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SD Property & Casualty practice questions

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Question 1Insurance Principles and Concepts

Which of the following situations is an example of a pure risk?

  1. A warehouse is damaged by a fire Correct answer.
  2. A farmer plants a new crop to sell at a profit
  3. A retailer opens a new location to increase sales
  4. An investor buys shares hoping the price rises

Explanation

A pure risk involves only the chance of loss or no loss, with no possibility of gain, which is why insurers will accept it. Fire damage to a building fits that definition because the owner can only lose. Speculative risks involve the possibility of gain as well as loss.

Question 2Insurance Principles and Concepts

In insurance terminology, the cause of a loss, such as a fire, windstorm, or theft, is best described as:

  1. A peril Correct answer.
  2. A warranty
  3. A hazard
  4. An exposure

Explanation

A peril is the actual cause of a loss, such as fire, wind, or theft. A hazard is a condition that increases the likelihood or severity of a loss, not the loss-producing event itself.

Question 3Insurance Principles and Concepts

The principle of indemnity is intended to:

  1. Allow the insured to collect from every policy that insures the property
  2. Require the insurer to pay the full face amount regardless of the loss
  3. Restore the insured to the pre-loss financial position Correct answer.
  4. Guarantee the insured a profit whenever a covered loss occurs

Explanation

Indemnity means the insured is made whole, placed in roughly the same financial position as before the loss, but no better. It is the reason property policies use actual cash value, deductibles, and limits. Collecting more than the loss would violate the principle.

Question 4Insurance Principles and Concepts

For property insurance, insurable interest must exist:

  1. Only when the application is signed
  2. At the time of the loss Correct answer.
  3. Only at each policy renewal
  4. Only when the policy is first purchased

Explanation

In property insurance, insurable interest must exist at the time of loss for the insured to recover, because the insured must actually suffer a financial loss. Life insurance follows a different rule, requiring interest when the policy is purchased.

Question 5Insurance Principles and Concepts

Because an insurance policy is a contract of adhesion, ambiguous policy language is generally:

  1. Construed against the insured
  2. Construed against the insurer Correct answer.
  3. Interpreted by the agent who sold the policy
  4. Rewritten by the state insurance department

Explanation

A contract of adhesion is drafted by one party, the insurer, and accepted or rejected by the other. Because the insurer controls the wording, courts resolve genuine ambiguities against the insurer. This rule protects the insured, who had no part in drafting.

Question 6Insurance Principles and Concepts

Actual cash value is most commonly calculated as:

  1. Replacement cost plus depreciation
  2. The original purchase price of the property
  3. Replacement cost minus depreciation Correct answer.
  4. The policy limit shown on the declarations page

Explanation

Actual cash value takes the cost to replace the damaged property and subtracts depreciation, producing today's value of the used item. The effect is to indemnify the insured for what was actually lost. Replacement-cost coverage, by contrast, pays to replace without deducting depreciation.

Question 7Insurance Principles and Concepts

A policy has a $1,000 deductible and a covered loss of $4,500 occurs. Ignoring all other provisions, the insurer pays:

  1. $1,000
  2. $5,500
  3. $4,500
  4. $3,500 Correct answer.

Explanation

A deductible is subtracted from the covered loss before the insurer pays, so the insurer pays $4,500 minus $1,000, or $3,500. The insured absorbs the deductible amount. Deductibles reduce small claims and lower premium.

Question 8Insurance Principles and Concepts

The principle of utmost good faith requires an applicant to:

  1. Disclose all material facts needed to evaluate the risk Correct answer.
  2. Report every claim and renewal to the state insurance department
  3. Pay the full annual premium before the policy can respond to any loss
  4. Purchase at least the minimum coverage the state requires before a loss

Explanation

Utmost good faith obligates the applicant to volunteer information a prudent insurer would consider important in deciding whether to accept the risk and at what price. Material misrepresentations, concealment, and fraud can allow the insurer to avoid the contract.

