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WA Property & Casualty practice questions

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Question 1Insurance Regulation, Licensing, and Washington State Law

Washington's insurance commissioner is chosen by the voters rather than appointed. How long is the commissioner's term of office?

  1. Six years
  2. Eight years
  3. Two years
  4. Four years Correct answer.

Explanation

The commissioner is an elected statewide executive officer who serves a four-year term, the same length as other Washington statewide officials. The position is not appointed by the governor.

Question 2Insurance Regulation, Licensing, and Washington State Law

What is the minimum age a person must reach to hold a Washington insurance producer license?

  1. 21 years
  2. 25 years
  3. 16 years
  4. 18 years Correct answer.

Explanation

Washington requires producer license applicants to be at least eighteen years of age, along with completing any required education and passing the licensing examination. Age alone does not qualify a person; the other licensing requirements still apply.

Question 3Insurance Regulation, Licensing, and Washington State Law

A Washington resident producer must complete continuing education during each two-year license period. What is the required total, and how much must be in ethics?

  1. 12 hours, with 2 hours of ethics
  2. 24 hours, with 3 hours of ethics Correct answer.
  3. 18 hours, with 2 hours of ethics
  4. 30 hours, with 4 hours of ethics

Explanation

Washington requires 24 credit hours of approved continuing education every two years, at least 3 of which must be ethics instruction. Credits must come from approved providers and be reported to the commissioner.

Question 4Insurance Regulation, Licensing, and Washington State Law

Washington resident producer licenses are renewed on what cycle?

  1. Every year
  2. Every three years
  3. Every five years
  4. Every two years Correct answer.

Explanation

Resident producer licenses are issued for a two-year term and renewed biennially, tied to the licensee's birth month. Continuing education must be completed before each renewal.

Question 5Insurance Regulation, Licensing, and Washington State Law

A producer moves her office and changes her business mailing address. Within what period must she notify the insurance commissioner?

  1. 10 days
  2. 90 days
  3. 60 days
  4. 30 days Correct answer.

Explanation

Licensees must keep their records with the commissioner current and report a change of name or address within 30 days of the change. Notice may be given electronically through the commissioner's licensing system.

Question 6Insurance Regulation, Licensing, and Washington State Law

An insurer contracts with a newly licensed producer to write business on its behalf. The insurer must file notice of appointment with the commissioner within what period after the agency contract is executed?

  1. 30 days Correct answer.
  2. 45 days
  3. 15 days
  4. 60 days

Explanation

An insurer may not use a producer's services until it files a notice of appointment with the commissioner, which must be submitted within 30 days after the agency contract is executed or the first application is submitted.

Question 7Insurance Regulation, Licensing, and Washington State Law

A producer's unlicensed office assistant refers a friend to the agency, and the friend buys a homeowners policy. The producer wants to pay the assistant part of the commission. Under Washington law this payment is:

  1. Permitted if the referral is documented in writing
  2. Prohibited, since commissions may go only to licensed producers Correct answer.
  3. Permitted if the insurer agrees to the arrangement
  4. Permitted because the assistant works for a licensed agency

Explanation

Commission sharing is limited to persons who hold a valid license for the class of insurance involved. Paying an unlicensed employee a share of commission, even for a referral, violates the licensing statute and can subject both parties to penalties.

Question 8Insurance Regulation, Licensing, and Washington State Law

Which practice is an illegal inducement under Washington insurance law?

  1. Paying a commission to a licensed producer
  2. Charging a disclosed policy fee
  3. Reducing a premium through a filed safe-driver discount
  4. Sharing a commission with a client to win the sale Correct answer.

Explanation

Rebating occurs when an insurer or producer offers part of the premium or commission to an insured as an inducement to buy. Washington prohibits rebating because it results in unequal treatment of buyers with similar risks. Filed discounts and disclosed fees are lawful.

Question 9Insurance Regulation, Licensing, and Washington State Law

An agent tells a client that her current insurer is about to fail financially so that she will surrender a sound policy and buy a replacement. This conduct is best described as:

  1. Coercion
  2. Rebating
  3. Twisting Correct answer.
  4. Defamation

Explanation

Twisting is inducing a policyholder to lapse, surrender, or replace coverage through misrepresentation or incomplete comparison of policies. The false statement about the insurer's solvency is the core of the violation.

