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MD Property & Casualty practice questions

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Question 1Insurance Principles and Concepts

Which type of risk is considered insurable by private insurers?

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

Explanation

Private insurance is designed to handle pure risk, where the only possible outcomes are loss or no loss. Speculative risk involves the chance of gain as well as loss, so it is not commercially insurable.

Question 2Insurance Principles and Concepts

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

  1. Paid more than the actual value of the damaged property
  2. Reimbursed for emotional distress caused by the loss
  3. Restored to roughly the same financial position as before the loss Correct answer.
  4. Allowed to collect the full limit from each of several policies

Explanation

Indemnity means the insured is made whole, no better and no worse off than before the loss. Payment therefore reflects the actual financial loss rather than the policy limit or an emotional injury.

Question 3Insurance Principles and Concepts

An insurance contract is described as aleatory because:

  1. The parties exchange promises that are always of exactly equal dollar value at inception
  2. Performance depends on chance, so the amounts exchanged may be unequal Correct answer.
  3. Only the insured makes an enforceable promise
  4. The insurer drafts the contract and the insured must accept it as written

Explanation

In an aleatory contract the dollar amounts exchanged by the parties may be very unequal because payment depends on the occurrence of a chance event. A small premium may fund a large claim, or the premium may buy no payment at all.

Question 4Insurance Principles and Concepts

The law of large numbers allows insurers to:

  1. Guarantee that no single insured will suffer a loss
  2. Eliminate the need for underwriting and reinsurance
  3. Predict losses more accurately as the number of similar exposure units grows Correct answer.
  4. Charge each policyholder exactly the amount of the expected loss

Explanation

The law of large numbers holds that actual results tend to approach expected results as the number of similar independent exposure units increases. This predictability is the foundation for ratemaking and reserving.

Question 5Insurance Principles and Concepts

A producer tells a client by telephone that coverage is bound effective today. What is the effect?

  1. Coverage begins only after the underwriter formally approves the risk
  2. Coverage begins only when the paper policy is delivered
  3. Coverage is in force now, subject to the policy terms and premium Correct answer.
  4. Coverage is void because an oral binder is not enforceable

Explanation

A binder is a temporary agreement that puts coverage in place immediately, pending issuance of the policy, as long as the risk is one the insurer would accept under its usual rules. Oral binders are generally enforceable.

Question 6Insurance Principles and Concepts

An insurance policy is a unilateral contract because:

  1. Both parties make legally enforceable promises
  2. Only the insurer makes a legally enforceable promise to pay Correct answer.
  3. The insured may cancel at any time without notice
  4. It becomes enforceable only after the premium is fully earned

Explanation

Only the insurer promises to perform; the insured's premium payment is a condition of coverage rather than a reciprocal promise to pay losses. The insured is free to cancel without breaching a promise.

Question 7Insurance Principles and Concepts

The primary function of a deductible is to:

  1. Eliminate small claims and reduce the premium Correct answer.
  2. Transfer the entire loss to the insurer
  3. Increase the policy limit available for large losses
  4. Satisfy the coinsurance requirement in a property policy

Explanation

A deductible leaves small losses with the insured, which reduces the insurer's handling costs and encourages loss prevention. Those savings are passed on in the form of a lower premium.

Question 8Insurance Principles and Concepts

Damages awarded to a liability claimant for pain and suffering are:

  1. General damages Correct answer.
  2. Special damages
  3. Liquidated damages
  4. Punitive damages

Explanation

General damages compensate intangible, non-economic harm such as pain, suffering, and loss of enjoyment of life. Economic items such as medical bills and lost wages are special damages.

Question 9Insurance Principles and Concepts

With respect to property insurance, insurable interest must exist:

  1. Whenever the insurer later asks for proof
  2. Only when the application is signed
  3. At both application and loss, with no exception
  4. At the time of the loss Correct answer.

Explanation

For property coverage the insured must have an economic interest in the property when the loss occurs, since indemnity requires actual financial harm. A person who sells property before the loss has no recoverable interest.

Question 10Insurance Principles and Concepts

After paying a covered loss caused by a negligent third party, the insurer may:

  1. Require the insured to abandon the claim against the third party
  2. Collect the full limit from the insured's other policies
  3. Pursue the third party for the amount it paid, in the insured's name Correct answer.
  4. Increase the insured's premium to recover the payment

Explanation

Subrogation lets the insurer step into the insured's legal shoes after payment and seek recovery from the responsible party. This keeps the cost with the party at fault and prevents the insured from recovering twice.