Question 9Insurance Principles and Concepts

An 80% coinsurance clause applies to a building with a replacement cost of $500,000. The insured carries $300,000 of coverage and a covered loss of $100,000 occurs. Ignoring deductibles, the insurer pays:

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

Explanation

The clause requires insurance of at least 80% of $500,000, or $400,000. Because the insured carried only $300,000, the recovery is reduced by the ratio $300,000 divided by $400,000, or 0.75, and 0.75 times the $100,000 loss equals $75,000.

Question 10Insurance Principles and Concepts

After paying a covered loss, an insurer's right to recover from the party that caused the loss is called:

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

Explanation

Subrogation allows the insurer that has paid a claim to stand in the insured's shoes and pursue the responsible third party. It helps hold down premiums and prevents the insured from recovering twice.

Question 11Insurance Principles and Concepts

Two policies cover the same property on the same basis. Policy A has a $200,000 limit and Policy B has a $100,000 limit, and a $60,000 covered loss occurs. Under pro rata contribution by limits, Policy B pays:

  1. $20,000 Correct answer.
  2. $40,000
  3. $30,000
  4. $60,000

Explanation

Under contribution by limits, each policy pays the proportion of the loss that its limit bears to the total limits. Policy B's share is $100,000 divided by $300,000, or one third, and one third of $60,000 is $20,000.

Question 12Insurance Principles and Concepts

The law of large numbers assists insurers because it means that:

  1. Guarantees that no single insured will ever suffer a large loss
  2. Allows the insurer to raise rates without regulatory review
  3. Eliminates the need to buy reinsurance for catastrophic risks
  4. Loss experience becomes more predictable as exposures increase Correct answer.

Explanation

As the number of similar independent exposure units grows, actual losses tend to approach the expected level. That predictability lets an insurer set rates on expected costs rather than on guesswork. It does not prevent individual large losses or catastrophes.

Question 13Insurance Principles and Concepts

Adverse selection is best described as a situation in which:

  1. Higher-risk applicants buy coverage more often than lower-risk applicants Correct answer.
  2. Agents steer business to the insurer paying the highest commission
  3. An insurer refuses to renew any policy that has produced a claim
  4. A regulator rejects a proposed rate increase as excessive

Explanation

Adverse selection occurs when those most likely to have losses are the most eager to obtain or retain insurance, leaving the insurer with a worse-than-average pool. Underwriting, exclusions, and experience-based pricing are used to control it.

Question 14Insurance Principles and Concepts

Which situation best illustrates a moral hazard?

  1. A store is located in a flood-prone area
  2. An insured becomes careless about housekeeping after buying a policy
  3. A state law limits the rate the insurer may charge
  4. An applicant hides a prior arson conviction to get coverage Correct answer.

Explanation

Moral hazard involves dishonesty or a deliberate increase in risk, such as concealing a material fact or intending to cause a loss. Careless indifference after buying insurance is a morale hazard, which arises from attitude rather than intent.

Question 15Insurance Principles and Concepts

An agent who has no actual authority collects a premium and issues a binder anyway. The insurer is bound because of:

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

Explanation

Apparent authority arises when the insurer's words or actions lead a reasonable person to believe the agent has authority, even though the insurer did not grant it. The insurer is bound to protect the public's reasonable reliance. Express and implied authority come from the agency agreement itself.

Question 16Insurance Principles and Concepts

An insurer's underwriter knowingly accepts a late premium payment and later tries to deny coverage because the payment was late. The insurer is most likely barred by:

  1. Subrogation
  2. The principle of indemnity
  3. Coinsurance
  4. Estoppel Correct answer.

Explanation

By knowingly accepting the late payment, the insurer waived the prompt-payment condition. Estoppel then prevents the insurer from asserting a right it has given up when the other party relied on that conduct to its detriment.

