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Florida Surplus Lines practice questions

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Question 1Insurance Terms and Related Concepts

Insurance is best described as which of the following?

  1. a loan from the insurer repaid after a loss
  2. a savings account the insurer holds for the insured
  3. a transfer of financial risk to an insurer for a premium Correct answer.
  4. a guarantee that a covered loss will never occur

Explanation

Insurance transfers the financial consequences of loss from the insured to the insurer in exchange for premium. It does not promise that losses will not happen, nor is it a savings account or a loan.

Question 2Insurance Terms and Related Concepts

For a property insurance policy to respond to a loss, the insured generally must have an insurable interest:

  1. only if the premium is financed
  2. only at the time the policy is delivered
  3. at the time of the loss Correct answer.
  4. only when a claim is denied

Explanation

Insurable interest must exist at the time of loss for property insurance, or the insured suffers no financial loss to indemnify. It is not limited to policy delivery, and premium payment alone does not create it.

Question 3Insurance Terms and Related Concepts

A cause of loss, such as fire, windstorm, or theft, is called a:

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

Explanation

A peril is the actual cause of a loss. Hazards are conditions that increase the chance of loss, while risk and exposure describe the possibility of loss.

Question 4Insurance Terms and Related Concepts

An insured who intentionally damages covered property in order to collect insurance presents a:

  1. legal hazard
  2. moral hazard Correct answer.
  3. morale hazard
  4. physical hazard

Explanation

Moral hazard exists when dishonesty or intentional conduct increases the likelihood or size of a loss. Morale hazard is carelessness, physical hazard is a condition of the property, and legal hazard arises from law or regulation.

Question 5Insurance Terms and Related Concepts

The principle of indemnity means that after a loss the insured is restored to:

  1. the policy limit regardless of the actual loss
  2. full replacement of all property regardless of value
  3. a better financial position than before the loss
  4. approximately the same financial position as before the loss Correct answer.

Explanation

Indemnity restores the insured to approximately the pre-loss financial position, no better and no worse. Paying more than the actual loss would violate the principle.

Question 6Insurance Terms and Related Concepts

After paying a covered loss, an insurer's right to recover from the party responsible for the loss is called:

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

Explanation

Subrogation allows the insurer to stand in the insured's shoes after paying a loss and pursue the responsible third party. Coinsurance, arbitration, and salvage are different concepts.

Question 7Insurance Terms and Related Concepts

A property policy with an 80% coinsurance clause requires the insured to:

  1. insure at least 80% of the property's value Correct answer.
  2. buy a policy limit equal to 80% of the premium
  3. pay 80% of every covered loss
  4. keep 80% of the premium in escrow

Explanation

A coinsurance clause requires the insured to carry insurance equal to a stated percentage of the property's value to avoid a penalty at claim time. It does not shift a percentage of each loss to the insured or require an escrow.

Question 8Insurance Terms and Related Concepts

A deductible in a property policy is best described as:

  1. a limit above which the insurer pays nothing
  2. the portion of a covered loss the insured bears first Correct answer.
  3. a coinsurance percentage
  4. a premium discount for safe behavior

Explanation

The deductible is the initial portion of a covered loss that the insured bears before the insurer pays. It is not a limit, discount, or coinsurance percentage.

Question 9Insurance Terms and Related Concepts

The insurer that transfers part of its risk to a reinsurer is called the:

  1. ceding company Correct answer.
  2. beneficiary
  3. retrocessionaire
  4. reinsurer

Explanation

The insurer that purchases reinsurance and transfers part of its risk is the ceding company, while the reinsurer assumes that risk. Retrocession is reinsurance of a reinsurer.

Question 10Insurance Terms and Related Concepts

A binder provides:

  1. a refund of unearned premium
  2. a guarantee that the insurer will never cancel
  3. a permanent policy with all terms finalized
  4. temporary proof of coverage until the policy is issued Correct answer.

Explanation

A binder is temporary evidence of coverage that bridges the gap until the policy is issued. It is not a permanent policy or a premium refund.

Question 11Insurance Terms and Related Concepts

A document that changes the terms of an existing policy is a(n):

  1. certificate
  2. binder
  3. endorsement Correct answer.
  4. declaration

Explanation

An endorsement is a written amendment that changes or adds to policy terms. Declarations describe the risk, and a binder is temporary proof of coverage.

