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NJ P&C practice questions

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Question 1Insurance Principles and Concepts

In insurance terms, which statement best defines risk?

  1. The dollar amount of premium charged for a policy
  2. The certainty that a covered loss will happen
  3. Uncertainty as to whether a loss will occur Correct answer.
  4. The contractual promise to pay a covered claim

Explanation

Risk is defined as uncertainty regarding loss, meaning the outcome is unknown before the event. Certainty of loss is not risk, and premium or promises to pay are features of the contract, not the definition of risk.

Question 2Insurance Principles and Concepts

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

  1. Business risk from competition and pricing decisions
  2. Speculative risk, such as investing in a new product line
  3. Pure risk, such as fire damage to a warehouse Correct answer.
  4. Market risk arising from changes in interest rates

Explanation

Private insurance addresses pure risk, where there is only the chance of loss or no loss and no possibility of gain. Speculative, market, and business risks involve the possibility of profit and are generally not insurable.

Question 3Insurance Principles and Concepts

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

  1. Only when the application is signed
  2. At the time the first premium is paid
  3. Only when the policy is delivered
  4. At the time of the loss Correct answer.

Explanation

For property coverage, the insured must have an insurable interest when the loss occurs, because the purpose is to make good an actual financial loss. Payment for a loss occurring after the interest has ended would violate the indemnity principle.

Question 4Insurance Principles and Concepts

The principle of indemnity means the insured is restored to:

  1. The full replacement cost of all property without any deduction
  2. A position better than before the loss, as compensation for inconvenience
  3. The policy limit regardless of the actual amount of damage
  4. Approximately the same financial position held before the loss Correct answer.

Explanation

Indemnity restores the insured to roughly the same financial position occupied before the loss, no better and no worse. This principle is why insureds cannot profit from a loss and why techniques such as depreciation and subrogation exist.

Question 5Insurance Principles and Concepts

Which term describes a condition that increases the chance or severity of a loss?

  1. Hazard Correct answer.
  2. Retention
  3. Peril
  4. Exposure

Explanation

A hazard is a condition that raises the likelihood or size of a loss, such as faulty wiring or careless habits. The peril is the actual cause of loss, such as fire or windstorm.

Question 6Insurance Principles and Concepts

Fire, windstorm, and theft, as causes of loss, are best described as:

  1. Warranties
  2. Perils Correct answer.
  3. Risks
  4. Hazards

Explanation

Perils are the actual events or causes of loss, such as fire, windstorm, and theft. Policies typically insure against listed or open perils, while hazards are conditions that increase the chance a peril will occur or cause damage.

Question 7Insurance Principles and Concepts

A policy is a contract of adhesion, which means:

  1. The insurer drafts the policy and ambiguities favor the insured Correct answer.
  2. Both parties negotiate the terms equally before the policy is issued
  3. The policy is enforceable only after a court approves its wording
  4. The insured may rewrite any provision that proves inconvenient

Explanation

Insurance is offered on a take-it-or-leave-it basis, so the insurer drafts the wording and courts construe ambiguity against the drafter. This rule offsets the insured's weaker bargaining position.

Question 8Insurance Principles and Concepts

An aleatory contract is one in which:

  1. Only one party makes any legally enforceable promise
  2. The insurer may cancel at any time without notice
  3. The amounts exchanged may be unequal because of chance Correct answer.
  4. Both parties exchange promises of exactly equal value

Explanation

Aleatory means that the values exchanged depend on uncertain events; a small premium may produce a large claim payment, or no payment at all. Insurance is aleatory rather than a balanced exchange of equal values.

Question 9Insurance Principles and Concepts

A woman applies for life insurance on her own life and names her adult brother as beneficiary. Regarding insurable interest, which statement is correct?

  1. The brother must prove a financial loss before the policy can be issued
  2. Insurable interest must be demonstrated again at the time of her death
  3. She has an insurable interest in her own life, shown by her signed consent Correct answer.
  4. No insurable interest exists because the beneficiary is not a spouse or dependent

Explanation

A person has an unlimited insurable interest in her own life, and signing the application shows the consent needed to insure it. In life insurance, insurable interest is tested at policy inception, not at death.

