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ME Property & Casualty practice questions

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Question 1Insurance Principles and Concepts

Which type of risk presents only the chance of loss or no loss, with no possibility of financial gain, and is therefore the type insurance is designed to handle?

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

Explanation

Pure risk involves only the possibility of loss or no loss, so it can be transferred to an insurer. Speculative risk includes the chance of gain and is generally not insurable. Hazards are conditions that increase loss, not categories of risk defined by the absence of gain.

Question 2Insurance Principles and Concepts

An insurer's actual losses become more stable and predictable as it insures a larger number of similar, independent exposure units. This principle is known as:

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

Explanation

The law of large numbers holds that observed results converge on expected results as the number of similar, independent exposure units grows. This predictability underlies ratemaking and underwriting.

Question 3Insurance Principles and Concepts

In property insurance, the insured must have insurable interest:

  1. Only when the application is signed
  2. Only when the policy is delivered
  3. Continuously for the entire policy period
  4. At the time of the loss Correct answer.

Explanation

For property coverage, insurable interest is tested at the time of loss, because the purpose is to make the insured whole for actual financial loss. Life insurance differs, since interest is tested at inception.

Question 4Insurance Principles and Concepts

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

  1. Paid the full policy limit every time
  2. Compensated for sentimental value
  3. Made whole financially Correct answer.
  4. Placed in a better position than before

Explanation

Indemnity restores the insured to approximately the same financial position held before the loss, no better and no worse. This is why actual cash value, deductibles, and limits exist.

Question 5Insurance Principles and Concepts

A condition that increases the chance or severity of a loss is called a:

  1. Premium
  2. Hazard Correct answer.
  3. Peril
  4. Loss

Explanation

A hazard is a condition that raises the probability or severity of a loss, such as oily rags in a storeroom. The peril is the actual cause of the loss, such as fire.

Question 6Insurance Principles and Concepts

An insured stops maintaining the fire suppression system and leaves a warehouse unlocked because a policy will pay for any resulting loss. This behavior is best described as:

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

Explanation

Morale hazard is indifference or carelessness toward loss because insurance will respond. Moral hazard, by contrast, involves dishonest or intentional conduct such as staging a claim.

Question 7Insurance Principles and Concepts

Adverse selection occurs when:

  1. An insurer concentrates policies in a single territory
  2. A policy is cancelled for nonpayment of premium
  3. A producer fails to submit an application
  4. High-risk applicants seek coverage most eagerly Correct answer.

Explanation

Adverse selection is the tendency of those most likely to suffer loss to buy or retain insurance, which can push loss experience above expectations. Underwriting, exclusions, and accurate rating are used to control it.

Question 8Insurance Principles and Concepts

A property policy is a contract of adhesion, which means that genuinely ambiguous policy language is generally:

  1. Referred to a state regulator for resolution
  2. Interpreted against the party that drafted it Correct answer.
  3. Interpreted in favor of the insurer
  4. Voided in its entirety

Explanation

Because the insurer drafts the policy and the insured has no real bargaining power over its terms, courts apply contra proferentem and resolve ambiguity against the insurer. This rule protects reasonable expectations of coverage.

Question 9Insurance Principles and Concepts

An insurance contract is aleatory because:

  1. Both parties exchange promises of equal value
  2. The insurer may cancel at any time
  3. Performance depends on an uncertain event Correct answer.
  4. The insured must disclose all material facts

Explanation

In an aleatory contract the dollar amounts exchanged are unequal and depend on chance; a small premium may buy a large claim payment. This contrasts with a commutative contract, where values exchanged are roughly equal.

Question 10Insurance Principles and Concepts

A binder provides:

  1. A permanent substitute for the policy
  2. A list of perils excluded from coverage
  3. A guarantee that the policy will not be cancelled
  4. Temporary evidence that coverage is in force Correct answer.

Explanation

A binder is temporary evidence of coverage pending issuance of the policy, and it is subject to the terms of the policy to be issued. It typically remains effective until the policy is delivered or the binder expires.

Question 11Insurance Principles and Concepts

An insurer's adjuster tells the insured in writing that a proof-of-loss deadline will be extended, and the insured relies on that statement. The insurer is later barred from denying coverage on timeliness grounds under the doctrine of:

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

Explanation

Waiver is the voluntary surrender of a known right, and estoppel prevents a party from asserting that right when another has relied on the waiver to their detriment. The written extension therefore binds the insurer.

