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MD Public Adjuster practice questions

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Question 1Insurance Principles and Concepts

A homeowner's covered fire loss is settled for an amount that returns the property to its pre-loss financial position, with no profit to the insured. Which insurance principle does this settlement reflect?

  1. Principle of indemnity Correct answer.
  2. Principle of subrogation
  3. Principle of insurable interest
  4. Principle of utmost good faith

Explanation

The principle of indemnity limits recovery to the actual financial loss so the insured is restored, not enriched. Subrogation, good faith, and insurable interest are related doctrines but do not themselves set the settlement amount.

Question 2Insurance Principles and Concepts

Which party holds an insurable interest in a commercial building that is the subject of a property policy?

  1. A prospective buyer who has only toured the property
  2. A trade association that publishes local real estate statistics
  3. A bank that holds a mortgage secured by the building Correct answer.
  4. A neighboring business that would prefer less competition

Explanation

Insurable interest requires a financial relationship in which the insured would suffer a measurable loss from damage to the property. A mortgagee bank has a direct financial stake because its collateral is impaired by a covered loss.

Question 3Insurance Principles and Concepts

A warehouse owner faces several loss exposures. Which one is classified as a pure risk?

  1. A loss from introducing an untested product line
  2. Fire damaging the warehouse and its stored goods Correct answer.
  3. A wager on the outcome of a sporting event
  4. A decline in the market value of the owner's stock portfolio

Explanation

Pure risk involves only the chance of loss or no loss, with no possibility of gain. Fire can damage or destroy property or not occur, so it fits that definition, while the other choices involve speculative gain potential.

Question 4Insurance Principles and Concepts

A covered loss destroys a five-year-old commercial machine. The replacement cost is $20,000, accumulated depreciation is $8,000, and the policy settles on an actual cash value basis. Ignoring any deductible, what is the ACV payment?

  1. $12,000 Correct answer.
  2. $8,000
  3. $28,000
  4. $20,000

Explanation

Actual cash value is typically replacement cost minus accumulated depreciation, so $20,000 minus $8,000 equals $12,000. The deductible is expressly ignored in the question.

Question 5Insurance Principles and Concepts

A commercial building has a replacement cost of $500,000. The policy carries an 80% coinsurance clause and a $300,000 limit. A covered fire causes $100,000 in damage. Ignoring any deductible, what amount is payable under the coinsurance formula?

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

Explanation

The coinsurance requirement is 80% of $500,000, or $400,000. Because the insured carries only $300,000, the insurer pays the loss multiplied by $300,000/$400,000, which is 75% of $100,000, or $75,000.

Question 6Insurance Principles and Concepts

An insurer pays its insured for a covered collision loss caused by another driver's negligence. What does the insurer's subrogation right allow it to do?

  1. Seek recovery from the negligent driver to the extent of the payment Correct answer.
  2. Collect an additional premium from the insured for the same loss under the policy
  3. Deny the claim after it has already been paid to the insured
  4. Cancel the policy back to its inception date

Explanation

Subrogation transfers to the insurer, to the extent of its payment, the insured's right to recover from the party legally responsible for the loss. It prevents double recovery by the insured and lets the insurer pursue the at-fault party.

Question 7Insurance Principles and Concepts

Which statement best distinguishes a representation from a warranty in insurance underwriting?

  1. A representation must be literally true, while a warranty is only a statement of belief held by the applicant.
  2. A representation is believed true to the best of the applicant's knowledge; a warranty is a promise that must be met. Correct answer.
  3. A representation applies only to life insurance, while a warranty applies only to property insurance policies.
  4. A representation and a warranty are identical in effect and are judged by the same legal standard in all cases.

Explanation

A representation is the applicant's factual statement, generally judged by whether it is substantially true and made in good faith. A warranty is a policy condition or promise that must be fulfilled, and breach can affect coverage more strictly.

Question 8Insurance Principles and Concepts

A covered windstorm blows down a wall, and the falling wall crushes inventory inside. The policy covers windstorm and contains no exclusion that applies to the collapse. How does proximate cause analysis treat the inventory damage?