Question 12Insurance Terms and Related Concepts

In insurance, a representation is:

  1. a promise that a condition will continue
  2. a statement believed true made by the applicant Correct answer.
  3. a guarantee of future performance
  4. a written waiver of policy terms

Explanation

A representation is a statement of fact the applicant believes to be true; it is not a guarantee. A warranty is a promise that a condition exists or will be maintained.

Question 13Insurance Terms and Related Concepts

A warranty in an insurance policy is best described as:

  1. an oral estimate of the loss amount
  2. a promise that a stated condition is true Correct answer.
  3. a promise by the insurer to renew
  4. a type of premium payment plan

Explanation

A warranty is a statement or condition that the insured promises is true and will be maintained. Breach of a warranty may affect coverage, unlike an ordinary representation.

Question 14Insurance Terms and Related Concepts

Intentional failure by an applicant to disclose a material fact asked about on an application is:

  1. subrogation
  2. waiver
  3. concealment Correct answer.
  4. representation

Explanation

Concealment is the intentional withholding of a material fact from the insurer. A representation is a statement made, and waiver is giving up a known right.

Question 15Insurance Terms and Related Concepts

The voluntary relinquishment of a known right under an insurance policy is:

  1. waiver Correct answer.
  2. warranty
  3. estoppel
  4. subrogation

Explanation

Waiver is the voluntary surrender of a known right under the policy. Estoppel, by contrast, prevents a party from asserting a right after conduct that misled another.

Question 16Insurance Terms and Related Concepts

An insurer that led an insured to believe late notice was acceptable may be barred from denying the claim later. This is:

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

Explanation

Estoppel bars an insurer from taking a position inconsistent with earlier conduct on which the insured reasonably relied. Waiver is the voluntary giving up of a right, while estoppel is a legal bar.

Question 17Insurance Terms and Related Concepts

Liability insurance primarily covers:

  1. legal liability to a third party for damages Correct answer.
  2. damage to the insured's own property
  3. business income lost after a fire
  4. employee injuries under workers compensation only

Explanation

Liability insurance covers the insured's legal obligation to pay damages to a third party for bodily injury or property damage. Property insurance covers the insured's own property.

Question 18Insurance Terms and Related Concepts

A first-party claim is one made by:

  1. the insured against his or her own insurer Correct answer.
  2. a claimant against another person
  3. a third party against the insured
  4. a reinsurer against a ceding company

Explanation

A first-party claim is brought by the insured against its own insurer, such as a property damage claim. Third-party claims are brought by others against the insured.

Question 19Insurance Terms and Related Concepts

In property insurance, the efficient and dominant cause of a loss, without which the loss would not have occurred, is:

  1. remote cause
  2. proximate cause Correct answer.
  3. intervening cause
  4. concurrent cause

Explanation

Proximate cause is the efficient and dominant cause of a loss without which the loss would not have occurred. A remote or intervening cause may break the chain of causation.

Question 20Insurance Terms and Related Concepts

A claims-made liability policy provides coverage for claims:

  1. that occur during the policy period regardless of when reported
  2. first made during the policy period Correct answer.
  3. only after the policy expires
  4. reported before the policy inception

Explanation

A claims-made policy responds to claims first made during the policy period, subject to any retroactive date. An occurrence policy responds to injury or damage occurring during the policy period.

Question 21Insurance Terms and Related Concepts

An aggregate limit is the:

  1. most payable for any one occurrence
  2. limit that applies only to defense costs
  3. most payable for all covered losses in the policy period Correct answer.
  4. amount the insured pays before coverage begins

Explanation

The aggregate limit caps total payments for all covered losses during the policy period. A per-occurrence limit caps a single loss.

Question 22Insurance Terms and Related Concepts

An additional insured is:

  1. a party added to the policy and protected under it Correct answer.
  2. an insurer that reinsures the policy
  3. a beneficiary of a life policy
  4. the first named insured on the declarations

Explanation

An additional insured is a party added by endorsement who receives protection under the policy. The first named insured is the primary insured shown on the declarations.

