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DC Property & Casualty practice questions

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Question 1Insurance Principles and Concepts (risk, insurable interest, indemnity, contract characteristics, agency and producer authority, insurer types and marketing systems)

Which statement best describes pure risk?

  1. A chance of loss or no loss, with no chance of gain Correct answer.
  2. A condition in which the size of a loss cannot be measured
  3. A chance of loss or gain, depending on the outcome
  4. A certainty that a loss will occur at some future point

Explanation

Pure risk has only two possible outcomes: loss or no loss. Because there is no possibility of gain, insurers can estimate losses across a large group and price coverage for them, which is why pure risk is generally insurable.

Question 2Insurance Principles and Concepts (risk, insurable interest, indemnity, contract characteristics, agency and producer authority, insurer types and marketing systems)

A homeowner stores oily rags in a garage next to a gas furnace. This condition is best classified as which type of hazard?

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

Explanation

A physical hazard is a tangible condition of the property or its surroundings that increases the chance or severity of loss. Oily rags beside a heat source is a physical condition, not an attitude or a legal circumstance.

Question 3Insurance Principles and Concepts (risk, insurable interest, indemnity, contract characteristics, agency and producer authority, insurer types and marketing systems)

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

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

Explanation

Property coverage is a contract of indemnity, so the insured must stand to suffer a financial loss when the damage occurs. That is why insurable interest is tested at the time of loss in property insurance, unlike life insurance, where it is tested at policy inception.

Question 4Insurance Principles and Concepts (risk, insurable interest, indemnity, contract characteristics, agency and producer authority, insurer types and marketing systems)

Insurance policies are generally treated as contracts of adhesion, which means that

  1. both parties negotiate the policy terms equally
  2. one party drafts the terms and the other accepts or rejects them Correct answer.
  3. the insured drafts the terms and the insurer accepts them
  4. the terms are fixed by statute and cannot be varied

Explanation

In a contract of adhesion the insurer drafts the wording and the applicant takes it or leaves it. Because the insured has no real bargaining power over the language, courts resolve genuine ambiguity in favor of the insured.

Question 5Insurance Principles and Concepts (risk, insurable interest, indemnity, contract characteristics, agency and producer authority, insurer types and marketing systems)

A stock insurer is best described as a company that

  1. is a nonprofit fraternal benefit society
  2. is owned by members who exchange reciprocal contracts
  3. is owned by its policyholders and operated at cost
  4. is owned by shareholders and operated for a profit Correct answer.

Explanation

Stock insurers are incorporated companies owned by shareholders, and the company's aim is to earn a profit that may be distributed as dividends. Their policies are typically nonparticipating, meaning policyholders do not receive dividends.

Question 6Insurance Principles and Concepts (risk, insurable interest, indemnity, contract characteristics, agency and producer authority, insurer types and marketing systems)

An insurer sells its products through producers who represent that one company and cannot place business with competitors. This insurer uses which marketing system?

  1. Surplus lines brokerage
  2. Independent agency system
  3. Exclusive agency system Correct answer.
  4. Direct response system

Explanation

Under the exclusive agency (or captive) system, producers represent a single insurer and place business only with it. Independent agents, by contrast, represent several insurers and may choose among them.

Question 7Insurance Principles and Concepts (risk, insurable interest, indemnity, contract characteristics, agency and producer authority, insurer types and marketing systems)

A building insured for $500,000 is damaged by fire, and the cost to repair the damage is $80,000. Applying the principle of indemnity, the insurer will pay

  1. nothing until the building is fully rebuilt
  2. $500,000, because that is the policy limit
  3. the market value of the building before the fire
  4. no more than $80,000, less any deductible Correct answer.

Explanation

Indemnity restores the insured to approximately the pre-loss financial position and never more. Payment is measured by the amount of the covered loss, subject to policy limits and deductibles, not by the limit itself.

Question 8Insurance Principles and Concepts (risk, insurable interest, indemnity, contract characteristics, agency and producer authority, insurer types and marketing systems)

Which type of authority arises when an insurer's conduct leads a third party to reasonably believe that a producer has authority to act for the insurer?

