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FL Property & Casualty practice questions

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Question 1Insurance Terms, Concepts, and Principles

Which statement describes the principle of indemnity in property insurance?

  1. The insured may collect more than the loss to discourage underinsurance.
  2. The insurer must pay the full policy limit for any covered loss.
  3. It restores the insured to the financial position held before the loss. Correct answer.
  4. The insured must be indemnified only after a lawsuit is filed.

Explanation

Indemnity means the insured is restored to approximately the same financial position as before the loss, no better and no worse. It prevents an insured from profiting from a loss while still making them whole for covered damage.

Question 2Insurance Terms, Concepts, and Principles

Which statement best describes insurable interest in property insurance?

  1. It applies only to persons who hold legal title to the property.
  2. A financial interest in the property that would be harmed by its loss. Correct answer.
  3. It is created automatically by purchasing a policy covering the property.
  4. It must exist only at the time of loss and may be acquired afterward.

Explanation

Insurable interest is a financial stake in property such that its damage or destruction causes the insured a genuine economic loss. It must exist at the time of the loss, and it can arise from ownership, leasehold, mortgage, or other economic relationships, not title alone.

Question 3Insurance Terms, Concepts, and Principles

What is the primary function of a deductible in a property policy?

  1. It increases the policy limit by the deductible amount.
  2. It guarantees the insured a refund at the end of the policy term.
  3. It transfers the entire loss to the insured.
  4. It reduces small claims and makes the insured share each loss. Correct answer.

Explanation

A deductible is the amount of each loss the insured absorbs before the insurer pays. It eliminates the expense of handling small claims and gives the insured an incentive to prevent losses, which lowers the premium.

Question 4Insurance Terms, Concepts, and Principles

How does a peril differ from a hazard?

  1. A hazard is a loss that has already occurred.
  2. A hazard is the cause of the loss, and a peril is a condition that increases the chance of loss.
  3. A peril causes loss; a hazard is a condition that raises the chance of loss. Correct answer.
  4. They are used interchangeably in insurance usage.

Explanation

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

Question 5Insurance Terms, Concepts, and Principles

Which concept allows an insurer to predict losses more accurately as the number of similar exposure units increases?

  1. Rule of contra proferentem
  2. Doctrine of subrogation
  3. Law of large numbers Correct answer.
  4. Principle of indemnity

Explanation

The law of large numbers holds that as the number of similar independent exposure units increases, actual results tend to approach the expected or predicted results. This is what allows insurers to set rates based on predicted loss experience.

Question 6Insurance Terms, Concepts, and Principles

An applicant deliberately fails to disclose a known material fact that would have affected the insurer's decision to accept the risk. This is best described as:

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

Explanation

Concealment is the intentional withholding of a material fact from the insurer during underwriting. Because insurance contracts are based on utmost good faith, concealment of a material fact can give the insurer grounds to void the policy.

Question 7Insurance Terms, Concepts, and Principles

After paying a covered loss caused by a negligent third party, an insurer may pursue that third party to recover its payment. This right is called:

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

Explanation

Subrogation is the insurer's right to step into the insured's shoes and pursue a negligent third party after paying the claim. It supports the principle of indemnity by preventing the insured from collecting twice and by placing the cost on the party at fault.

Question 8Insurance Terms, Concepts, and Principles

When an insurer pays a total loss and takes title to damaged property that still has value, the insurer is exercising its right of:

  1. Appraisal
  2. Assignment
  3. Abandonment
  4. Salvage Correct answer.

Explanation

Salvage is the residual value of damaged property. When an insurer pays a total loss, the policy generally entitles the insurer to take the salvage, which reduces the net cost of the claim.

Question 9Insurance Terms, Concepts, and Principles

A building with a replacement cost of $500,000 is insured for $300,000 under a policy with an 80% coinsurance clause. A covered loss of $100,000 occurs. Ignoring any deductible, how much does the insurer pay?

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

Explanation

The coinsurance requirement is 80% of $500,000, or $400,000. Because the insured carried $300,000, the recovery is (300,000 / 400,000) × $100,000 = $75,000.

Question 10Insurance Terms, Concepts, and Principles

Actual cash value in property insurance is generally calculated as:

  1. Replacement cost plus accumulated depreciation.
  2. The original purchase price without any adjustment.
  3. The policy limit divided by the number of years the policy has been in force.
  4. Replacement cost minus depreciation. Correct answer.

