the policyholder
  2. Soliciting and servicing policies on behalf of the insurer that appointed the agent Correct answer.
  3. Setting statutory solvency ratios for the insurer
  4. Underwriting reinsurance treaties for the ceding company

Explanation

An agent acting for an insurer represents that insurer in soliciting business, explaining products and servicing policies. The agent's authority derives from the appointment and is limited by the terms of that mandate. Loss adjusting, solvency regulation and reinsurance underwriting are separate functions.

Question 29Damage insurance fundamentals and the regulatory framework

Which statement best explains why regulators require damage insurers to maintain technical provisions for outstanding claims?

  1. To pay dividends to shareholders in the current year
  2. To fund the regulator's own operating costs
  3. To finance the insurer's marketing budget
  4. To ensure funds are set aside to pay claims already incurred but not yet settled Correct answer.

Explanation

Technical provisions are liabilities recognised for obligations already incurred, including reported and incurred-but-not-reported claims. They ensure the insurer can meet claim payments as they fall due. They are not a source of marketing or dividend funding.

Question 30Damage insurance fundamentals and the regulatory framework

A commercial insured's warehouse is insured under a policy that excludes damage caused by faulty workmanship. A contractor's defective welding starts a fire that destroys the building. How should the claim be assessed under a proximate cause analysis?

  1. The faulty workmanship is the proximate cause, so the exclusion defeats the claim automatically
  2. Both causes must be treated as equally effective, so the claim is halved
  3. The claim fails because workmanship was involved at any point in the chain
  4. The fire is the proximate cause, so the loss is covered unless a specific fire exclusion applies Correct answer.

Explanation

Proximate cause is the dominant, effective cause that sets the loss in motion without which the loss would not have occurred. Where a fire follows faulty workmanship and the fire is the operative cause of the damage, the fire is proximate unless the policy excludes fire in these circumstances. The exclusion for workmanship applies to damage caused by that workmanship itself, not automatically to every loss in which it played a part.

Question 31Damage insurance fundamentals and the regulatory framework

A retail chain insures its stock under a policy with a 500,000 unit deductible per event. A theft causes a 1,200,000 unit loss. How much does the insurer pay, assuming no other limits or exclusions apply?

  1. 1,200,000 units
  2. 700,000 units Correct answer.
  3. 500,000 units
  4. 1,700,000 units

Explanation

A deductible is subtracted from the loss before the insurer pays, so the insurer pays the loss less the deductible: 1,200,000 minus 500,000 equals 700,000. The insured bears the first 500,000 of each loss event. Deductibles reduce small claims handling and align the insured with loss prevention.

Question 32Damage insurance fundamentals and the regulatory framework

An insured holds two damage policies covering the same building for the same period. Policy A has a limit of 60 million and Policy B a limit of 40 million, and both contain rateable contribution clauses. A covered loss of 30 million occurs. How is the loss shared?

  1. A pays 18 million and B pays 12 million in proportion to their limits Correct answer.
  2. B pays 30 million because it is the excess policy
  3. Each insurer pays 15 million irrespective of limits
  4. A pays 30 million and then recovers 15 million from B

Explanation

Rateable contribution allocates the loss among insurers in proportion to the amounts they would each have paid independently. A's share is 60/100 of 30 million, which is 18 million, and B's share is 40/100, which is 12 million. This prevents the insured from recovering more than the actual loss.

Question 33Damage insurance fundamentals and the regulatory framework

A policyholder signs a proposal form declaring that the premises have an automatic sprinkler system. In fact the system was disconnected months earlier. A fire later causes extensive damage. What is the insurer's strongest contractual position?

  1. It may avoid or reduce the claim because a material misrepresentation induced the contract Correct answer.
  2. It may only increase the premium for the following year
  3. It must pay in full because the fire was accidental
  4. It must pay but may cancel cover after the loss

Explanation

A false statement of a material fact made before the contract, which induced the insurer to accept the risk on those terms, entitles the insurer to remedies that may include avoidance or a proportionate reduction. Sprinkler protection is plainly material to fire underwriting. The remedy operates on the contract rather than only on future pricing.

Question 34Damage insurance fundamentals and the regulatory framework

Which of the following best illustrates the operation of the principle of subrogation in practice?

