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SC Property & Casualty practice questions

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Question 1Insurance Principles and Concepts

In insurance terms, which statement best describes risk?

  1. The certainty that a loss will occur
  2. The process of transferring a loss to an insurer
  3. The dollar amount of damage after an event
  4. Uncertainty regarding a potential loss Correct answer.

Explanation

Risk is the uncertainty about whether a loss will occur and how large it may be. Insurance is a mechanism for handling certain pure risks, not risk itself.

Question 2Insurance Principles and Concepts

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

  1. At both the time of application and after any renewal
  2. At the time of the loss Correct answer.
  3. Only when the policy is purchased
  4. Only when a claim is denied

Explanation

For property coverage, insurable interest must exist at the time of the loss so the insured actually suffers a financial detriment. Life insurance differs, where interest is tested at policy inception.

Question 3Insurance Principles and Concepts

The principle of indemnity is intended to do which of the following?

  1. Punish the insurer for delaying a claim
  2. Allow the insured to collect more than the loss when premiums are high
  3. Restore the insured to the same financial position held before the loss Correct answer.
  4. Guarantee a new replacement for every damaged item

Explanation

Indemnity means the insured is made whole financially, no better and no worse off than before the loss. It prevents profit from insurance and discourages intentional losses.

Question 4Insurance Principles and Concepts

A condition that increases the chance or severity of a loss is known as which of the following?

  1. peril
  2. loss
  3. exposure
  4. hazard Correct answer.

Explanation

A hazard is a condition that raises the likelihood or size of a loss, such as oily rags in a workshop. The peril is the cause of loss itself, such as fire.

Question 5Insurance Principles and Concepts

Which type of risk is generally considered insurable by private insurers?

  1. Speculative risk
  2. Market risk
  3. Pure risk Correct answer.
  4. Business venture risk

Explanation

Pure risks involve only the chance of loss or no loss, which makes them predictable enough to insure. Speculative risks offer the chance of gain and are generally not insurable.

Question 6Insurance Principles and Concepts

An applicant for property insurance fails to disclose that the roof is 30 years old and actively leaking. This most directly implicates which principle?

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

Explanation

Utmost good faith requires both parties to disclose all material facts that would affect the underwriting decision. Concealing a serious roof defect is a breach of that duty.

Question 7Insurance Principles and Concepts

Because a property policy is a contract of adhesion, a court is most likely to do which of the following?

  1. Enforce the policy exactly as written when terms are clear
  2. Void the policy for lack of consideration
  3. Rewrite the policy to raise the premium
  4. Construing ambiguity against the insurer Correct answer.

Explanation

A contract of adhesion is drafted by one party and accepted by the other, so ambiguous wording is interpreted against the drafter. Clear language is still enforced as written.

Question 8Insurance Principles and Concepts

After paying a covered fire loss caused by a negligent contractor, an insurer pursues the contractor for reimbursement. This right is known as which of the following?

  1. contribution
  2. subrogation Correct answer.
  3. reinsurance
  4. salvage

Explanation

Subrogation allows the insurer, after paying the insured, to stand in the insured's shoes and recover from the party that caused the loss. It helps keep premiums down and prevents double recovery.

Question 9Insurance Principles and Concepts

An 80% coinsurance clause in a commercial property policy requires the insured to carry a limit of at least which amount?

  1. 80% of the property's replacement cost Correct answer.
  2. 80% of the outstanding mortgage
  3. 80% of the policy premium
  4. 80% of the total claim payments made last year

Explanation

A coinsurance clause sets a minimum limit based on the property's value, commonly 80% of replacement cost. Carrying less results in a reduced claim payment under the coinsurance formula.

Question 10Insurance Principles and Concepts

Actual cash value in property claims is generally calculated in which way?

  1. Replacement cost plus depreciation
  2. Replacement cost minus depreciation Correct answer.
  3. Market value of the entire building
  4. The policy limit regardless of damage

Explanation

Actual cash value is replacement cost less depreciation, reflecting the used value of the damaged property. It supports the indemnity principle by paying no more than the property was worth.