Explanation

Actual cash value is typically replacement cost less depreciation, reflecting the value of the property in its pre-loss condition. Some policies or jurisdictions define it differently, but the standard formula is replacement cost minus depreciation.

Question 11Insurance Terms, Concepts, and Principles

Which statement about replacement cost coverage is correct?

  1. It is limited to the fair market value of the property at the time of the loss, after depreciation is subtracted.
  2. It pays the original purchase price of the damaged property.
  3. It pays only after the insured rebuilds at a different location.
  4. It pays to replace damaged property with new property of like kind and quality, with no depreciation deducted. Correct answer.

Explanation

Replacement cost coverage pays the cost to replace or repair damaged property with new property of comparable kind and quality without deducting for depreciation. Many policies require the insured to actually repair or replace the property within a stated period before the full replacement cost is paid.

Question 12Insurance Terms, Concepts, and Principles

An insurer's representative tells an insured in writing that a late proof of loss will be accepted, and the insurer later tries to deny the claim for lateness. The insurer is most likely barred by:

  1. Material misrepresentation
  2. Coinsurance
  3. Subrogation
  4. Waiver and estoppel Correct answer.

Explanation

Waiver is the voluntary giving up of a known right, and estoppel prevents a party from later asserting a right after conduct that led another party to rely on it to their detriment. Accepting the late proof of loss waives the timeliness defense and estops the insurer from later denying the claim on that ground.

Question 13Insurance Terms, Concepts, and Principles

Which statement about representations in an insurance application is correct?

  1. They are absolute guarantees that, if breached in any way, will void the policy from the start.
  2. They are promises that the applicant will do something in the future.
  3. Statements the applicant believes true to the best of their knowledge; only material misstatements matter. Correct answer.
  4. They must be written by the insurer rather than by the applicant, and they are not part of the contract.

Explanation

Representations are statements of fact the applicant believes to be true to the best of their knowledge. Only a material misrepresentation, one that would have affected the insurer's decision, generally gives the insurer grounds to rescind or deny a claim.

Question 14Insurance Terms, Concepts, and Principles

A producer issues a temporary written or oral agreement providing immediate coverage while the application is being underwritten. This is a:

  1. Certificate of insurance
  2. Binder Correct answer.
  3. Warranty
  4. Endorsement

Explanation

A binder is a temporary contract that provides coverage from the date of application until the policy is issued or the application is declined. It is subject to the terms of the policy to be issued and can be written or oral.

Question 15Insurance Terms, Concepts, and Principles

When the insurer and insured agree that a loss is covered but cannot agree on the amount of loss, the policy typically provides for resolution through:

  1. Subrogation
  2. Appraisal Correct answer.
  3. Arbitration of coverage disputes
  4. A declaratory judgment

Explanation

Appraisal is the policy provision used to resolve disputes about the amount of a loss, not about coverage. Each party selects a competent appraiser, and an umpire resolves differences between them.

Question 16Insurance Terms, Concepts, and Principles

Reinsurance is best described as:

  1. A pool created by the state to insure residual or hard-to-place risks.
  2. Insurance purchased by a policyholder to add excess limits above the primary policy.
  3. Coverage provided to a lender to protect its mortgage interest in insured property.
  4. Insurance purchased by an insurer to transfer part of its risk to another insurer. Correct answer.

Explanation

Reinsurance is insurance for insurers: the ceding insurer transfers a portion of its risk to a reinsurer in exchange for part of the premium. It increases the insurer's capacity and protects against catastrophic or unusually large losses.

Question 17Insurance Terms, Concepts, and Principles

Adverse selection refers to:

  1. The tendency of high-risk applicants to seek coverage more eagerly than low-risk applicants. Correct answer.
  2. An insurer selecting only the best risks in its underwriting process.
  3. Selecting a policy based only on the lowest premium regardless of the coverage it provides.
  4. A decline in the number of insurers writing coverage in a market.

Explanation

Adverse selection occurs when those with the greatest likelihood of loss are most eager to buy insurance, which can distort the insured pool and raise rates. Underwriting and rate classification are used to control it.

Question 18Insurance Terms, Concepts, and Principles

Which statement about pure and speculative risk is correct?

  1. Pure risk involves only loss or no loss, and it is the type of risk insurance is designed for. Correct answer.
  2. Pure risk involves the chance of gain as well as the chance of loss.
  3. Speculative risk is insurable because both gain and loss are possible.
  4. Insurers commonly insure speculative risk through business interruption coverage.