Question 17Insurance Principles and Concepts

The part of an insurance policy that states what the insurer promises to do is the:

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

Explanation

The insuring agreement is the heart of the policy, setting out the insurer's promise to pay for covered losses. It is supported by the declarations, which describe the risk, the conditions, which set duties, and the exclusions, which limit coverage.

Question 18Insurance Principles and Concepts

A binder provides:

  1. Temporary evidence of coverage until the policy is issued Correct answer.
  2. A statement of the total premium the insured will pay for the policy
  3. Permanent coverage that the insurer can never cancel during the policy term
  4. Written proof that the insurer has inspected the insured property

Explanation

A binder is temporary evidence that coverage is in force while the formal policy is being prepared. It is subject to the terms of the policy to be issued and may be oral or written. It does not guarantee that the final policy will be issued as applied for.

Question 19Insurance Principles and Concepts

After an insurer pays a total loss on property, the insured:

  1. May force the insurer to take ownership of the damaged property
  2. Must destroy the damaged property before any payment is made
  3. Cannot abandon the damaged property to the insurer without consent Correct answer.
  4. Must pay the insurer a salvage fee before collecting the loss

Explanation

Under the abandonment provision, the insured may not simply hand over damaged property and demand a full payment. The insurer has the right to take the salvage at its option and may sell it to reduce its loss.

Question 20Insurance Principles and Concepts

A mutual insurer differs from a stock insurer in that a mutual insurer is:

  1. Always organized as an agency of the state government
  2. Owned by its shareholders and operated to earn a profit for them
  3. Prohibited from issuing participating policies
  4. Owned by its policyholders Correct answer.

Explanation

A mutual insurer is owned by its policyholders, who may receive dividends when results are favorable. A stock insurer is owned by shareholders and exists to produce a return for them. Both are private entities subject to state regulation.

Question 21Insurance Principles and Concepts

A hurricane's wind opens a roof and rain then ruins the interior. The policy covers wind but excludes flood, and no anti-concurrent causation language applies. Under the efficient proximate cause rule, the loss is:

  1. Covered, because wind was the efficient proximate cause Correct answer.
  2. Covered only for the roof opening, not for the interior damage
  3. Denied, because a covered and an excluded peril acted together
  4. Denied, because water damage ultimately caused most of the loss

Explanation

The efficient proximate cause is the peril that set the loss in motion. If that peril is covered, the resulting damage from a later excluded peril generally follows the coverage of the initiating cause. Many modern forms add anti-concurrent causation wording that would change this result.

Question 22Insurance Principles and Concepts

A building with a replacement cost of $400,000 is insured for $400,000 under an 80% coinsurance clause. A covered loss of $100,000 occurs. Ignoring deductibles, the insurer pays:

  1. $100,000 Correct answer.
  2. $80,000
  3. $320,000
  4. $125,000

Explanation

The clause requires coverage of at least 80% of $400,000, or $320,000. Because $400,000 exceeds the requirement, no penalty applies and the insurer pays the loss in full, up to the policy limit.

Question 23Insurance Principles and Concepts

An applicant for commercial property insurance is asked about prior fire losses and reports none, although a $120,000 fire loss was paid two years earlier. The policy is issued, and a later fire destroys the building. The insurer's strongest position is to:

  1. Pay the claim because the earlier fire was unrelated to this one
  2. Deny the claim only if arson is proven in the second fire
  3. Rescind the policy and deny the claim Correct answer.
  4. Pay the claim and simply raise the premium at renewal

Explanation

A false answer to a question the insurer relied on in accepting the risk is a material misrepresentation, which breaches utmost good faith. The insurer may rescind the policy as though it never existed, which supports denial of the claim. Proof of arson is not required to establish the misrepresentation.

Question 24Insurance Principles and Concepts

Under an occurrence-form liability policy, coverage is triggered by which event?

