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UT Property & Casualty practice questions

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Question 1Insurance Principles and Concepts (property and casualty basics)

Insurable interest in a property insurance claim must exist at which point in time?

  1. At the time the loss occurs Correct answer.
  2. Continuously from application through loss
  3. Only when the application is signed
  4. At the time the policy is delivered

Explanation

Property insurance is a contract of indemnity, so the insured must hold an insurable interest when the loss happens; that interest is what limits recovery to the actual financial loss. Interest acquired after the policy is issued but before a loss can still support recovery.

Question 2Insurance Principles and Concepts (property and casualty basics)

Which principle limits a property insurance recovery to the actual financial loss suffered so the insured cannot profit from a loss?

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

Explanation

The principle of indemnity restores the insured to roughly the same financial position held before the loss, no better. The other doctrines either support indemnity or govern the conduct of the parties rather than setting the measure of recovery.

Question 3Insurance Principles and Concepts (property and casualty basics)

An insurer pays a $30,000 fire claim caused by a contractor's negligence, then sues the contractor to recover that amount. Which right is the insurer exercising?

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

Explanation

Subrogation gives the insurer, after paying the loss, the insured's legal right to recover from the party responsible for the damage. Because of this right, the insured may not release or impair the claim against that party.

Question 4Insurance Principles and Concepts (property and casualty basics)

Actual cash value in property insurance is most commonly calculated in which way?

  1. Replacement cost plus depreciation
  2. Replacement cost minus depreciation Correct answer.
  3. Market value of the building and its site
  4. Original purchase price with no adjustment

Explanation

Actual cash value is typically replacement cost less depreciation, reflecting what the damaged property was worth at the time of loss. Some forms define the term differently, but replacement cost minus depreciation is the standard method.

Question 5Insurance Principles and Concepts (property and casualty basics)

A building has a replacement cost of $500,000. The policy carries a $300,000 limit and an 80% coinsurance clause. A covered loss of $50,000 occurs, and no deductible applies. What does the insurer pay?

  1. $40,000
  2. $37,500 Correct answer.
  3. $50,000
  4. $30,000

Explanation

Required insurance is 80% of $500,000, or $400,000. The insured carried $300,000, which is 75% of the requirement, so the payment is 75% of the $50,000 loss, or $37,500, subject to the limit.

Question 6Insurance Principles and Concepts (property and casualty basics)

A windstorm tears off part of a roof, allowing rain to ruin interior finishes and equipment. Which concept determines whether the interior water damage is covered?

  1. Adhesion
  2. Coinsurance
  3. Pro rata liability
  4. Proximate cause Correct answer.

Explanation

Proximate cause looks for the efficient, dominant cause of a loss and asks whether the chain of events from that cause to the damage is unbroken. Where the covered windstorm set the chain in motion without a new independent cause, the resulting damage is covered.

Question 7Insurance Principles and Concepts (property and casualty basics)

Storing oily rags next to a furnace is best described as which type of hazard?

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

Explanation

A physical hazard is a tangible condition that increases the chance or severity of a loss, such as combustible material stored near a heat source. Moral and morale hazards instead concern the attitude or conduct of the insured.

Question 8Insurance Principles and Concepts (property and casualty basics)

An agent issues a binder on Monday. The policy is later issued showing an effective date the following Monday. A covered loss occurs on Wednesday. What is the result?

  1. Coverage applies only if the risk is later approved
  2. No coverage, since binders exist only in liability lines
  3. No coverage, because the policy was not yet issued
  4. Coverage applies from the binder date Correct answer.

Explanation

A binder is temporary evidence of coverage that takes effect immediately, even though the formal policy is issued later. If a covered loss occurs while the binder is in force, the claim is handled as though the policy were already in effect.

Question 9Insurance Principles and Concepts (property and casualty basics)

An agent is expressly authorized in writing to sell commercial property policies. Binding coverage is not mentioned in the agreement, but it is a routine part of selling such policies in the agent's area. The authority to bind is best classified as which type?

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

Explanation

Implied authority is the power to do what is reasonably necessary to carry out authority that was expressly granted, even though the specific act is not written into the agreement. Express authority comes from the written agency agreement itself, and apparent authority comes from the insurer's conduct toward third parties.

Question 10Insurance Principles and Concepts (property and casualty basics)

Purchasing an insurance policy is which risk management technique?

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

Explanation

Insurance transfers the financial consequences of a loss to the insurer in exchange for a premium. Avoidance eliminates the exposure altogether, while retention keeps the financial consequences with the insured.