Question 10Insurance Regulation, Licensing, and Washington State Law

An advertisement describes a policy as providing coverage that the policy does not actually contain. This violates Washington rules against:

  1. Misrepresentation Correct answer.
  2. Premium financing
  3. Rebating
  4. Boycott

Explanation

Misrepresentation includes issuing or circulating advertising that falsely describes the terms, benefits, or conditions of a policy. Advertising is held to the same accuracy standard as the policy itself.

Question 11Insurance Regulation, Licensing, and Washington State Law

A producer deposits clients' premiums into his personal checking account and uses the funds for business expenses before remitting them to the insurer. This conduct is:

  1. Acceptable if the insurer is paid within 90 days
  2. Acceptable if the funds are repaid before the due date
  3. A breach of fiduciary duty and prohibited commingling Correct answer.
  4. Acceptable for small amounts only

Explanation

Premiums collected by a producer are held in a fiduciary capacity for the insurer or insured. Funds must be maintained separately from the producer's own money, and commingling or unauthorized use is a violation regardless of later repayment.

Question 12Insurance Regulation, Licensing, and Washington State Law

Under Washington's unfair claim settlement practices rules, an insurer that receives notice of a claim must acknowledge it within what period?

  1. 10 working days Correct answer.
  2. 30 calendar days
  3. 2 business days
  4. 5 business days

Explanation

The claim handling regulations require an insurer to acknowledge notification of a claim within 10 working days after receipt. Failure to meet the standard is an unfair claims practice subject to regulatory action.

Question 13Insurance Regulation, Licensing, and Washington State Law

A Washington homeowner holds a policy from an insurer that is later declared insolvent. Which statement about the Washington Insurance Guaranty Association is accurate?

  1. It covers only life and disability insurance claims
  2. It pays covered claims of insolvent insurers, within statutory limits Correct answer.
  3. It reimburses producers for their lost commissions
  4. It pays every covered claim in full, regardless of the claim amount

Explanation

The guaranty association is funded by member property and casualty insurers and responds to covered claims against insolvent insurers, subject to statutory limits and deductibles. It is a backstop, not a guarantee of full payment.

Question 14Insurance Regulation, Licensing, and Washington State Law

A person charges a fee to advise an insured about a first-party property claim and negotiates the settlement with the insurer on the insured's behalf. What Washington license is required?

  1. A public adjuster license Correct answer.
  2. A third-party administrator certificate
  3. A surplus lines broker license
  4. A producer license with a casualty line

Explanation

A public adjuster is licensed to represent the insured for compensation in negotiating a first-party claim. Producers and surplus lines brokers may not perform that role for a fee, because they act on the insurer's side of the transaction.

Question 15Insurance Regulation, Licensing, and Washington State Law

A licensed producer dies unexpectedly, leaving an operating agency. Under Washington law, the commissioner may:

  1. Issue a temporary license to the producer's designee Correct answer.
  2. Allow the agency to run unlicensed for up to one year
  3. Transfer the producer's book of business to the highest bidder
  4. Void all policies the producer placed

Explanation

Washington allows the commissioner to issue a temporary license to a designee, such as a surviving spouse or personal representative, when a licensee dies or becomes incapacitated. The temporary authority allows the business to be wound down or sold in an orderly way.

Question 16Insurance Regulation, Licensing, and Washington State Law

A producer licensed in Oregon wants to write Washington business. Washington will typically issue a nonresident license if the applicant:

  1. Opens a Washington office
  2. Holds a comparable license in good standing at home Correct answer.
  3. Posts a surety bond with the state
  4. Passes the Washington licensing exam

Explanation

Washington grants nonresident licenses on a reciprocal basis to producers who hold a comparable license in their home state and are in good standing there. A separate Washington examination is generally not required.

Question 17Insurance Regulation, Licensing, and Washington State Law

A producer places homeowners coverage with an insurer that is not authorized in Washington and does not meet any surplus lines exception. The producer has:

  1. Acted properly if the premium is lower
  2. Acted properly because the insured requested it
  3. Violated the insurance code and may face license action Correct answer.
  4. Acted properly if the policy is delivered out of state

Explanation

Placing coverage with an unauthorized insurer outside the surplus lines framework is unlawful and exposes the producer to suspension, revocation, and fines. The insured also loses the protection of the state guaranty association.