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

Explanation

Apparent authority is created by the appearance of authority that the insurer's words or actions give to the public, even when the producer lacks actual authority. An insurer can be bound by acts that fall within that reasonable appearance.

Question 9Insurance Principles and Concepts (risk, insurable interest, indemnity, contract characteristics, agency and producer authority, insurer types and marketing systems)

An insurance contract is aleatory because

  1. the terms are offered on a take-it-or-leave-it basis
  2. the insured must meet conditions before coverage applies
  3. the parties' performances are unequal and depend on chance Correct answer.
  4. only the insurer makes an enforceable promise

Explanation

In an aleatory contract the dollar amounts exchanged are unequal and contingent on an uncertain event. A modest premium may produce a large claim payment, or no payment at all.

Question 10Insurance Principles and Concepts (risk, insurable interest, indemnity, contract characteristics, agency and producer authority, insurer types and marketing systems)

The principle of utmost good faith requires an insurance applicant to

  1. disclose material facts the insurer needs to evaluate the risk Correct answer.
  2. read the entire policy and waive any ambiguity in it
  3. guarantee that every answer on the application is literally true
  4. report every claim to the insurer within 24 hours

Explanation

Utmost good faith obligates both parties to deal honestly and to disclose facts that would affect the insurer's decision to accept or rate the risk. Statements on an application are generally representations, which must be substantially true rather than literally perfect.

Question 11Insurance Principles and Concepts (risk, insurable interest, indemnity, contract characteristics, agency and producer authority, insurer types and marketing systems)

Which party holds an insurable interest in goods stored in a public warehouse?

  1. A competitor that would gain market share if the goods were destroyed
  2. A prospective customer with no contract for the goods
  3. The warehouse operator who is legally liable for the stored goods Correct answer.
  4. A lender whose loan is not secured by the stored goods

Explanation

A warehouse operator in lawful control of another's goods can be legally liable for their damage, and that liability supports an insurable interest. Insurable interest requires a lawful economic relationship to the property, not merely a hope of benefit.

Question 12Insurance Principles and Concepts (risk, insurable interest, indemnity, contract characteristics, agency and producer authority, insurer types and marketing systems)

Which statement correctly describes a mutual insurance company?

  1. It is owned by its policyholders, who may receive dividends Correct answer.
  2. It is a marketplace of individual underwriters
  3. It is owned by stockholders who receive taxable dividends
  4. It issues only assessable policies and pays no dividends

Explanation

A mutual insurer is owned by its policyholders rather than by shareholders, and favorable results may be returned to them as dividends or premium reductions. Policyholders therefore occupy the ownership role that stockholders hold in a stock company.

Question 13Insurance Principles and Concepts (risk, insurable interest, indemnity, contract characteristics, agency and producer authority, insurer types and marketing systems)

A producer gives a commercial applicant a binder while the application is being underwritten. What is the effect of the binder?

  1. It guarantees that the quoted premium will not change
  2. It permanently extends coverage for a full policy year
  3. It provides temporary coverage until the policy is issued Correct answer.
  4. It has no effect until an underwriter signs it

Explanation

A binder is temporary evidence that coverage is in force, bridging the period between application and policy issuance. It is subject to the terms of the policy applied for and may be cancelled in accordance with its terms and applicable law.

Question 14Insurance Principles and Concepts (risk, insurable interest, indemnity, contract characteristics, agency and producer authority, insurer types and marketing systems)

Which loss exposure is generally considered insurable?

  1. A loss that is certain to happen to every policyholder at once
  2. A loss caused by the insured's deliberate act
  3. An accidental, measurable loss shared among many similar units Correct answer.
  4. A business loss that reflects only a change in market prices

Explanation

Insurable losses are ideally accidental, definite and measurable, and spread across many similar exposure units so the insurer can predict them. Predictability across a large pool is what allows a workable premium to be charged.