Explanation

Pure risk presents only the possibility of loss or no loss, with no chance of gain, which makes it measurable and insurable. Speculative risk involves the possibility of gain as well as loss, such as investing or launching a business, and is generally uninsurable.

Question 19Insurance Terms, Concepts, and Principles

A producer exceeds their actual authority, but the insured reasonably believes the producer has authority based on the insurer's conduct. The producer is acting with:

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

Explanation

Apparent authority arises when the insurer's conduct leads a reasonable person to believe the producer has authority, even if actual authority was not granted. The insurer may be bound by the producer's acts under this doctrine.

Question 20Insurance Terms, Concepts, and Principles

Under most property policies, which statement about abandonment is correct?

  1. The insured may not abandon damaged property to the insurer without the insurer's consent. Correct answer.
  2. The insured may abandon damaged property to the insurer at any time and demand a total loss payment.
  3. Abandonment automatically transfers title to the insurer after a partial loss.
  4. Abandonment is required before the insured may claim any salvage value.

Explanation

Property policies generally prohibit abandonment of damaged property to the insurer without the insurer's consent. The insurer has the option to take salvage after paying a total loss, but the insured cannot force the insurer to accept the property.

Question 21Insurance Terms, Concepts, and Principles

An insured has two property policies covering the same loss: Policy A with a $100,000 limit and Policy B with a $300,000 limit, each with an other insurance clause providing pro rata sharing by limits. For a covered loss of $80,000, how much does Policy A pay?

  1. $60,000
  2. $80,000
  3. $40,000
  4. $20,000 Correct answer.

Explanation

Under pro rata sharing by limits, each policy pays its limit divided by the total of all applicable limits, multiplied by the loss. Policy A bears 100,000/400,000, or 25%, of the $80,000 loss, which equals $20,000.

Question 22Insurance Terms, Concepts, and Principles

Which statement best distinguishes a valued policy from an open policy?

  1. A valued policy states a fixed value in the policy that is paid on a total loss. Correct answer.
  2. An open policy requires the value to be set at the time of application.
  3. A valued policy is used only for liability coverage, not for property.
  4. A valued policy pays the actual cash value determined after a loss occurs.

Explanation

A valued policy fixes the value of the insured property in the contract, and that amount is payable in the event of a total loss without a post-loss valuation dispute. An open policy, by contrast, determines the value of the loss at the time of loss.

Question 23Insurance Terms, Concepts, and Principles

Which situation most clearly lacks insurable interest at policy inception?

  1. A business insures a key employee whose death would cause a significant financial loss to the business.
  2. A spouse insures the other spouse with that spouse's written consent.
  3. An investor with no relationship to a stranger buys a policy on that stranger's life as a wager. Correct answer.
  4. A creditor insures a debtor up to the amount of the outstanding debt.

Explanation

Life insurance requires insurable interest at the time the policy is issued. A policy purchased by someone with no relationship to the insured and no economic stake is a wagering contract and is not supported by insurable interest.

Question 24Insurance Terms, Concepts, and Principles

A standard mortgage clause in a property policy provides that:

  1. The mortgagee must pay the premium on behalf of the insured.
  2. The mortgagee's interest in the policy ends when the insured sells the property.
  3. The mortgagee loses all of its rights under the policy if the insured fails to comply with the policy conditions.
  4. The mortgagee is paid to the extent of its interest, and its rights are not affected by the insured's acts. Correct answer.

Explanation

The standard mortgage clause protects the lender's interest separately from the insured's. The mortgagee receives loss payment to the extent of its interest, and its rights are not impaired by the insured's acts, neglect, or policy violations.

Question 25Insurance Terms, Concepts, and Principles

Which statement best describes the requirement that a covered loss be fortuitous?

  1. The loss must be predictable so the insurer can calculate an accurate rate.
  2. The loss must be caused by a natural disaster such as wind or hail.
  3. The loss must occur during the policy period and must be reported to the insurer within 24 hours.
  4. The loss must be accidental or unexpected; intentional acts are generally not covered. Correct answer.

Explanation

Insurance responds to fortuitous losses, meaning losses that are accidental or unexpected from the standpoint of the insured. Intentional acts by the insured are excluded because allowing recovery would create a moral hazard and violate indemnity principles.

