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NM P&C practice questions

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Question 1Insurance Principles and Concepts

Which method of handling risk involves shifting the financial consequences of loss to an insurer?

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

Explanation

Risk transfer shifts the financial consequence of a loss to another party, typically an insurer, in exchange for premium. Avoidance eliminates the exposure, retention keeps it, and loss reduction only lessens its severity.

Question 2Insurance Principles and Concepts

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

  1. Only when a claim is filed in court
  2. Only when the policy is first issued
  3. At the time of the loss Correct answer.
  4. Throughout the policy period and for five years afterward

Explanation

In property insurance, insurable interest must exist at the time of loss because the policy is a contract of indemnity. Life insurance is the opposite: interest must exist at inception.

Question 3Insurance Principles and Concepts

The principle of indemnity means the insured is restored to which position?

  1. The average position held by similar insureds
  2. Whatever amount the insurer deems fair in its discretion
  3. The same financial position as before the loss Correct answer.
  4. A better financial position than before the loss

Explanation

Indemnity restores the insured to the same financial position held before the loss, no better and no worse. It prevents profit from loss and underpins limits, deductibles, and actual cash value settlement.

Question 4Insurance Principles and Concepts

Utmost good faith requires each party to an insurance contract to do which of the following?

  1. Inspect all insured property personally before binding
  2. Agree to arbitrate all coverage disputes before suit
  3. Disclose all material facts relevant to the risk Correct answer.
  4. Pay every claim within one business day of notice

Explanation

Utmost good faith obligates both parties to deal honestly and to disclose material facts that affect the risk. It supports the insurer's underwriting and the insured's reasonable expectations.

Question 5Insurance Principles and Concepts

Which of these is an example of a pure risk?

  1. Opening a new restaurant
  2. Investing in a new product line
  3. Buying stock hoping for a gain
  4. Fire damaging a warehouse Correct answer.

Explanation

Pure risk involves only the chance of loss or no loss, with no possibility of gain; fire is a classic example. Speculative risk offers the chance of gain as well as loss and is generally not insurable.

Question 6Insurance Principles and Concepts

A moral hazard is best described as which of the following?

  1. A risk that can be measured statistically
  2. A physical condition that increases the chance of loss
  3. The uncertainty about whether a loss will occur
  4. A dishonest tendency that raises claim costs Correct answer.

Explanation

A moral hazard is a dishonest or unethical tendency, such as exaggerating a claim, that increases the likelihood or size of loss. It differs from morale hazard, which is carelessness, and from physical hazard, which is a tangible condition.

Question 7Insurance Principles and Concepts

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

  1. Charge an identical premium to every policyholder regardless of risk
  2. Guarantee that no losses will ever occur
  3. Predict losses more accurately as exposures increase Correct answer.
  4. Avoid the need for underwriting

Explanation

The law of large numbers holds that observed loss experience approaches expected results as the number of similar independent exposures grows, improving rate accuracy. It does not guarantee outcomes or remove the need for underwriting.

Question 8Insurance Principles and Concepts

Which policy section identifies the insured, the property covered, and the policy period?

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

Explanation

The declarations page names the insured, describes the property and locations, shows limits and deductibles, and states the policy period. The insuring agreement grants coverage, conditions set duties, and exclusions remove coverage.

Question 9Insurance Principles and Concepts

After paying a covered property claim, an insurer pursues the at-fault party. This right is called what?

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

Explanation

Subrogation lets an insurer that has paid a claim step into the insured's shoes and pursue the responsible third party, preventing double recovery. Contribution allocates a loss among insurers, coinsurance is an insurance-to-value requirement, and salvage is the residual value of damaged property.

Question 10Insurance Principles and Concepts

A building valued at $1,000,000 is insured for $600,000 under an 80% coinsurance clause. A $200,000 covered loss occurs. Ignoring deductibles, what does the insurer pay?

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

Explanation

With an 80% requirement, the required limit is $800,000. The insured carries $600,000, so the loss is paid at 600,000/800,000 = 75%: $200,000 x 0.75 = $150,000.

Question 11Insurance Principles and Concepts

The primary purpose of a deductible is to do which of the following?

  1. Transfer the risk of large losses to the insured
  2. Satisfy the coinsurance requirement
  3. Eliminate small claims and reduce premium Correct answer.
  4. Increase the insurer's exposure to small losses

Explanation

A deductible makes the insured absorb a small first portion of each loss, which removes small claims from the insurer's book and lowers premium. It does not satisfy coinsurance and does not shift large losses to the insured.