Question 11Insurance Principles and Concepts

Intentionally setting fire to an insured building in order to collect the insurance money is an example of which of the following?

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

Explanation

A moral hazard involves a dishonest act intended to create or exaggerate a loss for financial gain. Morale hazard, by contrast, is carelessness arising from the mere existence of insurance.

Question 12Insurance Principles and Concepts

An insurer's agent tells an insured in writing that a late premium will be accepted, and the insurer later denies coverage on that ground. This situation is best described by which concept?

  1. waiver and estoppel Correct answer.
  2. coinsurance
  3. adverse selection
  4. subrogation

Explanation

Waiver is the voluntary giving up of a known right, and estoppel prevents the insurer from later asserting that right to the insured's detriment. The written statement supports both elements.

Question 13Insurance Principles and Concepts

The law of large numbers helps insurers predict losses because which of the following occurs?

  1. A larger pool of similar units yields more stable results Correct answer.
  2. Each individual loss becomes more severe over time
  3. Premiums rise as the number of insureds grows
  4. Large policies always produce a lower loss ratio for the insurer

Explanation

As the number of similar exposure units increases, actual loss experience tends to approach the expected or predicted level. This predictability is the basis for ratemaking.

Question 14Insurance Principles and Concepts

An insured's wall collapses during a covered windstorm, and investigators determine the dominant cause was long-term termite damage, which the policy excludes. Under the doctrine of proximate cause, the loss is most likely to be treated in which way?

  1. covered, because a windstorm occurred on the same day as the collapse
  2. covered in full, because collapse is always covered
  3. covered at 50% as a concurrent loss
  4. not covered, because the efficient cause was excluded termite damage Correct answer.

Explanation

Proximate cause looks to the dominant, efficient cause that set the loss in motion. If that cause is excluded, the loss is not covered even when a covered peril was also present.

Question 15Insurance Principles and Concepts

A property insurance policy is described as an aleatory contract because of which characteristic?

  1. Both parties must exchange promises of identical value
  2. The insurer may cancel at any time without notice
  3. The insured must read and understand every policy term
  4. Premiums paid may be far less than a loss payment Correct answer.

Explanation

Aleatory means the values exchanged are unequal and depend on chance; a modest premium may fund a large claim. This distinguishes insurance from contracts with equal exchanges.

Question 16Insurance Principles and Concepts

An insurer strengthens underwriting guidelines and uses risk-based pricing primarily in order to reduce which of the following?

  1. Adverse selection Correct answer.
  2. The number of claims-made policies
  3. Subrogation recoveries
  4. Coinsurance requirements

Explanation

Adverse selection occurs when applicants with higher-than-average risk seek coverage more eagerly than preferred risks. Careful underwriting and accurate pricing help keep the risk pool balanced.

Question 17Property Insurance Basics

For property insurance purposes, insurable interest means that the insured:

  1. has a financial stake that would be harmed by damage to the property Correct answer.
  2. occupies the building as a primary residence during the policy term
  3. holds a recorded deed naming the insured as owner of record
  4. owns the property outright with no mortgage or lien against it

Explanation

Insurable interest is a financial relationship with the property such that its damage or destruction causes the insured a measurable economic loss. It can arise from ownership, but also from tenancy, leasehold, bailment, or a secured interest. The interest must exist at the time of the loss for the claim to be payable.

Question 18Property Insurance Basics

Actual cash value (ACV) is most commonly calculated as:

  1. current market value plus sales tax
  2. replacement cost minus depreciation Correct answer.
  3. original purchase price less all premiums paid
  4. a stated value agreed on at policy inception

Explanation

ACV reflects the value of the property at the time of loss, which is typically replacement cost reduced by depreciation for age and condition. Some forms instead use fair market value, but replacement cost minus depreciation is the standard method. This method supports the indemnity principle by restoring the insured to roughly the pre-loss position, no better.

Question 19Property Insurance Basics

The declarations page of a property policy typically shows which of the following?