Question 23Insurance Terms and Related Concepts

Surplus lines insurance is insurance placed with:

  1. an eligible unauthorized insurer after authorized insurers decline Correct answer.
  2. an insurer authorized in Florida
  3. a reinsurer only
  4. a government risk pool

Explanation

Surplus lines insurance is placed with an eligible unauthorized insurer when authorized insurers decline the risk after a diligent effort. It is not placed with authorized insurers or government pools.

Question 24Insurance Terms and Related Concepts

Before placing a risk with a surplus lines insurer, a Florida surplus lines agent generally must:

  1. obtain written approval from the insured's mortgagee
  2. request a reinsurance quote
  3. file the policy with the state treasurer
  4. document efforts to obtain coverage from authorized insurers Correct answer.

Explanation

Florida requires a surplus lines agent to show a diligent effort to place the risk with authorized insurers before using a surplus lines insurer. This is usually documented by declinations.

Question 25Insurance Terms and Related Concepts

The Florida Surplus Lines Service Office (FSLSO) primarily:

  1. issues certificates of authority to surplus lines insurers
  2. sets rates for authorized insurers
  3. decides coverage disputes between insureds and insurers
  4. collects surplus lines premium taxes and reports data Correct answer.

Explanation

The FSLSO is a nonprofit entity created by Florida law to collect and remit surplus lines premium taxes and maintain policy data. It does not issue insurer certificates of authority or adjudicate coverage disputes.

Question 26Insurance Terms and Related Concepts

In property insurance, the insured must have an insurable interest in the covered property at which point in time?

  1. Continuously from application through expiration
  2. At the time a covered loss occurs Correct answer.
  3. Only on the date the application is signed
  4. Only on the policy's effective date

Explanation

Property insurance is a contract of indemnity, so the insured must suffer a financial loss when a covered event occurs. Insurable interest therefore must exist at the time of loss, not necessarily when the policy is purchased.

Question 27Insurance Terms and Related Concepts

The principle of indemnity means that a property insurer generally:

  1. Pays only after other insurance is exhausted
  2. Restores the insured to approximately the pre-loss financial position Correct answer.
  3. Pays a fixed amount regardless of the loss amount
  4. Allows the insured to profit when property values rise

Explanation

Indemnity seeks to make the insured whole after a loss, no more and no less. The payment is measured by the actual financial loss, subject to policy limits and provisions.

Question 28Insurance Terms and Related Concepts

When the wording of an insurance policy is ambiguous, a court generally interprets the ambiguity:

  1. In favor of the insurer that drafted the policy
  2. Against the insurer that drafted the policy Correct answer.
  3. According to the agent's personal understanding
  4. By voiding the entire policy

Explanation

Insurance is a contract of adhesion because the insurer drafts the policy and the insured generally has little bargaining power over its terms. Ambiguities are therefore construed against the drafter, the insurer.

Question 29Insurance Terms and Related Concepts

An insurance contract is described as aleatory because:

  1. The parties exchange promises of equal value
  2. The insurer must renew the policy each year
  3. The insured may cancel without any penalty
  4. Performance depends on an uncertain future event Correct answer.

Explanation

In an aleatory contract, the dollar values exchanged are not necessarily equal and performance depends on chance. The insured pays a premium, but the insurer may pay far more or nothing depending on whether a covered event occurs.

Question 30Insurance Terms and Related Concepts

In an insurance contract, the insured's consideration is best described as:

  1. The insured's right to receive a copy of the policy
  2. The insurer's promise to investigate claims
  3. Payment of premium and compliance with policy conditions Correct answer.
  4. The agent's commission on the sale

Explanation

Consideration is what each party gives up to make the contract binding. The insured gives the premium and agrees to comply with policy conditions, while the insurer gives its promise to pay covered claims.

Question 31Insurance Terms and Related Concepts

Property insurance is considered a personal contract because it:

  1. Must be purchased by an individual rather than a business
  2. Automatically transfers with the property when sold
  3. Covers the property regardless of who owns it
  4. Insures the named insured's financial interest in the property Correct answer.

Explanation

A property policy insures the person's interest in the property, not the property itself. Because the contract is personal, assignment to a new owner generally requires the insurer's consent.

