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CO Property & Casualty practice questions

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Question 1Insurance Principles and Concepts (general insurance knowledge)

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

  1. transfer title to damaged property to the insurer
  2. restore the insured to the pre-loss financial position Correct answer.
  3. allow the insured to profit from a covered loss
  4. pay the full policy limit for every covered loss

Explanation

Indemnity means the insured should be restored to approximately the same financial position occupied before the loss, no better and no worse. Policy limits, deductibles, and actual cash value valuation all support this principle.

Question 2Insurance Principles and Concepts (general insurance knowledge)

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

  1. only when the first premium is paid
  2. at the time of the loss Correct answer.
  3. only when the policy expires
  4. only when the application is signed

Explanation

For property coverage, the insured must have an insurable interest when the loss occurs. A financial interest at application is helpful, but recovery requires an interest at the time of loss.

Question 3Insurance Principles and Concepts (general insurance knowledge)

A binder issued by an insurer or agent provides which of the following?

  1. coverage only after the premium is audited
  2. temporary evidence of coverage until the policy is issued Correct answer.
  3. a guarantee that the insurer will not cancel
  4. a permanent policy with no expiration date

Explanation

A binder is temporary evidence that coverage is in force while the formal policy is being prepared. It is subject to the terms of the policy to be issued and can be time-limited.

Question 4Insurance Principles and Concepts (general insurance knowledge)

Which term describes a condition that increases the chance or severity of a loss?

  1. hazard Correct answer.
  2. risk
  3. exposure
  4. peril

Explanation

A hazard is a condition that increases the likelihood or severity of a loss, such as poor housekeeping or faulty wiring. A peril is the actual cause of loss, such as fire or windstorm.

Question 5Insurance Principles and Concepts (general insurance knowledge)

Which part of a property policy lists the named insured, policy period, and coverage limits?

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

Explanation

The declarations page identifies the insured, the property, the policy period, and the limits and deductibles. It personalizes the policy and is read together with the other forms.

Question 6Insurance Principles and Concepts (general insurance knowledge)

Actual cash value is generally calculated as replacement cost minus which of the following?

  1. salvage value
  2. depreciation Correct answer.
  3. coinsurance
  4. the deductible

Explanation

Actual cash value reflects the depreciated value of the damaged property. It is commonly computed as replacement cost less depreciation, though some policies use market value.

Question 7Insurance Principles and Concepts (general insurance knowledge)

Which of the following is an example of a moral hazard?

  1. storing flammables near a furnace
  2. intentionally causing a loss to collect Correct answer.
  3. failing to install a security alarm
  4. living in a region prone to hail

Explanation

Moral hazard involves a dishonest tendency or intent, such as deliberately causing a loss to collect insurance. The other choices describe physical hazards or exposure to natural perils.

Question 8Insurance Principles and Concepts (general insurance knowledge)

The transfer of risk from an individual or business to an insurer is accomplished through which of the following?

  1. risk retention
  2. loss prevention
  3. insurance Correct answer.
  4. avoidance

Explanation

Insurance is a risk transfer mechanism in which the insurer accepts the financial consequences of covered losses in exchange for premium. Retention and avoidance are different risk management techniques.

Question 9Insurance Principles and Concepts (general insurance knowledge)

After paying a covered loss caused by a negligent third party, an insurer may seek recovery from that party under which right?

  1. salvage
  2. contribution
  3. subrogation Correct answer.
  4. abandonment

Explanation

Subrogation allows the insurer, after paying the claim, to step into the insured's shoes and pursue the responsible party. It helps prevent the insured from collecting twice and holds the wrongdoer accountable.

Question 10Insurance Principles and Concepts (general insurance knowledge)

A building with a $1,000,000 replacement cost is insured for $600,000 under an 80% coinsurance clause. A $100,000 covered loss occurs. Ignoring any deductible, what amount does the insurer pay?

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

Explanation

The required amount is 80% of $1,000,000, or $800,000. Because $600,000 is carried, the insurer pays 600,000 divided by 800,000, or 75%, of the $100,000 loss, which equals $75,000.

Question 11Insurance Principles and Concepts (general insurance knowledge)

The doctrine of proximate cause is used to determine whether which of the following occurred?

  1. a covered peril set off an unbroken chain of events Correct answer.
  2. the insurer paid a claim within a set time
  3. the policy was properly cancelled
  4. the insured had an insurable interest

Explanation

Proximate cause looks for the dominant, efficient cause that sets off an unbroken sequence leading to the loss. If that cause is a covered peril, the resulting damage is generally covered.