Question 12Insurance Principles and Concepts

After paying a covered property claim caused by a negligent third party, an insurer may pursue that third party for reimbursement. This right is called:

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

Explanation

Subrogation allows the insurer that has paid a loss to stand in the insured's shoes against the party responsible for the loss. It helps hold the responsible party accountable and controls the cost of insurance.

Question 13Insurance Principles and Concepts

A windstorm blows down a wall, and the falling wall crushes the insured building. In analyzing coverage, the windstorm is treated as:

  1. An excluded cause
  2. A concurrent cause that voids coverage
  3. The proximate cause of the loss Correct answer.
  4. A remote cause with no bearing on coverage

Explanation

The proximate cause is the dominant, efficient cause that sets the loss in motion without a break in the chain of events. Damage from the falling wall is therefore attributed to the windstorm.

Question 14Insurance Principles and Concepts

A building valued at $500,000 is insured with an 80% coinsurance clause and a $320,000 limit. A covered loss of $100,000 occurs and no deductible applies. How much will the insurer pay?

  1. $64,000
  2. $80,000 Correct answer.
  3. $50,000
  4. $100,000

Explanation

The coinsurance requirement is 80% of $500,000, or $400,000. Because only $320,000 was purchased, the insurer pays the loss times the ratio of limit to requirement: ($320,000 / $400,000) x $100,000 = $80,000.

Question 15Insurance Principles and Concepts

A vessel sinks in deep water, and the cost of recovery would greatly exceed its insured value. The insured may treat this as:

  1. A constructive total loss Correct answer.
  2. A latent defect loss
  3. A partial loss only
  4. A general average loss

Explanation

A constructive total loss exists when damage is not literally total but recovery or repair costs more than the property is worth. The insured may then claim as though the property were a total loss.

Question 16Insurance Principles and Concepts

Property saved from a covered loss that the insurer may sell or retain to reduce the net cost of a claim is known as:

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

Explanation

Salvage is the value remaining in damaged property that the insurer may take and dispose of after paying the loss. The proceeds reduce the insurer's net claim cost.

Question 17Insurance Principles and Concepts

Under a facultative reinsurance agreement, the reinsurer:

  1. Is obligated to accept every risk the ceding insurer offers
  2. Shares only in losses and never in premiums
  3. Automatically accepts all business written under the treaty
  4. May accept or decline each risk individually Correct answer.

Explanation

Facultative reinsurance is negotiated risk by risk, so either party may decline a particular submission. Treaty reinsurance, by contrast, obligates the reinsurer to accept business that falls within the treaty's terms.

Question 18Insurance Principles and Concepts

An insurer reports incurred losses of $6 million, loss adjustment expenses of $1 million, and underwriting expenses of $2.5 million on earned premiums of $10 million. Its combined ratio is:

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

Explanation

The loss and LAE ratio is ($6M + $1M) / $10M, or 70%. The expense ratio is $2.5M / $10M, or 25%, so the combined ratio is 95%. A combined ratio below 100% indicates an underwriting profit.

Question 19Insurance Principles and Concepts

Which section of an insurance policy identifies the named insured, the covered property, the policy period, and the limits of insurance?

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

Explanation

The declarations page personalizes the policy by stating who is insured, what is covered, the term, and the limits. The insuring agreement then states the insurer's core promise to pay.

Question 20Insurance Principles and Concepts

A claims-made liability policy responds to claims:

  1. Reported within 30 days of the date of injury
  2. For injury occurring during the policy period, whenever reported
  3. Reported during the policy period, subject to any retroactive date Correct answer.
  4. Only for injury that both occurs and is reported in the same policy year

Explanation

Claims-made coverage is triggered by the reporting of the claim during the policy period or an extended reporting period, with a retroactive date limiting how far back coverage reaches. The date of injury is not the trigger.

Question 21Insurance Principles and Concepts

A liability policy has a $500,000 per-occurrence limit and a $1,000,000 aggregate limit. Two separate covered occurrences each produce $400,000 in damages. How much will the policy pay in total?

  1. $1,000,000
  2. $500,000
  3. $400,000
  4. $800,000 Correct answer.

Explanation

Each occurrence is paid up to the $500,000 per-occurrence limit, so each $400,000 claim is paid in full. The total of $800,000 remains within the $1,000,000 aggregate.