Question 15Insurance Principles and Concepts (risk, insurable interest, indemnity, contract characteristics, agency and producer authority, insurer types and marketing systems)

In a reciprocal exchange, the insureds

  1. are protected against insolvency by the FDIC
  2. insure one another through an attorney-in-fact Correct answer.
  3. receive dividends guaranteed by state law
  4. buy shares of stock in the company

Explanation

A reciprocal exchange is an unincorporated group of individuals or organizations that insure one another under reciprocal agreements. An attorney-in-fact manages the exchange's operations on the members' behalf.

Question 16Insurance Principles and Concepts (risk, insurable interest, indemnity, contract characteristics, agency and producer authority, insurer types and marketing systems)

An applicant for commercial property coverage deliberately leaves a prior fire loss off the application when asked about loss history. This conduct is best described as

  1. a warranty
  2. an estoppel
  3. concealment Correct answer.
  4. a representation

Explanation

Concealment is the intentional withholding of a fact material to the insurer's decision. It breaches the duty of utmost good faith and may give the insurer grounds to rescind the policy.

Question 17Insurance Principles and Concepts (risk, insurable interest, indemnity, contract characteristics, agency and producer authority, insurer types and marketing systems)

An insurer asks applicants detailed questions about prior losses and current conditions before agreeing to issue a policy. This underwriting step primarily addresses which problem?

  1. Adverse selection Correct answer.
  2. The law of large numbers
  3. The principle of indemnity
  4. Moral hazard

Explanation

Adverse selection is the tendency of applicants with the greatest likelihood of loss to seek or keep coverage. Underwriting questions let the insurer identify such applicants and rate, modify, or decline the risk so that premiums remain adequate for the pool.

Question 18Insurance Principles and Concepts (risk, insurable interest, indemnity, contract characteristics, agency and producer authority, insurer types and marketing systems)

An adjuster tells an insured that a claim filed after the policy deadline will still be paid, and the insured relies on that statement and misses the deadline. A court bars the insurer from denying the claim under the doctrine of

  1. rescission
  2. reformation
  3. subrogation
  4. estoppel Correct answer.

Explanation

Estoppel prevents a party from asserting a right when its own conduct led another to rely on it to that person's detriment. The insurer's assurance induced the insured's reliance, so the insurer cannot now enforce the deadline.

Question 19Insurance Principles and Concepts (risk, insurable interest, indemnity, contract characteristics, agency and producer authority, insurer types and marketing systems)

Lloyd's of London is best characterized as

  1. a marketplace where syndicates underwrite risks Correct answer.
  2. a stock insurer owned by its shareholders
  3. a single insurer that issues policies directly to the public
  4. a state guaranty association for insolvent insurers

Explanation

Lloyd's is not itself an insurer; it is a marketplace where syndicates of individual and corporate members underwrite risk through managing agents. Each syndicate bears its own share of the risk it accepts.

Question 20Insurance Principles and Concepts (risk, insurable interest, indemnity, contract characteristics, agency and producer authority, insurer types and marketing systems)

Which pairing of contract characteristics correctly describes a standard insurance policy?

  1. Unilateral and unconditional
  2. Adhesive and conditional Correct answer.
  3. Negotiated and unconditional
  4. Bilateral and conditional

Explanation

The insurer drafts the policy and the applicant accepts or rejects it, making the contract one of adhesion. It is also conditional, because the insured must satisfy stated conditions, such as providing prompt notice of loss, before the insurer's promise to pay is triggered.

Question 21Property Insurance Basics and Dwelling/Homeowners Coverage (policy structure, perils, valuation, coinsurance, endorsements, HO forms and coverage parts)

On an unendorsed HO-3 policy, Coverage C (Personal Property) is written for what percentage of the Coverage A limit?

  1. 70 percent
  2. 30 percent
  3. 50 percent Correct answer.
  4. 10 percent

Explanation

Under the HO-3 form, Coverage C is automatically set at 50 percent of the Coverage A dwelling limit unless the insured buys a different amount. Coverage D is typically 30 percent of Coverage A, and Coverage B is 10 percent. These percentages can be changed by endorsement on the declarations page.

Question 22Property Insurance Basics and Dwelling/Homeowners Coverage (policy structure, perils, valuation, coinsurance, endorsements, HO forms and coverage parts)

Which Dwelling Property form insures the dwelling against risks of direct physical loss unless the loss is excluded?