Question 12Insurance Principles and Concepts (general insurance knowledge)

When two property policies with equal coverage apply to the same loss, each insurer's share is determined under which principle?

  1. coinsurance
  2. abandonment
  3. contribution Correct answer.
  4. subrogation

Explanation

Contribution allows insurers that cover the same loss to share it fairly so the insured does not collect more than the actual loss. Equal policies typically pay equal shares.

Question 13Insurance Principles and Concepts (general insurance knowledge)

Utmost good faith requires an insurance applicant to do which of the following?

  1. report every claim to the state
  2. disclose material facts needed to evaluate the risk Correct answer.
  3. purchase coverage equal to property value
  4. pay the premium before coverage begins

Explanation

Utmost good faith obliges the applicant to disclose material facts that would affect the insurer's decision to accept or rate the risk. Material misrepresentation or concealment can affect coverage.

Question 14Insurance Principles and Concepts (general insurance knowledge)

In an insurance application, a representation is best described as which of the following?

  1. a promise to perform a future act
  2. a guarantee that a stated fact is absolutely true
  3. a statement believed true to the applicant's knowledge Correct answer.
  4. a temporary agreement to provide coverage

Explanation

A representation is a statement of fact made to the best of the applicant's knowledge and belief. It differs from a warranty, which is a stricter promise or guarantee.

Question 15Insurance Principles and Concepts (general insurance knowledge)

An insurer's voluntary relinquishment of a known right under a policy is called which of the following?

  1. concealment
  2. estoppel
  3. rescission
  4. waiver Correct answer.

Explanation

Waiver occurs when an insurer knowingly gives up a right, such as a right to deny a claim for late notice. Estoppel may then prevent the insurer from later asserting that right if the insured relied on the waiver.

Question 16Insurance Principles and Concepts (general insurance knowledge)

The law of large numbers helps insurers do which of the following?

  1. avoid the need for reinsurance
  2. eliminate all uncertainty from underwriting
  3. set rates equal to the highest possible loss
  4. predict losses more accurately as similar exposures increase Correct answer.

Explanation

As the number of similar independent exposures grows, actual loss experience tends to approach expected results. This allows insurers to price coverage with greater confidence.

Question 17Insurance Principles and Concepts (general insurance knowledge)

An endorsement is used to do which of the following?

  1. modify the terms of an existing policy Correct answer.
  2. cancel coverage retroactively
  3. replace the policy's declarations page
  4. increase the policy premium only

Explanation

An endorsement is a written amendment that adds, removes, or changes coverage in a policy. It becomes part of the policy and takes precedence over conflicting original terms.

Question 18Insurance Principles and Concepts (general insurance knowledge)

A straight deductible in a property policy requires the insured to do which of the following?

  1. share in the insurer's defense costs
  2. absorb a fixed dollar amount of each loss Correct answer.
  3. pay a percentage of every loss up to the policy limit
  4. pay the insurer a penalty for late premium

Explanation

A straight deductible is a specified dollar amount subtracted from each covered loss before the insurer pays. It reduces small claims and gives the insured a share of every loss.

Question 19Insurance Principles and Concepts (general insurance knowledge)

After paying a total loss, the insurer's right to take possession of the damaged property is known as which of the following?

  1. arbitration
  2. subrogation
  3. salvage Correct answer.
  4. abandonment

Explanation

Salvage is the insurer's right to take and dispose of damaged property after paying the loss. Its value helps offset the claim cost.

Question 20Insurance Principles and Concepts (general insurance knowledge)

An occurrence policy responds to losses that occur under which circumstances?

  1. only after the policy expires
  2. during the policy period regardless of when reported Correct answer.
  3. only when reported within 30 days
  4. that are reported during the period regardless of when they happen

Explanation

An occurrence policy is triggered by the date of the loss event, not the date of the claim. Coverage applies if the occurrence happens during the policy period, even if the claim is reported later.

Question 21Insurance Principles and Concepts (general insurance knowledge)

A property policy covers fire but excludes earth movement. An earthquake causes a collapse, and the collapse ruptures a gas line that ignites a fire. Under the efficient proximate cause rule, coverage for the fire damage generally depends on which of the following?

  1. the number of exclusions listed in the policy
  2. whether the insured reported the loss within 24 hours
  3. whether fire was the dominant cause of the loss Correct answer.
  4. whether the earthquake was the last event in the chain

Explanation

The efficient proximate cause rule looks for the dominant, initiating cause of the loss. If fire is the efficient cause, the fire coverage may apply even though an excluded event began the sequence.