  1. The complete list of exclusions that apply to the coverage forms
  2. The definitions of insured and additional insureds
  3. The insured's duties after a loss and the appraisal process
  4. Named insured, policy period, limits, and deductible Correct answer.

Explanation

The declarations page personalizes the policy by identifying who is insured, the property or location covered, the policy term, the limits of liability, and the deductible. It is the summary page that ties the standard coverage forms to a particular risk. Exclusions, conditions, and definitions appear in the coverage forms, not the declarations.

Question 20Property Insurance Basics

A property policy carries a $1,000 deductible. This means that:

  1. The insured pays the first $1,000 of each covered loss Correct answer.
  2. The insured collects $1,000 less than the loss on every claim filed
  3. The deductible reduces the policy limit by $1,000 after each claim
  4. The insurer pays the first $1,000 and the insured pays whatever remains

Explanation

A deductible is the amount of a covered loss the insured retains before the insurer pays anything. It applies per occurrence (or per policy period, depending on the form) and does not reduce the stated limit of liability. Its purposes are to eliminate small claims and to make the insured share in the loss.

Question 21Property Insurance Basics

Replacement cost coverage differs from actual cash value coverage in that replacement cost:

  1. settles losses at new-for-old value without a depreciation deduction Correct answer.
  2. pays only after the insured rebuilds at a different location
  3. pays the original purchase price of the property that was destroyed
  4. pays the depreciated value of the damaged property plus a ten percent cash allowance

Explanation

Replacement cost pays the amount needed to repair or replace the damaged property with new property of like kind and quality, with no deduction for depreciation. Many forms pay the replacement cost only after the property is actually repaired or replaced, with an ACV payment made first. The insured therefore may recover more than the pre-loss depreciated value, up to the limit.

Question 22Property Insurance Basics

A building valued at $500,000 is insured for $300,000 under a policy with an 80 percent coinsurance clause. Ignoring any deductible, how much does the insurer pay for a $100,000 covered loss?

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

Explanation

The coinsurance requirement is 80 percent of $500,000, or $400,000. Because the insured carried only $300,000, the payment is reduced to the ratio of carried insurance to required insurance: $300,000 divided by $400,000 equals 0.75. Applying 0.75 to the $100,000 loss produces a payment of $75,000.

Question 23Property Insurance Basics

After paying an insured's covered loss caused by a negligent third party, the insurer's right of subrogation allows it to:

  1. recover from the negligent third party the amount it paid Correct answer.
  2. require the insured to file suit at the insurer's expense
  3. cancel the policy without notice to the insured
  4. recover from the insured any amount above the deductible

Explanation

Subrogation transfers to the insurer, to the extent of its payment, the insured's right to recover from the party that caused the loss. It prevents the insured from collecting twice and places the ultimate cost on the responsible party. The insured must not impair that right, for example by releasing the third party before the insurer is reimbursed.

Question 24Property Insurance Basics

An insured has two property policies on the same building: Policy A with a $300,000 limit and Policy B with a $100,000 limit, both containing pro rata other insurance clauses. On a $40,000 covered loss, Policy A pays:

  1. $20,000, because the two policies share the loss equally
  2. $10,000, because the smaller policy's limit sets the proportion
  3. $40,000, because the policy with the larger limit responds first
  4. $30,000, equal to Policy A's 75 percent share of the loss Correct answer.

Explanation

Under a pro rata other insurance clause, each policy pays its proportion of the total applicable insurance. Policy A carries $300,000 of the $400,000 combined limit, or 75 percent. Applied to the $40,000 loss, Policy A pays $30,000 and Policy B pays $10,000.

Question 25Property Insurance Basics

Under a standard mortgage clause attached to a property policy, the mortgagee is entitled to:

  1. cancel the policy only after obtaining the insured's written approval
  2. receive all policy proceeds regardless of the insured's interest
  3. collect loss payments up to its interest despite the insured's acts Correct answer.
  4. increase the policy limits at any time without the insured's consent

Explanation

The standard mortgage clause creates an independent contract between the insurer and the mortgagee, so the mortgagee's rights are not defeated by the insured's acts, neglect, or misrepresentation. The mortgagee also receives advance notice of cancellation or nonrenewal and may pay the premium to keep coverage in force. Payment to the mortgagee is limited to its interest, with any balance going to the insured.