  1. DP-2 broad form
  2. HO-8 modified form
  3. DP-3 special form Correct answer.
  4. DP-1 basic form

Explanation

The DP-3 special form provides open-peril (all-risk) coverage on the dwelling, meaning all direct physical losses are covered unless specifically excluded. The DP-1 and DP-2 forms cover only the perils named in the form. The HO-8 is a homeowners form, not a dwelling form.

Question 23Property Insurance Basics and Dwelling/Homeowners Coverage (policy structure, perils, valuation, coinsurance, endorsements, HO forms and coverage parts)

Actual cash value is best described as which of the following?

  1. The limit shown on the declarations page
  2. The market value of the property at the time of loss
  3. Replacement cost plus depreciation
  4. Replacement cost minus depreciation Correct answer.

Explanation

Actual cash value reflects the depreciated value of damaged property, usually computed as replacement cost less depreciation. It is not the same as market value, which reflects what a buyer would pay. The policy limit is only the maximum payable, not a valuation method.

Question 24Property Insurance Basics and Dwelling/Homeowners Coverage (policy structure, perils, valuation, coinsurance, endorsements, HO forms and coverage parts)

Which coverage is provided by the HO-4 renters policy?

  1. Coverage on the rented dwelling structure
  2. Personal property and personal liability coverage Correct answer.
  3. Coverage on the building owned by the landlord
  4. Liability coverage only, with no property coverage

Explanation

The HO-4 is designed for tenants and covers the insured's personal property, loss of use, personal liability, and medical payments to others. It contains no Coverage A or Coverage B because the tenant does not own the building. The landlord insures the structure under a dwelling or commercial policy.

Question 25Property Insurance Basics and Dwelling/Homeowners Coverage (policy structure, perils, valuation, coinsurance, endorsements, HO forms and coverage parts)

The principle that an insured should be restored to approximately the same financial position held before a loss, no better, is known as which of the following?

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

Explanation

Indemnity holds that a property insurance recovery should make the insured whole without creating a profit from the loss. Replacement cost and agreed value settlements are limited exceptions permitted by policy terms. The other doctrines support the contract but do not express the no-profit rule.

Question 26Property Insurance Basics and Dwelling/Homeowners Coverage (policy structure, perils, valuation, coinsurance, endorsements, HO forms and coverage parts)

Coverage F, Medical Payments to Others, in a homeowners policy pays which of the following?

  1. Injury expenses of guests, regardless of fault Correct answer.
  2. Only expenses awarded by a court judgment against the insured
  3. Medical expenses of the named insured and resident relatives
  4. Lost wages of an injured visitor

Explanation

Coverage F pays reasonable and necessary medical expenses for persons injured on the insured location, or off it under limited circumstances, without any finding of fault. The insured's own household members are excluded because their medical costs belong under a health plan. Payment does not require a lawsuit or judgment.

Question 27Property Insurance Basics and Dwelling/Homeowners Coverage (policy structure, perils, valuation, coinsurance, endorsements, HO forms and coverage parts)

A scheduled personal property endorsement is used primarily to do which of the following?

  1. Reduce the deductible on personal property claims
  2. Raise the Coverage C limit for all personal property
  3. Insure listed items for agreed value without a deductible Correct answer.
  4. Extend liability coverage to business property

Explanation

Scheduling items individually provides broader perils, an agreed value for each listed article, and typically no deductible. Items are described and valued in the endorsement, so the insured does not need to prove the value after a loss. The endorsement is item-specific rather than a blanket increase.

Question 28Property Insurance Basics and Dwelling/Homeowners Coverage (policy structure, perils, valuation, coinsurance, endorsements, HO forms and coverage parts)

The HO-6 condominium unit owners form is designed to cover which of the following?

  1. Improvements and betterments inside the unit Correct answer.
  2. The entire building, including common elements
  3. Association liability for common-area injuries
  4. The landlord's interest in a rented unit

Explanation

The HO-6 covers the unit owner's personal property, liability, and building items within the unit such as improvements, betterments, and additions made at the owner's expense. The condominium association insures the common elements and the original building under its own master policy. Loss assessment coverage is also available for the owner's share of association charges.