Question 26Insurance Terms, Concepts, and Principles

A warehouse owner has stopped locking the loading dock at night because the building is fully insured and the owner reasons that any theft will be paid for by the insurer. This behavior is an example of which type of hazard?

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

Explanation

Hazards are conditions that increase the chance or size of a loss. A morale hazard arises from carelessness or indifference created by the presence of insurance, such as skipping routine protective measures. Moral hazard, by contrast, involves a dishonest intent to bring about or exaggerate a loss.

Question 27Insurance Terms, Concepts, and Principles

An insurer can forecast losses far more accurately for a group of 50,000 similar homes than for a group of 500 similar homes. Which concept explains this result?

  1. Adverse selection
  2. Law of large numbers Correct answer.
  3. Doctrine of subrogation
  4. Indemnity principle

Explanation

The law of large numbers holds that as the number of similar, independent exposure units increases, actual results tend to move closer to expected results. This statistical predictability is what allows insurers to set rates with confidence. Small groups produce wider, less reliable fluctuation.

Question 28Insurance Terms, Concepts, and Principles

The principle of indemnity provides that, after a covered property loss, the insured should be:

  1. Compensated for emotional distress
  2. Made whole financially, without profiting from the loss Correct answer.
  3. Paid the full policy limit regardless of loss
  4. Put in a better position than before the loss

Explanation

Indemnity means the insured is restored to approximately the same financial position held before the loss, no better and no worse. The recovery is therefore limited to the actual value of the loss, subject to policy limits and deductibles. This principle is why most property policies do not pay the full limit for a small loss.

Question 29Insurance Terms, Concepts, and Principles

A windstorm, a covered peril, tears open a section of a roof. Rain then enters the opening and ruins interior drywall, and the policy excludes damage caused by rain. How is the interior damage most likely handled?

  1. Covered, because the windstorm is the proximate cause Correct answer.
  2. Denied, because the policy expressly excludes rain damage
  3. Covered only up to a water damage sublimit
  4. Denied, unless the roof was in good repair

Explanation

Proximate cause is the dominant, effective cause that sets in motion an unbroken chain of events producing the loss. Where a covered peril such as wind opens the building and rain follows naturally, the wind is treated as the proximate cause and the resulting damage is covered. The exclusion for rain applies only when rain itself is the initiating cause.

Question 30Insurance Terms, Concepts, and Principles

Insurance contracts are described as aleatory because:

  1. Both parties exchange promises of equal value
  2. Only the insurer makes an enforceable promise
  3. The insured must accept the policy terms as written
  4. Each party's performance is unequal and depends on chance Correct answer.

Explanation

In an aleatory contract the dollar amounts exchanged are not equal and are contingent on an uncertain event; a small premium may purchase a large claim payment, or no payment at all. This uncertainty of performance distinguishes insurance from an even-exchange contract. The other features often listed for insurance, such as being unilateral or a contract of adhesion, are separate characteristics.

Question 31Insurance Terms, Concepts, and Principles

A homeowners policy contains a phrase that reasonably supports two different meanings. Under the rules governing contracts of adhesion, a court will most likely:

  1. Refer the dispute to the state insurance department
  2. Void the entire policy for uncertainty
  3. Apply the meaning that favors the insurer
  4. Interpret the phrase in favor of the insured Correct answer.

Explanation

A policy is drafted by the insurer and offered on a take-it-or-leave-it basis, making it a contract of adhesion. Because the insured had no part in drafting the wording, ambiguity is construed strictly against the insurer and in favor of coverage. Courts will interpret rather than discard a policy that can be given a reasonable meaning.

Question 32Insurance Terms, Concepts, and Principles

A liability policy covers injury or damage that takes place during the policy period, regardless of when the claim is first reported to the insurer. This policy is written on which basis?

  1. Discovery basis
  2. Occurrence basis Correct answer.
  3. Claims-made basis
  4. Retroactive basis

Explanation

An occurrence policy is triggered by the date the injury or damage happens, even if the claim surfaces years later. A claims-made policy is triggered instead by the date the claim is reported, subject to any retroactive date. The distinction matters greatly for long-tail exposures such as construction defects.

Question 33Insurance Terms, Concepts, and Principles

Which activity is most likely to create liability without any showing that the party acted negligently?