Question 26Property Insurance Basics

Which of the following is a duty commonly imposed on an insured after a property loss?

  1. Submit a signed and sworn proof of loss within a specified time Correct answer.
  2. Begin permanent repairs before the insurer inspects the damage
  3. Obtain the insurer's permission before calling the fire department
  4. Pay the fee charged by the insurer's adjuster

Explanation

Standard property forms require the insured to give prompt notice, protect the property from further damage, cooperate in the investigation, and submit a signed proof of loss within a stated period. The proof of loss itemizes the amount claimed and is sworn to by the insured. Failure to comply can prejudice the claim.

Question 27Property Insurance Basics

A windstorm blows down a power line, which starts a fire that destroys the insured's building. The policy covers windstorm and fire. Which doctrine supports coverage for the entire loss?

  1. Coinsurance
  2. Abandonment
  3. Proximate cause Correct answer.
  4. Salvage

Explanation

Proximate cause links an unbroken chain of events back to a covered peril, so the resulting damage is covered even if the final agent of destruction is not listed in the policy. Because windstorm is a covered peril and the chain of events was continuous, the resulting fire damage is payable. The doctrine is used to resolve claims involving sequential or concurring causes.

Question 28Property Insurance Basics

Which statement correctly distinguishes vacancy from unoccupancy?

  1. Vacancy means empty of occupants and contents; unoccupancy means occupants are absent but contents remain. Correct answer.
  2. Unoccupancy applies only to commercial buildings, while vacancy applies only to dwellings and other residential structures.
  3. Vacancy means occupants have left but their contents remain; unoccupancy means both are gone.
  4. The two terms are interchangeable and are used to mean the same condition in all standard property forms.

Explanation

Unoccupancy exists when the building contains its usual furnishings but no people are living or working there. Vacancy means the building is empty of both occupants and contents, which typically produces broader restrictions or a suspension of coverage for perils such as vandalism. Both conditions can trigger additional exclusions and higher rates.

Question 29Property Insurance Basics

A property insurance binder provides:

  1. a permanent policy that the insurer can never cancel
  2. temporary evidence that coverage is in force until the policy is issued Correct answer.
  3. a guarantee that the quoted premium will never increase
  4. coverage that begins only after the first full premium is earned

Explanation

A binder is a temporary agreement, oral or written, that provides immediate coverage while the application is underwritten or the policy is issued. It is subject to the terms of the policy to be issued and terminates when the policy is issued or the binder's time limit expires. The insurer must cancel or nonrenew a binder according to the usual notice requirements.

Question 30Property Insurance Basics

A dwelling policy shows a Coverage A limit of $400,000 and a 2 percent hurricane deductible. Ignoring all other deductibles, how much does the insurer pay for a $60,000 covered hurricane loss?

  1. $58,800
  2. $56,000
  3. $60,000
  4. $52,000 Correct answer.

Explanation

A percentage deductible is calculated by applying the stated percentage to the Coverage A limit shown on the declarations. Two percent of $400,000 equals an $8,000 deductible. Subtracting the $8,000 deductible from the $60,000 loss leaves $52,000 for the insurer to pay.

Question 31Property Insurance Basics

A policy issued with an agreed value provision means that:

  1. the insurer will not apply a deductible to a total loss
  2. the insured may buy any limit and still collect every loss in full
  3. the policy limit increases automatically each year with inflation
  4. the value is agreed at inception and the coinsurance clause is waived Correct answer.

Explanation

Under agreed value, the insured and insurer fix the property's value when the policy is written, and the policy is issued for that amount. Because the limit is accepted as adequate, the coinsurance (limit-to-value) penalty is not applied to losses. The insured still must report any major change that materially increases the value.