Question 11Insurance Principles and Concepts (property and casualty basics)

Courts generally resolve ambiguity in an insurance policy against the insurer because the policy is which type of contract?

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

Explanation

A contract of adhesion is drafted by one party and offered to the other on a take-it-or-leave-it basis, so ambiguity is construed against the drafter. The other classifications describe the exchange of values, the promises made, or the duties that must be satisfied.

Question 12Insurance Principles and Concepts (property and casualty basics)

Two policies cover the same property on the same basis, Policy A with a $200,000 limit and Policy B with a $100,000 limit, and neither is primary. A covered loss of $60,000 occurs. Under a pro rata other insurance clause, how is the loss shared?

  1. A pays $20,000 and B pays $40,000
  2. Each insurer pays $30,000
  3. A pays $40,000 and B pays $20,000 Correct answer.
  4. A pays $60,000 and B pays nothing

Explanation

Under pro rata sharing, each insurer pays the proportion of the loss that its limit bears to the total insurance. A carries two-thirds of the $300,000 total, so it pays $40,000, and B pays the remaining $20,000.

Question 13Insurance Principles and Concepts (property and casualty basics)

Which policy section identifies the insured, the covered location, the policy period, and the limits of liability?

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

Explanation

The declarations page supplies the identifying facts of the contract: who is insured, what and where is covered, the term, and the limits. The other sections state the promise to pay, the duties of the parties, and what is not covered.

Question 14Insurance Principles and Concepts (property and casualty basics)

Which element of negligence requires proof that the defendant's conduct actually produced the claimant's injury?

  1. Causation Correct answer.
  2. Damages
  3. Breach
  4. Duty

Explanation

A negligence claim requires duty, breach, causation, and damages. Causation supplies the link showing the breach brought about the harm, tested both as actual cause and as proximate cause.

Question 15Insurance Principles and Concepts (property and casualty basics)

A standard homeowners policy written on an open peril basis for the dwelling typically excludes direct loss caused by which of the following?

  1. Earth movement Correct answer.
  2. Vandalism
  3. Fire
  4. Windstorm

Explanation

Standard homeowners forms exclude earth movement, including earthquake, landslide, and sinkhole collapse, so coverage for that peril must be added separately. Fire, windstorm, and vandalism are among the perils the form covers.

Question 16Insurance Principles and Concepts (property and casualty basics)

Which situation is the best example of a moral hazard rather than a morale hazard?

  1. A business owner skips routine roof maintenance
  2. An insured overstates the value of destroyed inventory Correct answer.
  3. A homeowner stops locking the garage because theft is insured
  4. An insured habitually leaves a car unlocked downtown

Explanation

Moral hazard involves a dishonest intent to create, exaggerate, or profit from a loss, as when an insured inflates a claim. Morale hazard is carelessness or indifference created by the existence of insurance, without any intent to gain.

Question 17Insurance Principles and Concepts (property and casualty basics)

In a property policy, the insuring agreement does which of the following?

  1. Identifies the perils the policy excludes
  2. Sets out the insurer's core promise to pay Correct answer.
  3. Describes the insured's duties after a loss
  4. Lists the named insured and policy limits

Explanation

The insuring agreement is the heart of the contract: it states what the insurer promises to pay for and under what broad circumstances. The other items appear in the declarations, the conditions, and the exclusions.

Question 18Insurance Principles and Concepts (property and casualty basics)

A policy carries a $1,000 deductible and a $25,000 limit. A covered loss of $900 occurs. What does the insurer pay?

  1. $0 Correct answer.
  2. $900
  3. $25,000
  4. $1,000

Explanation

The deductible is subtracted from the amount of the covered loss, and coverage responds only to the excess. Because $900 is below the $1,000 deductible, no payment is owed and the insured absorbs the loss.

Question 19Insurance Principles and Concepts (property and casualty basics)

After paying a total loss on a building, the insurer sells the remaining scrap materials. Who is entitled to those proceeds, and why?

  1. The insured, because the property was theirs
  2. The insured, because salvage is theirs
  3. The mortgagee, under the loss payable clause
  4. The insurer, under its salvage rights Correct answer.

Explanation

When an insurer pays a total loss, it succeeds to the salvage value of the damaged property, which is why the insured may not keep both the full payment and the remains. The insured cannot abandon the property to the insurer and still demand payment.

Question 20Insurance Principles and Concepts (property and casualty basics)

An applicant for a commercial property policy states that the building has a central-station alarm. In fact it does not. How is that statement best characterized?