Question 11Insurance Principles and Concepts

Representations made by an applicant in a property-casualty application are:

  1. Irrelevant unless the applicant signs the application
  2. Binding only if repeated in the policy declarations
  3. Guaranteed literally true, exactly like warranties
  4. Statements believed true to the best of the applicant's knowledge Correct answer.

Explanation

Representations are the applicant's statements of fact, made in good faith and believed substantially true. They differ from warranties, which are promises or conditions that must be literally met.

Question 12Insurance Principles and Concepts

Because an insurance policy is a contract of adhesion, ambiguity in the wording is:

  1. Resolved in favor of the insurer
  2. Resolved by a court-appointed arbitrator in every case
  3. Construed against the party that drafted it Correct answer.
  4. Ignored, since the policy is a standardized form

Explanation

The insured has no bargaining power over the wording, so courts resolve genuinely ambiguous policy language against the insurer that wrote it. This rule of contra proferentem protects the reasonable expectations of the insured.

Question 13Insurance Principles and Concepts

An insurance policy is a conditional contract, which means:

  1. The policy takes effect only once a loss has occurred
  2. Coverage applies only when no other insurance exists
  3. The insurer's duty to pay depends on the insured meeting the policy conditions Correct answer.
  4. The insured must renew the policy each year to keep coverage

Explanation

Conditions such as notice, proof of loss, and cooperation must be satisfied before the insurer is obligated to pay. Failure to meet a material condition can allow the insurer to deny the claim.

Question 14Insurance Principles and Concepts

Adverse selection is best described as:

  1. The tendency of those most likely to suffer loss to seek or retain insurance Correct answer.
  2. The selection of policy forms by a state regulator
  3. The tendency of insurers to choose the least profitable applicants
  4. An error made while underwriting a single application

Explanation

Adverse selection occurs when applicants with higher-than-average loss potential are disproportionately drawn to coverage. Underwriting, exclusions, and rating classes are used to control it.

Question 15Insurance Principles and Concepts

A homeowner stops locking the doors after purchasing a homeowners policy. This behavior illustrates:

  1. A speculative risk
  2. A morale hazard Correct answer.
  3. A moral hazard
  4. A physical hazard

Explanation

A morale hazard is carelessness or indifference toward loss that arises because insurance is in place. A moral hazard, by contrast, involves a dishonest intent to create or exaggerate a loss.

Question 16Insurance Principles and Concepts

Two property policies with equal limits cover the same loss on the same basis. The insured may:

  1. Collect no more than the actual loss, with each insurer paying a share Correct answer.
  2. Assign the claim to whichever insurer pays faster
  3. Collect from only the policy purchased first
  4. Collect the full amount from each policy

Explanation

The contribution principle requires concurrent insurers to share a loss so the insured recovers no more than the actual amount of the loss. Each policy pays its proportionate share under its other-insurance clause.

Question 17Insurance Principles and Concepts

A properly executed endorsement attached to a policy:

  1. Changes the policy terms and prevails over the original wording Correct answer.
  2. Has no legal effect unless it is approved by the state insurance department
  3. Is a temporary agreement that expires when the policy is delivered to the insured
  4. Replaces the declarations page but leaves all other terms unchanged

Explanation

An endorsement is a written amendment that becomes part of the policy and controls over conflicting language in the original form. Insurers use endorsements to add or restrict coverage for a specific insured.

Question 18Insurance Principles and Concepts

To recover in negligence, a claimant must prove:

  1. A written contract, a breach, and actual damages
  2. Strict liability, causation, and punitive damages
  3. Intent to cause harm, causation, and damages
  4. A duty owed, a breach of that duty, proximate cause, and damages Correct answer.

Explanation

Negligence requires a legal duty of reasonable care, a failure to meet that standard, a causal link to the harm, and actual damages. Intent is not required, which distinguishes negligence from intentional torts.

Question 19Insurance Principles and Concepts

Vicarious liability means that:

  1. A party is liable only for its own negligent acts
  2. A party is liable for another's acts under their relationship Correct answer.
  3. Liability is imposed without fault for abnormally dangerous activities
  4. An employer is immune from suits by injured employees in all cases

Explanation

Vicarious liability holds one party responsible for the acts of another because of their relationship, most commonly an employer for an employee acting within the scope of employment. The employer's liability is derivative of the employee's negligence.

Question 20Insurance Principles and Concepts

Under pure comparative negligence, a claimant's damages are:

  1. Barred entirely if the claimant was negligent at all
  2. Paid in full regardless of the claimant's fault
  3. Doubled if the defendant's conduct was willful
  4. Reduced in proportion to the claimant's share of fault Correct answer.