Question 22Insurance Principles and Concepts (general insurance knowledge)

An insured has a $500 deductible and a $1,200 covered loss. The policy has an 80% coinsurance clause, and the insured carries $80,000 on a building with a $200,000 replacement cost. What does the insurer pay?

  1. $600
  2. $700
  3. $100 Correct answer.
  4. $350

Explanation

The coinsurance requirement is 80% of $200,000, or $160,000. Because $80,000 is carried, the insurer pays 50% of the $1,200 loss, which is $600, and then subtracts the $500 deductible, leaving $100.

Question 23Insurance Principles and Concepts (general insurance knowledge)

An adjuster tells an insured in writing that a late claim will be accepted, and the insurer later denies it. The insured may prevail under which doctrine?

  1. estoppel Correct answer.
  2. coinsurance
  3. subrogation
  4. salvage

Explanation

Estoppel can prevent an insurer from asserting a right after its conduct led the insured to rely on a different position. Here, the written acceptance may bar a later denial.

Question 24Insurance Principles and Concepts (general insurance knowledge)

Which statement best describes adverse selection in insurance underwriting?

  1. regulators decide which risks must be written
  2. agents favor policies with the highest commissions
  3. high-risk applicants are more likely to seek insurance Correct answer.
  4. insurers seek only the largest accounts

Explanation

Adverse selection occurs when people with greater-than-average risk are more likely to buy or keep coverage. Insurers counter it through underwriting, exclusions, and appropriate rating.

Question 25Insurance Principles and Concepts (general insurance knowledge)

A property policy states that there can be no abandonment of property to the insurer. This means which of the following?

  1. the insured cannot force the insurer to take title to damaged property Correct answer.
  2. the insurer must pay the full policy limit
  3. the insured must always repair the property
  4. the insurer cannot take possession of salvage

Explanation

The no-abandonment provision prevents an insured from walking away from damaged property and demanding payment as if the insurer had taken it. The insurer may still exercise salvage rights after paying a loss.

Question 26Insurance Principles and Concepts (general insurance knowledge)

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

  1. Only when the first premium is paid
  2. At the time of the loss Correct answer.
  3. Only when the application is signed
  4. Only when the policy is delivered

Explanation

Property insurance requires the insured to have an insurable interest at the time of loss, because the purpose is to indemnify actual financial loss. A policyholder who has already sold the property, for example, generally cannot collect for damage to it.

Question 27Insurance Principles and Concepts (general insurance knowledge)

Which principle states that an insured should be restored to approximately the same financial position after a loss as before the loss, no better and no worse?

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

Explanation

Indemnity is the core principle that insurance restores the insured to the pre-loss financial position without creating profit from a loss. It is why actual cash value and replacement cost methods exist and why overinsurance is discouraged.

Question 28Insurance Principles and Concepts (general insurance knowledge)

A policy that is drafted by the insurer and presented to the insured on a take-it-or-leave-it basis is best described as which type of contract?

  1. An adhesion contract Correct answer.
  2. An aleatory contract
  3. A conditional contract
  4. A unilateral contract

Explanation

A contract of adhesion is prepared by one party, the insurer, and accepted or rejected by the other party without negotiation. Ambiguities in such contracts are generally construed against the party that drafted them.

Question 29Insurance Principles and Concepts (general insurance knowledge)

An insurance contract is considered aleatory because the amounts exchanged by the parties are:

  1. Determined solely by the insured
  2. Fixed by state law
  3. Unequal and dependent on chance Correct answer.
  4. Always exactly equal

Explanation

In an aleatory contract, the dollar amounts exchanged are not equal and depend on whether a covered event occurs. The insured may pay premiums for years and receive no loss payment, or may receive a payment far larger than one premium.

Question 30Insurance Principles and Concepts (general insurance knowledge)

Insurance is designed primarily to handle which type of risk?

  1. Speculative risk
  2. Investment risk
  3. Market risk
  4. Pure risk Correct answer.

Explanation

Pure risk involves only the chance of loss or no loss, such as fire or liability, and is generally insurable. Speculative risk involves the chance of gain as well as loss and is typically not insured.

Question 31Insurance Principles and Concepts (general insurance knowledge)

In insurance terminology, a condition that increases the likelihood or severity of a loss is called:

  1. An indemnity
  2. A hazard Correct answer.
  3. A peril
  4. A proximate cause

Explanation

A hazard is a condition that increases the chance or size of a loss, such as oily rags in a warehouse. The peril is the actual cause of loss, such as fire.

Question 32Insurance Principles and Concepts (general insurance knowledge)

Which section of an insurance policy identifies the insured, the property or risk covered, the policy period, and the limits of insurance?