  1. The inventory damage is uncovered because the windstorm did not touch the inventory directly or cause direct physical contact.
  2. The inventory damage is covered because the windstorm is the proximate cause of the loss. Correct answer.
  3. The claim must be denied because two separate perils contributed to the same inventory loss event.
  4. The inventory damage is covered only if the insured purchased separate falling-object coverage for such losses.

Explanation

Proximate cause is the efficient cause that sets the loss in motion without a new, independent cause breaking the chain. The covered windstorm caused the wall to fall and crush the inventory, so the loss is covered when no exclusion applies, even without direct contact.

Question 9Insurance Principles and Concepts

An insurer's authorized representative tells an insured in writing that a late proof of loss will be accepted. The insurer later denies the claim solely because the proof was late. Which doctrine most likely bars the insurer from enforcing the deadline?

  1. Estoppel Correct answer.
  2. Coinsurance
  3. Subrogation
  4. Abandonment

Explanation

Estoppel can prevent a party from asserting a right after its own conduct led the other party to rely to their detriment. Waiver is the voluntary relinquishment of a known right, and estoppel reinforces that result when reliance occurs.

Question 10Insurance Principles and Concepts

A liability policy is written on an occurrence basis for the period January 1, 2020, through January 1, 2021. An injury occurs in June 2020, but the claim is first reported in 2023, after the policy has expired. Which statement is correct, assuming no other coverage issue exists?

  1. The claim is generally covered because the occurrence policy is triggered by the injury date, not the report date. Correct answer.
  2. The claim is automatically barred because it was reported after the policy expired, regardless of the injury date.
  3. The claim is covered only if the insured renews the same liability policy in 2023 and reports the claim then.
  4. The claim is covered only if the occurrence policy includes a claims-made extension that applies after the policy expires.

Explanation

An occurrence policy is triggered by the date of the injury or occurrence, not the date the claim is reported. A claims-made policy, by contrast, generally responds based on when the claim is made, subject to any retroactive date.

Question 11Insurance Principles and Concepts

An insurer collects premiums from thousands of homeowners and uses those funds to pay the fire losses suffered by a few of them. Which insurance principle does this arrangement best illustrate?

  1. Indemnity limitation by subrogation
  2. Warranty enforcement
  3. Speculative risk financing
  4. Risk pooling and transfer Correct answer.

Explanation

Insurance pools many similar exposures so that premiums from the group fund the losses of the few. The insured also transfers the financial consequence of a covered loss to the insurer in exchange for premium.

Question 12Insurance Principles and Concepts

A restaurant stores oily rags in a closed bin beside a gas water heater. If a fire starts at the heater, the oily rags are best described as:

  1. A hazard Correct answer.
  2. A peril
  3. A proximate cause
  4. A loss exposure

Explanation

A peril is the cause of loss, such as fire, while a hazard is a condition that increases the chance or severity of that loss. The oily rags increase the likelihood of fire, so they are a physical hazard.

Question 13Insurance Principles and Concepts

A property policy has a $1,000 deductible and a covered loss of $6,500. With no other limits or endorsements, the insurer pays:

  1. $1,000
  2. $7,500
  3. $6,500
  4. $5,500 Correct answer.

Explanation

The deductible is subtracted from the covered loss before the insurer pays. Here, $6,500 minus the $1,000 deductible leaves an insurer payment of $5,500.

Question 14Insurance Principles and Concepts

After increasing his policy's theft limit, an insured stops locking his store's rear door because he expects the insurer to cover any loss. This behavior best illustrates:

  1. Moral hazard
  2. Morale hazard Correct answer.
  3. Physical hazard
  4. Speculative risk

Explanation

Morale hazard is carelessness or indifference toward loss because insurance exists. Moral hazard involves dishonest or intentional conduct, such as filing a false claim, which is not described here.

Question 15Insurance Principles and Concepts

An applicant for a property policy knows the building has active termite damage but does not disclose it, and the insurer issues the policy without asking. The duty of utmost good faith primarily requires the applicant to:

  1. Wait for the insurer to inspect the property before answering
  2. Report only facts the insurer specifically asks about
  3. Warrant that every statement in the application is literally true
  4. Disclose material facts the insurer would use in underwriting Correct answer.