Question 10Insurance Principles and Concepts

An insured's vehicle is damaged by a negligent driver. The insurer pays the claim and then sues the negligent driver to recover the amount paid. This right is called:

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

Explanation

Subrogation allows the insurer, after paying a loss, to stand in the insured's shoes and pursue the responsible third party. It supports indemnity because the insured cannot recover twice for the same loss.

Question 11Insurance Principles and Concepts

An applicant for property insurance fails to disclose that the building has been the site of three prior arson fires. The insurer would most likely rely on which principle?

  1. Utmost good faith Correct answer.
  2. Adhesion
  3. Waiver
  4. Estoppel

Explanation

Insurance contracts require utmost good faith, which obligates the applicant to disclose material facts the insurer could not reasonably discover. Intentional concealment of a material fact such as a prior arson history can allow the insurer to rescind the policy.

Question 12Insurance Principles and Concepts

An adjuster tells an insured in writing that a late claim filing will be accepted, and the insurer later tries to deny coverage for lateness. The insurer is most likely barred by:

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

Explanation

Estoppel prevents a party whose words or conduct led another to act to his or her detriment from later asserting a right inconsistently with that conduct. The insurer's written assurance that reliance was reasonable makes denying the claim unfair.

Question 13Insurance Principles and Concepts

The law of large numbers allows insurers to:

  1. Eliminate all uncertainty from the underwriting process
  2. Predict losses more accurately as similar exposure units increase Correct answer.
  3. Guarantee a profit on every line of insurance written
  4. Charge each policyholder the exact amount of that person's future loss

Explanation

As the number of similar, independent exposure units grows, actual loss experience tends to approach the expected result. This predictability underlies ratemaking and the pooling of risk.

Question 14Insurance Principles and Concepts

A commercial property policy contains an 80% coinsurance clause and covers a building valued at $500,000. The insured carries a $300,000 limit. Ignoring any deductible, how much will the insurer pay for a $100,000 covered loss?

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

Explanation

The required limit is 80% of $500,000, or $400,000. The payment equals the loss multiplied by the carried limit divided by the required limit: $100,000 x ($300,000 / $400,000) = $75,000.

Question 15Insurance Principles and Concepts

A primary insurer transfers part of its risk to another insurer. The transferring insurer is called the:

  1. Retrocessionaire
  2. Reciprocal
  3. Ceding company Correct answer.
  4. Reinsurer

Explanation

The insurer that transfers risk is the ceding company, and the insurer accepting the risk is the reinsurer. Reinsurance spreads large or catastrophic exposures and increases the primary insurer's capacity.

Question 16Insurance Principles and Concepts

A five-year-old roof has a replacement cost of $12,000 and depreciation of $4,000. Its actual cash value is:

  1. $4,000
  2. $12,000
  3. $8,000 Correct answer.
  4. $16,000

Explanation

Actual cash value equals replacement cost minus depreciation, so $12,000 minus $4,000 is $8,000. This valuation method supports the indemnity principle by reflecting the property's depreciated worth.

Question 17Insurance Principles and Concepts

A windstorm damages a building's power supply, which shuts down a sprinkler system, and water then damages the interior. When a covered peril begins an unbroken chain of events leading to loss, causation is determined by:

  1. The efficient proximate cause Correct answer.
  2. The coinsurance clause
  3. The concurrent cause rule
  4. The doctrine of adhesion

Explanation

Under the efficient proximate cause rule, the cause that sets the loss sequence in motion and predominates determines coverage. If that originating peril is covered, resulting damage from the chain of events is generally covered as well.

Question 18Insurance Principles and Concepts

A producer gives a temporary written or oral agreement that coverage is in force while the application is being underwritten. This agreement is a:

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

Explanation

A binder is temporary evidence that coverage exists, effective until the policy is issued or the application is declined. It is subject to the same terms that will appear in the final policy.