Question 32Insurance Terms and Related Concepts

A loss payee in a property insurance policy is:

  1. A party with a financial interest entitled to share in loss proceeds Correct answer.
  2. The insurer's agent who settles the claim
  3. The public adjuster hired by the insured
  4. The tenant who occupies the insured building

Explanation

A loss payee is typically a lender with a secured interest in the insured property. The policy directs that loss payments be shared with that party to the extent of its financial interest.

Question 33Insurance Terms and Related Concepts

A standard mortgagee clause in a property policy generally:

  1. Allows the mortgagee to cancel the policy for any reason
  2. Makes the mortgagee the only party entitled to claim proceeds
  3. Protects the mortgagee's interest even if the insured's acts impair coverage Correct answer.
  4. Eliminates the insured's obligation to pay premiums

Explanation

A mortgagee clause protects the lender's separate interest in the property. It typically provides notice of cancellation and allows the mortgagee to pay premium or submit proof of loss without being bound by the insured's acts.

Question 34Insurance Terms and Related Concepts

A proof of loss is:

  1. A sworn statement from the insured detailing the claimed loss Correct answer.
  2. A receipt showing the premium has been paid
  3. A court order requiring the insurer to pay
  4. A notice from the insurer that coverage is denied

Explanation

A proof of loss is a formal, often sworn statement submitted by the insured that describes the loss, its cause, and the amount claimed. Policies usually require it within a specified time after the loss.

Question 35Insurance Terms and Related Concepts

The appraisal provision in a property policy is used to:

  1. Cancel the policy before its expiration date
  2. Resolve a disagreement about the amount of a loss Correct answer.
  3. Transfer the policy to a new owner
  4. Determine whether the insurer acted in bad faith

Explanation

Appraisal is a dispute-resolution process for the amount of loss, not for coverage questions. Each side selects an appraiser, and an umpire resolves any difference if the appraisers cannot agree.

Question 36Insurance Terms and Related Concepts

The insurer's right to take possession of damaged property after paying a loss is known as:

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

Explanation

Salvage refers to the insurer's right to take or dispose of damaged property after paying a loss. This can reduce the insurer's net cost because the property may have residual value.

Question 37Insurance Terms and Related Concepts

An abandonment clause in a property policy prevents the insured from:

  1. Buying additional coverage after the loss has occurred
  2. Abandoning damaged property and demanding full payment Correct answer.
  3. Hiring a public adjuster to help document the claim
  4. Repairing the property before the insurer inspects the damage

Explanation

An abandonment clause states that the insured cannot simply give damaged property to the insurer and claim the full policy amount. The insurer decides whether to take salvage after paying the loss.

Question 38Insurance Terms and Related Concepts

When two property policies cover the same loss on the same basis, the other insurance provision typically requires each insurer to pay:

  1. The full amount of the loss independently
  2. Nothing until the other insurer becomes insolvent
  3. Only the policy limit stated on its declarations
  4. A proportionate share of the loss Correct answer.

Explanation

Other-insurance provisions prevent overpayment when more than one policy covers the same loss. Under pro rata liability, each insurer pays its proportionate share based on the applicable limits.

Question 39Insurance Terms and Related Concepts

The right of an insurer that has paid more than its share of a loss to recover the excess from other insurers is called:

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

Explanation

Contribution allows an insurer that paid more than its proper share to seek reimbursement from other insurers covering the same loss. It supports the principle that each insurer should bear only its proportionate part.

Question 40Insurance Terms and Related Concepts

An occurrence-based liability policy covers bodily injury or property damage that:

  1. Is threatened during the policy period
  2. Is first reported during the policy period
  3. Occurs during the policy period Correct answer.
  4. Is discovered during the policy period

Explanation

Occurrence policies are triggered by when the injury or damage happens, even if the claim is reported later. This differs from claims-made policies, which focus on when the claim is first made.

Question 41Insurance Terms and Related Concepts

Split liability limits are expressed as three numbers, such as 25/50/25. These represent:

  1. Deductibles for bodily injury, property damage, and medical payments
  2. Coinsurance percentages for each category of loss
  3. Premiums charged for each vehicle, driver, and coverage
  4. Bodily injury per person, per accident, and property damage Correct answer.