Explanation

Utmost good faith requires each party to disclose material facts that affect the underwriting decision, even if no question asks for them. Concealment of known termite damage can make the policy voidable if the fact is material.

Question 16Insurance Principles and Concepts

Which feature of an insurance contract is illustrated when a $1,200 premium results in a $100,000 covered property payment?

  1. It is a contract of adhesion.
  2. It is a conditional contract.
  3. It is a unilateral contract.
  4. It is an aleatory contract. Correct answer.

Explanation

An aleatory contract exchanges unequal monetary values that depend on an uncertain event. The insured may pay modest premiums and receive a large payment, or receive nothing, depending on whether a covered loss occurs.

Question 17Insurance Principles and Concepts

A policy exclusion is drafted by the insurer and is genuinely ambiguous about whether water backup is covered. A court is most likely to:

  1. Enforce the exclusion in the insurer's favor because the insurer drafted it
  2. Declare the policy void for lack of mutual assent
  3. Rewrite the entire policy to provide the broadest possible coverage
  4. Resolve the ambiguity in favor of coverage Correct answer.

Explanation

An insurance policy is a contract of adhesion because the insurer drafts it and the insured has little bargaining power over its terms. Genuine ambiguity is therefore construed against the drafter and in favor of the insured's reasonable expectation of coverage.

Question 18Insurance Principles and Concepts

A property policy requires a signed proof of loss within 60 days after the insurer's request, and the insured misses the deadline without good cause. The insurer may:

  1. Enforce the proof-of-loss condition and deny the claim Correct answer.
  2. Deny the claim only if the insured intended to defraud
  3. Cancel the policy and refund all premiums paid
  4. Automatically pay the claim because the loss itself was covered

Explanation

A proof-of-loss requirement is a policy condition precedent to payment. Missing the deadline without a valid excuse can bar recovery because the insured failed to satisfy a condition the insurer relied on to investigate and evaluate the claim.

Question 19Insurance Principles and Concepts

An insurer's underwriter never expressly authorized a producer to bind a commercial property risk, but the producer had bound similar risks for months and the insurer accepted the premiums. A court is most likely to hold the insurer:

  1. Not bound because the producer's act was a warranty
  2. Bound only if the insured read the producer's agency agreement
  3. Not bound because express authority was absent
  4. Bound because the producer had apparent authority Correct answer.

Explanation

Apparent authority arises when the insurer's words or conduct lead a reasonable third party to believe the producer may act for the insurer. Accepting premiums on similar binders can create that appearance, even without express authority.

Question 20Insurance Principles and Concepts

Two property policies cover the same building on the same basis: Policy A has a $200,000 limit and Policy B has a $300,000 limit. Neither has an other-insurance clause specifying a different method, and a covered $50,000 loss occurs. Under pro rata contribution by limits, Policy A pays:

  1. $50,000
  2. $20,000 Correct answer.
  3. $25,000
  4. $30,000

Explanation

Under pro rata contribution by limits, each policy pays its limit divided by the total limits of all applicable policies, multiplied by the loss. Policy A's share is $200,000 divided by $500,000, or 40 percent, and 40 percent of $50,000 is $20,000.

Question 21Insurance Principles and Concepts

An insured pays the first premium and receives a bound policy. Which contract characteristic applies because only the insurer makes an enforceable promise to pay covered claims, while the insured may choose to stop paying premiums?

  1. Conditional contract
  2. Aleatory contract
  3. Unilateral contract Correct answer.
  4. Contract of adhesion

Explanation

Insurance is unilateral because only the insurer gives a legally enforceable promise to pay covered claims; the insured's premium payments are conditions to coverage rather than a reciprocal promise to pay. Aleatory refers to an unequal exchange of value, conditional refers to duties that must be met, and adhesion refers to the insurer drafting the form.

Question 22Insurance Principles and Concepts

A restaurant installs a grease-trap interlock and a fire-suppression hood to lessen the severity of a possible kitchen fire. Which risk management technique does this illustrate?

  1. Risk avoidance
  2. Risk reduction Correct answer.
  3. Risk retention
  4. Risk transfer

Explanation

Risk reduction, also called loss control, lowers the frequency or severity of a loss while the exposure continues. Avoidance would eliminate the cooking operation, retention would keep the financial consequences, and transfer would shift them to an insurer.