  1. The insured assigns the policy to a lender as security
  2. The insurer recovers unearned premium after cancellation
  3. After paying a fire claim, the insurer pursues the negligent contractor who caused the fire Correct answer.
  4. The insurer refuses to pay because a third party might be liable

Explanation

Subrogation allows the insurer, having indemnified the insured, to step into the insured's shoes and pursue third parties responsible for the loss. It supports the indemnity principle by preventing double recovery and allocating cost to the wrongdoer. It applies after payment, not as a reason to withhold payment.

Question 35Damage insurance fundamentals and the regulatory framework

How does a claims-made liability policy differ from an occurrence policy in respect of when cover responds?

  1. An occurrence policy responds to claims made during the policy period only
  2. A claims-made policy responds to claims first made during the policy period, regardless of when the act occurred Correct answer.
  3. A claims-made policy responds only to acts occurring during the policy period
  4. The two forms are identical in their trigger of cover

Explanation

A claims-made policy is triggered by the making of the claim during the period of cover, usually subject to a retroactive date. An occurrence policy is triggered by the date of the act or event giving rise to the loss, whenever the claim is later made. This distinction matters greatly for long-tail exposures.

Question 36Damage insurance fundamentals and the regulatory framework

A small firm decides not to buy property insurance for minor equipment losses and instead budgets for them from operating cash flow. Which risk treatment is this?

  1. Retention Correct answer.
  2. Reduction
  3. Transfer
  4. Avoidance

Explanation

Retention is the deliberate or inadvertent bearing of a risk by the organisation itself, often for small, frequent or predictable exposures. Avoidance would mean eliminating the activity, transfer would mean insuring or otherwise shifting the risk, and reduction means lessening frequency or severity. Budgeting for the loss is the hallmark of planned retention.

Question 37Damage insurance fundamentals and the regulatory framework

An insurer and a reinsurer agree a treaty under which the reinsurer automatically accepts a defined share of every risk in a specified class that the insurer writes. Which arrangement is this?

  1. A facultative placement
  2. A fronting arrangement
  3. A quota share treaty Correct answer.
  4. A co-insurance arrangement

Explanation

A quota share treaty is a proportional reinsurance agreement in which the reinsurer takes a fixed percentage of every risk within the defined class, automatically. Facultative reinsurance is offered and accepted risk by risk, and co-insurance involves several insurers sharing the original risk. Fronting involves one insurer issuing the policy while another bears the risk.

Question 38Damage insurance fundamentals and the regulatory framework

A property policy contains a condition precedent requiring the insured to maintain a working alarm system. The alarm is disabled and a burglary occurs. What is the legal significance of a condition precedent in this context?

  1. The condition converts the policy into a valued policy
  2. Compliance with the condition must be established before the insurer's liability to pay arises Correct answer.
  3. The condition transfers the risk to a third party
  4. The condition is merely advisory and has no effect on the claim

Explanation

A condition precedent is a term whose fulfilment must occur before the insurer's obligation to indemnify is triggered. Breach can entitle the insurer to decline the claim even where the loss is otherwise covered. This distinguishes it from a condition subsequent, which operates to terminate an existing liability.

Question 39Damage insurance fundamentals and the regulatory framework

A regulator assesses an insurer's capital using a formula that measures the risk of assets and liabilities against available capital. What is the primary purpose of such a risk-based capital regime?

  1. To fix the premium rates the insurer may charge
  2. To set the level of claims deductibles
  3. To determine the commission paid to intermediaries
  4. To require capital commensurate with the risks the insurer actually bears Correct answer.

Explanation

Risk-based capital regimes link required capital to the profile of risks an insurer assumes, including asset, underwriting and reserving risk. The aim is to ensure the insurer holds sufficient resources to absorb adverse outcomes and protect policyholders. Rate setting, commission and deductibles are commercial or contractual matters outside the capital formula.

Question 40Damage insurance fundamentals and the regulatory framework

An insurer discovers after inception that a commercial policyholder failed to disclose a prior fire loss that would have changed the terms offered. The insurer wishes to rely on the breach. Which consideration is most relevant to how the remedy is applied?

  1. Whether the non-disclosure was material to the insurer's underwriting decision and what remedy the governing law allows Correct answer.
  2. Whether the insured has since renewed the policy
  3. Whether the insurer used an intermediary in the sale
  4. Whether the loss was ultimately caused by fire

Explanation

The remedy for non-disclosure depends on whether the omitted fact was material, meaning it would have influenced a prudent underwriter's decision, and on the remedies available under the applicable legal regime. Materiality and the legal consequence must be assessed together. Renewal, the eventual cause of loss and the distribution channel do not determine the remedy.

