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NH Property & Casualty practice questions

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Question 1New Hampshire Insurance Laws, Rules, and Regulations

What are the minimum liability limits required for a private passenger auto liability policy in New Hampshire?

  1. $25,000 per person, $50,000 per accident, $25,000 property damage Correct answer.
  2. $30,000 per person, $60,000 per accident, $25,000 property damage
  3. $50,000 per person, $100,000 per accident, $50,000 property damage
  4. $20,000 per person, $40,000 per accident, $10,000 property damage

Explanation

New Hampshire's financial responsibility law requires bodily injury liability limits of at least $25,000 per person and $50,000 per accident, plus $25,000 of property damage liability. A policy written below these amounts does not satisfy the statutory minimum.

Question 2New Hampshire Insurance Laws, Rules, and Regulations

How is the New Hampshire Insurance Commissioner selected?

  1. Selected by the Legislature for a two-year term
  2. Elected by the voters to a four-year term
  3. Chosen by the insurance industry from a slate of nominees
  4. Appointed by the Governor with Executive Council approval Correct answer.

Explanation

The Commissioner heads the New Hampshire Insurance Department and is appointed by the Governor with the advice and consent of the Executive Council. The Commissioner serves a fixed statutory term and is not chosen by the industry or the Legislature.

Question 3New Hampshire Insurance Laws, Rules, and Regulations

A person who solicits and negotiates the sale of homeowners insurance in New Hampshire must hold which of the following?

  1. A producer license issued by the Insurance Department Correct answer.
  2. A certificate of authority from the Attorney General
  3. A real estate broker's license
  4. A surety bond filed with the Secretary of State

Explanation

Soliciting, negotiating, or selling insurance in New Hampshire requires a producer license from the Insurance Department. A real estate license, a bond, or approval by another agency does not authorize insurance sales.

Question 4New Hampshire Insurance Laws, Rules, and Regulations

How many continuing education credit hours must a New Hampshire insurance producer complete during each two-year license period, and how many of those hours must be in ethics?

  1. 12 total hours, with 1 hour in ethics
  2. 16 total hours, with 2 hours in ethics
  3. 24 total hours, with 3 hours in ethics Correct answer.
  4. 20 total hours, with 4 hours in ethics

Explanation

New Hampshire producers must complete 24 hours of approved continuing education during each two-year license period. At least 3 of those hours must be in ethics instruction.

Question 5New Hampshire Insurance Laws, Rules, and Regulations

An agent collects a premium payment from a client and deposits it into the agency's general operating account before remitting it to the insurer. This practice is best described as:

  1. Permissible, because the premium becomes agency revenue on receipt
  2. Permissible, if the agency remits the premium within 90 days
  3. Prohibited commingling of fiduciary funds Correct answer.
  4. Permissible, if the client consents in writing

Explanation

Premiums collected from insureds are held in a fiduciary capacity for the insurer and must be kept separate from the agency's own funds. Placing them in a general operating account is commingling and is prohibited regardless of client consent.

Question 6New Hampshire Insurance Laws, Rules, and Regulations

An agent offers a $200 gift card to a prospective buyer to induce the purchase of an auto policy, a benefit not stated in the policy. Under New Hampshire law this is:

  1. Permissible if disclosed to the commissioner
  2. Lawful, since the insured receives a benefit
  3. An allowable marketing expense if under $500
  4. Rebating, a prohibited unfair trade practice Correct answer.

Explanation

Offering any inducement not specified in the policy to persuade a buyer to purchase insurance is rebating. Rebating is an unfair trade practice prohibited under New Hampshire law.

Question 7New Hampshire Insurance Laws, Rules, and Regulations

A producer tells a client that her current insurer is 'about to go bankrupt' so that she will surrender her existing policy and buy a new one. This conduct is:

  1. Permissible if the new policy costs less
  2. Replacement, which is always prohibited
  3. Twisting, a prohibited unfair trade practice Correct answer.
  4. Lawful competition

Explanation

Twisting is a misrepresentation made to induce a policyholder to lapse, surrender, or replace existing coverage. The false insolvency statement is a classic example of a prohibited unfair trade practice.