  1. A binder
  2. An implied condition of the policy
  3. A representation, material to the risk Correct answer.
  4. A warranty that voids coverage automatically

Explanation

Statements made in an application are generally representations rather than warranties, and coverage may be avoided only if the misstatement is material to the risk and relied on by the insurer. A warranty is a promise that must be literally true and is treated far more strictly.

Question 21Insurance Principles and Concepts (property and casualty basics)

Which of the following is a pure risk?

  1. Damage to a warehouse from a fire Correct answer.
  2. A new product failing to sell
  3. A gain from a currency trade
  4. A loss on a stock purchase

Explanation

Pure risks involve only the possibility of loss or no loss, and they are the type of risk insurance is designed to handle. Speculative risks carry the chance of gain as well as loss and are generally not insurable.

Question 22Insurance Principles and Concepts (property and casualty basics)

A liability policy gives the insurer the right and duty to defend the insured. When must the insurer provide a defense?

  1. Even when the allegations are groundless Correct answer.
  2. Only after the insured's liability is established
  3. Only if the insured advances defense costs
  4. Only up to the policy limit

Explanation

The duty to defend is broader than the duty to indemnify: if the allegations in the complaint could fall within coverage, the insurer must defend, even if the suit is groundless. Liability is determined later, and for liability policies defense costs are usually paid in addition to the limit.

Question 23Insurance Principles and Concepts (property and casualty basics)

Which statement best describes facultative reinsurance?

  1. It covers every policy the ceding insurer writes in a given line
  2. Each risk is offered and accepted individually Correct answer.
  3. It shifts the timing of losses but not the underlying risk
  4. The reinsurer automatically accepts all risks ceded under the agreement

Explanation

Facultative reinsurance is negotiated risk by risk, so the reinsurer may accept or decline each submission. Treaty reinsurance, by contrast, automatically covers the defined class of business the ceding insurer writes.

Question 24Insurance Principles and Concepts (property and casualty basics)

Which combination is required for a legally enforceable insurance contract?

  1. Approval by a court
  2. Offer, acceptance, and consideration Correct answer.
  3. A verbal agreement only
  4. A premium refund guarantee

Explanation

An enforceable contract needs offer, acceptance, consideration, legal purpose, and competent parties. In insurance the application is typically the offer, the policy the acceptance, and the premium the consideration.

Question 25Insurance Principles and Concepts (property and casualty basics)

In a liability claim, which type of damages compensates for pain and suffering rather than for documented expenses?

  1. General damages Correct answer.
  2. Punitive damages
  3. Liquidated damages
  4. Special damages

Explanation

General damages compensate for non-economic harm such as pain, suffering, and disfigurement. Special damages cover documented economic losses, and punitive damages are awarded to punish the wrongdoer.

Question 26Insurance Principles and Concepts (property and casualty basics)

Which statement best describes the insurable interest requirement in property insurance?

  1. The insured would suffer a financial loss if the property were damaged. Correct answer.
  2. The insured has a strong personal attachment to the property.
  3. The insurer has set aside reserves equal to the policy limit.
  4. The insured owns the property free of any mortgages or liens.

Explanation

Insurable interest requires that the insured stand to lose money or suffer an economic detriment if the covered property is damaged or destroyed. It is a financial relationship, not merely an emotional one, and it supports the principle of indemnity.

Question 27Insurance Principles and Concepts (property and casualty basics)

Actual cash value in a property policy is most commonly calculated as replacement cost minus which of the following?

  1. The policy deductible
  2. The coinsurance percentage
  3. Accumulated depreciation Correct answer.
  4. Any salvage the insurer recovers

Explanation

Actual cash value reflects the value of the property in its condition at the time of loss, typically replacement cost less depreciation. This keeps the recovery tied to the actual economic loss rather than the cost of a brand-new item.

Question 28Insurance Principles and Concepts (property and casualty basics)

An endorsement attached to an insurance policy is used to do which of the following?

  1. Guarantee that the premium will never be increased
  2. Cancel the policy automatically if the insured moves
  3. Change, add to, or delete coverage in the policy Correct answer.
  4. Replace the declarations page at every renewal

Explanation

An endorsement, sometimes called a rider, is a written amendment that alters the original policy terms. It may broaden coverage, restrict coverage, or modify conditions, and it controls over conflicting language in the base form.

Question 29Insurance Principles and Concepts (property and casualty basics)

Which policy section generally sets out the insured's obligations after a loss, such as giving prompt notice and submitting a proof of loss?