Question 22Insurance Principles and Concepts

When an insurer is uncertain whether a claim is covered but must begin an immediate investigation, it typically sends the insured a:

  1. Certificate of insurance
  2. Notice of cancellation
  3. Binder
  4. Reservation of rights letter Correct answer.

Explanation

A reservation of rights letter tells the insured that the insurer will defend or investigate while preserving its right to deny coverage later. It protects the insurer from waiving coverage defenses.

Question 23Insurance Principles and Concepts

Under a pure comparative negligence rule, a claimant found 30% at fault for their own injury:

  1. Recovers 70% of the damages Correct answer.
  2. Recovers 30% of the damages
  3. Recovers 100% of the damages
  4. Recovers nothing

Explanation

Pure comparative negligence reduces the claimant's recovery by their own percentage of fault, so a 30% fault share leaves 70% recoverable. The claimant is not barred regardless of how great their fault may be.

Question 24Insurance Principles and Concepts

Two policies cover the same property on the same basis. Policy A has a $200,000 limit and Policy B has a $300,000 limit. Under pro rata contribution by limits, how is a $100,000 covered loss allocated?

  1. A pays $60,000 and B pays $40,000
  2. A pays $40,000 and B pays $60,000 Correct answer.
  3. A pays $50,000 and B pays $50,000
  4. A pays $100,000 and B pays $0

Explanation

Under pro rata by limits, each insurer pays its limit divided by the total of all limits. Policy A bears 200,000/500,000, or 40%, which is $40,000, and Policy B bears 60%, which is $60,000.

Question 25Insurance Principles and Concepts

An applicant for a commercial property policy says nothing about the building having been vacant for months, and the insurer would have declined the risk had it known. This is best described as:

  1. A breach of warranty that voids coverage automatically
  2. A waiver by the insurer
  3. Concealment of a material fact Correct answer.
  4. An immaterial omission with no effect on coverage

Explanation

Concealment is the intentional failure to disclose a fact that is material to the insurer's decision to accept or rate the risk. Because the insurer would have declined the risk, the fact is material and the insurer may rescind or deny coverage.

Question 26Insurance Principles and Concepts

Which type of risk is generally considered insurable by a private insurer?

  1. The chance of loss from fire, windstorm, or theft Correct answer.
  2. The chance of gain from investing in stocks
  3. The risk of loss from a business decision that may also produce profit
  4. The risk of losing money at a casino

Explanation

Pure risk involves only the chance of loss or no loss, with no possibility of gain, which is the type of risk private insurers generally insure. Speculative risks involve both gain and loss and are typically not insurable.

Question 27Insurance Principles and Concepts

For property insurance, insurable interest must exist at which point?

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

Explanation

For property insurance, insurable interest must exist at the time of the loss, because the insured must suffer actual financial loss. Life insurance is different, requiring insurable interest at inception.

Question 28Insurance Principles and Concepts

The law of large numbers allows an insurer to do which of the following?

  1. Set premiums without regard to past loss experience
  2. Eliminate the need for underwriting
  3. Guarantee that no individual insured will ever experience a covered loss
  4. Predict losses more accurately as similar exposure units increase Correct answer.

Explanation

The law of large numbers states that as the number of similar exposure units increases, actual losses tend to approach expected losses. This improves the accuracy of loss predictions and supports rate making.

Question 29Insurance Principles and Concepts

An insurance policy is a unilateral contract because:

  1. The policy must be signed by both parties
  2. Both parties exchange equal promises
  3. Only the insurer makes a legally enforceable promise Correct answer.
  4. Only the insured is legally bound to perform

Explanation

A unilateral contract is one in which only one party makes a legally enforceable promise. The insurer promises to pay covered claims, while the insured is not legally compelled to pay premiums or maintain the policy.

Question 30Insurance Principles and Concepts

The insuring agreement in a policy generally does which of the following?

  1. States the insurer's basic promise to pay Correct answer.
  2. Lists the named insured and policy limits
  3. Describes exclusions that limit coverage
  4. Explains the insured's duties after a loss

Explanation

The insuring agreement contains the insurer's core promise to pay for losses from covered perils. It establishes the broad scope of coverage that exclusions and conditions then refine.

Question 31Insurance Principles and Concepts

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

  1. It guarantees the policy will be renewed
  2. It makes the insured share small losses Correct answer.
  3. It transfers all risk of loss to the insured
  4. It increases the policy limit after each loss

Explanation

A deductible requires the insured to absorb a specified initial amount of each loss. This reduces small claims, lowers claim handling costs, and can reduce premium.