Question 8New Hampshire Insurance Laws, Rules, and Regulations

An advertisement describes a policy as providing 'full coverage with no exclusions' when the policy actually contains significant exclusions. This is an example of which prohibited practice?

  1. Boycott
  2. Coercion
  3. Controlled business
  4. False advertising Correct answer.

Explanation

Publishing a misleading statement about the terms or benefits of a policy is false advertising, an unfair trade practice. The misstatement of coverage is the defining feature.

Question 9New Hampshire Insurance Laws, Rules, and Regulations

Two applicants present identical risk characteristics for the same homeowners coverage, but the insurer charges one a higher rate because of the applicant's national origin. This is:

  1. Lawful if disclosed in the policy
  2. Acceptable if approved by the producer
  3. Unfair discrimination prohibited by law Correct answer.
  4. Permissible underwriting judgment

Explanation

Charging different rates to insureds of the same class and essentially the same hazard is unfair discrimination. Classification must rest on sound actuarial distinctions, not on characteristics such as national origin.

Question 10New Hampshire Insurance Laws, Rules, and Regulations

Before placing a commercial property risk with a surplus lines insurer, a New Hampshire surplus lines producer must:

  1. File the policy with the Secretary of State within 10 days
  2. Obtain written approval from the Governor
  3. Verify the surplus lines insurer holds a NH certificate of authority
  4. Document a diligent search of the admitted market Correct answer.

Explanation

Surplus lines coverage may be used only when authorized insurers will not provide it, so the producer must document a diligent search showing the declinations. A surplus lines insurer is by definition not authorized in New Hampshire.

Question 11New Hampshire Insurance Laws, Rules, and Regulations

Placing New Hampshire insurance business with an insurer that holds no certificate of authority from the Insurance Department is:

  1. Allowed if the premium is lower
  2. Allowed for commercial lines only
  3. Allowed with the insured's written consent
  4. Prohibited unless transacted under the surplus lines law Correct answer.

Explanation

Transacting insurance with an unauthorized insurer is prohibited in New Hampshire unless the placement qualifies under the surplus lines statutes. Price, consent, or line of business alone does not make the transaction lawful.

Question 12New Hampshire Insurance Laws, Rules, and Regulations

The primary purpose of the New Hampshire Insurance Guaranty Association is to:

  1. Guarantee that insurers remain solvent
  2. Pay covered claims of insolvent insurers' policyholders Correct answer.
  3. Set minimum rates for all property and casualty lines
  4. License producers who sell surplus lines coverage

Explanation

The guaranty association responds when a member property and casualty insurer becomes insolvent, paying covered claims within statutory limits. It does not regulate solvency, set rates, or license producers.

Question 13New Hampshire Insurance Laws, Rules, and Regulations

Under New Hampshire's guaranty association law, the association's obligation for a covered claim is generally capped at:

  1. $300,000 per claim Correct answer.
  2. $1,000,000 per claim
  3. $50,000 per claim
  4. $100,000 per claim

Explanation

The guaranty association pays covered claims up to a statutory ceiling, generally $300,000 per claim. Amounts above the cap remain claims against the insolvent insurer's estate rather than obligations of the association.

Question 14New Hampshire Insurance Laws, Rules, and Regulations

A commercial general liability policy has been in force for two years. The insurer wishes to cancel for a reason other than nonpayment of premium. How much advance written notice must the insured receive under New Hampshire's commercial cancellation statute?

  1. 45 days Correct answer.
  2. 90 days
  3. 20 days
  4. 10 days

Explanation

New Hampshire's commercial risk cancellation statute requires at least 45 days' written notice before cancellation takes effect. The shortened 10-day period applies only when the reason is nonpayment of premium.

Question 15New Hampshire Insurance Laws, Rules, and Regulations

Which of the following is an unfair claim settlement practice under New Hampshire law?

  1. Requesting a sworn proof of loss from the claimant
  2. Assigning the claim to an independent adjuster
  3. Failing to acknowledge claims promptly Correct answer.
  4. Investigating a claim before issuing payment

Explanation

Insurers have a duty to acknowledge and act reasonably promptly on claim communications. Ignoring correspondence is an unfair claim settlement practice, while investigation and proof-of-loss requests are ordinary and permitted steps.