Explanation

Pure comparative negligence reduces the award by the claimant's percentage of fault but never bars recovery, even when the claimant is mostly at fault. Contributory negligence, by contrast, can bar recovery entirely.

Question 21Insurance Principles and Concepts

An applicant intentionally omits a material fact from a property-casualty application. The insurer may:

  1. Cancel prospectively but must still pay the pending claim in full
  2. Rescind the policy if the fact was material and the insurer relied on the omission Correct answer.
  3. Take no action, because concealment breaches no duty owed by the applicant
  4. Void the policy only if the omission also appears in the declarations

Explanation

Concealment is the intentional withholding of a fact that would affect the insurer's decision to accept or rate the risk. Because insurance is a contract of utmost good faith, a material concealment relied upon by the insurer permits rescission.

Question 22Insurance Principles and Concepts

High winds tear off part of a roof, and rain entering through the opening destroys inventory inside. In property claims, the windstorm is:

  1. The proximate cause, since the damage flowed in an unbroken sequence from the wind Correct answer.
  2. A remote cause, so no coverage applies
  3. A concurrent cause that voids the claim
  4. An excluded cause because water produced the damage

Explanation

Proximate cause is the dominant, efficient cause that sets in motion an unbroken chain of events leading to the loss, even if another peril caused the final damage. Because the opening was created by wind and no new independent force intervened, the windstorm is the proximate cause.

Question 23Insurance Principles and Concepts

A building has a replacement value of $500,000. The policy carries an 80% coinsurance clause, a $300,000 limit, and no deductible. A covered loss of $100,000 occurs. What does the insurer pay?

  1. $75,000 Correct answer.
  2. $100,000
  3. $60,000
  4. $40,000

Explanation

The insured must carry at least 80% of $500,000, or $400,000. Because $300,000 was carried, the recovery is $300,000 divided by $400,000, or 75%, times the $100,000 loss, which equals $75,000; the limit is not exceeded.

Question 24Insurance Principles and Concepts

An insurer voluntarily gives up a known right to deny coverage. This is:

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

Explanation

Waiver is the intentional relinquishment of a known right, such as an insurer's decision not to enforce a policy condition. Estoppel is related but focuses on preventing a party from asserting a right after another has relied on its conduct to their detriment.

Question 25Insurance Principles and Concepts

Under a claims-made liability policy, coverage is triggered by:

  1. The date the claim is first made against the insured Correct answer.
  2. The date the injury or damage occurred
  3. The date the insurer actually pays the claim
  4. The date the policy was first issued

Explanation

A claims-made policy responds to claims first asserted during the policy period, regardless of when the injury happened, and is typically paired with a retroactive date. An occurrence policy instead responds to injury or damage that takes place during the policy period whenever the claim is later filed.

Question 26Insurance Principles and Concepts

Which type of risk involves the possibility of either loss or gain and is generally considered uninsurable?

  1. Particular risk
  2. Pure risk
  3. Static risk
  4. Speculative risk Correct answer.

Explanation

Speculative risk involves a chance of gain as well as a chance of loss, as when buying stock, so there is no accidental loss that can be pooled. Insurers generally write only pure risk, where the outcome is loss or no loss.

Question 27Insurance Principles and Concepts

A condition that increases the likelihood or severity of a loss, such as oily rags stored next to a furnace, is called a:

  1. Peril
  2. Hazard Correct answer.
  3. Exposure unit
  4. Loss reserve

Explanation

A hazard is a condition that raises the chance or size of a loss, while a peril is the actual cause of loss such as fire or wind. Oily rags near a furnace increase the likelihood of a fire but are not themselves the cause of loss.

Question 28Insurance Principles and Concepts

The principle of indemnity means that a property claim payment should:

  1. Reimburse the insured for emotional distress
  2. Restore the insured to the pre-loss position Correct answer.
  3. Allow the insured to profit from the loss
  4. Pay the full limit regardless of the size of loss

Explanation

Indemnity means the insured is restored to approximately the financial position held before the loss, no better and no worse. The principle prevents an insured from collecting more than the value of what was lost.

Question 29Insurance Principles and Concepts

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

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

Explanation

A binder is a temporary contract that puts coverage in force before the policy is issued, subject to the terms of the policy to follow. It is often given orally and must be confirmed in writing if the policy or law requires it.

Question 30Insurance Principles and Concepts

An insurer that is owned by its policyholders and may pay dividends to them is a:

  1. Stock insurer
  2. Reinsurer
  3. Surplus lines insurer
  4. Mutual insurer Correct answer.

Explanation

A mutual insurer is owned by its policyholders, who may receive dividends when results are favorable. A stock insurer is owned by shareholders instead.