Question 18Insurance Regulation, Licensing, and Washington State Law

Before an insurer may transact insurance business in Washington, it must obtain from the commissioner a:

  1. Producer appointment
  2. Certificate of authority Correct answer.
  3. Rate approval letter
  4. Fidelity bond

Explanation

An insurer must hold a certificate of authority before it is authorized to transact insurance in Washington. Insurers holding that certificate are referred to as admitted or authorized insurers.

Question 19Insurance Regulation, Licensing, and Washington State Law

Before the commissioner may revoke a producer's license, the commissioner must:

  1. Give notice and an opportunity for a hearing Correct answer.
  2. Obtain a court judgment
  3. Wait for a consumer complaint
  4. Publish the charges in the local newspaper

Explanation

License revocation is an administrative action that requires notice of the charges and an opportunity for a hearing, consistent with due process. The licensee may appeal the commissioner's order afterward.

Question 20Insurance Regulation, Licensing, and Washington State Law

Which document must a Washington-authorized insurer file with the commissioner each year?

  1. Its internal audit work papers
  2. An annual financial statement Correct answer.
  3. Copies of every advertisement it uses
  4. A list of its producers' home addresses

Explanation

Authorized insurers must file an annual financial statement with the commissioner showing their financial condition. The commissioner uses these filings, together with examinations, to monitor solvency.

Question 21Insurance Regulation, Licensing, and Washington State Law

A surplus lines broker places a commercial property risk with a nonadmitted insurer. Before doing so, Washington law generally requires the broker to:

  1. Collect the premium in a separate escrow account
  2. Notify every authorized insurer in the state
  3. Make a diligent search among authorized insurers Correct answer.
  4. Obtain written approval from the commissioner for each placement

Explanation

Surplus lines placement is permitted only after a diligent effort to place the risk with authorized insurers has failed. The broker must document that search and meet the surplus lines filing and tax requirements.

Question 22Insurance Regulation, Licensing, and Washington State Law

In Washington, the legal distinction between an agent and a broker is that an agent:

  1. Represents the insurer, while a broker represents the insured Correct answer.
  2. May not receive commissions
  3. Works only for commercial clients
  4. Must be appointed by the insured

Explanation

An agent is appointed by and acts for the insurer, while a broker acts on behalf of the insured in obtaining coverage. The distinction affects whose interests the licensee represents and how appointments work.

Question 23Insurance Regulation, Licensing, and Washington State Law

A consumer complains to the commissioner that an insurer delayed a claim without explanation. The commissioner's typical authority in response includes:

  1. Ordering the insurer to pay the consumer's attorney fees
  2. Investigating the complaint and taking regulatory action Correct answer.
  3. Awarding punitive damages to the consumer
  4. Imposing criminal penalties on the adjuster

Explanation

The commissioner investigates consumer complaints and may pursue regulatory remedies such as fines, orders, or license action against a noncompliant insurer. The commissioner does not adjudicate the consumer's damages claim, which is resolved privately or in court.

Question 24Insurance Regulation, Licensing, and Washington State Law

A licensed Washington producer is convicted of felony theft. The producer must:

  1. Report the conviction only if the insurer asks
  2. Wait until license renewal to report it
  3. Report it only if the conviction relates to insurance
  4. Report the conviction to the commissioner within 30 days Correct answer.

Explanation

Licensees must notify the commissioner within 30 days of specified events, including criminal convictions and administrative actions taken by other regulators. Failure to report is itself a separate violation that can lead to license action.

Question 25Insurance Regulation, Licensing, and Washington State Law

Under the McCarran-Ferguson Act, regulation of the business of insurance is primarily left to:

  1. The federal government
  2. The courts
  3. The states Correct answer.
  4. The National Association of Insurance Commissioners

Explanation

The McCarran-Ferguson Act confirms that the states regulate the business of insurance, with federal law generally applying only where Congress specifically addresses insurance. This is why Washington licenses producers and insurers through its own commissioner.

Question 26Insurance Regulation, Licensing, and Washington State Law

In Washington, the insurance commissioner is chosen in which manner?

  1. Elected by the voters to a four-year term Correct answer.
  2. Chosen by the legislature for a two-year term
  3. Appointed by the governor to a four-year term
  4. Selected by the insurers admitted in the state

Explanation

Washington's insurance commissioner is a statewide elected official who serves a four-year term. The commissioner heads the office that administers and enforces the state's insurance code (Title 48 RCW) and issues the rules that carry it out. Neither the governor nor the industry plays a role in selecting the commissioner.