Question 16New Hampshire Insurance Laws, Rules, and Regulations

An insurer's adjuster concludes that its insured is clearly liable for an auto accident, but the insurer delays settlement for months without a reasonable basis while the claimant faces mounting medical bills. This conduct is best characterized as:

  1. Acceptable reserving practice
  2. Permissible while policy limits remain unpaid
  3. Lawful because no lawsuit has been filed
  4. An unfair claim settlement practice Correct answer.

Explanation

Failing to attempt in good faith to effectuate prompt and fair settlement when liability has become reasonably clear is an unfair claim settlement practice. The absence of litigation does not excuse the delay.

Question 17New Hampshire Insurance Laws, Rules, and Regulations

A licensed New Hampshire producer may share a commission on a policy with which of the following?

  1. A licensed producer who shared in the sale Correct answer.
  2. A bank teller who collected the application
  3. An unlicensed friend who referred the client
  4. An unlicensed telemarketer who set the appointment

Explanation

Commissions may be split only with another properly licensed producer. Paying any part of a commission to an unlicensed person for soliciting or referring insurance business is prohibited.

Question 18New Hampshire Insurance Laws, Rules, and Regulations

When an insurer wants a producer to represent it in New Hampshire, the insurer must:

  1. Ask the producer to post a bond with the Department
  2. File an appointment with the Insurance Department Correct answer.
  3. Publish notice in a local newspaper
  4. Obtain the commissioner's written permission for each policy

Explanation

Insurers authorize producers to act on their behalf by filing an appointment with the Insurance Department. Individual policy approvals and newspaper notices are not part of the appointment process.

Question 19New Hampshire Insurance Laws, Rules, and Regulations

A New Hampshire producer is disciplined by another state's insurance regulator for a licensing violation. The producer must:

  1. Report the action to the Insurance Department within 30 days Correct answer.
  2. Report only if the other state's action involves a suspension
  3. Take no action, because the matter arose outside New Hampshire
  4. Report only at the next license renewal

Explanation

Producers must report administrative actions taken against them by any insurance regulator, in New Hampshire or elsewhere, within 30 days of the final disposition. The duty applies even when the sanction is less than a suspension.

Question 20New Hampshire Insurance Laws, Rules, and Regulations

The New Hampshire Medical Malpractice Joint Underwriting Association was created to:

  1. Defend physicians in disciplinary hearings before the Board of Medicine
  2. Pay court judgments against hospitals without insurance
  3. Provide malpractice coverage unavailable in the voluntary market Correct answer.
  4. Set the fees that physicians may charge insurers

Explanation

The Joint Underwriting Association is a residual market mechanism that makes medical malpractice coverage available when admitted insurers decline to write it. It functions as an insurer of last resort, not as a regulatory or disciplinary body.

Question 21New Hampshire Insurance Laws, Rules, and Regulations

Under New Hampshire's competitive rating law, an insurer that wants to use a new property and casualty rate must generally:

  1. Use the rate for one year before filing it
  2. File the rate and use it immediately Correct answer.
  3. Post the rate publicly for 60 days before use
  4. Obtain prior written approval before using any rate

Explanation

New Hampshire uses a competitive, file-and-use approach for most property and casualty rates: the rate is filed with the Department and may be used at once, subject to the Commissioner's disapproval authority. Prior approval and public posting are not required.

Question 22New Hampshire Insurance Laws, Rules, and Regulations

New Hampshire's auto insurance system is best described as:

  1. A no-fault system with first-party medical benefits
  2. A tort system in which fault must be established Correct answer.
  3. A state-run residual plan for all drivers
  4. A system in which liability coverage is optional

Explanation

New Hampshire is a tort liability state for auto accidents, meaning an injured party generally must establish the other driver's fault to recover. There is no no-fault first-party medical benefits system, and liability coverage is required.