  1. The declarations
  2. The insuring agreement
  3. The conditions Correct answer.
  4. The exclusions

Explanation

The conditions section contains the rules both parties must follow for the contract to operate, including the insured's post-loss duties such as notice, proof of loss, and cooperation. Failure to satisfy these duties can affect the insurer's obligation to pay.

Question 30Insurance Principles and Concepts (property and casualty basics)

An insurer writes a very large number of similar, independent exposure units. Which result does the law of large numbers predict?

  1. Each individual policyholder becomes less likely to have a loss.
  2. Actual losses will more closely approach the expected level. Correct answer.
  3. Rates must rise in direct proportion to the number of policies.
  4. The insurer no longer needs to hold any surplus or reserves.

Explanation

The law of large numbers holds that as the number of similar independent exposure units increases, actual loss experience tends to converge on the expected or predicted loss level. This convergence makes future losses more predictable and is the mathematical basis for pooling risk.

Question 31Insurance Principles and Concepts (property and casualty basics)

Applicants who know they face a costly loss tend to seek coverage far more actively than applicants with no such knowledge, which raises the insurer's loss ratio. Which term describes this tendency?

  1. Retention of risk by the insured
  2. Spread of risk across many insureds
  3. Concentration of risk in one location
  4. Adverse selection Correct answer.

Explanation

Adverse selection is the tendency of those with the greatest probability of loss to seek or keep insurance most eagerly, leaving the insurer with a pool that is worse than average. Underwriters counter it through application questions, inspections, exclusions, and careful pricing.

Question 32Insurance Principles and Concepts (property and casualty basics)

An insurance contract is described as aleatory because of which characteristic?

  1. The contract is not binding until the first premium is paid.
  2. The amounts exchanged depend on an uncertain future event. Correct answer.
  3. The parties exchange promises that are equal in value.
  4. Only one of the parties makes a legally enforceable promise.

Explanation

An aleatory contract is one in which the amounts exchanged by the parties are contingent on an uncertain event, so one party may receive far more or far less than it paid. A small premium may produce a large claim payment, or the insured may collect nothing at all.

Question 33Insurance Principles and Concepts (property and casualty basics)

A liability policy is written on a claims-made basis. Which event determines whether a given claim is covered?

  1. The date the claim is first made against the insured Correct answer.
  2. The date the insured first purchased coverage
  3. The date the policy period ends
  4. The date the injury or damage first began

Explanation

A claims-made policy responds to claims first made against the insured during the policy period, regardless of when the underlying act occurred, subject to any retroactive date and extended reporting provisions. An occurrence policy instead looks to when the injury or damage took place.

Question 34Insurance Principles and Concepts (property and casualty basics)

An adjuster with authority tells an insured in writing that a late claim notice will be accepted, and the insurer later tries to deny the claim because the notice was late. Which doctrine is most likely to defeat the denial?

  1. Subrogation
  2. Abandonment
  3. Coinsurance
  4. Waiver Correct answer.

Explanation

Waiver is the voluntary relinquishment of a known right, and an insurer's authorized representative can waive a policy condition such as prompt notice through words or conduct. Once a condition is waived, the insurer generally cannot later rely on it to deny the claim.

Question 35Insurance Principles and Concepts (property and casualty basics)

A business installs an automatic sprinkler system so that a fire, if it starts, will be put out before it can spread. This step is best classified as which risk management technique?

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

Explanation

Loss reduction measures lessen the severity of a loss once it has begun, and automatic extinguishing equipment limits the extent of fire damage. Loss prevention, by contrast, aims to reduce the frequency of loss before it starts.

Question 36Insurance Principles and Concepts (property and casualty basics)

An insured cancels a one-year policy after six months and the unearned premium is returned on a short-rate basis. How does that refund compare with a pro rata refund?

  1. The short-rate refund is larger than the pro rata refund.
  2. The short-rate refund returns the entire annual premium.
  3. The short-rate refund is less than the pro rata refund. Correct answer.
  4. The two methods always produce an identical refund.

Explanation

Short-rate cancellation applies a penalty to the unearned premium, so the insured receives back less than a strict day-by-day or monthly calculation would allow. Pro rata return gives the insured the exact unearned portion, which is why insurers use short rate when the insured initiates the cancellation.

Question 37Insurance Principles and Concepts (property and casualty basics)

Under a pure comparative negligence rule, how is an injured claimant's recovery affected when the claimant is partly at fault?