Question 12Insurance Principles and Concepts

Reinsurance is best described as which of the following?

  1. A government program for catastrophic losses
  2. Insurance bought by an insurer to cover its own risk Correct answer.
  3. Insurance sold directly to consumers by a primary insurer
  4. An agreement among insurers to share commissions

Explanation

Reinsurance is insurance for insurers: the ceding insurer transfers part of its risk to a reinsurer. It improves capacity and surplus protection but does not change the original insured's policy.

Question 13Insurance Principles and Concepts

Adverse selection occurs when which of the following happens?

  1. An insurer selects only the best risks
  2. A producer sells policies to unlicensed persons
  3. A policyholder increases risk after buying coverage
  4. A disproportionate number of poor risks seek insurance Correct answer.

Explanation

Adverse selection is the tendency for those most likely to have losses to seek or retain coverage, which can skew an insurer's book. Insurers counter it with underwriting, exclusions, and appropriate pricing.

Question 14Insurance Principles and Concepts

An insurer's adjuster tells the insured that a late proof of loss will be accepted, and the insurer later denies the claim for lateness. The insured may rely on which doctrine?

  1. Subrogation
  2. Coinsurance
  3. Indemnity
  4. Waiver and estoppel Correct answer.

Explanation

Waiver is the voluntary surrender of a known right, and estoppel prevents the insurer from later asserting that right when the insured reasonably relied on the waiver. The adjuster's assurance and the insured's reliance support both elements.

Question 15Insurance Principles and Concepts

A windstorm blows down a wall, which crushes inventory. The proximate cause of the inventory loss is which of the following?

  1. The collapsing wall
  2. The windstorm Correct answer.
  3. The building owner's negligence
  4. The inventory damage

Explanation

Proximate cause is the dominant, efficient cause that sets the chain of events in motion without which the loss would not have occurred. The windstorm is that cause; the wall collapse is a consequence.

Question 16Insurance Principles and Concepts

A representation in an insurance application is best described as which of the following?

  1. A statement the applicant believes to be true Correct answer.
  2. A promise that a condition will be maintained
  3. An intentional concealment of a fact
  4. A guarantee that is always material

Explanation

A representation is a statement of fact on the application that the applicant believes to be true; it need not be literally exact. A warranty, by contrast, is a promise or condition that must be strictly met.

Question 17Insurance Principles and Concepts

Which element must a claimant prove in a negligence action against a property owner?

  1. A criminal conviction of the owner for the act
  2. An intentional act by the owner that caused harm
  3. A duty owed by the owner that was breached Correct answer.
  4. A written contract signed by the owner

Explanation

A negligence claim requires duty, breach, proximate cause, and damages. The claimant must show the owner owed a duty of reasonable care and failed to meet it.

Question 18Insurance Principles and Concepts

Under pure comparative negligence, an injured party who is 30% at fault does which of the following?

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

Explanation

Pure comparative negligence reduces the claimant's recovery by his or her percentage of fault but does not bar it, so a 30% at-fault claimant recovers 70%.

Question 19Insurance Principles and Concepts

A binder provides which of the following?

  1. A list of excluded perils
  2. Proof that the premium was paid
  3. Temporary evidence of coverage until the policy is issued Correct answer.
  4. A permanent policy with no expiration

Explanation

A binder is temporary evidence of coverage, often oral or written, that bridges the gap until the policy is issued. It is subject to the terms of the policy to be issued and can be cancelled per its terms.

Question 20Insurance Principles and Concepts

A building is destroyed beyond repair by a covered peril. This outcome is classified as which of the following?

  1. A constructive total loss
  2. A particular average loss
  3. An actual total loss Correct answer.
  4. A partial loss

Explanation

An actual total loss occurs when the property is destroyed or so damaged that it no longer exists as the thing insured. A constructive total loss occurs when damage is not total but the cost of repair exceeds the value, making recovery impractical.

Question 21Insurance Principles and Concepts

Under a valued policy, in the event of a total loss the insurer pays which of the following?