Question 27Insurance Regulation, Licensing, and Washington State Law

An insurer that is organized under the laws of the state of Washington is classified as:

  1. A domestic insurer Correct answer.
  2. A reciprocal insurer
  3. An alien insurer
  4. A foreign insurer

Explanation

Domicile classification depends on the jurisdiction under whose laws the insurer was organized. An insurer formed under Washington law is domestic, one formed under another state's law is foreign, and one formed outside the United States is alien. Reciprocal describes an organizational structure, not a domicile.

Question 28Insurance Regulation, Licensing, and Washington State Law

Washington insurance producers must complete how much continuing education during each two-year license period?

  1. 30 hours, including 6 hours of ethics
  2. 12 hours, including 1 hour of ethics
  3. 20 hours, including 2 hours of ethics
  4. 24 hours, including 3 hours of ethics Correct answer.

Explanation

Washington requires producers to complete 24 credit hours of approved continuing education every two-year license period. At least 3 of those hours must be in ethics. Records must be retained and are subject to audit by the commissioner.

Question 29Insurance Regulation, Licensing, and Washington State Law

Under Washington law, which of these activities requires an insurance producer license?

  1. An attorney who reviews policy language while representing a client
  2. An office clerk who mails renewal notices and never discusses coverage
  3. A neighbor who mentions an agency to a friend and receives no compensation at all
  4. A person who, for a commission, solicits and negotiates insurance sales Correct answer.

Explanation

A license is required of anyone who for compensation solicits, negotiates, sells, or otherwise transacts insurance. Clerical work that does not involve discussing coverage, and uncompensated referrals, fall outside the licensing requirement. Attorneys performing legal work for clients are also outside it.

Question 30Insurance Regulation, Licensing, and Washington State Law

When the insurance commissioner examines an insurer's books and records, the cost of the examination is borne by:

  1. The commissioner's office from its operating budget
  2. The insurer that is being examined Correct answer.
  3. The state guaranty association
  4. The producers appointed by the insurer

Explanation

The insurer being examined pays the expense of the examination, which is one reason examinations are budgeted and scheduled in advance. The commissioner has broad authority to examine the affairs and records of authorized insurers to assess financial condition and compliance. Examiners may also examine officers and agents under oath.

Question 31Insurance Regulation, Licensing, and Washington State Law

Washington regulates most property and casualty rates under a competitive rating system. Which standard applies to a rate that an insurer files?

  1. It may be set at any level the insurer's board finds profitable
  2. It may not be excessive, inadequate, or unfairly discriminatory Correct answer.
  3. It must be approved by the legislature before each calendar year
  4. It must match the rate charged by the largest writer in the line

Explanation

Competitive rating does not mean unregulated rating: filed rates must not be excessive, inadequate, or unfairly discriminatory, judged by the statutory standards. Insurers set and file their own rates, and the commissioner reviews them for compliance and may order changes after a hearing. Rates need not match competitors or be legislatively approved.

Question 32Insurance Regulation, Licensing, and Washington State Law

Two applicants with identical risk characteristics apply for the same homeowners policy. The insurer charges one a higher premium because of her national origin. The practice is:

  1. Permitted, because underwriting judgment is left to the insurer
  2. Lawful, because the insurer applies the same surcharge to every applicant
  3. Permitted, provided the difference is disclosed in the binder
  4. Unlawful unfair discrimination between individuals of the same class Correct answer.

Explanation

Washington prohibits unfair discrimination between individuals of the same class in rates, terms, and conditions of coverage, and national origin is not a permissible rating factor. Treating identically situated applicants differently on that basis violates the unfair trade practices provisions. Disclosure or uniformity of the surcharge does not cure the violation.

Question 33Insurance Regulation, Licensing, and Washington State Law

A producer appointed by an insurer collects a premium and issues a binder that exceeds the authority granted in the agency contract. The insured had no notice of the contract limits. The insurer is:

  1. Bound only if the insurer later ratifies the binder in writing
  2. Bound, because the producer acted with apparent authority Correct answer.
  3. Not bound, because the insured should have requested written confirmation
  4. Not bound, because the agency contract limited the producer's authority

Explanation

An insurer is responsible for the acts of its appointed producer that fall within the authority a reasonable person would infer from the relationship, even when the producer violated private instructions. The insured's reasonable belief, not the undisclosed agency contract, controls. Written ratification is unnecessary when apparent authority already binds the insurer.