Question 23New Hampshire Insurance Laws, Rules, and Regulations

The New Hampshire Insurance Department's examination powers allow it to:

  1. Delegate exams to the insurer's outside auditors
  2. Inspect records only after a consumer complaint
  3. Examine insurer records and market conduct Correct answer.
  4. Examine only domestic insurers headquartered in the state

Explanation

The Commissioner may examine the books, records, and market conduct of licensed insurers and other regulated entities. The authority is not limited to domestic companies or to situations where a complaint has been filed.

Question 24New Hampshire Insurance Laws, Rules, and Regulations

New Hampshire insurance producer licenses are renewed:

  1. Annually
  2. Every four years
  3. Every two years Correct answer.
  4. Every five years

Explanation

New Hampshire producer licenses are issued on a two-year cycle and renewed biennially, subject to completion of continuing education. Annual, four-year, and five-year renewal cycles do not apply.

Question 25New Hampshire Insurance Laws, Rules, and Regulations

When an insurer terminates a producer's appointment for cause, the insurer must:

  1. Notify the Insurance Department of the termination Correct answer.
  2. Obtain the commissioner's approval before terminating
  3. Notify the producer's clients individually within 10 days
  4. Refund all commissions paid during the preceding year

Explanation

Insurers must report terminations of producer appointments to the Insurance Department, including terminations for cause. The insurer does not need the Commissioner's approval, and commissions already earned are not refunded.

Question 26New Hampshire Insurance Laws, Rules, and Regulations

How often must a New Hampshire insurance producer license be renewed?

  1. Every year
  2. Every two years Correct answer.
  3. Every four years
  4. Every three years

Explanation

New Hampshire issues producer licenses on a biennial basis, and the licensee must apply for renewal before the license expires. Continuing education is tracked over the same two-year period. A producer who allows the license to lapse may not transact insurance until it is reinstated or reissued.

Question 27New Hampshire Insurance Laws, Rules, and Regulations

A New Hampshire producer must complete continuing education each renewal period. Which requirement applies?

  1. Twelve hours of any insurance coursework
  2. Twenty-four hours, including three hours of ethics Correct answer.
  3. Thirty hours, including six hours of ethics
  4. No continuing education once the license has been held for ten years

Explanation

New Hampshire requires producers to complete 24 credit hours of approved continuing education every two years, and at least 3 of those hours must be in ethics. The requirement continues for as long as the license is held, regardless of tenure. Credits must come from approved course providers.

Question 28New Hampshire Insurance Laws, Rules, and Regulations

Under New Hampshire workers' compensation law, an employer must obtain coverage when it employs:

  1. Five or more full-time employees
  2. Ten or more employees at any single location
  3. Three or more employees, counting only full-time workers
  4. One or more employees, including part-time employees Correct answer.

Explanation

New Hampshire requires workers' compensation coverage for employers with one or more employees, and part-time workers count toward that threshold. Limited statutory exemptions exist for certain agricultural and domestic workers. The requirement is not tied to a headcount above one.

Question 29New Hampshire Insurance Laws, Rules, and Regulations

Which statement describes New Hampshire's requirement for liability insurance on private passenger automobiles?

  1. The state requires minimum liability limits of 50/100/25 on every private passenger policy
  2. Only uninsured motorist coverage is required by statute for private passenger vehicles
  3. Liability coverage with limits of at least 25/50/25 must be purchased before a vehicle may be registered in the state
  4. Coverage is not required to register a vehicle; financial responsibility is required after an accident Correct answer.

Explanation

New Hampshire does not require owners to buy liability insurance as a condition of registering a private passenger vehicle. Instead, its financial responsibility law can require proof of ability to pay after an accident or certain convictions. Mandatory liability limits of 25/50/25 or 50/100/25 apply elsewhere, not to NH registration.

Question 30New Hampshire Insurance Laws, Rules, and Regulations

In New Hampshire, uninsured motorist coverage under a private passenger auto policy:

  1. Is required only for drivers who have had one or more at-fault accidents
  2. Is provided at the liability limits unless the named insured rejects it in writing Correct answer.
  3. Must be written at limits that exceed the policy's liability limits
  4. Is available only by endorsement and only for an additional premium charge

Explanation

New Hampshire insurers must make uninsured motorist coverage available at limits equal to the policy's liability limits, and the named insured may decline it only by signing a written rejection. The rejection generally applies to all vehicles insured under the policy. Coverage is part of the standard offer rather than a special endorsement.