Question 23Insurance Principles and Concepts

Which policy section states the named insured, the covered premises, the policy period, and the dollar limits that apply?

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

Explanation

The declarations page identifies the insured, locations, policy term, limits, and deductible. The insuring agreement states the broad promise to cover, conditions set duties of the parties, and exclusions remove specified exposures.

Question 24Insurance Principles and Concepts

An insurer notices that applicants with unrepaired roofs are buying its new homeowners policy at a much higher rate than other applicants. Which concept is the insurer addressing by tightening underwriting?

  1. Subrogation
  2. Coinsurance
  3. Indemnity
  4. Adverse selection Correct answer.

Explanation

Adverse selection is the tendency of poorer-than-average risks to seek or keep insurance more readily than better risks. Underwriting seeks to identify and price or decline those risks so that the pooled premium remains adequate.

Question 25Insurance Principles and Concepts

A building is insured under a valued policy with an agreed value of $800,000. A total loss occurs, and the actual cash value at the time of loss is $650,000. Ignoring any deductible, what does the insurer pay?

  1. $0, because the loss exceeds actual cash value
  2. $650,000, the actual cash value
  3. $800,000, the agreed value Correct answer.
  4. $150,000, the difference between the values

Explanation

A valued policy states an agreed amount that the insurer pays for a total loss, regardless of the property's actual cash value at the time of loss. The indemnity principle is modified by the parties' agreement on value.

Question 26Insurance Principles and Concepts

After paying a covered total loss on a commercial printing press, the insurer takes title to the damaged machine and sells it for scrap. Which policy right supports that action?

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

Explanation

Salvage is the insurer's right to take possession of damaged property after paying a total loss and to recover some of its value. The insured generally cannot abandon property to the insurer and demand full payment without that right.

Question 27Insurance Principles and Concepts

A commercial property policy covers three warehouses under one $1,500,000 limit that applies to all three locations collectively. What is this coverage called?

  1. Valued coverage
  2. Scheduled coverage
  3. Blanket coverage Correct answer.
  4. Specific coverage

Explanation

Blanket coverage applies a single limit to two or more locations or items collectively. Specific coverage applies a separate limit to each described item, while scheduled coverage lists items with individual limits.

Question 28Insurance Principles and Concepts

A covered fire shuts a bakery for three weeks, and the owner loses sales that would have been made during the repairs. What type of loss is the lost income?

  1. Salvage loss
  2. Direct property loss
  3. Physical hazard
  4. Consequential loss Correct answer.

Explanation

Consequential loss, also called indirect loss, results from a covered direct loss but is separate from the physical damage itself, such as lost business income. Property policies commonly require business income coverage to pay it.

Question 29Insurance Principles and Concepts

An insured paid $30,000 in premiums over 20 years on a $500,000 life insurance policy, and the insurer pays the full death benefit. Which principle explains why the payment is not limited to the premiums paid?

  1. Life insurance is a contract of adhesion; ambiguities favor the insured.
  2. Life insurance is a unilateral contract; only the insurer makes a promise.
  3. Life insurance is a conditional contract; payment depends on proof of death.
  4. Life insurance is not a contract of indemnity; it pays a stated sum. Correct answer.

Explanation

Life insurance is generally a valued contract rather than a contract of indemnity, so the insurer pays the face amount instead of measuring the insured's economic loss. Property insurance, by contrast, is built on indemnity and cannot enrich the insured.

Question 30Insurance Principles and Concepts

A policy is issued with a $100,000 limit, but both parties intended $1,000,000 and a clerical error caused the lower figure. Which remedy allows a court to correct the written policy to match the true agreement?

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

Explanation

Reformation corrects a written contract that fails to express the parties' actual agreement because of mutual mistake or clerical error. Rescission cancels the contract, subrogation transfers recovery rights, and estoppel prevents a party from asserting a right after inducing reliance.

Question 31Insurance Principles and Concepts

An individual considers buying insurance against the possibility that a new restaurant concept fails and loses money. A property-casualty insurer declines to write this coverage. Which characteristic of insurable risk explains the declination?