Question 32Property Insurance Basics

When the insured and the insurer cannot agree on the amount of a covered property loss, the appraisal provision allows:

  1. the insured to sue immediately without any further steps
  2. the insurer to deny the claim until the insured accepts its offer
  3. the insured to abandon the damaged property to the insurer
  4. each party to name an appraiser, with an umpire resolving disagreement Correct answer.

Explanation

Appraisal is a dispute resolution condition used when the parties agree the loss is covered but disagree on its dollar value. Each side selects a competent appraiser, and the appraisers choose an umpire who decides if they cannot agree. Appraisal settles the amount of the loss only; it does not decide questions of coverage.

Question 33Homeowners and Dwelling Insurance

In a homeowners policy, Coverage A applies to which property?

  1. Personal property of the insured
  2. Additional living expenses
  3. Detached structures on the premises
  4. The dwelling on the residence premises Correct answer.

Explanation

Coverage A is the dwelling coverage on the residence premises and insures the structure itself. Personal property is Coverage C, detached structures are Coverage B, and additional living expenses are Coverage D.

Question 34Homeowners and Dwelling Insurance

Coverage C of a homeowners policy insures which of the following?

  1. Personal property of insureds Correct answer.
  2. The dwelling structure
  3. Other structures on the premises
  4. Liability for bodily injury

Explanation

Coverage C insures personal property owned or used by insureds, subject to special limits. The dwelling is Coverage A, other structures are Coverage B, and bodily injury liability is Coverage E.

Question 35Homeowners and Dwelling Insurance

Which homeowners form is designed for a tenant who rents an apartment?

  1. The building and the tenant's personal property
  2. Only the landlord's property
  3. The tenant's personal property and liability Correct answer.
  4. Only scheduled jewelry

Explanation

The HO-4 contents broad form is written for tenants and insures personal property, loss of use, and liability; the building itself is the landlord's responsibility. It is not a homeowners form for owner-occupied dwellings.

Question 36Homeowners and Dwelling Insurance

A condominium unit-owner would typically use which homeowners form?

  1. HO-6 Correct answer.
  2. HO-5
  3. HO-2
  4. HO-3

Explanation

The HO-6 unit-owners form is designed for condominium owners and covers personal property, interior building items, loss of use, and liability. HO-2, HO-3, and HO-5 are for owner-occupied dwellings.

Question 37Homeowners and Dwelling Insurance

Which dwelling policy form provides open-peril coverage on the dwelling itself?

  1. HO-3
  2. DP-3 Correct answer.
  3. DP-1
  4. DP-2

Explanation

The DP-3 special form provides open-peril coverage on the dwelling and broad named-peril coverage on personal property. DP-1 is basic named perils and DP-2 is broad named perils; HO-3 is a homeowners form, not a dwelling form.

Question 38Homeowners and Dwelling Insurance

A deductible in a homeowners policy generally applies to which claims?

  1. Liability claims only
  2. Loss of use only
  3. Medical payments only
  4. Property loss claims Correct answer.

Explanation

A deductible applies to property loss claims under Section I and is subtracted before payment, except where a separate deductible applies. Liability and medical payments coverage generally do not use the property deductible.

Question 39Homeowners and Dwelling Insurance

Section II of a homeowners policy includes which coverages?

  1. Coverages E and F Correct answer.
  2. Coverages A and B
  3. Coverages A and C
  4. Coverages C and D

Explanation

Section II of a homeowners policy provides liability coverage: Coverage E personal liability and Coverage F medical payments to others. Coverages A through D are Section I property coverages.

Question 40Homeowners and Dwelling Insurance

Replacement cost in property insurance means which of the following?

  1. New-for-old replacement cost Correct answer.
  2. Current market value
  3. Stated agreed amount
  4. Original cost less depreciation

Explanation

Replacement cost settles a loss on a new-for-old basis without deducting depreciation, subject to policy limits and conditions. Actual cash value, by contrast, is replacement cost less depreciation.

Question 41Homeowners and Dwelling Insurance

A dwelling has a replacement cost of $200,000. If the policy has an 80% insurance-to-value requirement, what is the minimum required amount of insurance?

  1. $200,000
  2. $180,000
  3. $150,000
  4. $160,000 Correct answer.