Question 34Insurance Regulation, Licensing, and Washington State Law

A holding company seeks to acquire control of a Washington domestic insurer. Under the insurance holding company law, the acquiring party must:

  1. Report the acquisition on the insurer's next annual statement
  2. Obtain the commissioner's approval after a filing and any hearing Correct answer.
  3. Notify only the target insurer's board of directors before closing
  4. Seek clearance from the federal bank regulatory agencies

Explanation

A person seeking to acquire control of a domestic insurer must file a registration statement with the commissioner and obtain approval before completing the transaction. The commissioner may hold a hearing and may disapprove the acquisition if it would jeopardize policyholders or the public. After-the-fact reporting does not satisfy the requirement.

Question 35Insurance Regulation, Licensing, and Washington State Law

An authorized insurer is found to be insolvent. The commissioner's usual course of action is to:

  1. Sell the insurer's policies to a surplus lines broker
  2. Pay the insurer's outstanding claims directly from the department's operating fund
  3. Transfer all policies to the guaranty association by contract
  4. Petition the court for an order of rehabilitation or liquidation Correct answer.

Explanation

When an insurer is insolvent, the commissioner seeks a court order placing the company in rehabilitation or, if rehabilitation is not viable, liquidation. A court-appointed receiver then marshals assets and handles claims. Guaranty association involvement follows from the insolvency proceeding rather than replacing it.

Question 36Insurance Regulation, Licensing, and Washington State Law

A foreign insurer seeking authority to transact business in Washington must:

  1. Maintain its principal office within Thurston County at all times
  2. File copies of all policy forms with the superior court
  3. Reinsure every Washington risk with a domestic insurer
  4. Appoint the commissioner as its service-of-process agent Correct answer.

Explanation

Authorized foreign and alien insurers must appoint the insurance commissioner as their attorney to receive legal process in Washington. This lets claimants serve suit papers on the commissioner when the insurer is the defendant. It does not require a Washington head office, court filing of forms, or mandatory reinsurance.

Question 37Insurance Regulation, Licensing, and Washington State Law

A surplus lines broker may place Washington business with which insurer?

  1. Any insurer the broker personally believes to be financially sound
  2. An insurer on the commissioner's eligible surplus line list Correct answer.
  3. An insurer that holds a Washington certificate of authority
  4. An insurer whose claims are backed by the state guaranty association

Explanation

Surplus lines placements may be made only with nonadmitted insurers that satisfy statutory eligibility standards and appear on the commissioner's list of eligible surplus line insurers. An insurer holding a Washington certificate of authority is admitted and must be used through normal admitted markets instead. Guaranty association protection does not extend to nonadmitted insurers.

Question 38Insurance Regulation, Licensing, and Washington State Law

The commissioner finds that a producer's continued operations pose an immediate danger to the public. The commissioner may:

  1. Ask the governor to issue an executive suspension order
  2. Suspend the license only after a full evidentiary hearing is finished
  3. Suspend the license at once, then provide notice and a prompt hearing Correct answer.
  4. Suspend the license only if the producer consents in writing

Explanation

Summary suspension is available when immediate action is necessary to protect the public, but due process still requires that the licensee receive notice and a prompt opportunity for a hearing after the order takes effect. The commissioner acts directly on the license rather than through the governor. Waiting for a completed hearing would defeat the purpose of a summary action.

Question 39Insurance Regulation, Licensing, and Washington State Law

After a hearing, the commissioner concludes that an insurer's filed rate is excessive. Under Washington law, the commissioner may:

  1. Order the rate modified and refund excess premiums collected Correct answer.
  2. Revoke the insurer's certificate of authority as the only remedy
  3. Take no action unless the insurer agrees to the change
  4. Refer the matter to the legislature for a rate rollback statute

Explanation

Because filed rates must satisfy the statutory standard, the commissioner may order that a noncompliant rate be modified going forward. Where premiums were collected under the disapproved rate, the commissioner may also order refunds of the excess. Revocation of authority is not the sole or automatic remedy for a rate violation.