  1. Conducting blasting near a road project Correct answer.
  2. Operating a delivery van on public streets
  3. Installing handrails in an office stairwell
  4. Cleaning a store floor during business hours

Explanation

Blasting and similar ultrahazardous activities give rise to strict liability, meaning the party is responsible for resulting harm even with the utmost care. Negligence need not be proven because the activity itself creates an abnormal risk. Ordinary activities such as driving, installing fixtures, or mopping floors are judged by a reasonable-care standard.

Question 34Insurance Terms, Concepts, and Principles

A general liability policy has a $300,000 per-occurrence limit and a $500,000 general aggregate. The insurer has paid $300,000 on the first claim and $150,000 on the second. What is the most the insurer will pay toward a third claim?

  1. $200,000
  2. $50,000 Correct answer.
  3. $300,000
  4. $150,000

Explanation

The per-occurrence limit caps what any one claim can receive, and the aggregate caps total payments for the policy period. Payments of $300,000 and $150,000 total $450,000, leaving only $50,000 of the $500,000 aggregate. The remaining aggregate, not the per-occurrence limit, controls once it is smaller.

Question 35Property Insurance Basics and Policy Provisions

An insured's insurable interest in a covered building must exist at which point for a property loss to be payable?

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

Explanation

Property insurance is a contract of indemnity, so the insured must stand to suffer actual financial loss when the loss occurs. Insurable interest is therefore measured as of the time of loss, not the time of application or delivery.

Question 36Property Insurance Basics and Policy Provisions

The principle of indemnity is best described as which of the following?

  1. Paying the full face amount of the policy after every covered loss
  2. Returning the insured to the pre-loss financial position Correct answer.
  3. Allowing the insured to profit when property values have risen
  4. Shifting every risk to the insurer regardless of fault

Explanation

Indemnity means the insured is restored to approximately the same financial position occupied before the loss, no better and no worse. Recovery is therefore tied to the value of the loss rather than to the policy's face amount.

Question 37Property Insurance Basics and Policy Provisions

Which information is ordinarily shown on the declarations page of a property policy?

  1. Names, limits, property description, and policy term Correct answer.
  2. The definitions of terms used throughout the policy
  3. The list of duties the insured must perform after a loss occurs
  4. A schedule of perils the policy does not cover

Explanation

The declarations page personalizes the policy: it identifies the named insured, describes the covered property, states the limits and deductible, and gives the policy period. The remaining policy language is found in the forms that follow.

Question 38Property Insurance Basics and Policy Provisions

A homeowners policy carries a $1,000 deductible and a covered loss totals $7,500. How much does the insurer pay?

  1. $7,500
  2. $6,500 Correct answer.
  3. $8,500
  4. $1,000

Explanation

A deductible is the amount the insured absorbs before the insurer's payment begins. Subtracting the $1,000 deductible from the $7,500 covered loss leaves $6,500 payable, subject to the policy limit.

Question 39Property Insurance Basics and Policy Provisions

A contract in which the amounts exchanged by the parties may be unequal is known as which type of contract?

  1. Adhesion
  2. Aleatory Correct answer.
  3. Unilateral
  4. Conditional

Explanation

An aleatory contract depends on chance events, so the premium paid and the amount the insurer ultimately pays may be very unequal. A small premium can produce a large claim payment, or no payment at all.

Question 40Property Insurance Basics and Policy Provisions

Subrogation in a property policy refers to which of the following?

  1. The insured's right to collect from two policies for one loss
  2. The insurer's right to recover from the party that caused the loss after paying the claim Correct answer.
  3. The transfer of a policy from one insured to another
  4. The insurer's right to cancel a policy mid-term without a stated reason

Explanation

After paying a covered loss, the insurer steps into the insured's shoes and may pursue the negligent third party who caused the damage. This keeps the insured from collecting twice and places the cost on the responsible party.

Question 41Property Insurance Basics and Policy Provisions

A proof of loss is which of the following?

  1. A sworn statement from the insured detailing the amount and cause of the loss Correct answer.
  2. The insurer's formal written denial of coverage
  3. A court order requiring the insurer to pay the claim
  4. A written demand from the insurer that the insured appear for an examination

Explanation

The proof of loss is a signed, often sworn, statement the insured submits showing the time, cause, and amount of the loss. It is one of the standard duties after loss and gives the insurer the documentation needed to evaluate the claim.

Question 42Property Insurance Basics and Policy Provisions

An endorsement to a property policy is best described as which of the following?