  1. The loss is speculative rather than pure. Correct answer.
  2. The loss is too small to measure.
  3. The loss is outside the insurer's underwriting territory.
  4. The loss is certain to occur eventually.

Explanation

Insurance is designed for pure risk, where there is a chance of loss or no loss but no chance of gain. A restaurant failure is a speculative risk because it can produce either profit or loss, so it is generally not insurable. The other choices do not describe why insurers avoid speculative business risk.

Question 32Insurance Principles and Concepts

A warehouse with an actual cash value of $500,000 is insured for $500,000. A fire causes $120,000 in damage, and the insured has no other coverage. The insurer pays $120,000, not the $500,000 policy limit. Which principle of insurance does this payment illustrate?

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

Explanation

The principle of indemnity restores the insured to the same financial position after a loss, without allowing a profit. The policy limit is a ceiling, not a guaranteed payment, so the insurer pays the actual covered damage of $120,000. This is why actual cash value and limits work together rather than automatically paying the full limit.

Question 33Insurance Principles and Concepts

A homeowner obtains a property policy on a house owned by a neighbor. The homeowner has no financial interest in the house and would suffer no economic loss if it burned. Which requirement for enforcing the policy is absent?

  1. Consideration
  2. Offer and acceptance
  3. Insurable interest Correct answer.
  4. Legal purpose

Explanation

Insurable interest requires the insured to have a financial stake in the property such that a loss would cause a real economic detriment. Without that stake, the arrangement is a wager rather than insurance and is not enforceable. The other contract elements may be present in form but do not cure the missing interest.

Question 34Insurance Principles and Concepts

A building has a replacement cost of $1,000,000. The policy carries an 80% coinsurance clause and a $600,000 limit. A covered fire causes $200,000 in damage, and the insured carries no other insurance. Ignoring any deductible, what amount does the insurer pay under the coinsurance formula?

  1. $150,000 Correct answer.
  2. $120,000
  3. $160,000
  4. $200,000

Explanation

The coinsurance requirement is 80% of $1,000,000, or $800,000. Because the insured carried only $600,000, the loss payment is reduced by $600,000 divided by $800,000, or 75%. Applying 75% to the $200,000 loss produces $150,000, which is within the policy limit.

Question 35Insurance Principles and Concepts

An insured's building is damaged by a contractor's negligent use of a torch. The insurer pays the insured $80,000 for the covered loss. The insured has already been fully reimbursed and has no remaining out-of-pocket loss. Which right permits the insurer to pursue the contractor for the $80,000?

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

Explanation

Subrogation lets the insurer stand in the insured's shoes after paying a covered loss and pursue the responsible third party. Because the insured has already been fully reimbursed, recovery by the insurer avoids double payment to the insured. The right is generally limited to the amount the insurer paid.

Question 36Insurance Principles and Concepts

A homeowner sells her house and transfers the deed to the buyer. The buyer assumes the seller's existing homeowners policy will continue unchanged. Under general property insurance principles, what is the effect of the sale on the policy?

  1. The policy is void because the seller lacks insurable interest at closing.
  2. The policy becomes a valued policy measured by the house's sale price.
  3. The policy automatically transfers because it insures the building itself.
  4. The policy does not transfer automatically; assignment requires insurer consent. Correct answer.

Explanation

Property insurance is a personal contract between the insurer and the named insured, even though it covers a building. The buyer does not automatically become an insured when the deed transfers; the policy must be assigned with the insurer's consent. The seller's policy may also be cancelled or endorsed because the seller's insurable interest ends at sale.

Question 37Insurance Principles and Concepts

An insured and an insurer agree that a fire is a covered cause of loss, but they disagree sharply about the amount of damage to the building. The policy contains a standard appraisal provision. What is the proper use of appraisal?

  1. To decide whether the fire was intentionally set by the insured.
  2. To cancel the policy retroactively if the parties cannot agree.
  3. To determine the amount of loss through appraisers and an umpire. Correct answer.
  4. To interpret the policy's exclusions and coverage grants.

Explanation

Appraisal is a policy mechanism for resolving a disagreement about the amount of a covered loss, not about whether coverage applies. Each party selects a competent appraiser, and the appraisers may choose an umpire if they cannot agree. Coverage disputes and policy interpretation remain outside the appraisal process.