Question 41Property insurance

In a standard homeowners policy, which peril is typically excluded from coverage for the dwelling and personal property?

  1. Fire
  2. Windstorm
  3. Earthquake Correct answer.
  4. Lightning

Explanation

Earth movement, including earthquakes, is commonly excluded and must be added by endorsement or a separate policy. Fire, lightning, and windstorm are named perils covered under most standard forms.

Question 42Property insurance

What does the coinsurance clause in a commercial property policy require of the insured?

  1. Adding flood coverage to the policy
  2. Purchasing coverage from at least two insurers
  3. Reporting inventory values monthly
  4. Insuring property to a specified percentage of its value to avoid a penalty Correct answer.

Explanation

A coinsurance clause requires the insured to carry limits equal to a stated percentage of the property's value at the time of loss. If the insured falls short, a proportional penalty reduces the claim payment.

Question 43Property insurance

Under a replacement cost valuation, how is a covered property loss settled?

  1. The outstanding mortgage balance on the property
  2. The actual cash value at the time of loss
  3. The cost to repair or replace with new property of like kind and quality Correct answer.
  4. The original purchase price minus accounting depreciation

Explanation

Replacement cost pays the amount needed to repair or replace damaged property with new materials of comparable kind and quality, without deducting depreciation. Actual cash value, by contrast, subtracts depreciation.

Question 44Property insurance

Which term describes the insured's failure to use reasonable care to protect property from further damage after a covered loss?

  1. Waiver
  2. Subrogation
  3. Neglect Correct answer.
  4. Abandonment

Explanation

Property policies impose a duty on the insured to protect covered property from further damage after a loss. Failing to exercise reasonable care can reduce or defeat recovery for the resulting additional damage.

Question 45Property insurance

What is the purpose of a deductible in a property insurance policy?

  1. To increase the policy limit automatically
  2. To make the insured share in each loss before the insurer pays Correct answer.
  3. To extend coverage to additional perils
  4. To waive the coinsurance requirement

Explanation

A deductible is the amount the insured absorbs on each covered loss before the insurer's payment begins. It reduces small claims and gives the insured a financial stake in loss prevention.

Question 46Property insurance

Which coverage in a homeowners policy protects against liability for bodily injury to others on the insured premises?

  1. Coverage A, dwelling
  2. Coverage E, personal liability Correct answer.
  3. Coverage C, personal property
  4. Coverage D, loss of use

Explanation

Coverage E provides personal liability protection for bodily injury or property damage for which the insured is legally responsible. Coverage A, C, and D address the structure, contents, and additional living expenses respectively.

Question 47Property insurance

What does the appraisal provision in a property policy allow?

  1. Each party selects a competent appraiser to resolve a dispute over the loss amount Correct answer.
  2. The insurer to cancel the policy mid-term
  3. The insured to increase coverage after a loss
  4. A court to determine the cause of loss

Explanation

The appraisal clause provides a mechanism for resolving disagreements about the amount of loss, with each side choosing an appraiser and a possible umpire. It addresses valuation disputes, not coverage or fault questions.

Question 48Property insurance

Which of the following is a named peril commonly covered under a dwelling fire policy form?

  1. Wear and tear
  2. Volcanic eruption Correct answer.
  3. Flood
  4. Earthquake

Explanation

Dwelling forms typically list volcanic eruption among covered perils. Flood and earthquake generally require separate coverage, and wear and tear is a maintenance exclusion.

Question 49Property insurance

A commercial building valued at $1,000,000 is insured for $600,000 under an 80% coinsurance clause. A covered loss of $200,000 occurs. Ignoring the deductible, what does the insurer pay?

  1. $160,000
  2. $120,000
  3. $150,000 Correct answer.
  4. $200,000

Explanation

The required limit is 80% of $1,000,000, or $800,000. The insured carried $600,000, so the recovery ratio is 600,000 divided by 800,000, or 0.75. Applying 0.75 to the $200,000 loss yields $150,000.

Question 50Property insurance

A building with an actual cash value of $400,000 is insured for $400,000 under an 80% coinsurance clause. A $100,000 covered loss occurs. What is the payment before deductible?

  1. $80,000
  2. $50,000
  3. $40,000
  4. $100,000 Correct answer.

Explanation

The required limit is 80% of $400,000, or $320,000. Because the insured carried $400,000, which exceeds the requirement, no penalty applies and the full loss of $100,000 is paid.