Question 19Insurance Principles and Concepts

In insurance contract law, a representation differs from a warranty in that a representation is:

  1. A statement the applicant believes to be true Correct answer.
  2. A promise that a future condition will be maintained
  3. A guarantee that, if false, voids the policy from inception
  4. A written amendment that changes the policy's terms

Explanation

A representation is a statement made at application that the applicant believes to be true to the best of his or her knowledge. A warranty is a stricter promise or condition that the policy requires to be literally true.

Question 20Insurance Principles and Concepts

A contract that one party may cancel or avoid because of a legal defect, while the other party remains bound, is:

  1. Conditional
  2. Unenforceable
  3. Voidable Correct answer.
  4. Void

Explanation

A voidable contract is valid until the party with the right to avoid it chooses to do so. A void contract, by contrast, has no legal effect from the beginning for either party.

Question 21Insurance Principles and Concepts

An insurer uses a policy term that is reasonably susceptible to two meanings. Under the reasonable expectations doctrine, a court will most likely:

  1. Void the entire policy and order the premium refunded
  2. Resolve the ambiguity in favor of the insured Correct answer.
  3. Rewrite the policy to provide the broadest coverage money can buy
  4. Apply the insurer's internal underwriting manual definition

Explanation

Because the insurer drafts a contract of adhesion, ambiguous language is construed against the drafter and in line with the reasonable expectations of the insured. The court resolves the meaning; it does not create unlimited coverage.

Question 22Insurance Principles and Concepts

A producer has no express authority to bind coverage, yet the producer routinely binds risks and the insurer accepts the resulting business for years. If the insurer later denies a bound claim, the insured may rely on:

  1. Subrogation
  2. Express authority
  3. Apparent authority Correct answer.
  4. The parol evidence rule

Explanation

Apparent authority arises when the insurer's words or conduct lead a reasonable person to believe the producer may act for it. Because the insurer accepted similar bindings repeatedly, the insured's belief was reasonable and the insurer is bound.

Question 23Insurance Principles and Concepts

An insured is indifferent about locking the store at night, believing the insurance company will pay for any theft loss. This attitude is best described as:

  1. Morale hazard, arising from indifference toward loss Correct answer.
  2. Moral hazard, because the insured intended the loss to occur
  3. A speculative risk, because theft may or may not happen
  4. A physical hazard, such as a frayed electrical cord

Explanation

Morale hazard is carelessness or indifference toward loss because insurance is expected to pay. Moral hazard, by contrast, involves a dishonest intent to cause or exaggerate a loss.

Question 24Insurance Principles and Concepts

A large manufacturer sets aside its own funds to pay for frequent, predictable small losses rather than buying insurance for them. This practice is best described as:

  1. Pooling risk through a residual market mechanism
  2. Retaining risk through planned self-insurance Correct answer.
  3. Avoiding risk by discontinuing the activity
  4. Transferring risk through a surplus lines insurer

Explanation

Planned retention, often called self-insurance, means the organization funds expected losses itself instead of transferring them. Insurers commonly combine retention with commercial coverage for catastrophic exposures.

Question 25Insurance Principles and Concepts

An insurer's underwriting guidelines are designed to control adverse selection, which occurs when:

  1. A producer places business with an unauthorized insurer
  2. Premiums collected exceed losses and expenses over a policy period
  3. Higher-risk applicants buy coverage more readily than lower-risk ones Correct answer.
  4. An insurer writes so many policies that it exceeds its reinsurance capacity

Explanation

Adverse selection is the tendency of poorer-than-average risks to seek insurance most eagerly, which can distort the pool and drive up rates. Underwriting, exclusions, and proper pricing protect the insurer against this tendency.

Question 26Insurance Principles and Concepts

Which of the following is a pure risk that is properly handled by insurance?