Explanation

Split limits state separate maximums for bodily injury per person, bodily injury per accident, and property damage per accident. The insured must satisfy each applicable limit.

Question 42Insurance Terms and Related Concepts

A combined single limit liability policy provides:

  1. One total limit for all injury and damage from an occurrence Correct answer.
  2. A limit that applies only to property damage
  3. No limit until a court enters a judgment
  4. Separate limits for each injured person and each claim

Explanation

A combined single limit uses one total dollar amount for all bodily injury and property damage arising from one occurrence. It does not separately allocate limits among injured persons or damage types.

Question 43Insurance Terms and Related Concepts

Medical payments coverage under a personal auto policy pays:

  1. Lost wages resulting from an accident
  2. Repair costs for the insured vehicle
  3. Only expenses caused by an uninsured driver
  4. Reasonable medical expenses regardless of fault, up to the limit Correct answer.

Explanation

Medical payments coverage is a first-party coverage that pays reasonable and necessary medical expenses for covered persons after an accident. It applies without regard to fault, subject to the stated limit.

Question 44Insurance Terms and Related Concepts

Actual cash value in property insurance is generally calculated as:

  1. Replacement cost plus depreciation
  2. Replacement cost minus depreciation Correct answer.
  3. The original purchase price of the property
  4. The policy limit divided by the number of items

Explanation

Actual cash value reflects the property's value at the time of loss, typically replacement cost less depreciation. It is intended to approximate the property's pre-loss market value.

Question 45Insurance Terms and Related Concepts

Replacement cost coverage pays to:

  1. Repair the property only to its pre-loss market value
  2. Repair or replace damaged property without deducting depreciation Correct answer.
  3. Replace the property with used property of lesser quality
  4. Pay the insured the policy limit without regard to loss

Explanation

Replacement cost coverage pays the cost to repair or replace damaged property with new property of like kind and quality, without a depreciation deduction. Payment is still subject to the policy limit and conditions.

Question 46Insurance Terms and Related Concepts

Business income coverage is designed to replace:

  1. Employee medical expenses after a workplace injury
  2. The cost of permanent improvements to the property
  3. The market value of the insured building
  4. Lost net income and continuing expenses during restoration Correct answer.

Explanation

Business income coverage responds to the income a business loses while its operations are interrupted by a covered loss. It also typically covers continuing normal operating expenses during the restoration period.

Question 47Insurance Terms and Related Concepts

Ordinance or law coverage pays for:

  1. Permits that were required before the loss occurred
  2. Legal fees for defending a liability lawsuit
  3. Extra costs to rebuild to current building code requirements Correct answer.
  4. Fines imposed on the insured for violating building codes

Explanation

Ordinance or law coverage addresses the increased cost of repairing or rebuilding damaged property so it complies with current building codes. It may also cover demolition costs required by code.

Question 48Insurance Terms and Related Concepts

An umbrella liability policy primarily:

  1. Pays first-dollar medical expenses for the insured
  2. Provides excess limits and may fill gaps in underlying coverage Correct answer.
  3. Replaces all underlying liability policies
  4. Covers only automobile liability claims

Explanation

An umbrella policy sits above underlying liability policies and provides additional limits after those policies are exhausted. It may also cover some claims not covered by the underlying policies, subject to a self-insured retention.

Question 49Insurance Terms and Related Concepts

A self-insured retention in an excess or umbrella policy is:

  1. A penalty charged when a claim is reported late
  2. The amount the insured pays before the excess policy responds Correct answer.
  3. A percentage of premium returned at policy expiration
  4. A limit that applies only after the insurer becomes insolvent

Explanation

A self-insured retention is the amount the insured must pay out of pocket before excess or umbrella coverage responds to a claim. It functions similarly to a deductible for certain coverage layers.

Question 50Insurance Terms and Related Concepts

An insurer's duty to defend is generally:

  1. Limited to claims the insurer has already paid
  2. The same as the duty to indemnify in every respect
  3. Broader than its duty to indemnify and applies when claims potentially fall within coverage Correct answer.
  4. Triggered only after a judgment is entered against the insured

Explanation

The duty to defend is broader than the duty to indemnify because it can arise when a claim is potentially covered, even before liability is established. The insurer may defend under a reservation of rights while coverage is investigated.