  1. Coverage is triggered by the date of injury, not the date of claim Correct answer.
  2. Coverage is triggered by the date the claim is reported to the insurer
  3. Coverage is triggered by the date the premium is paid
  4. Coverage is triggered only after a court enters a judgment

Explanation

An occurrence form responds to injury or damage that happens during the policy period, even if the claim is brought years later. A claims-made form instead looks to when the claim is first made against the insured.

Question 25Insurance Principles and Concepts

A risk retention group formed under federal law must:

  1. Write both property and liability coverage in every state
  2. Limit its coverage to personal auto and homeowners policies
  3. Be owned and operated by the shareholders of a stock insurer
  4. Be owned by its insureds and write liability coverage only Correct answer.

Explanation

Federal law allows risk retention groups to operate nationwide once licensed in one state, but only to write liability coverage for risks of its member insureds, who own the group. Property coverage and personal lines are outside that authority.

Question 26Insurance Principles and Concepts

Insurance is best described as a mechanism that:

  1. transfers pure risk from one party to a group Correct answer.
  2. shifts speculative investment risk from owners to insurers
  3. guarantees that policyholders will never suffer a financial loss
  4. eliminates the chance that a covered loss will ever occur

Explanation

Insurance pools premiums collected from many similar exposures so that the few who suffer losses can be paid. It manages risk by financing the consequences of loss rather than by preventing loss from happening.

Question 27Insurance Principles and Concepts

Which of the following is an example of a speculative risk?

  1. Hail that damages the shingles on a homeowner's roof
  2. Buying stock hoping it rises in value Correct answer.
  3. A fire that damages a warehouse and destroys the inventory
  4. A customer who slips and falls on a wet store floor

Explanation

Speculative risk involves the possibility of gain as well as loss, as with an investment. Pure risk involves only the chance of loss or no loss and is the type insurance is designed to handle.

Question 28Insurance Principles and Concepts

A condition that increases the chance that a loss will occur, or increases its severity, is called:

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

Explanation

A hazard is a condition surrounding a risk that raises the frequency or the severity of loss. The peril is the actual cause of the loss, such as fire, wind, or theft.

Question 29Insurance Principles and Concepts

An insured stops locking his bicycle in a high-theft neighborhood because he knows his policy will pay for a theft. This behavior illustrates:

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

Explanation

Morale hazard is carelessness or indifference toward loss that grows out of the mere existence of insurance. It reflects attitude rather than any intent to cause or exaggerate a loss.

Question 30Insurance Principles and Concepts

Insurable interest in property must exist at the time of:

  1. the loss Correct answer.
  2. the first premium payment
  3. the policy's inception date
  4. the policy application

Explanation

In property insurance the insured must have an insurable interest when the loss occurs, because that is when the insured must actually suffer financial detriment. A person who has already sold the property has nothing to insure at that point.

Question 31Insurance Principles and Concepts

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

  1. receive the full policy limit in every case
  2. profit slightly to offset the inconvenience of the loss
  3. be paid before any loss actually occurs
  4. be restored to the pre-loss financial position Correct answer.

Explanation

Indemnity restores the insured to approximately the same financial position occupied before the loss, no better and no worse. Valuation methods such as actual cash value are tools for applying that principle.

Question 32Insurance Principles and Concepts

The maximum amount an insurer will pay for a covered loss under a policy is the:

  1. the limit of liability Correct answer.
  2. the coinsurance percentage required by the form
  3. the premium paid for the current policy term
  4. the deductible stated on the declarations page

Explanation

The limit of liability caps what the insurer will pay for a covered loss. Amounts above that limit, along with any deductible, are the insured's responsibility.

Question 33Insurance Principles and Concepts

An endorsement is best described as:

  1. a written change to the policy's terms Correct answer.
  2. a statement of the insured's duties after a loss
  3. a separate contract that replaces the policy entirely
  4. a promise that a statement of fact is true

Explanation

Endorsements, also called forms, amend the base policy by adding, removing, or altering coverage, and they control over conflicting language in the printed form.