  1. A homeowner's exposure to fire damage to the house and its contents Correct answer.
  2. An investor's chance of earning a higher return by buying growth stocks instead of bonds
  3. A manufacturer's opportunity to increase profit by entering a new market
  4. A saver's chance of benefiting from a rise in interest rates

Explanation

Pure risk involves only the possibility of loss or no loss, with no chance of gain, which is why insurers will accept it. Speculative risk carries the possibility of gain as well as loss and is generally not insurable. Fire damage to a home is a classic pure risk because the owner can only stay the same or lose.

Question 27Property Insurance Basics

Why does property insurance require the insured to have an insurable interest in the covered property?

  1. It keeps the policy from being a wager and caps recovery at the real loss. Correct answer.
  2. It proves that the insured holds clear title to the property.
  3. It guarantees that the property will be repaired after a loss.
  4. It fixes the replacement cost the insurer will use at claim time.

Explanation

Insurable interest means the insured would suffer a genuine financial loss if the property were damaged. Requiring it prevents property policies from becoming gambling contracts and ties the payment to the actual loss sustained.

Question 28Property Insurance Basics

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

  1. paid the new-for-old value of the damaged property
  2. reimbursed for emotional distress caused by the loss
  3. paid the full policy limit whenever a total loss occurs
  4. restored to the same financial position held before the loss Correct answer.

Explanation

Indemnity restores the insured financially to where they stood before the loss, no better and no worse. It is the reason property settlements are usually based on actual cash value or replacement cost rather than on the policy limit.

Question 29Property Insurance Basics

Actual cash value is calculated as replacement cost minus:

  1. any salvage recovered
  2. the policy deductible
  3. accumulated depreciation Correct answer.
  4. the coinsurance penalty

Explanation

Actual cash value reflects what the damaged property was worth just before the loss, so depreciation is subtracted from the cost to replace it. The deductible and any salvage are applied later in the settlement calculation.

Question 30Property Insurance Basics

The main purpose of a deductible in a property policy is to:

  1. eliminate small claims and lower the premium Correct answer.
  2. satisfy the coinsurance requirement on partial losses
  3. shift the entire loss to the mortgagee
  4. raise the amount the insurer will pay on a total loss

Explanation

A deductible makes the insured absorb the first part of every loss, which removes the expense of handling minor claims. Because the insurer's average claim cost drops, the premium is lower than for a policy with no deductible.

Question 31Property Insurance Basics

The declarations page of a property policy typically:

  1. contains the insuring agreement and the conditions
  2. explains the appraisal and subrogation provisions
  3. lists every exclusion that limits coverage
  4. identifies the insured, the property, the limits, and the policy period Correct answer.

Explanation

The declarations page is the summary sheet of the policy: who is insured, what is covered, where it is located, how much insurance applies, and for how long. The remaining policy sections supply the agreement, exclusions, and conditions.

Question 32Property Insurance Basics

Policy exclusions are included mainly to:

  1. remove exposures that are catastrophic, uninsurable, or covered elsewhere Correct answer.
  2. identify the mortgagee's rights under the policy
  3. reduce the amount paid for an otherwise covered loss
  4. describe the insured's duties after a loss occurs

Explanation

Exclusions keep the policy from promising coverage the insurer cannot reasonably price or that another policy is designed to handle, such as war, earth movement, or intentional acts. They define the outer edge of the insuring agreement.

Question 33Property Insurance Basics

Under a replacement cost policy, a covered loss to a 12-year-old roof is settled based on:

  1. the cost to replace it with new material of like kind and quality Correct answer.
  2. the market value of the home at the time of the loss
  3. the original installed cost less 12 years of depreciation
  4. the actual cash value plus a flat 10 percent allowance

Explanation

Replacement cost coverage pays what it costs today to repair or replace the damage with similar new materials, without deducting for age. The payment is still limited by the policy limit and any deductible.

Question 34Property Insurance Basics

An 80 percent coinsurance clause requires the insured to:

  1. keep the policy in force for at least 80 percent of its term
  2. pay 80 percent of every loss out of pocket
  3. insure the property for 80 percent of the policy limit
  4. carry insurance equal to at least 80 percent of the replacement cost Correct answer.