Explanation

The required amount is 80% of replacement cost: 0.80 × $200,000 = $160,000. Carrying less may trigger a coinsurance penalty under dwelling forms.

Question 42Homeowners and Dwelling Insurance

Coverage B Other Structures is usually limited to what percentage of the Coverage A limit?

  1. 30%
  2. 5%
  3. 20%
  4. 10% Correct answer.

Explanation

Coverage B Other Structures is typically limited to 10% of the Coverage A limit. The limit can be increased by endorsement if detached structures are worth more.

Question 43Homeowners and Dwelling Insurance

Coverage D Loss of Use primarily pays which of the following?

  1. Permanent replacement of the home
  2. Debris removal
  3. Landscaping
  4. Additional living expenses Correct answer.

Explanation

Coverage D pays additional living expenses when the residence is uninhabitable because of a covered loss, including temporary housing and increased food costs. It does not pay to permanently replace the home or remove debris.

Question 44Homeowners and Dwelling Insurance

Coverage F Medical Payments to Others pays for which of the following?

  1. The insured's own medical bills
  2. Liability judgments against the insured
  3. Injuries to others, without regard to fault Correct answer.
  4. Medical expenses of the insured's regular residents

Explanation

Coverage F pays necessary medical expenses of others injured on the insured location or by an insured's activities, without regard to fault, subject to the limit. It does not pay the insured's own bills or liability judgments.

Question 45Homeowners and Dwelling Insurance

Under an HO-3, the dwelling is insured on an open-peril basis and personal property is insured on which basis?

  1. Named perils Correct answer.
  2. Broad form
  3. Open-peril basis
  4. Basic form

Explanation

The HO-3 special form insures the dwelling on an open-peril basis but personal property on a named-peril basis. The HO-5 is the form that provides open-peril coverage for both.

Question 46Homeowners and Dwelling Insurance

A tree falls and damages the insured dwelling under an HO-3. Which coverage responds?

  1. Coverage D
  2. Coverage B
  3. Coverage C
  4. Coverage A Correct answer.

Explanation

A falling tree that damages the dwelling is a direct physical loss to the structure, so Coverage A responds. Coverage B is for other structures, Coverage C for personal property, and Coverage D for loss of use.

Question 47Homeowners and Dwelling Insurance

Damage caused by insects, vermin, or rodents is treated how under a homeowners policy?

  1. Excluded Correct answer.
  2. Covered only with replacement cost
  3. Covered as a sudden accident
  4. Covered under Coverage C

Explanation

Homeowners policies exclude loss caused by insects, vermin, or rodents because that is considered a maintenance issue rather than a sudden accidental loss. Resulting damage may be covered only in limited circumstances, such as if a covered peril ensues.

Question 48Homeowners and Dwelling Insurance

The mortgage clause in a homeowners policy protects the lender by doing which of the following?

  1. Increasing Coverage A
  2. Paying the lender its interest Correct answer.
  3. Paying the lender's attorney fees
  4. Waiving the deductible

Explanation

A mortgage clause protects the lender's interest by providing that loss payments go to the mortgagee to the extent of its interest. It does not increase limits, waive deductibles, or pay attorney fees.

Question 49Homeowners and Dwelling Insurance

If an insured intentionally causes a loss, the homeowners policy does which of the following?

  1. No coverage applies Correct answer.
  2. Pays actual cash value
  3. Pays after a 30-day wait
  4. Covers it under liability

Explanation

Intentional loss is excluded so that no insured can recover for a loss he or she caused deliberately. The exclusion applies even if other insureds are innocent, though some jurisdictions limit that result.

Question 50Homeowners and Dwelling Insurance

Which of the following is a standard duty of the insured after a homeowners loss?

  1. Replacing all exterior door locks
  2. Increasing the coverage limit
  3. Prompt notice and protect property Correct answer.
  4. Paying the next premium installment

Explanation

After a loss, the insured must give prompt notice, protect the property from further damage, and cooperate with the insurer's investigation. Increasing coverage or replacing locks is not a standard post-loss duty.