Question 34Insurance Principles and Concepts

Under a claims-made liability policy, coverage is triggered when:

  1. a claim is made against the insured during the policy period Correct answer.
  2. the insured first purchases the policy from an authorized insurer
  3. the bodily injury or property damage occurs during the policy term
  4. the insured first notifies the insurer of a potential claim

Explanation

A claims-made form responds to claims first made against the insured during the policy period, provided the claim falls on or after any retroactive date. The date of the injury itself does not control.

Question 35Insurance Principles and Concepts

To recover damages in a negligence action, the claimant must prove:

  1. that the claimant suffered no pre-existing injury
  2. duty, breach, causation, and damages Correct answer.
  3. that the defendant carried liability insurance
  4. that the defendant intended to cause harm

Explanation

Negligence requires a legal duty owed to the claimant, a failure to meet that duty, an injury proximately caused by the failure, and actual damages. All four elements must be established.

Question 36Insurance Principles and Concepts

Under pure comparative negligence, an injured party found 30% at fault:

  1. recovers 70% of the proven damages Correct answer.
  2. recovers 30% of the proven damages
  3. recovers 100% of the proven damages
  4. recovers nothing because of her own fault

Explanation

Pure comparative fault reduces the claimant's recovery by her own percentage of responsibility, so a claimant 30% at fault collects the remaining 70% of proven damages.

Question 37Insurance Principles and Concepts

Strict liability for a defective product means the manufacturer can be held liable:

  1. only when the product carried no written warranty
  2. without proof that the manufacturer was negligent Correct answer.
  3. only when the manufacturer failed to exercise reasonable care
  4. only when the product was sold directly to the consumer

Explanation

Under strict products liability, a seller of a defective product that is unreasonably dangerous may be liable without any showing of negligent conduct, if the defect caused the injury.

Question 38Insurance Principles and Concepts

An employer is liable for a delivery driver's negligent accident that occurred while making deliveries because of:

  1. comparative fault assigned to the employer personally
  2. strict liability that applies to ultrahazardous activities
  3. vicarious liability for acts within employment Correct answer.
  4. the doctrine of res ipsa loquitur applied to vehicles

Explanation

Under respondeat superior, an employer is vicariously liable for torts an employee commits within the scope of employment, even though the employer did nothing wrong.

Question 39Insurance Principles and Concepts

An insurance contract is aleatory because:

  1. the insured must accept the policy exactly as it is written
  2. only the insurer is legally obligated to perform under the terms
  3. the values exchanged depend on chance Correct answer.
  4. coverage applies only to losses that are certain to occur

Explanation

In an aleatory contract the amounts the parties exchange are unequal and uncertain, since a small premium may buy a large payment or no payment at all.

Question 40Insurance Principles and Concepts

A policy provision in which the insured promises that a stated fact is true, such as maintaining a sprinkler system, is:

  1. a warranty Correct answer.
  2. a binder
  3. a representation
  4. a declaration

Explanation

A warranty is a policy term in which the insured promises that a fact is true, and a breach of it can affect coverage. Representations, by contrast, are statements made to induce the insurer to issue the policy.

Question 41Insurance Principles and Concepts

Premiums that a producer collects from insureds are held in a fiduciary capacity, which means the producer must:

  1. return them to the insured if the policy is not yet issued
  2. account for them and remit them to the insurer promptly Correct answer.
  3. use them only to pay commissions owed to the producer
  4. deposit them in the agency's general operating account

Explanation

Trust premiums belong to the insurer or the insured, not to the producer, so they must be accounted for and forwarded promptly. Commingling them with agency funds is prohibited.

Question 42Insurance Principles and Concepts

Installing an automatic sprinkler system to limit fire damage is an example of which risk management technique?

  1. risk avoidance
  2. loss reduction Correct answer.
  3. loss prevention
  4. risk retention

Explanation

Loss reduction measures lessen the severity of a loss once it begins, as sprinklers do by holding fire damage in check. Loss prevention measures instead reduce how often a loss occurs.