Question 31Insurance Principles and Concepts

A retailer discontinues a product line to eliminate a liability exposure. This risk management technique is:

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

Explanation

Avoidance eliminates the exposure entirely by stopping the activity that produced it. Retention keeps the risk, transfer shifts it to an insurer, and reduction lowers but does not eliminate it.

Question 32Insurance Principles and Concepts

The declarations page of a property and casualty policy typically states the:

  1. Exclusions that limit coverage
  2. Named insured, policy period, and limits Correct answer.
  3. Insuring agreement and insurer promises
  4. Conditions required after a loss

Explanation

The declarations identify the insured, the policy period, the covered property or activities, the limits, and the premium. The insuring agreement, exclusions, and conditions appear elsewhere in the policy.

Question 33Insurance Principles and Concepts

After paying a total loss, an insurer sells the damaged property for its scrap value. The insurer's right to do this reflects the concept of:

  1. Salvage Correct answer.
  2. Subrogation
  3. Betterment
  4. Abandonment

Explanation

Salvage is the insurer's right to take title to damaged property after paying a loss and to recover whatever value remains. This reduces the net cost of the claim.

Question 34Insurance Principles and Concepts

Which of these is an example of a physical hazard?

  1. A homeowner who stops maintaining the roof
  2. An insured who deliberately starts a fire
  3. A building with worn electrical wiring Correct answer.
  4. An investor who buys stock hoping for a gain

Explanation

A physical hazard is a tangible condition of the property or its surroundings that increases the chance of loss. Worn wiring is a physical characteristic of the building.

Question 35Insurance Principles and Concepts

Which situation best illustrates moral hazard?

  1. A store keeps flammable liquids near a heater
  2. A driver becomes careless after buying auto insurance
  3. An applicant conceals a prior arson conviction Correct answer.
  4. A business installs a sprinkler system

Explanation

Moral hazard involves dishonesty or intentional conduct that increases the likelihood or size of a loss, such as concealing facts to obtain coverage. Morale hazard, by contrast, is mere carelessness or indifference created by having insurance.

Question 36Insurance Principles and Concepts

The law of large numbers helps an insurer because it:

  1. Allows the insurer to charge any premium it chooses
  2. Makes losses more predictable as exposure units grow Correct answer.
  3. Eliminates the need for reinsurance
  4. Guarantees that no single loss will exceed the premium

Explanation

As the number of similar, independent exposure units increases, actual loss results tend to approach the expected results. This predictability allows insurers to set rates and maintain adequate reserves.

Question 37Insurance Principles and Concepts

A roof has a replacement cost of $20,000 and a 25-year useful life. It is 10 years old. Using straight-line depreciation, what is its actual cash value?

  1. $20,000
  2. $12,000 Correct answer.
  3. $8,000
  4. $15,000

Explanation

Straight-line depreciation is 10 of 25 years, or 40 percent, of the $20,000 replacement cost, which equals $8,000. Subtracting that depreciation from replacement cost gives an actual cash value of $12,000.

Question 38Insurance Principles and Concepts

An insurance contract is aleatory because:

  1. The amounts exchanged may be unequal and depend on a loss Correct answer.
  2. The parties exchange promises of exactly equal value
  3. The insured must meet duties before coverage applies
  4. Any ambiguity is resolved against the insurer

Explanation

In an aleatory contract the dollar amounts exchanged are not equal and depend on chance, since a large claim may far exceed the premium paid. The other choices describe commutative, adhesion, and conditional features rather than the aleatory element.

Question 39Insurance Principles and Concepts

The principle of utmost good faith requires an insurance applicant to:

  1. Report all losses within 24 hours
  2. Pay the premium before coverage can begin
  3. Disclose material facts about the risk Correct answer.
  4. Read the entire policy before a loss occurs

Explanation

Utmost good faith obligates the applicant to disclose all facts a prudent underwriter would consider material to the risk. The insurer relies on that disclosure because it cannot inspect every fact itself.

Question 40Insurance Principles and Concepts

A policy condition requires the insured to maintain a sprinkler system, and the insured shuts it off for weeks. If a fire loss occurs during that period, the insurer may generally:

  1. Deny coverage while the warranty is not met Correct answer.
  2. Cancel the policy only at the next renewal
  3. Take no action, because warranties are mere representations
  4. Deny the claim only if the breach caused the loss

Explanation

A warranty is a policy condition that must be complied with, and breach generally suspends coverage while the breach continues. Unlike a representation, a warranty does not require the insurer to show that the breach caused the loss, unless a statute provides otherwise.