  1. The agreed value stated in the policy Correct answer.
  2. The replacement cost less depreciation
  3. The market value determined by appraisal after loss
  4. The actual cash value at the time of loss

Explanation

A valued policy states an agreed value for the insured property, and that amount is paid on a total loss without a further proof of value. This differs from an unvalued policy, which settles based on the actual loss up to the limit.

Question 22Insurance Principles and Concepts

Two policies cover the same property loss: Policy A has a $100,000 limit and Policy B has a $50,000 limit, and both contain pro rata other insurance clauses. For a $60,000 loss, how much does Policy A pay?

  1. $40,000 Correct answer.
  2. $45,000
  3. $30,000
  4. $50,000

Explanation

Under pro rata contribution by limits, each insurer pays its limit divided by the total limits, multiplied by the loss. Total limits are $150,000, so Policy A pays $60,000 x (100,000/150,000) = $40,000.

Question 23Insurance Principles and Concepts

After a total loss, the insured may not surrender the damaged property to the insurer and demand full payment because of which rule?

  1. Subrogation automatically voids any claim for a total loss
  2. Policies typically prohibit abandonment without insurer consent Correct answer.
  3. Abandonment is required whenever a coinsurance clause applies
  4. Salvage rights belong exclusively to the mortgagee

Explanation

Property policies typically prohibit abandonment, which is the insured's surrender of damaged property to the insurer in exchange for full payment. The insurer is entitled to take salvage only when it chooses to do so.

Question 24Insurance Principles and Concepts

An applicant misstates a fact on a property application. The insurer may rescind the policy only if the misstatement was which of the following?

  1. About a prior claim at another company
  2. Written in ink on the application
  3. Material to acceptance of the risk Correct answer.
  4. Made by the producer rather than the applicant

Explanation

A misrepresentation supports rescission or denial only when it is material, meaning it would have affected the insurer's decision to accept the risk or set the premium. Immaterial errors generally do not void coverage.

Question 25Insurance Principles and Concepts

An insurance policy is aleatory because of which characteristic?

  1. The amounts exchanged may be unequal Correct answer.
  2. It is enforceable only in a court of law
  3. The insured must perform first
  4. Both parties exchange roughly equal value

Explanation

An insurance contract is aleatory because the performance of the parties is unequal and contingent on chance: a small premium may produce a large claim payment, or no payment at all. It is not a commutative contract, where values exchanged are roughly equal.

Question 26Insurance Principles and Concepts

Which type of risk is the traditional subject matter of insurance?

  1. Pure risk, which can produce only a loss or no change Correct answer.
  2. Market risk, which arises from price movements in securities
  3. Strategic risk, which arises from poor business decisions
  4. Speculative risk, which can produce either a gain or a loss

Explanation

Insurance is designed for pure risks, where the only possible outcomes are loss or no loss, because those losses are accidental and measurable. Speculative risks involve the chance of gain and are handled through other means.

Question 27Insurance Principles and Concepts

In property insurance, the insured must generally have insurable interest in the covered property at which point?

  1. Only after the insurer accepts the proof of loss
  2. Only when the policy is issued and delivered
  3. At the time of the loss Correct answer.
  4. Only at the time the application is signed

Explanation

Property coverage indemnifies actual loss, so insurable interest must exist when the loss occurs. A person who has already sold the property has no recoverable loss even if the policy was valid at inception.

Question 28Insurance Principles and Concepts

Fire, windstorm, and theft, as causes of loss, are examples of which of the following?

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

Explanation

A peril is the actual cause of a loss, such as fire or windstorm. A hazard is a condition that increases the chance or severity of a loss caused by a peril.

Question 29Insurance Principles and Concepts

An insurance policy is a unilateral contract because of which of the following?

  1. The insured may cancel at any time without penalty
  2. The policy must be signed by both parties to be enforceable
  3. Only the insurer makes a legally enforceable promise Correct answer.
  4. Both parties exchange promises of equal value at inception

Explanation

In a unilateral contract only one party, the insurer, is bound by an enforceable promise to pay. The insured makes no promise to pay premiums but may lose coverage if premiums are not paid.

Question 30Insurance Principles and Concepts

A policy is prepared entirely by the insurer and offered on a take-it-or-leave-it basis, with ambiguities construed against the insurer. This characteristic is known as which of the following?

  1. Adhesion Correct answer.
  2. Conditional
  3. Aleatory
  4. Unilateral

Explanation

A contract of adhesion is drafted by one party and accepted or rejected by the other, so courts resolve unclear language in favor of the party who did not draft it.