  1. The claimant recovers nothing if at fault in any degree.
  2. The claimant recovers the full amount regardless of fault.
  3. Damages are reduced by the claimant's percentage of fault. Correct answer.
  4. Recovery is increased to offset the fault of others.

Explanation

Pure comparative negligence reduces the claimant's damages in proportion to the claimant's own share of responsibility, so a claimant 30 percent at fault collects 70 percent of the proven damages. Allocating fault this way differs from contributory negligence, which can bar recovery entirely.

Question 38Insurance Principles and Concepts (property and casualty basics)

A building with a replacement cost of $500,000 is insured for $300,000 under a policy containing an 80% coinsurance clause and a $1,000 deductible. A covered loss causes $100,000 of damage. What does the insurer pay?

  1. $74,000 Correct answer.
  2. $99,000
  3. $75,000
  4. $60,000

Explanation

The coinsurance requirement is 80% of $500,000, or $400,000, and the insured carried $300,000, which is 75% of that requirement. Applying 75% to the $100,000 loss gives $75,000, and subtracting the $1,000 deductible leaves a payment of $74,000.

Question 39Insurance Principles and Concepts (property and casualty basics)

What is the effect of the doctrine of res ipsa loquitur in a negligence case?

  1. Recovery is barred if the plaintiff was negligent at all.
  2. The defendant is strictly liable without any showing of fault.
  3. The trier of fact may infer negligence from the nature of the accident. Correct answer.
  4. The burden of proof shifts to the plaintiff to disprove fault.

Explanation

Res ipsa loquitur, meaning the thing speaks for itself, permits an inference of negligence when the accident is of a kind that ordinarily does not happen without negligence and the instrumentality was under the defendant's exclusive control. It relieves the plaintiff of identifying the precise negligent act but does not impose strict liability.

Question 40Insurance Principles and Concepts (property and casualty basics)

A property policy with a $40,000 limit covers a $50,000 fire loss, and the insurer pays the full $40,000 limit. The insured then collects $50,000 from the at-fault third party. How much of that $50,000 is the insurer entitled to recover under subrogation?

  1. $0
  2. $10,000
  3. $50,000
  4. $40,000 Correct answer.

Explanation

Subrogation lets the insurer step into the insured's shoes to recover what it paid from the party responsible for the loss, so the insurer may recover its $40,000 payment. The insured keeps the remaining $10,000, which represents the uninsured portion of the loss, and no one recovers more than the actual loss.

Question 41Property Insurance Coverages and Policy Provisions

On a homeowners HO-3 policy, the Coverage B (Other Structures) limit is calculated as a percentage of which other coverage limit?

  1. 30% of the Coverage A limit
  2. 50% of the Coverage A limit
  3. 10% of the Coverage A limit Correct answer.
  4. 20% of the Coverage A limit

Explanation

The standard HO-3 assigns Coverage B a limit equal to 10% of the Coverage A (Dwelling) limit. That amount can be increased by endorsement if the insured has detached structures worth more. Coverage B applies to structures separated from the dwelling by clear space, such as a detached garage or fence.

Question 42Property Insurance Coverages and Policy Provisions

Under the special limits of liability in a homeowners policy, what is the maximum amount payable for loss of money?

  1. $200 Correct answer.
  2. $500
  3. $1,500
  4. $1,000

Explanation

Homeowners forms impose a special sublimit of $200 for money, and similar low sublimits apply to items such as bullion, coin collections, and valuable papers. These limits apply regardless of the Coverage C limit. Higher amounts require an endorsement or a separate floater.

Question 43Property Insurance Coverages and Policy Provisions

Which homeowners coverage pays the necessary increase in living expenses so the insured household can maintain its normal standard of living while the damaged dwelling is being repaired?

  1. Coverage A - Dwelling
  2. Coverage E - Personal Liability
  3. Coverage D - Loss of Use Correct answer.
  4. Coverage B - Other Structures

Explanation

Coverage D, Loss of Use, responds when a covered peril makes the residence premises unfit to live in. It pays additional living expenses and, where applicable, fair rental value for the time reasonably needed to repair or replace. Coverage A and Coverage B pay to repair the structures themselves, not the occupants' living costs.

Question 44Property Insurance Coverages and Policy Provisions

Which homeowners coverage form is written for an insured who rents an apartment and owns no part of the building?

  1. HO-6
  2. HO-8
  3. HO-3
  4. HO-4 Correct answer.

Explanation

The HO-4 is the tenants form. It insures personal property and liability, plus limited building additions and alterations made by the tenant, but it does not insure the building itself because the tenant does not own it. The HO-6 serves condominium unit owners and the HO-3 and HO-8 serve owners of dwellings.