Question 29Property Insurance Basics and Dwelling/Homeowners Coverage (policy structure, perils, valuation, coinsurance, endorsements, HO forms and coverage parts)

A dwelling is insured under a DP-2 with an 80 percent replacement cost condition. Replacement cost is $300,000, the policy limit is $180,000, and a covered fire causes a $60,000 loss with no deductible. What amount is payable?

  1. $36,000
  2. $60,000
  3. $48,000
  4. $45,000 Correct answer.

Explanation

The required amount of insurance is 80 percent of $300,000, or $240,000. Because the $180,000 carried is only 75 percent of replacement cost, the loss is paid at limit divided by required, times the loss: ($180,000 / $240,000) x $60,000 = $45,000. The insured bears the shortfall as a coinsurance penalty.

Question 30Property Insurance Basics and Dwelling/Homeowners Coverage (policy structure, perils, valuation, coinsurance, endorsements, HO forms and coverage parts)

An HO-3 has a $1,000 deductible. A visitor is injured on the premises and the insurer determines that $4,000 is payable under Coverage F, Medical Payments to Others. What amount does the insurer pay?

  1. $2,500
  2. $3,000
  3. $0
  4. $4,000 Correct answer.

Explanation

The policy deductible applies to property coverages and, under the standard form, does not reduce medical payments or personal liability payments. Coverage F therefore pays the full $4,000 determined to be reasonable and necessary. Deductibles apply separately to Coverage A and usually to Coverages B and C.

Question 31Property Insurance Basics and Dwelling/Homeowners Coverage (policy structure, perils, valuation, coinsurance, endorsements, HO forms and coverage parts)

Under an unendorsed HO-3, the special limit for money, banknotes, and coins under Coverage C is which amount?

  1. $200 Correct answer.
  2. $1,500
  3. $2,500
  4. $500

Explanation

Money is subject to a $200 special limit in the homeowners form, well below the Coverage C limit. Comparable special limits apply to securities, jewelry theft, firearms theft, and silverware theft. Higher amounts require an endorsement or scheduling.

Question 32Property Insurance Basics and Dwelling/Homeowners Coverage (policy structure, perils, valuation, coinsurance, endorsements, HO forms and coverage parts)

On an HO-3, Coverage D (Loss of Use) is normally written for what percentage of the Coverage A limit?

  1. 50 percent
  2. 20 percent
  3. 10 percent
  4. 30 percent Correct answer.

Explanation

Coverage D is normally 30 percent of the Coverage A limit on the HO-3 and pays additional living expense or fair rental value when the dwelling is uninhabitable. Additional living expense is paid for the reasonable time needed to repair or relocate, and fair rental value applies to rented portions. Some forms also extend the time period when a civil authority prohibits occupancy.

Question 33Property Insurance Basics and Dwelling/Homeowners Coverage (policy structure, perils, valuation, coinsurance, endorsements, HO forms and coverage parts)

A homeowners insured has a $100,000 Coverage C limit. Personal property normally kept at a seasonal cabin the insured owns is destroyed by a covered peril. What is the most the policy pays for that property before any deductible?

  1. $50,000
  2. $100,000
  3. $2,500
  4. $10,000 Correct answer.

Explanation

Personal property usually located at another residence owned or rented by the insured is limited to 10 percent of the Coverage C limit, or $10,000 here. Property carried with the insured while traveling is covered worldwide subject to other limits. The special limit protects against overloading one policy with property from a second residence.

Question 34Property Insurance Basics and Dwelling/Homeowners Coverage (policy structure, perils, valuation, coinsurance, endorsements, HO forms and coverage parts)

Under the mortgage clause of a homeowners policy, which statement is correct?