  1. A separate contract that replaces the policy entirely
  2. A written amendment that changes the terms of the policy Correct answer.
  3. A summary of coverage sent after the policy expires
  4. The initial application submitted to the insurer

Explanation

An endorsement, also called a rider, is attached to the policy to add, delete, or alter coverage without issuing an entirely new contract. Its terms control over conflicting preprinted policy language.

Question 43Property Insurance Basics and Policy Provisions

Actual cash value in property insurance is calculated as which of the following?

  1. The full policy limit shown on the declarations page
  2. The original purchase price of the property
  3. The highest price the property could bring on the open market
  4. Replacement cost minus depreciation Correct answer.

Explanation

Actual cash value reflects the depreciated value of the damaged property at the time of loss, commonly expressed as replacement cost less depreciation. It is the traditional indemnity measure for property losses.

Question 44Property Insurance Basics and Policy Provisions

A building valued at $400,000 is insured for $240,000 under a policy with an 80% coinsurance clause and no deductible. A covered loss of $80,000 occurs. How much does the insurer pay?

  1. $80,000
  2. $36,000
  3. $48,000
  4. $60,000 Correct answer.

Explanation

The coinsurance requirement is 80% of $400,000, or $320,000. Because only $240,000 was carried, the insurer pays the proportion of the loss that carried insurance bears to the requirement: ($240,000 ÷ $320,000) × $80,000 = $60,000, subject to the limit.

Question 45Property Insurance Basics and Policy Provisions

The same $40,000 loss is covered by two property policies with pro rata other-insurance clauses: Policy A has a $300,000 limit and Policy B has a $100,000 limit. How much does Policy A pay?

  1. $10,000
  2. $20,000
  3. $30,000 Correct answer.
  4. $40,000

Explanation

Under a pro rata clause each policy pays the share of the loss that its limit bears to the total insurance in force. Policy A's share is ($300,000 ÷ $400,000) × $40,000 = $30,000.

Question 46Property Insurance Basics and Policy Provisions

The insurer and insured agree that a loss is covered but cannot agree on the amount of damage. Which policy provision addresses this dispute?

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

Explanation

The appraisal condition applies when coverage is not in dispute but the dollar amount of the loss is. Each side selects a competent appraiser, and the appraisers choose an umpire if they cannot agree.

Question 47Property Insurance Basics and Policy Provisions

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

  1. Repairing the damage before the insurer inspects it
  2. Increasing the policy limit to match the damage
  3. Protecting the property from further damage Correct answer.
  4. Paying the insurer's claim investigation expenses

Explanation

Duties after loss commonly require prompt notice, protection of the property from further damage, cooperation, and submission of a proof of loss. Temporary repairs to prevent additional damage are expected and are typically reimbursed.

Question 48Property Insurance Basics and Policy Provisions

The function of an exclusion in a property policy is to do which of the following?

  1. List the steps required to report a claim
  2. Set the amount the insured pays before coverage begins
  3. Identify perils or property that the policy does not cover Correct answer.
  4. Describe the insurer's promise to pay for loss

Explanation

Exclusions carve out perils, property, or situations for which coverage is not provided, shaping the scope of the insuring agreement. Coverage questions are resolved by reading the insuring agreement together with its exclusions.

Question 49Property Insurance Basics and Policy Provisions

An applicant for property insurance deliberately omits that the building has been the site of two prior arson fires, and the insurer would have declined the risk had it known. After a fire loss, standard policy conditions allow the insurer to do which of the following?

  1. Cancel the policy for future terms but pay this loss in full
  2. Pay the claim and then adjust the premium retroactively
  3. Avoid the policy and deny the claim because of the material misrepresentation Correct answer.
  4. Deny only the part of the claim traceable to the undisclosed fires

Explanation

A concealment or misrepresentation of a material fact in the application permits the insurer to void the contract, because the insurer was deprived of the chance to evaluate the true risk. The whole policy is affected, not merely a portion of the claim.

Question 50Property Insurance Basics and Policy Provisions

Under the abandonment provision, the insured may not do which of the following?

  1. Hire a public adjuster to assist with the claim
  2. Make temporary repairs before the claim is settled
  3. Turn the damaged property over to the insurer and demand full payment Correct answer.
  4. Accept a cash settlement instead of having repairs made

Explanation

The abandonment clause prevents the insured from walking away from damaged property and forcing the insurer to accept title to it. The insurer may take the salvage only by its own choice after paying the loss.