Question 45Property Insurance Coverages and Policy Provisions

A commercial building valued at $1,000,000 is insured for $600,000 under a policy with an 80% coinsurance clause and no deductible. A covered fire loss totals $200,000. How much will the insurer pay?

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

Explanation

The coinsurance requirement is 80% of $1,000,000, or $800,000. The insured carried only $600,000, so the payment ratio is 600,000 divided by 800,000, or 0.75. Applying that ratio to the $200,000 loss produces a payment of $150,000.

Question 46Property Insurance Coverages and Policy Provisions

A home subject to a mortgage is damaged by a fire caused by the insured's own negligence. Which statement best describes the mortgagee's rights under the standard mortgage clause?

  1. The mortgagee must pay a separate premium to preserve its rights under the policy.
  2. The mortgagee may collect the unpaid balance of the debt to the extent of its interest even if the insured's own conduct bars the insured's claim. Correct answer.
  3. The mortgagee's claim fails whenever the insurer denies the insured's claim because of the insured's acts.
  4. The mortgagee's recovery is limited to the insured's equity in the property.

Explanation

The standard mortgage clause makes the mortgagee a separate insured with independent rights. The mortgagee can collect up to the amount of its interest even when the named insured's acts would defeat the insured's own claim. The mortgagee must also be given notice of cancellation or nonrenewal.

Question 47Property Insurance Coverages and Policy Provisions

The insurer and the insured agree that a fire loss is covered but cannot agree on the amount of damage. How does the appraisal provision resolve the dispute?

  1. An appraisal determines whether the policy provides coverage for the loss.
  2. The insurer's adjuster sets the amount, subject to the insured's right to sue afterward.
  3. The insured must accept the umpire's award in advance as a condition of demanding appraisal.
  4. Each party selects a competent appraiser, and if the appraisers disagree they choose an umpire whose award sets the amount of loss. Correct answer.

Explanation

Appraisal is a policy condition used only to fix the dollar amount of a covered loss, not to decide coverage. Each side names an appraiser; if the two cannot agree, they select an umpire and a majority award is binding as to the amount. Coverage disputes are resolved separately.

Question 48Property Insurance Coverages and Policy Provisions

An insurer pays a homeowners claim for fire damage caused by a contractor's negligence. Which statement correctly describes the insurer's subrogation rights?

  1. The insured may collect the full policy amount and also keep any recovery from the contractor.
  2. The insurer may recover from the contractor even before the insured has been fully reimbursed for the loss.
  3. The insured's right to sue the contractor ends as soon as the insurer makes any payment on the claim.
  4. The insurer may pursue the contractor only to the extent of its payment and only after the insured has been fully compensated. Correct answer.

Explanation

Subrogation transfers the insured's right of recovery against a responsible third party to the insurer, but only to the extent of the insurer's payment. The insured must first be made whole, so the insurer cannot compete with its own insured for the third party's limited funds. Any recovery beyond the insurer's payment belongs to the insured.

Question 49Property Insurance Coverages and Policy Provisions

Under the homeowners policy, what limit applies to trees, shrubs, and other plants on the residence premises?

  1. 10% of the Coverage A limit, up to $500 for any one item
  2. 5% of the Coverage A limit, up to $1,000 for any one item
  3. 2% of the Coverage A limit, up to $250 for any one item
  4. 5% of the Coverage A limit, up to $500 for any one item Correct answer.

Explanation

The homeowners forms provide a sublimit of 5% of the Coverage A limit for trees, shrubs, and other plants, with a maximum of $500 for any one tree, shrub, or plant. This coverage is further restricted to specified perils such as fire, lightning, explosion, riot, and vandalism. The sublimit is in addition to the Coverage A and Coverage B limits.

Question 50Property Insurance Coverages and Policy Provisions

What is the function of an inflation guard endorsement on a homeowners policy?

  1. It automatically increases the Coverage A limit at stated intervals to keep pace with rising replacement costs. Correct answer.
  2. It adds coverage for newly acquired property at a second location.
  3. It reduces the deductible as property values rise.
  4. It raises the Coverage A limit only after a covered total loss.

Explanation

The inflation guard endorsement increases the dwelling limit by a specified annual percentage so the insurance to value ratio does not erode as construction costs rise. The insured pays premium for the increased limit. It does not address newly acquired property, which is handled by a separate extension of coverage.