  1. The mortgagee may cancel the policy only with the insured's consent
  2. The mortgagee's rights end when the insured breaches a policy condition
  3. The mortgagee may pay premiums and receive loss payments to the extent of its interest Correct answer.
  4. The mortgagee must be named as a coinsured on the declarations

Explanation

The mortgage clause protects the lender's interest separately from the insured's conduct: the mortgagee is entitled to loss payment to the extent of its interest, may pay premiums to keep the policy in force, and must receive notice of cancellation or nonrenewal. A breach by the insured does not defeat the mortgagee's rights.

Question 35Property Insurance Basics and Dwelling/Homeowners Coverage (policy structure, perils, valuation, coinsurance, endorsements, HO forms and coverage parts)

The HO-8 modified coverage form is designed for which situation?

  1. A tenant renting a single-family dwelling for a year
  2. A condominium unit owner who upgraded the interior finishes
  3. A newly built home that has appreciated in market value
  4. An older home with repair cost above market value Correct answer.

Explanation

The HO-8 is intended for owner-occupied dwellings whose replacement cost significantly exceeds market value, typically older homes with ornate or obsolete construction. It settles losses on a functional replacement cost or repair basis and carries reduced limits. Newer homes and tenants belong in other forms.

Question 36Property Insurance Basics and Dwelling/Homeowners Coverage (policy structure, perils, valuation, coinsurance, endorsements, HO forms and coverage parts)

An HO-3 insured carries $240,000 on a dwelling with a replacement cost of $400,000. A covered partial loss of $80,000 occurs. With no deductible, how does the insurer settle the loss?

  1. $80,000 less a 20 percent penalty for underinsurance
  2. The greater of ACV or $60,000, up to the limit Correct answer.
  3. ACV only, with no coinsurance calculation applied
  4. $80,000 in full, since the loss is under the limit

Explanation

The amount carried is 60 percent of replacement cost, below the 80 percent required for full replacement cost settlement. The insurer therefore pays the greater of actual cash value or the proportion (limit divided by 80 percent of replacement cost) times the loss: ($240,000 / $320,000) x $80,000 = $60,000. Payment can never exceed the policy limit.

Question 37Property Insurance Basics and Dwelling/Homeowners Coverage (policy structure, perils, valuation, coinsurance, endorsements, HO forms and coverage parts)

A homeowners insured's finished basement is damaged when a sewer line backs up into the home. How does an unendorsed HO-3 respond?

  1. It pays nothing, because backup of water is excluded Correct answer.
  2. It pays as a sudden and accidental discharge from a plumbing system
  3. It pays up to the Coverage C special limit for water damage
  4. It pays under Coverage D for the cost of moving out

Explanation

The homeowners form excludes loss caused by water that backs up through sewers or drains or overflows from a sump, even if the backup is accidental. Coverage requires a water backup endorsement, which carries its own limit. Discharge from a plumbing system within the dwelling is treated differently and is covered.

Question 38Property Insurance Basics and Dwelling/Homeowners Coverage (policy structure, perils, valuation, coinsurance, endorsements, HO forms and coverage parts)

An earthquake shakes a home and cracks the foundation. Under an unendorsed HO-3, the loss is:

  1. Covered under Coverage A as an accidental loss
  2. Covered only if the home is vacant
  3. Excluded as earth movement Correct answer.
  4. Covered under Coverage D

Explanation

Earth movement, including earthquake, landslide, and sinkhole collapse, is excluded under the unendorsed homeowners form. Coverage is available by adding an earthquake endorsement and paying the applicable premium. Damage from a volcanic eruption, by contrast, is treated as a covered peril in the form.

Question 39Property Insurance Basics and Dwelling/Homeowners Coverage (policy structure, perils, valuation, coinsurance, endorsements, HO forms and coverage parts)

Which of the following is a duty of the insured after a covered loss under a homeowners policy?

  1. Submit a signed sworn proof of loss only after suit is filed
  2. Give prompt notice to the insurer or its agent Correct answer.
  3. Begin permanent repairs before the insurer inspects the damage
  4. Discard damaged property immediately to avoid further loss

Explanation

The duties after loss include giving prompt notice, protecting the property from further damage, cooperating with the investigation, and submitting a signed proof of loss when required. Permanent repairs should wait until the insurer has had an opportunity to inspect. Damaged property must be preserved for examination.