Question 32Insurance Principles and Concepts

A stock insurance company is owned by:

  1. The state insurance department
  2. A group of subscribers who exchange indemnity agreements
  3. Its stockholders Correct answer.
  4. Its policyholders

Explanation

A stock insurer is owned by stockholders who provide capital and expect a return. Policyholders are customers rather than owners, unlike in a mutual insurer.

Question 33Insurance Principles and Concepts

An endorsement attached to an insurance policy is used to:

  1. Cancel the policy automatically
  2. Replace the policy with a completely new contract
  3. Serve as proof that the premium was paid
  4. Modify, add, or delete policy coverage Correct answer.

Explanation

An endorsement is a written amendment attached to and made part of the policy. It changes the original terms without replacing the entire contract.

Question 34Insurance Principles and Concepts

An insurer cancels a one-year policy with an annual premium of $1,200 after four months have passed. Using pro rata cancellation, what refund is owed to the insured?

  1. $400
  2. $1,200
  3. $1,000
  4. $800 Correct answer.

Explanation

Pro rata cancellation returns the unearned premium in proportion to the unused policy period. Four months used leaves eight of twelve months unused, so the refund is $1,200 × 8/12 = $800.

Question 35Insurance Principles and Concepts

When an insured cancels a policy midterm and the insurer uses short-rate cancellation, the refund is:

  1. Less than a pro rata refund Correct answer.
  2. The full unearned premium regardless of time on risk
  3. More than a pro rata refund
  4. Equal to a pro rata refund

Explanation

Short-rate cancellation applies a penalty when the insured cancels, so the insurer keeps more premium than a pro rata calculation would require. The refund is therefore less than the unearned premium.

Question 36Insurance Principles and Concepts

Which statement correctly distinguishes a warranty from a representation in insurance?

  1. Both are treated identically under all state laws.
  2. A representation is always written into the policy, while a warranty is only oral.
  3. A warranty is a statement believed true to the best of the applicant's knowledge, while a representation is guaranteed true.
  4. A warranty is a promise or condition that must be met, while a representation is a statement of fact believed true. Correct answer.

Explanation

A warranty is a promise or condition that must be true, while a representation is a statement of fact the applicant believes to be true. Material misrepresentation of a representation can affect coverage, but warranties are stricter.

Question 37Insurance Principles and Concepts

A covered loss destroys a five-year-old machine. Replacement cost is $50,000, and depreciation is 40%. Under actual cash value, the insurer pays:

  1. $30,000 Correct answer.
  2. $50,000
  3. $40,000
  4. $20,000

Explanation

Actual cash value is generally replacement cost minus depreciation. With 40% depreciation, the machine's value is 60% of $50,000, or $30,000.

Question 38Insurance Principles and Concepts

The appraisal provision in a property policy is used when:

  1. The insured fails to submit a proof of loss
  2. The insurer and insured dispute the loss amount Correct answer.
  3. A policy is canceled for nonpayment of premium
  4. The insurer denies coverage based on an exclusion

Explanation

Appraisal is a dispute-resolution method for disagreements about the amount of a loss, not about whether coverage applies. Each side selects an appraiser, and an umpire resolves any difference.

Question 39Insurance Principles and Concepts

A mortgagee clause in a property policy generally provides that the lender:

  1. Becomes the sole insured and replaces the property owner
  2. Must pay the premium directly to the insurer
  3. May receive loss payment up to its interest Correct answer.
  4. Loses all rights if the insured cancels the policy

Explanation

A mortgagee clause protects the lender's interest by allowing it to receive loss proceeds up to its interest. The mortgagee's rights can survive certain acts by the insured that would otherwise impair coverage.

Question 40Insurance Principles and Concepts

An assigned risk plan is an example of:

  1. A state guaranty association
  2. A residual market for hard-to-place risks Correct answer.
  3. A voluntary reinsurance pool formed by private insurers
  4. A Lloyd's syndicate

Explanation

Assigned risk plans are residual market mechanisms that provide coverage for risks that cannot obtain insurance in the voluntary market. Insurers in the state share the assigned risks.

Question 41Insurance Principles and Concepts

An agent who has no express authority to bind a risk but whose insurer has routinely allowed him to do so may bind coverage under:

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

Explanation

Apparent authority arises when the insurer's words or conduct lead a third party to reasonably believe the agent has authority. The insurer may be bound even if the agent lacked express authority.