Question 31New Hampshire Insurance Laws, Rules, and Regulations

When an insurer enters into an agency contract with a New Hampshire producer, the insurer must file notice of appointment with the Insurance Department within:

  1. 60 days
  2. 30 days Correct answer.
  3. 10 days
  4. 45 days

Explanation

New Hampshire requires the appointing insurer to notify the Insurance Department of the appointment within 30 days after the agency contract is executed or the first application is submitted. The producer may not act for the insurer until the appointment is properly filed. Failure to file can result in penalties against the insurer.

Question 32New Hampshire Insurance Laws, Rules, and Regulations

A producer collects a premium from an insured and deposits it in the producer's personal checking account before remitting it to the insurer. This conduct is:

  1. Acceptable if the producer maintains a surety bond covering the funds
  2. Prohibited only if the insurer ultimately suffers an actual financial loss
  3. Prohibited, because premiums held by a producer are trust funds that may not be commingled Correct answer.
  4. Acceptable if the premium is remitted to the insurer within thirty days

Explanation

Premiums and return premiums received by a producer are held in a fiduciary capacity and must be kept separate from the producer's personal or general business funds. Commingling is a violation even if the money is later forwarded on time and no loss occurs. The rule protects insureds and insurers from the producer's insolvency or misuse of funds.

Question 33New Hampshire Insurance Laws, Rules, and Regulations

Which action is required when a licensed New Hampshire producer changes his or her business address?

  1. File a new license application and pay the full licensing fee
  2. No action, because the Department obtains address changes from the postal service
  3. Wait until the next license renewal to report the new address
  4. Notify the Insurance Department within 30 days of the change Correct answer.

Explanation

A licensed producer must keep the Department's licensing records current and must report a change of address within 30 days. The notice is a simple update rather than a new application. Accurate records are important because official correspondence and notices are sent to the address on file.

Question 34New Hampshire Insurance Laws, Rules, and Regulations

A producer who is licensed and resides in Vermont applies for a New Hampshire producer license. New Hampshire will generally:

  1. Deny the application because only New Hampshire residents may be licensed
  2. Require the producer to complete the New Hampshire prelicensing course and pass the state examination
  3. Issue a temporary license that expires after ninety days
  4. Issue a nonresident license without an examination if the home state grants reciprocity Correct answer.

Explanation

New Hampshire licenses nonresident producers on a reciprocal basis, issuing the license without a New Hampshire examination when the applicant's home state extends the same courtesy. The applicant must hold a valid home-state license in the same lines and remain in good standing. Nonresidents are not restricted to temporary licenses.

Question 35New Hampshire Insurance Laws, Rules, and Regulations

The New Hampshire Insurance Commissioner examines an insurer's books and records. Who bears the cost of the examination?

  1. The Department's general fund appropriation
  2. The producers who write business for the insurer
  3. The insurer being examined Correct answer.
  4. The National Association of Insurance Commissioners

Explanation

New Hampshire law authorizes the Commissioner to examine insurers, producers, and other licensees, and the examined insurer is responsible for the expense of the examination. Examiners may access the insurer's books, accounts, and records. The cost allocation keeps the examination program funded by the entities being regulated.

Question 36New Hampshire Insurance Laws, Rules, and Regulations

A New Hampshire surplus lines producer may place a risk with a non-admitted insurer only if the insurer:

  1. Is approved by the insured in writing before the policy is bound
  2. Charges rates that are lower than those in the admitted market
  3. Has at least one licensed producer residing in New Hampshire
  4. Is an eligible surplus lines insurer recognized by the Insurance Commissioner Correct answer.

Explanation

Surplus lines business may be placed only with insurers that meet New Hampshire's eligibility standards and are recognized by the Commissioner as eligible surplus lines insurers. The producer must also confirm that the coverage cannot be obtained from authorized insurers. Placing business with a non-eligible insurer can constitute an unauthorized insurance violation.