Question 38Insurance Principles and Concepts

A primary insurer buys a reinsurance treaty to protect itself against a catastrophic hurricane loss that could exceed its capacity. An insured who suffers a covered hurricane loss under a primary policy asks how the reinsurance affects the claim. What is the correct statement?

  1. The insured's claim is paid only after the reinsurer approves the adjustment.
  2. The insured must file the claim directly with the reinsurer.
  3. Reinsurance is between insurers and does not change the primary insurer's duty. Correct answer.
  4. The reinsurer's involvement changes the primary policy's limits and deductibles.

Explanation

Reinsurance is a contract between the primary insurer and a reinsurer that spreads the primary insurer's risk. The original insured generally has no direct contractual relationship with the reinsurer and is not required to seek payment from it. The primary insurer remains responsible for adjusting and paying the claim under the primary policy.

Question 39Insurance Principles and Concepts

A commercial property policy covers fire and excludes the cost to repair faulty workmanship. A poorly installed electrical connection overheats and ignites combustible material, starting a fire that damages the building and inventory. The faulty connection itself is not damaged by the fire. How should a public adjuster analyze the claim?

  1. Pay fire damage to building and inventory; exclude repair of the faulty connection. Correct answer.
  2. Deny the inventory portion but pay the building portion because inventory is personal property.
  3. Pay only the cost to correct the electrical connection because that is the excluded cause.
  4. Deny the entire claim because faulty workmanship contributed to the loss.

Explanation

When faulty workmanship causes a covered peril such as fire, the resulting fire damage is generally covered, while the cost to repair the faulty work itself remains excluded. The public adjuster should separate the excluded repair cost from the covered fire damage to building and inventory. Denying the entire claim would improperly treat the excluded cause as barring all resulting damage.

Question 40Insurance Principles and Concepts

An insurer's claim representative tells an insured in writing that the company will accept a late proof of loss and will not rely on the 60-day deadline. The insured relies on that statement and files 10 days late. The insurer then denies the claim based on the missed deadline. Which doctrine is most likely to prevent the denial?

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

Explanation

Estoppel prevents an insurer from denying a claim on a deadline after its representative assured the insured that the deadline would not be enforced and the insured reasonably relied on that assurance. The reliance and detriment are what make estoppel appropriate. A waiver may also exist, but estoppel focuses on preventing unfair reliance.

Question 41Property Insurance Policy Coverages and Provisions

Under a standard HO-3 homeowners policy, personal property is insured against which set of perils?

  1. All risks of direct physical loss, subject to policy exclusions
  2. The broad named perils listed in the policy Correct answer.
  3. Only fire and lightning
  4. Only perils required by Maryland law

Explanation

An HO-3 uses two different peril bases: the dwelling and other structures are insured on an open-peril basis, while personal property is insured against the broad named perils printed in the policy. Fire, lightning, and theft are examples, but the list is broader than those three.

Question 42Property Insurance Policy Coverages and Provisions

For property insurance claims, actual cash value is generally calculated as:

  1. Market value of the building at the time of sale
  2. Original purchase price increased by inflation
  3. Replacement cost plus overhead and profit
  4. Replacement cost less depreciation Correct answer.

Explanation

Actual cash value is typically replacement cost minus depreciation, reflecting the value of the damaged property at the time of loss. It is not the same as market value or original purchase price, and it does not include overhead and profit.

Question 43Property Insurance Policy Coverages and Provisions

A covered fire makes an insured home uninhabitable for two months. Under Coverage D - Loss of Use, the policy typically pays:

  1. Additional living expenses and fair rental value, within policy limits Correct answer.
  2. The decrease in the home's market value caused by the fire
  3. Only hotel receipts, with no other living expenses included
  4. The full mortgage payment until the home is completely rebuilt

Explanation

Coverage D pays the necessary increase in living expenses so the household can maintain its normal standard of living, plus fair rental value if part of the home was rented. Payments are subject to the Coverage D limit and any time limitation in the policy.

Question 44Property Insurance Policy Coverages and Provisions

A commercial building has a replacement cost of $300,000. The policy has an 80% coinsurance clause and a $180,000 building limit, with a $1,000 deductible. A covered fire causes a $60,000 loss. What amount does the insurer pay, before any other adjustments?