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

Explanation

The declarations page provides the specific facts of the individual policy, including names, dates, limits, and descriptions of insured property. The insuring agreement states the insurer's promise, conditions set duties, and exclusions remove coverage.

Question 33Insurance Principles and Concepts (general insurance knowledge)

A temporary written or oral agreement that provides immediate coverage until the policy is issued is called:

  1. An endorsement
  2. A certificate of insurance
  3. A binder Correct answer.
  4. A warranty

Explanation

A binder provides temporary evidence of coverage and is effective until the permanent policy is issued or the binder expires. It is often used when coverage must begin before underwriting is complete.

Question 34Insurance Principles and Concepts (general insurance knowledge)

An applicant for property insurance does not disclose that the building has been vacant for a year. The insurer would most likely treat this omission as:

  1. A binder extending coverage
  2. An immaterial detail with no effect on coverage
  3. A material misrepresentation Correct answer.
  4. A warranty automatically waived by the insurer

Explanation

A material misrepresentation or concealment is a false statement or omission that would have affected the insurer's decision to issue coverage or set the premium. If it is material, the insurer may be able to rescind the policy or deny a claim.

Question 35Insurance Principles and Concepts (general insurance knowledge)

In insurance, a warranty is best described as:

  1. An oral estimate of the amount of a loss
  2. A temporary proof that coverage exists
  3. A promise by the insured to pay premiums on time
  4. A guarantee that a stated fact is true Correct answer.

Explanation

A warranty is a statement or condition in the policy that the insured guarantees is true, such as a protective safeguard warranty. A breach of warranty can affect coverage, although modern statutes often require a material relationship to the loss.

Question 36Insurance Principles and Concepts (general insurance knowledge)

A producer has no written authority to bind coverage but does so anyway, and the insurer has routinely accepted and honored such bindings. The producer's authority is best described as:

  1. Implied authority
  2. Apparent authority Correct answer.
  3. Express authority
  4. Fiduciary authority

Explanation

Apparent authority arises when the insurer's conduct leads a reasonable third party to believe the producer has authority, even if express authority was not granted. The insurer's routine acceptance of similar bindings supports that belief.

Question 37Insurance Principles and Concepts (general insurance knowledge)

Which of the following is typically a duty of the insured after a covered property loss?

  1. Renewing the policy early
  2. Paying the insurer's adjuster fees
  3. Increasing the policy limit before the next renewal
  4. Providing prompt notice and a proof of loss Correct answer.

Explanation

Standard property policies require the insured to give prompt notice, protect the property from further damage, and submit a proof of loss. These duties allow the insurer to investigate and verify the claim.

Question 38Insurance Principles and Concepts (general insurance knowledge)

A sworn statement from the insured that details the amount and circumstances of a loss is called:

  1. A proof of loss Correct answer.
  2. A declaration
  3. An endorsement
  4. A binder

Explanation

A proof of loss is a formal, often sworn, statement submitted by the insured that documents the loss and the amount claimed. Insurers use it to evaluate the claim and confirm policy conditions have been met.

Question 39Insurance Principles and Concepts (general insurance knowledge)

If the insurer and insured agree that a loss is covered but disagree on the value of the damaged property, the policy provision most likely used is:

  1. Appraisal Correct answer.
  2. Arbitration
  3. Salvage
  4. Subrogation

Explanation

Appraisal is the policy mechanism for resolving a disagreement about the amount of loss when coverage itself is not disputed. Each party selects an appraiser, and the appraisers may choose an umpire if they cannot agree.

Question 40Insurance Principles and Concepts (general insurance knowledge)

Reinsurance is best described as:

  1. Insurance sold directly to individual consumers
  2. Insurance bought by an insurer to transfer risk Correct answer.
  3. A method by which a business self-insures its own losses
  4. A government program that writes flood coverage

Explanation

Reinsurance is insurance for insurers: the ceding insurer transfers some of its risk to a reinsurer in exchange for part of the premium. It helps insurers manage capacity and solvency.

Question 41Insurance Principles and Concepts (general insurance knowledge)

A subsidiary formed by a parent company primarily to insure the parent company's own risks is called:

  1. A reinsurer
  2. A residual market plan
  3. A reciprocal exchange
  4. A captive insurer Correct answer.

Explanation

A captive insurer is an insurance company owned by a non-insurance parent and formed to finance the parent's risks. Captives may be used when commercial coverage is expensive or unavailable.