Question 42Insurance Principles and Concepts

A franchise deductible of $1,000 means that:

  1. The deductible is subtracted only from liability claims
  2. The deductible increases with each claim
  3. The insured pays the first $1,000 of every loss
  4. The insurer pays the full loss once it exceeds $1,000 Correct answer.

Explanation

With a franchise deductible, the insured pays nothing once the loss exceeds the deductible amount; the insurer then pays the full covered loss. This differs from a standard deductible, which is subtracted from every loss.

Question 43Insurance Principles and Concepts

State guaranty associations exist primarily to:

  1. Regulate insurance rates
  2. License insurance producers
  3. Provide reinsurance to all insurers in the state
  4. Pay covered claims of insolvent insurers Correct answer.

Explanation

Guaranty associations are created by state law to protect policyholders when an insurer becomes insolvent. They pay covered claims up to statutory limits, subject to the association's rules.

Question 44Insurance Principles and Concepts

An insurer collects $2,400 for a one-year policy on July 1. On December 31, the unearned premium reserve for that policy is:

  1. $2,400
  2. $600
  3. $1,800
  4. $1,200 Correct answer.

Explanation

The unearned premium is the portion of premium that applies to future coverage. Six months remain on the one-year policy, so the reserve is $2,400 × 6/12 = $1,200.

Question 45Insurance Principles and Concepts

Under a valued policy law, in the event of a total loss of a building:

  1. The insurer pays only the outstanding mortgage balance
  2. The insurer pays the amount stated in the policy Correct answer.
  3. The insurer pays the actual cash value determined after the loss
  4. The insurer may reduce payment by depreciation

Explanation

A valued policy law requires the insurer to pay the policy amount for a total loss of a building, regardless of actual value at the time of loss. It is designed to prevent disputes over value after a catastrophic loss.

Question 46Insurance Principles and Concepts

A surplus share treaty has a retention of $100,000 per risk and a 9-line limit. For a policy with a $500,000 limit, how much does the reinsurer assume?

  1. $100,000
  2. $400,000 Correct answer.
  3. $500,000
  4. $900,000

Explanation

The retention is one line, or $100,000, and the treaty provides nine lines of capacity. For a $500,000 policy, the insurer retains $100,000 and cedes the remaining $400,000 to the reinsurer.

Question 47Insurance Principles and Concepts

A retrospective rating plan adjusts the insured's final premium based on:

  1. The insured's payroll at the start of the policy period only
  2. The number of employees covered at inception
  3. Actual losses, subject to minimum and maximum premiums Correct answer.
  4. The average loss ratio of all insurers in the state

Explanation

A retrospective rating plan sets a final premium after the policy period based on the insured's actual losses. The premium is subject to minimum and maximum amounts stated in the plan.

Question 48Insurance Principles and Concepts

The McCarran-Ferguson Act provides that the regulation of the business of insurance is primarily:

  1. Shared equally by federal and state governments
  2. Left to the individual states Correct answer.
  3. Delegated to the National Association of Insurance Commissioners
  4. The responsibility of the federal government

Explanation

The McCarran-Ferguson Act confirms that the states primarily regulate the business of insurance. Federal antitrust laws apply only to the extent that the states do not regulate.

Question 49Insurance Principles and Concepts

The doctrine of res ipsa loquitur permits a plaintiff to:

  1. Transfer liability automatically to the manufacturer of any product
  2. Infer negligence from defendant-controlled circumstances Correct answer.
  3. Hold a defendant strictly liable for all injuries regardless of fault
  4. Recover damages without proving that any injury actually occurred

Explanation

Res ipsa loquitur allows negligence to be inferred from the facts when the instrumentality causing injury was under the defendant's control and the accident would not ordinarily occur without negligence. It shifts the burden of explanation to the defendant.

Question 50Insurance Principles and Concepts

An experience modification factor of 0.85 in a workers compensation policy means the insured's premium will be:

  1. Reduced by 15% for better-than-average experience Correct answer.
  2. Increased by 15% because its loss experience is worse than average
  3. Unchanged because the factor is below 1.00
  4. Reduced by 85% because the factor is below 1.00

Explanation

An experience modification factor compares the insured's loss experience with the average for its classification. A factor below 1.00 produces a premium credit, so 0.85 reduces premium by 15%.