Question 41Insurance Principles and Concepts

An insurer gives a producer blank binders and company letterhead, and the producer binds coverage the agency agreement does not expressly authorize. The insurer is bound under the doctrine of:

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

Explanation

Apparent authority arises when the insurer's conduct leads a third party to reasonably believe the producer has authority, even if the written agreement does not grant it. The insurer is bound because it created the appearance of authority.

Question 42Insurance Principles and Concepts

Premiums a producer collects from insureds are held:

  1. In escrow for the insured's benefit
  2. As commission earned when collected
  3. In a fiduciary capacity for the insurer Correct answer.
  4. As the producer's own funds until remitted

Explanation

A producer acts in a fiduciary capacity when handling premiums and must account for and remit them as required by law and the agency agreement. Commingling premiums with personal or business funds is prohibited.

Question 43Insurance Principles and Concepts

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

  1. Retrocessionaire
  2. Fronting insurer
  3. Assuming insurer
  4. Ceding insurer Correct answer.

Explanation

The ceding insurer transfers, or cedes, part of its risk to a reinsurer, which is the assuming insurer. A retrocessionaire assumes risk from a reinsurer rather than from a primary insurer.

Question 44Insurance Principles and Concepts

A captive insurer is a company that:

  1. Is formed by a parent to insure the parent's own risks Correct answer.
  2. Reinsures only catastrophic losses
  3. Writes only surplus lines coverage
  4. Is organized by a state to write residual market risks

Explanation

A captive is an insurer owned by a parent organization and formed chiefly to insure the parent's own exposures. This lets the parent retain risk formally and gain tax and cash-flow advantages.

Question 45Insurance Principles and Concepts

State property and casualty guaranty associations exist to:

  1. Provide reinsurance to admitted insurers
  2. Regulate the rates charged by admitted insurers
  3. Guarantee that insurers will earn a profit
  4. Pay covered claims of insolvent admitted insurers Correct answer.

Explanation

Guaranty associations step in when an admitted insurer becomes insolvent, paying covered claims subject to statutory limits. They are funded by assessments on member insurers, not by guaranteeing profits.

Question 46Insurance Principles and Concepts

Which statement correctly distinguishes treaty reinsurance from facultative reinsurance?

  1. Treaty is bought by insureds; facultative is bought by insurers
  2. Treaty applies to a single policy; facultative applies to a whole book
  3. Treaty is automatic for a class; facultative is case by case Correct answer.
  4. Treaty is arranged after each loss; facultative is arranged in advance

Explanation

Under a treaty, the reinsurer automatically accepts a defined share or class of risks under a standing agreement. Facultative reinsurance is offered and accepted one risk at a time, giving both parties the chance to evaluate each submission.

Question 47Insurance Principles and Concepts

An insured cancels a one-year policy after six months. Under a short rate cancellation provision, the refund is:

  1. More than the pro rata unearned premium
  2. The entire annual premium
  3. Less than the pro rata unearned premium Correct answer.
  4. The full unearned premium calculated pro rata

Explanation

Short rate cancellation applies when the insured initiates cancellation and retains a penalty for the unexpired term, so the refund is less than the pro rata amount. Pro rata refunds are used when the insurer cancels without the insured's fault.

Question 48Insurance Principles and Concepts

An insurer has incurred losses of $600,000, loss adjustment expenses of $100,000, underwriting expenses of $250,000, and earned premiums of $1,000,000. What is the combined ratio?

  1. 95% Correct answer.
  2. 85%
  3. 70%
  4. 105%

Explanation

The combined ratio adds the loss ratio and the expense ratio: 60 percent for losses, 10 percent for loss adjustment expenses, and 25 percent for underwriting expenses, totaling 95 percent. A ratio below 100 percent indicates an underwriting profit before investment income.

Question 49Insurance Principles and Concepts

Under a valued policy, a total loss is settled by paying:

  1. The replacement cost of the damaged property
  2. The value stated in the policy Correct answer.
  3. The policy limit less depreciation
  4. The actual cash value determined after the loss

Explanation

A valued policy states an agreed value for the insured property in advance, and that amount is paid for a total loss without a post-loss valuation dispute. This differs from a policy that pays actual cash value or replacement cost as determined at the time of loss.

Question 50Insurance Principles and Concepts

Strict liability differs from negligence because the claimant must show only that:

  1. The defendant failed to act as a reasonable person
  2. The defendant intended to cause the harm
  3. The defendant's activity caused the harm Correct answer.
  4. The defendant breached a contractual promise

Explanation

Under strict liability, the defendant is liable for harm caused by an inherently dangerous activity or defective product regardless of fault. The claimant does not have to prove negligence or intent, only that the activity caused the harm.