Question 37New Hampshire Insurance Laws, Rules, and Regulations

A New Hampshire insurer tells its agents that they must stop writing auto policies for customers who also buy homeowners coverage from a competing insurer, or the agents will lose their appointments. This conduct is best described as:

  1. An unfair trade practice, because it is an attempt to coerce and restrain competition Correct answer.
  2. Lawful, because the insurer has not made any false statement to anyone
  3. Unfair discrimination, because the customers are in the same risk class
  4. Lawful, because insurers may select the producers who represent them

Explanation

New Hampshire's unfair trade practice law prohibits coercion, intimidation, and boycotts undertaken to restrain competition or monopolize insurance business. Directing agents to refuse dealings with a competitor's customers is a restraint-of-trade tactic rather than a permissible appointment decision. A false statement is not required for the conduct to be an unfair trade practice.

Question 38New Hampshire Insurance Laws, Rules, and Regulations

An insurer writes coverage for several unrelated trade associations and treats them as a single group to obtain a lower group rate. Under New Hampshire law this is:

  1. Prohibited as the use of a fictitious group Correct answer.
  2. Permitted if each association signs a group master policy
  3. Permitted if the Commissioner approves the rate filing
  4. Prohibited only if a member of one association files a complaint

Explanation

Group treatment is allowed only where the members share a genuine commonality recognized by law. Combining unrelated associations to obtain a group rate is the use of a fictitious group and constitutes unfair discrimination. The practice is unlawful regardless of whether anyone complains or a filing is approved.

Question 39New Hampshire Insurance Laws, Rules, and Regulations

A surplus lines policy delivered to a New Hampshire insured must include a notice stating that:

  1. The insurer is not licensed in this state and is not protected by the guaranty association Correct answer.
  2. The producer personally guarantees the financial condition of the non-admitted insurer
  3. The insurer is authorized in this state and is fully protected by the New Hampshire guaranty association
  4. The policy will convert to an admitted-market policy after one year

Explanation

Surplus lines policies must carry a conspicuous notice that the insurer is not licensed by New Hampshire and that the policy is not covered by the state guaranty association. The disclosure gives the insured a clear warning about the reduced regulatory protections. The producer does not guarantee the insurer's solvency, and the policy does not convert to admitted status.

Question 40New Hampshire Insurance Laws, Rules, and Regulations

An applicant knowingly understates the number of prior claims on a homeowners application. Under New Hampshire law, this conduct may result in:

  1. No consequence, because the insurer has already issued the policy as applied for
  2. Automatic voiding of the policy with no other consequence
  3. Criminal prosecution for insurance fraud and possible license discipline Correct answer.
  4. Only a premium adjustment at the next renewal

Explanation

Knowingly giving false information to obtain insurance is insurance fraud under New Hampshire law and may be prosecuted criminally. A producer who knowingly participates also faces licensing discipline, including fines, suspension, or revocation. The insurer may separately rescind or reform the policy, but that civil remedy does not replace the statutory penalties.

Question 41General Insurance Concepts and Principles

In property insurance, when must the insured have an insurable interest in the covered property?

  1. Only when the policy is first renewed
  2. Only at the time the policy is issued
  3. At the time of the loss Correct answer.
  4. Only when the application is submitted

Explanation

Property coverage is a contract of indemnity, so the insured must stand to suffer an economic loss at the moment the damage occurs; an owner who sold the building before the fire has no interest to insure. An interest that existed at inception but ended before the loss will not support a property claim.

Question 42General Insurance Concepts and Principles

What is the purpose of the principle of indemnity in property and casualty insurance?

  1. Guarantee that every damaged item is replaced with new property of like kind
  2. Shift every unpaid claim to the state guaranty association
  3. Return the insured to the pre-loss financial position Correct answer.
  4. Let the insured collect more than the loss is worth

Explanation

Indemnity means the insured is made whole for the actual value of the loss, no more and no less. It prevents insurance from becoming a source of profit and is enforced through valuation methods, policy limits, and deductibles.

Question 43General Insurance Concepts and Principles

Statements made by an applicant on an insurance application that the applicant believes to be true to the best of his or her knowledge are known as what?