Question 43Insurance Principles and Concepts

When the insurer and the insured agree a loss is covered but disagree on its dollar amount, the policy condition that resolves the dispute is:

  1. salvage
  2. arbitration
  3. appraisal Correct answer.
  4. subrogation

Explanation

Appraisal provisions let each side select a competent appraiser, who together choose an umpire; an agreement by any two of them sets the amount of the loss.

Question 44Insurance Principles and Concepts

Which statement best explains why a property policy may exclude a peril such as earthquake?

  1. Exclusions exist mainly to reduce the number of insureds who can buy a policy.
  2. Excluded perils are always caused by the insured's own negligence.
  3. The excluded perils are not capable of causing any financial loss.
  4. The exposure is catastrophic or better handled by a separate policy. Correct answer.

Explanation

Exclusions keep coverage and price aligned with what the form is meant to insure by removing catastrophic, uninsurable, or separately insured exposures. Earthquake is commonly handled by a separate policy or endorsement.

Question 45Insurance Principles and Concepts

Reinsurance in which the reinsurer and the ceding insurer negotiate each risk individually is called:

  1. facultative reinsurance Correct answer.
  2. a surplus share treaty agreement
  3. an assigned risk plan
  4. an automatic treaty arrangement

Explanation

Facultative reinsurance is arranged risk by risk, and the reinsurer may accept or decline each submission. Treaty reinsurance instead covers a defined class of business automatically under a standing agreement.

Question 46Insurance Principles and Concepts

An insurer reports a loss ratio of 72% and an expense ratio of 31%. Its combined ratio is:

  1. 103% Correct answer.
  2. 93%
  3. 41%
  4. 72%

Explanation

The combined ratio is the loss ratio plus the expense ratio: 72% + 31% = 103%. A combined ratio above 100% indicates that underwriting produced a loss for the period.

Question 47Insurance Principles and Concepts

The doctrine of res ipsa loquitur allows a plaintiff to:

  1. recover damages without proving that any injury actually occurred
  2. infer negligence from the circumstances of the accident Correct answer.
  3. shift liability from the retailer back to the wholesaler
  4. hold a manufacturer liable without proof of a defect

Explanation

Res ipsa loquitur, meaning the thing speaks for itself, permits an inference of negligence when the event is one that ordinarily does not occur without negligence and was under the defendant's exclusive control.

Question 48Insurance Principles and Concepts

When an insurer defends its insured under a reservation of rights, the insurer:

  1. has already conceded that the claim is covered by the policy
  2. keeps the right to deny coverage later Correct answer.
  3. is permanently relieved of any further duty to defend
  4. must tender the full policy limit to the claimant right away

Explanation

A reservation-of-rights letter advises the insured that the insurer will defend while it continues to investigate coverage and may later deny the claim. This protects the insurer from arguments that it waived a coverage defense by defending.

Question 49Insurance Principles and Concepts

Because an insurance policy is a contract of adhesion, an ambiguity in the policy wording is generally:

  1. referred to the state insurance department for a ruling
  2. construed against the party that drafted it Correct answer.
  3. ignored so that the plain meaning of the policy controls
  4. resolved in favor of the insurer that drafted it

Explanation

In a contract of adhesion the insurer drafts the terms and the insured has no real bargaining power, so courts interpret ambiguity against the drafter and in favor of the insured's reasonable expectations.

Question 50Insurance Principles and Concepts

Negligence per se is established when a party:

  1. fails to buy the amount of liability insurance required by law
  2. does something a reasonable and prudent person would not do
  3. injures another while acting lawfully and with reasonable care
  4. violates a statute intended to protect the injured party Correct answer.

Explanation

Negligence per se substitutes a statutory standard for the reasonable-person standard when the violated statute was enacted to protect a class of persons from the type of harm that occurred. The violation itself establishes breach of duty.