Question 40Property Insurance Basics and Dwelling/Homeowners Coverage (policy structure, perils, valuation, coinsurance, endorsements, HO forms and coverage parts)

An HO-3 dwelling has been vacant for 70 consecutive days when vandals damage the interior. How does the policy respond?

  1. Covered, but with a doubled deductible
  2. Covered under Coverage A because vandalism is an open peril
  3. Covered under Coverage C only
  4. Not covered, because vandalism is excluded after 60 days of vacancy Correct answer.

Explanation

The homeowners form excludes vandalism and malicious mischief if the dwelling has been vacant for more than 60 consecutive days before the loss. Vacancy means no occupants and not enough furnishings to make it livable. Other covered perils, such as fire, may still respond during a vacancy.

Question 41Property Insurance Basics and Dwelling/Homeowners Coverage (policy structure, perils, valuation, coinsurance, endorsements, HO forms and coverage parts)

A covered fire damages a home built before current building codes, and the insured must demolish the undamaged remainder and rebuild to code. What does the unendorsed HO-3 provide for these added costs?

  1. Up to 10 percent of the Coverage A limit for the increased cost of construction Correct answer.
  2. Nothing, because code compliance is always the insured's expense
  3. Coverage only when the building is a total loss
  4. Unlimited payment for all code upgrades required by the local authority

Explanation

The form includes limited ordinance or law coverage, usually 10 percent of the Coverage A limit, for the increased cost of construction, and comparable amounts for demolition and for the value of the undamaged portion. Higher limits can be purchased by endorsement. The coverage applies to partial as well as total losses.

Question 42Property Insurance Basics and Dwelling/Homeowners Coverage (policy structure, perils, valuation, coinsurance, endorsements, HO forms and coverage parts)

Coverage A on an HO-3 is $400,000 and the policy carries a 25 percent extended replacement cost endorsement. A total loss requires $480,000 to rebuild. What is the most the policy pays on the dwelling?

  1. $500,000
  2. $480,000 Correct answer.
  3. $600,000
  4. $400,000

Explanation

The endorsement raises the available amount to 125 percent of the Coverage A limit, or $500,000. Because the actual cost to rebuild is only $480,000, the insurer pays that amount and the extra $20,000 of capacity is unused. Extended replacement cost does not create a $600,000 limit.

Question 43Property Insurance Basics and Dwelling/Homeowners Coverage (policy structure, perils, valuation, coinsurance, endorsements, HO forms and coverage parts)

A covered loss damages one chair of a matched dining set. How does the homeowners policy settle this pair or set loss?

  1. It pays the full scheduled value of the set
  2. Repair of the damaged piece, or the difference in set value Correct answer.
  3. It replaces the entire matched set in every case
  4. It pays nothing unless the whole set is destroyed

Explanation

For a pair or set, the insurer may repair or replace the damaged part, or pay the difference between the value of the set before and after the loss. The insured may not automatically collect the value of a complete new set. If the item is scheduled, the agreed value for that item governs.

Question 44Property Insurance Basics and Dwelling/Homeowners Coverage (policy structure, perils, valuation, coinsurance, endorsements, HO forms and coverage parts)

Under the appraisal provision of a homeowners policy, how are appraisal costs handled?

  1. The party who loses the appraisal pays all costs
  2. The insured pays all costs when the insurer requests appraisal
  3. The insurer pays all appraisal and umpire costs
  4. Each pays its own appraiser and shares the umpire's fee Correct answer.

Explanation

When the insurer and insured disagree on the amount of loss, either may demand appraisal: each selects a competent appraiser, and the appraisers choose an umpire. Each party pays its own appraiser and the two share the umpire's expense. Appraisal resolves the amount of loss only, not questions of coverage.

Question 45Property Insurance Basics and Dwelling/Homeowners Coverage (policy structure, perils, valuation, coinsurance, endorsements, HO forms and coverage parts)

Coverage A on an HO-3 is $300,000. The insured runs a home-based business out of a detached workshop on the premises. What limit applies to that workshop under Coverage B?