  1. A warranty
  2. A concealment
  3. A waiver
  4. A representation Correct answer.

Explanation

A representation is a statement of fact the applicant believes to be true; it need only be substantially accurate, and only a material misrepresentation affects the insurer's obligations. A warranty, by contrast, is a policy condition the insured must meet exactly.

Question 44General Insurance Concepts and Principles

Which of the following is an example of a moral hazard?

  1. Frayed electrical wiring in an aging building
  2. An icy sidewalk in front of a retail store
  3. Gasoline stored next to a basement furnace
  4. A merchant who inflates a fire loss claim Correct answer.

Explanation

Moral hazard is the increased likelihood or severity of loss created by the insured's attitude or dishonesty, such as exaggerating or deliberately causing a claim. Physical conditions such as ice, stored fuel, or bad wiring are physical hazards.

Question 45General Insurance Concepts and Principles

Because an insurance policy is a contract of adhesion, how is an ambiguous policy provision generally interpreted?

  1. In favor of the agent who delivered the policy
  2. In favor of the insured who purchased the policy Correct answer.
  3. In favor of the mortgagee named on the policy
  4. In favor of the insurer that drafted the policy

Explanation

The insurer drafts the policy and the insured has no meaningful chance to negotiate its wording, so courts construe genuine ambiguity in favor of the insured and against the insurer. The rule, often called contra proferentem, applies only when the language is truly ambiguous.

Question 46General Insurance Concepts and Principles

Which statement best describes the law of large numbers as it applies to insurance?

  1. Prediction accuracy improves as similar exposure units increase Correct answer.
  2. Rates must be raised whenever the number of policies in force grows
  3. Insurers must reinsure a fixed percentage of every policy they write
  4. Each additional policyholder raises the chance of an individual catastrophic loss

Explanation

As an insurer covers more independent, similar exposure units, actual loss experience converges on the expected level, making rates and reserves more reliable. This is why insurers seek a broad spread of risks rather than a small, concentrated book.

Question 47General Insurance Concepts and Principles

After paying a covered loss caused by a negligent third party, what right does the insurer have under subrogation?

  1. The right belongs to the agent who placed the policy
  2. The insurer keeps any recovery from the third party without regard to the insured's deductible
  3. The insurer may recover what it paid from the responsible party Correct answer.
  4. The insured must return the full policy limit to the insurer after any recovery

Explanation

Subrogation lets the insurer stand in the insured's shoes against the responsible party, but recovery is limited to what the insurer paid; any amount beyond that belongs to the insured for the deductible or uncovered portion. The doctrine supports indemnity by preventing a double recovery.

Question 48General Insurance Concepts and Principles

A building valued at $500,000 is insured for $200,000 under a policy with an 80% coinsurance clause and no deductible. A $100,000 covered loss occurs. How much will the insurer pay?

  1. $100,000
  2. $80,000
  3. $25,000
  4. $50,000 Correct answer.

Explanation

The coinsurance requirement is 80% of $500,000, or $400,000, and the insured carries $200,000, which is one-half of that requirement. Payment is therefore one-half of the $100,000 loss, or $50,000.

Question 49General Insurance Concepts and Principles

What is the function of reinsurance?

  1. It lets a primary insurer transfer part of its risk to another insurer Correct answer.
  2. It transfers the insured's policy to a different state
  3. It requires the insured to share in every loss through a deductible
  4. It allows an insured to buy two policies and collect twice for one loss

Explanation

Reinsurance is insurance for insurers: the ceding company transfers part of its exposure to a reinsurer, which protects surplus and frees capacity to write more business. The original insured continues to look to the primary insurer for payment of claims.

Question 50General Insurance Concepts and Principles

What is the main effect of a deductible in a property insurance policy?

  1. Keep premiums down by having the insured retain small losses Correct answer.
  2. Raise the premium so the insurer can absorb every small claim
  3. Let the insured collect twice for the same loss
  4. Require the insured to carry insurance equal to full replacement cost

Explanation

The insured absorbs the first dollars of each loss up to the deductible amount, which removes small claims from the insurer's book and lowers both premium and claim-handling expense. It is a form of insured retention rather than a limit on the amount of coverage.