Question 31Insurance Principles and Concepts

What is the primary function of an exclusion in an insurance policy?

  1. To state the premium amount and the schedule of payments due
  2. To describe the insured, the covered property, and the policy period
  3. To identify the duties the insured must perform after a loss
  4. To remove exposures the insurer does not intend to insure Correct answer.

Explanation

Exclusions narrow the insuring agreement by removing exposures the insurer is unwilling to write, such as intentional acts or uninsurable perils. They keep the premium appropriate to the risk actually assumed.

Question 32Insurance Principles and Concepts

A document attached to a policy that changes its terms, such as by adding coverage, is called which of the following?

  1. A warranty
  2. A certificate
  3. A binder
  4. An endorsement Correct answer.

Explanation

An endorsement, sometimes called a rider, amends the policy and takes precedence over the original form language where the two conflict.

Question 33Insurance Principles and Concepts

A business sells its delivery vans and hires a contractor to make all deliveries, eliminating its auto exposure. This risk management technique is which of the following?

  1. Avoidance Correct answer.
  2. Retention
  3. Loss reduction
  4. Transfer

Explanation

Avoidance eliminates the exposure entirely by stopping the activity that creates it. Selling the vehicles removes the auto liability and physical damage exposure rather than shifting or reducing it.

Question 34Insurance Principles and Concepts

An insured stops locking the warehouse because a policy will pay for theft losses. This attitude is which type of hazard?

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

Explanation

A morale hazard is carelessness or indifference toward loss because insurance exists. A moral hazard involves a dishonest intent to cause or exaggerate a loss.

Question 35Insurance Principles and Concepts

Actual cash value is best described as which of the following?

  1. Replacement cost less depreciation Correct answer.
  2. Replacement cost of the property with no deduction
  3. The market value of the insured's entire business
  4. The policy limit shown in the declarations

Explanation

Actual cash value reflects the property's value at the time of loss, commonly computed as replacement cost minus depreciation. It supports the indemnity principle by restoring the insured to the pre-loss financial position.

Question 36Insurance Principles and Concepts

A liability policy pays claims for injury that happens during the policy period regardless of when the claim is reported. This is which type of policy?

  1. Claims-made
  2. Reporting form
  3. Occurrence Correct answer.
  4. Valued

Explanation

An occurrence policy is triggered by the date of the injurious event, even if the claim is filed years later. A claims-made policy is instead triggered by the date the claim is reported.

Question 37Insurance Principles and Concepts

Which part of a policy states the insurer's core promise to pay for covered losses?

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

Explanation

The insuring agreement contains the insurer's promise to indemnify the insured for covered losses under the described circumstances. The other sections identify the risk, set duties, or limit the promise.

Question 38Insurance Principles and Concepts

Provisions that set out the obligations of both parties, such as submitting a proof of loss, appear in which policy section?

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

Explanation

The conditions section lists duties that must be satisfied for coverage to apply, such as giving prompt notice and cooperating in the investigation. Failure to meet a condition can affect the claim.

Question 39Insurance Principles and Concepts

An applicant deliberately fails to tell the insurer about a prior fire loss that would have affected underwriting. This is which of the following?

  1. Subrogation
  2. Representation
  3. Waiver
  4. Concealment Correct answer.

Explanation

Concealment is the intentional withholding of a material fact that the insurer needs to evaluate the risk. It differs from a misrepresentation because nothing false is stated; relevant information is simply omitted.

Question 40Insurance Principles and Concepts

An insured promises in the policy that a sprinkler system will be maintained in working order. This statement is which of the following?

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

Explanation

A warranty is a promise by the insured that a specified condition will be maintained, and it becomes part of the policy. A representation is a statement of fact made to induce the insurer to issue coverage.

Question 41Insurance Principles and Concepts

A policy obtained through fraud by the applicant is generally treated as which of the following?

  1. Void from the beginning
  2. Voidable at the option of the injured party Correct answer.
  3. Fully enforceable by both parties
  4. Valid only after a court rewrites the terms

Explanation

A contract procured by fraud is voidable, meaning the injured party may rescind it and treat it as unenforceable. A void contract, by contrast, never had legal effect for either party.

Question 42Insurance Principles and Concepts

A general aggregate limit in a liability policy caps which of the following?