  1. $2,500 Correct answer.
  2. $10,000
  3. $25,000
  4. $30,000

Explanation

Although Coverage B is generally 10 percent of Coverage A, the form limits structures used in whole or in part for business purposes, or rented to others, to $2,500. The insured would need a business or endorsement solution to cover the exposure fully. The full 10 percent applies to ordinary structures such as a private garage or tool shed.

Question 46Property Insurance Basics and Dwelling/Homeowners Coverage (policy structure, perils, valuation, coinsurance, endorsements, HO forms and coverage parts)

Which part of a homeowners policy identifies the named insured, the insured property address, the policy period, and the limit of liability that applies to each coverage?

  1. The exclusions section of the policy
  2. The conditions section of the policy
  3. The insuring agreement of the policy
  4. The declarations page of the policy Correct answer.

Explanation

The declarations personalizes the policy by stating who is insured, what and where the insured property is, the term of coverage, and the limits and deductibles that apply. The insuring agreement states the insurer's broad promise to pay, while conditions set out the duties of both parties and exclusions remove specified losses from coverage.

Question 47Property Insurance Basics and Dwelling/Homeowners Coverage (policy structure, perils, valuation, coinsurance, endorsements, HO forms and coverage parts)

Which homeowners form insures both the dwelling and personal property on an open-peril basis?

  1. The HO-5 comprehensive form Correct answer.
  2. The HO-8 modified coverage form
  3. The HO-2 broad form
  4. The HO-3 special form

Explanation

The HO-5 is the only homeowners form that covers both Coverage A (dwelling) and Coverage C (personal property) against risks of direct physical loss unless excluded. The HO-3 covers the dwelling on an open-peril basis but personal property only for named perils, and the HO-2 and HO-8 are named-peril forms.

Question 48Property Insurance Basics and Dwelling/Homeowners Coverage (policy structure, perils, valuation, coinsurance, endorsements, HO forms and coverage parts)

A covered fire destroys a sofa insured under Coverage C of an unendorsed HO-3. The sofa would cost $2,000 to replace with a new one, and accumulated depreciation is $1,400. Ignoring any deductible, how much will the insurer pay for the sofa?

  1. $2,000
  2. $0, because household furniture is insured on a valued basis
  3. $1,400
  4. $600 Correct answer.

Explanation

Personal property under Coverage C is settled at actual cash value, which is replacement cost minus depreciation, unless a replacement cost endorsement is added. Here $2,000 less $1,400 of depreciation leaves $600 payable.

Question 49Property Insurance Basics and Dwelling/Homeowners Coverage (policy structure, perils, valuation, coinsurance, endorsements, HO forms and coverage parts)

A homeowners policy has a $300,000 Coverage A limit and carries an inflation guard endorsement that automatically increases limits by 4 percent each year. At the first policy anniversary, what is the Coverage A limit?

  1. $324,000
  2. $312,000 Correct answer.
  3. $304,000
  4. $300,000

Explanation

An inflation guard endorsement increases the policy limits by a stated percentage at each anniversary so the amount of insurance keeps pace with rising construction costs. Four percent of $300,000 is $12,000, so the Coverage A limit becomes $312,000.

Question 50Property Insurance Basics and Dwelling/Homeowners Coverage (policy structure, perils, valuation, coinsurance, endorsements, HO forms and coverage parts)

A slow leak from a pipe inside a wall goes unrepaired for several months, and the constant seepage causes extensive rot and mold throughout the framing. How does an unendorsed HO-3 respond to the rot and mold damage?

  1. It is covered up to the special limit that applies to mold.
  2. It is excluded, but the resulting water damage to drywall is still covered.
  3. It is covered because escape of water from a plumbing system is a listed peril.
  4. It is excluded because the seepage was constant over 14 days or more. Correct answer.

Explanation

Although the HO-3 covers the dwelling on an open-peril basis, the water damage exclusion removes loss caused by constant or repeated seepage or leakage of water over a period of 14 days or more. Because the rot and mold flow from that excluded cause of loss, they are not covered either, and the limited mold coverage applies only when the mold results from a covered peril.