  1. $45,000
  2. $36,000
  3. $44,000 Correct answer.
  4. $60,000

Explanation

The coinsurance requirement is 80% of $300,000, or $240,000. Because the insured carried $180,000, the recovery is ($180,000 ÷ $240,000) × $60,000 = $45,000, and the $1,000 deductible reduces that to $44,000.

Question 45Property Insurance Policy Coverages and Provisions

For a covered dwelling loss outside the small-loss exception in ISO HO 00 03 05 11, payment above actual cash value on a replacement cost basis requires that the insured:

  1. Accepts the insurer's first written repair estimate without any delay
  2. Purchases separate flood insurance covering the same dwelling
  3. Repairs or replaces the property and claims within the deadline Correct answer.
  4. Files a sworn proof of loss before making any emergency repairs

Explanation

For a loss outside the standard form's small-loss exception, the insurer pays no more than actual cash value until repair or replacement is complete. The insured must also comply with applicable claim and notice requirements. The exception permits replacement cost settlement without completed repairs when repair cost is below both 5% of building insurance and $2,500.

Question 46Property Insurance Policy Coverages and Provisions

A standard mortgage clause in a property policy provides that the mortgagee:

  1. Loses its rights whenever the insured breaches a policy condition
  2. Must pay the deductible whenever the insured defaults
  3. Receives loss payment to the extent of its interest and cancellation notice Correct answer.
  4. May cancel the policy without notifying the named insured

Explanation

A standard mortgage clause protects the lender's interest even if the insured breaches a policy condition. The mortgagee is entitled to loss payment to the extent of its interest and to advance notice of cancellation or nonrenewal.

Question 47Property Insurance Policy Coverages and Provisions

Under an unendorsed HO-3 policy, which cause of loss is excluded under the water damage exclusion?

  1. Accidental discharge from a broken interior plumbing pipe
  2. Rain entering through a roof opening created by a covered windstorm
  3. Accidental discharge from a household appliance such as a washing machine
  4. Flood, surface water, waves, and overflow of a body of water Correct answer.

Explanation

The HO-3 water damage exclusion removes flood, surface water, waves, tidal water, overflow of a body of water, and spray from those sources. Accidental discharge from plumbing or a household appliance and rain entering through a storm-created roof opening are treated differently and may be covered.

Question 48Property Insurance Policy Coverages and Provisions

Under an HO-3 policy, the Ordinance or Law coverage for increased costs to repair or rebuild a dwelling to comply with current building codes is usually limited to:

  1. 10% of the Coverage A dwelling limit Correct answer.
  2. 100% of the Coverage C personal property limit
  3. No fixed limit if the dwelling is a total loss
  4. 50% of the Coverage A dwelling limit

Explanation

The HO-3 Ordinance or Law provision usually provides 10% of the Coverage A limit for the increased cost of repairing or rebuilding to comply with current code. Broader ordinance or law coverage can be added by endorsement.

Question 49Property Insurance Policy Coverages and Provisions

The insured and insurer agree that a fire was covered but disagree about the dollar amount of the dwelling damage. Under the appraisal provision, the appraisal process will determine:

  1. Whether the insured committed fraud
  2. Whether the policy was in force on the date of loss
  3. The insurer's liability for bad faith
  4. The amount of the loss, not coverage Correct answer.

Explanation

Appraisal is a dispute-resolution method for the amount of loss after coverage is accepted. Each side selects an appraiser, and an umpire resolves disagreements; the appraisal award does not decide whether the policy covers the loss.

Question 50Property Insurance Policy Coverages and Provisions

In commercial property coverage, the period of restoration for business income loss ends when:

  1. The insured's lease expires, even if repairs are still incomplete
  2. Repairs should be finished with reasonable speed or business resumes Correct answer.
  3. The insurer issues its final payment for the covered direct damage
  4. The insured permanently closes the business at that particular location

Explanation

Business income coverage pays during the period of restoration, which ends when the property should be repaired, rebuilt, or replaced with reasonable speed and similar quality, or when the business resumes at another location. The lease expiration or final payment date does not control.