  1. The amount payable for any single occurrence, regardless of other losses
  2. The amount payable for defense costs incurred in a single claim
  3. The amount payable after the per-occurrence deductible is applied
  4. The total payable for all covered losses in the policy period Correct answer.

Explanation

The aggregate limit is the most the insurer will pay for all covered claims during the policy period combined. The per-occurrence limit caps each individual loss, but total payments cannot exceed the aggregate.

Question 43Insurance Principles and Concepts

The insurer and insured agree a loss is covered but cannot agree on the amount of damage. The policy provision used to resolve this dispute is which of the following?

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

Explanation

An appraisal provision lets each party select a competent appraiser, with an umpire resolving differences, when only the amount of loss is disputed. Coverage questions are not decided through appraisal.

Question 44Insurance Principles and Concepts

A mortgagee clause in a property policy generally does which of the following?

  1. Requires the lender to pay the premium and any assessments
  2. Protects the lender's interest even if the insured voids the policy Correct answer.
  3. Transfers ownership of the policy to the lender named in the declarations
  4. Limits coverage to the outstanding loan balance at the time of loss

Explanation

The mortgagee clause gives the lender its own protected interest, so the lender can collect loss payments even if the insured's acts would otherwise defeat coverage. It does not transfer the policy or cap coverage at the loan balance.

Question 45Insurance Principles and Concepts

An insurer collects $2,000,000 in premiums and pays $1,200,000 in losses and loss adjustment expenses. What is its loss ratio?

  1. 167%
  2. 80%
  3. 40%
  4. 60% Correct answer.

Explanation

The loss ratio divides incurred losses and loss adjustment expenses by earned premiums. Here $1,200,000 divided by $2,000,000 equals 60%.

Question 46Insurance Principles and Concepts

Under a disappearing deductible, what happens to the deductible as the amount of a covered loss increases?

  1. The deductible falls and eventually disappears as the loss grows Correct answer.
  2. The deductible increases in proportion to the size of the covered loss
  3. The deductible stays the same but the policy limit is reduced accordingly
  4. The deductible applies only to liability claims and not to property claims

Explanation

A disappearing deductible shrinks as losses rise and is fully eliminated once the loss reaches a stated threshold. It gives small claims a deductible while allowing large claims to be paid as if no deductible applied.

Question 47Insurance Principles and Concepts

A liberalization clause provides that which of the following happens when the insurer broadens coverage in a later edition of the same form?

  1. The policy is cancelled and rewritten at the next renewal
  2. The insured must buy an endorsement to receive the broadened coverage
  3. The broadened coverage applies only to losses after renewal
  4. The broadened coverage applies automatically at no additional premium Correct answer.

Explanation

The liberalization clause automatically extends any broader coverage the insurer later adopts in its forms to existing policies during the current policy period. The insured receives the improvement without an endorsement or extra premium.

Question 48Insurance Principles and Concepts

An insured cancels a policy midterm and receives a refund smaller than the unearned pro rata premium. This cancellation method is called which of the following?

  1. Pro rata cancellation
  2. Flat cancellation
  3. Retroactive cancellation
  4. Short rate cancellation Correct answer.

Explanation

Short rate cancellation returns less than the unearned premium because the insurer keeps a penalty for the early termination. Pro rata cancellation returns the exact unearned portion and is typical when the insurer cancels.

Question 49Insurance Principles and Concepts

An insurer's expected loss and loss adjustment expense ratio is 65% and its expense ratio is 25%. What is its expected underwriting profit?

  1. 25%
  2. 10% Correct answer.
  3. 40%
  4. 90%

Explanation

The combined ratio adds the loss and loss adjustment expense ratio to the expense ratio, giving 90%. Underwriting profit is the amount by which that total falls short of 100%, which is 10%.

Question 50Insurance Principles and Concepts

Under the doctrine of reasonable expectations, coverage is generally honored when which of the following occurs?

  1. An objectively reasonable insured would expect coverage Correct answer.
  2. The insurer's agent gave a verbal explanation of the policy terms at delivery
  3. The insured paid the full annual premium before the loss occurred
  4. The loss resulted from a peril that the policy does not mention anywhere

Explanation

The doctrine protects the coverage expectations of an ordinary insured reading the policy, particularly where the wording is ambiguous or hidden. It does not create coverage where no reasonable person would have expected it.