Explanation

The coinsurance percentage is applied to the replacement cost of the property to determine the limit the insured should carry. Falling short of that target triggers a penalty on partial losses.

Question 35Property Insurance Basics

A building has a replacement cost of $500,000. The policy has an 80 percent coinsurance clause and a limit of $300,000. A covered partial loss is $80,000 and no deductible applies. How much does the insurer pay?

  1. $64,000
  2. $48,000
  3. $80,000
  4. $60,000 Correct answer.

Explanation

The required amount of insurance is 80 percent of $500,000, or $400,000. Dividing the carried limit by the requirement gives 300/400, or 0.75, and 0.75 times the $80,000 loss equals $60,000.

Question 36Property Insurance Basics

Covered damage has a replacement cost of $20,000, and 30 percent depreciation applies. The policy has a $500 deductible and settles on an actual cash value basis. The payment is:

  1. $20,000
  2. $19,500
  3. $14,000
  4. $13,500 Correct answer.

Explanation

Actual cash value is $20,000 minus 30 percent depreciation of $6,000, which equals $14,000. Subtracting the $500 deductible from that figure produces a payment of $13,500.

Question 37Property Insurance Basics

A standard mortgage clause gives the mortgagee the right to:

  1. set the deductible that applies to each covered loss
  2. receive loss payments up to its interest and advance notice of cancellation Correct answer.
  3. cancel the policy at any time without telling the insured
  4. collect the full policy limit even after the debt is repaid

Explanation

The mortgage clause protects the lender's financial interest: loss payments go to the mortgagee to the extent of the outstanding debt, and the mortgagee must be notified of cancellation or nonrenewal. The mortgagee's rights generally survive even if the insured's own acts would void coverage.

Question 38Property Insurance Basics

A proof of loss is best described as:

  1. an appraisal award signed by the umpire
  2. the immediate notice an insured gives the agent right after a loss
  3. the insurer's written explanation for denying a claim
  4. a sworn statement of the loss amount filed within the policy time limit Correct answer.

Explanation

A proof of loss is a formal, usually sworn document in which the insured states the amount of the claim and supports it with detail. It is a condition of the policy and must be filed within the stated deadline, and it is distinct from the prompt notice of loss.

Question 39Property Insurance Basics

After paying a covered loss, an insurer that pursues the at-fault party is exercising:

  1. subrogation, which helps hold down premiums Correct answer.
  2. contribution, which divides a loss among insurers
  3. salvage, which transfers title to damaged property
  4. abandonment, which gives the insurer the damaged goods

Explanation

Subrogation lets the insurer stand in the insured's shoes and recover the claim amount from the party that caused the loss. Recoveries reduce the insurer's net cost and are reflected in lower rates.

Question 40Property Insurance Basics

Two policies cover the same building on a pro rata basis. Policy A has a $300,000 limit and Policy B has a $200,000 limit. A covered loss is $100,000. How much does Policy A pay?

  1. $50,000
  2. $75,000
  3. $60,000 Correct answer.
  4. $100,000

Explanation

Pro rata sharing divides the loss by each policy's share of the total insurance. Policy A carries 300,000 of the 500,000 total, or 60 percent, and 60 percent of the $100,000 loss is $60,000.

Question 41Property Insurance Basics

An insured with a $1,000 deductible reports a covered loss of $900. The insurer pays:

  1. $800, the loss less the deductible
  2. $1,000, the amount of the deductible
  3. $0, because the loss is below the deductible Correct answer.
  4. $900, because deductibles apply only to total losses

Explanation

The deductible is subtracted from every covered loss before payment. When the loss is smaller than the deductible, the subtraction leaves nothing and no payment is made.

Question 42Property Insurance Basics

When an insurer pays a total loss and takes ownership of the damaged property, the value of that property is called:

  1. abandonment
  2. betterment
  3. salvage Correct answer.
  4. subrogation

Explanation

Salvage is the remaining value of damaged property that the insurer may take, sell, or credit against the claim after paying the loss. Its value reduces the insurer's net cost of the claim.