Question 42Insurance Principles and Concepts (general insurance knowledge)

Surplus lines insurers are used primarily when:

  1. The state automatically assigns the risk to an insurer
  2. A risk is too small for standard insurers to write
  3. The insured wants a lower deductible
  4. Coverage is unavailable from admitted insurers Correct answer.

Explanation

Surplus lines insurers are nonadmitted carriers that can write risks standard admitted insurers decline or cannot place. They provide a market for unusual, high-risk, or hard-to-place exposures.

Question 43Insurance Principles and Concepts (general insurance knowledge)

An insurer has earned premium of $2,000,000 and incurred losses of $1,200,000. Its loss ratio is:

  1. 50%
  2. 60% Correct answer.
  3. 80%
  4. 40%

Explanation

The loss ratio is incurred losses divided by earned premium. Here, $1,200,000 divided by $2,000,000 equals 0.60, or 60%.

Question 44Insurance Principles and Concepts (general insurance knowledge)

An insurer has a loss ratio of 65% and an expense ratio of 30%. Its combined ratio is:

  1. 125%
  2. 65%
  3. 35%
  4. 95% Correct answer.

Explanation

The combined ratio is the loss ratio plus the expense ratio, so 65% plus 30% equals 95%. A combined ratio below 100% indicates an underwriting profit before investment income.

Question 45Insurance Principles and Concepts (general insurance knowledge)

A claims-made liability policy generally responds to a claim:

  1. Only for property damage claims
  2. Only after the policy has expired
  3. Reported during the policy period, subject to a retroactive date Correct answer.
  4. Only if the act causing injury occurred during the policy period

Explanation

Claims-made coverage is triggered by the report of a claim during the policy period, regardless of when the act occurred, subject to any retroactive date. Occurrence policies, by contrast, are triggered by when the injury or damage occurs.

Question 46Insurance Principles and Concepts (general insurance knowledge)

A claims-made liability policy has a retroactive date of January 1, 2022, and a policy period from January 1, 2023 to January 1, 2024. A claim is reported in June 2023 for an act that occurred in 2021. The policy will:

  1. Cover the claim if the insured pays a higher deductible
  2. Cover defense costs only
  3. Cover the claim because it was reported during the policy period
  4. Not cover it because the act predates the retroactive date Correct answer.

Explanation

A retroactive date bars coverage for acts that occurred before that date, even if the claim is first reported during the current policy period. Because the act occurred in 2021, before the January 1, 2022 retroactive date, the policy does not respond.

Question 47Insurance Principles and Concepts (general insurance knowledge)

An umbrella policy with a $1,000,000 limit sits over a $500,000 primary policy. The primary insurer becomes insolvent and pays nothing, and the umbrella contains a drop-down provision. The umbrella will:

  1. Pay nothing because the primary insurer must always pay first
  2. Drop down and respond as primary coverage for covered losses Correct answer.
  3. Cancel all coverage automatically
  4. Pay only after the insured personally pays the $500,000 primary limit

Explanation

A drop-down provision allows an umbrella insurer to replace an unavailable or exhausted underlying insurer and respond as if it were primary. This protects the insured when the primary carrier cannot pay.

Question 48Insurance Principles and Concepts (general insurance knowledge)

Under a business income policy, the period of restoration generally ends when:

  1. The business could reasonably resume operations with due diligence Correct answer.
  2. The damaged building is fully rebuilt, even if the business remains closed
  3. The policy period expires
  4. The insured receives a government loan

Explanation

The period of restoration measures the time reasonably required to repair or replace the damaged property and resume operations with due diligence. It does not extend to delays caused by the insured's lack of funds or unrelated business conditions.

Question 49Insurance Principles and Concepts (general insurance knowledge)

A general contractor asks to be added to a subcontractor's liability policy as an additional insured. This status typically:

  1. Transfers ownership of the policy to the contractor
  2. Makes the contractor a named insured for all of the subcontractor's operations
  3. Covers the contractor for liability arising from the subcontractor's work Correct answer.
  4. Eliminates the subcontractor's own coverage

Explanation

An additional insured is an entity added to another's policy and protected only for the scope of exposure described in the endorsement, often liability arising from the named insured's work. The named insured retains its own coverage and policy rights.

Question 50Insurance Principles and Concepts (general insurance knowledge)

A retrospective rating plan adjusts the final premium for a policy period based on:

  1. The insurer's investment returns during the policy period
  2. The insured's losses incurred during the policy period Correct answer.
  3. A fixed schedule that never changes after inception
  4. The insured's gross payroll for the prior year only

Explanation

Retrospective rating sets a provisional premium at inception and adjusts it after the period based on actual losses, within a minimum and maximum. It rewards good loss experience and penalizes poor experience.