Question 43Property Insurance Basics

For property insurance purposes, a building is considered vacant when it:

  1. is undergoing cosmetic updates while still occupied
  2. is empty of people and contents and not in use Correct answer.
  3. is occupied only on weekends by the owner
  4. is temporarily without occupants but still fully furnished

Explanation

Vacancy means both people and belongings are gone and the building is no longer being put to its intended use. A building that still holds furnishings but has no occupants is merely unoccupied, which is treated differently.

Question 44Property Insurance Basics

If the insured and the insurer disagree only on the amount of a covered loss, the appraisal provision allows them to:

  1. each name a competent appraiser and, if needed, an umpire Correct answer.
  2. submit the dispute to binding arbitration
  3. void the policy and return the unearned premium
  4. ask the mortgagee to decide the amount

Explanation

Appraisal is a valuation procedure: each side chooses a competent appraiser, and the appraisers may select an umpire to break a deadlock. It resolves only the amount of the loss and does not decide whether coverage applies.

Question 45Property Insurance Basics

The abandonment provision in a property policy means that the insured:

  1. cannot turn damaged property over to the insurer and claim a total loss Correct answer.
  2. may abandon the claim after the proof of loss is filed
  3. may abandon the property to the insurer and demand full payment
  4. must vacate the premises after any total loss

Explanation

The abandonment condition blocks the insured from walking away from damaged property and sticking the insurer with it. The insurer is entitled to inspect and deal with salvage on its own terms after a loss.

Question 46Property Insurance Basics

A windstorm knocks down a wall, which tears open the roof, and rain then ruins the interior. The rain damage is:

  1. covered, because the windstorm set the chain of events in motion Correct answer.
  2. excluded, because rain is an excluded peril in every policy
  3. limited to the actual cash value of the interior
  4. covered only if the policy lists rain before windstorm

Explanation

Under proximate cause, a loss is covered when an insured peril starts an unbroken chain of events leading to the damage. Because the wind opened the roof, the resulting rain damage flows from the windstorm and is covered even though rain alone might be excluded.

Question 47Property Insurance Basics

A building with a replacement cost of $1,000,000 is insured for $600,000 under an 80 percent coinsurance clause. A covered loss is $200,000 and the deductible is $2,000. The insurer pays:

  1. $148,000 Correct answer.
  2. $150,000
  3. $120,000
  4. $198,000

Explanation

The required limit is 80 percent of $1,000,000, or $800,000. The ratio of carried to required insurance is 600/800, or 0.75, so the adjusted loss is 0.75 times $200,000, or $150,000, and the $2,000 deductible is then subtracted to reach $148,000.

Question 48Property Insurance Basics

An owner stops locking the building because a loss would be paid anyway. This attitude is:

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

Explanation

A morale hazard is carelessness or indifference toward loss that arises from having insurance. A moral hazard involves dishonesty such as arson or exaggeration, while physical hazards are tangible conditions and legal hazards come from the legal environment.

Question 49Property Insurance Basics

Insurers forecast losses more reliably as they insure many similar, independent exposure units. This concept is:

  1. the principle of indemnity
  2. adverse selection
  3. the rule of contribution
  4. the law of large numbers Correct answer.

Explanation

The law of large numbers holds that actual results approach expected results as the number of similar independent units increases. It is the statistical basis for pooling risk and for setting rates.

Question 50Property Insurance Basics

Under a replacement cost policy on a commercial building, the insurer may pay actual cash value first and hold back the balance until the insured:

  1. pays an additional premium for the difference
  2. recalculates the coinsurance percentage
  3. finishes the repairs and files a replacement cost claim Correct answer.
  4. obtains the mortgagee's written consent to the settlement

Explanation

Commercial replacement cost forms commonly settle at actual cash value initially and withhold the recoverable depreciation. The holdback is released once the property has actually been repaired or replaced and the claim is presented within the policy deadline.