Question 40Insurance Regulation, Licensing, and Washington State Law

During an investigation of a producer, the commissioner issues a subpoena for the producer's bank records. The producer refuses to comply. The commissioner may:

  1. Ask a court to enforce the subpoena Correct answer.
  2. Impose a fine on the bank rather than on the producer
  3. Refer the matter to the legislature for a special committee hearing
  4. Do nothing, because bank records are protected from any inquiry

Explanation

The commissioner holds investigative authority that includes issuing subpoenas, administering oaths, and compelling production of records relevant to a licensed person's conduct. When a recipient refuses to comply, the commissioner may petition a court to enforce the subpoena. The power to investigate would be meaningless without judicial enforcement.

Question 41General Insurance Concepts and Principles

Which statement best describes the primary mechanism by which insurance operates?

  1. Risk is transferred to an insurer that pools many similar exposures Correct answer.
  2. The insurer guarantees that covered perils will never cause a loss to any insured
  3. Losses are paid only from the insurer's investment earnings, not from premiums
  4. Premiums paid by each insured are held in a separate account until a claim is filed

Explanation

Insurance transfers the financial consequences of loss from an individual to an insurer, which pools many similar exposure units so premiums from the group fund the losses of the few. Pooling, not prevention of loss, is the core mechanism.

Question 42General Insurance Concepts and Principles

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

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

Explanation

Insurable interest in property must exist at the time of loss, because the indemnity principle requires the insured to suffer actual financial detriment. A person who has already sold the property has no recoverable interest when the loss occurs.

Question 43General Insurance Concepts and Principles

The law of large numbers allows an insurer to:

  1. Charge each policyholder the exact cost of that policyholder's future losses
  2. Predict losses more accurately as the number of similar units increases Correct answer.
  3. Eliminate the need for reinsurance on catastrophic exposures
  4. Guarantee that actual losses will equal expected losses in any single year

Explanation

The law of large numbers holds that as the number of similar independent exposure units increases, actual results tend toward expected results, improving the accuracy of loss prediction. It improves estimates over a large group but never guarantees exact results for a single year.

Question 44General Insurance Concepts and Principles

The principle of indemnity in property insurance means the insured is:

  1. Restored to the same financial position as before the loss, no better Correct answer.
  2. Entitled to collect the full policy limit whenever a covered loss occurs
  3. Required to insure the property for at least its full market value
  4. Paid an amount that includes a reasonable profit on the damaged property

Explanation

Indemnity restores the insured to approximately the same financial position held before the loss, no better and no worse. Paying more would create a moral hazard and violate the principle.

Question 45General Insurance Concepts and Principles

The primary function of a deductible in a property policy is to:

  1. Keep small losses with the insured, reducing premium and claim expense Correct answer.
  2. Increase the insurer's liability for small partial losses
  3. Penalize the insured for reporting a claim after the policy expires
  4. Shift the deductible amount to other policyholders in the pool

Explanation

A deductible assigns small, predictable losses to the insured, removing them from the insurer's claim-handling process and lowering premium through reduced expense and reduced moral hazard. It is a retained amount, not a penalty.

Question 46General Insurance Concepts and Principles

A coinsurance clause in a commercial property policy is intended to:

  1. Limit recovery to the policy limit regardless of the loss amount
  2. Apply only when two or more insurers cover the same property
  3. Require the insurer to share underwriting profit with the insured
  4. Encourage the insured to insure property close to its value Correct answer.

Explanation

A coinsurance clause imposes a penalty when the insured carries less insurance than a stated percentage of the property's value. This encourages insurance to value so that collected premiums reasonably reflect the exposure.

Question 47General Insurance Concepts and Principles

The principle of utmost good faith requires an applicant for insurance to:

  1. Disclose material facts the insurer needs to evaluate the risk Correct answer.
  2. Accept every policy provision without negotiation
  3. Pay the first premium in advance of the effective date
  4. Submit to a physical inspection of all insured property

Explanation

Utmost good faith obligates the applicant to disclose all facts material to the insurer's underwriting decision, since the insurer cannot independently investigate every risk. Failure to do so may allow the insurer to rescind or deny coverage.

Question 48General Insurance Concepts and Principles

Which of the following is an example of a physical hazard?

  1. An applicant who fails to disclose a prior fire loss
  2. A building with old knob-and-tube electrical wiring Correct answer.
  3. An insured who is careless about housekeeping and maintenance
  4. An insured who intentionally sets fire to a building

Explanation

A physical hazard is a tangible condition of the property or its surroundings that increases the chance of loss, such as deteriorated wiring. Dishonest conduct reflects a moral hazard and carelessness reflects a morale hazard.

Question 49General Insurance Concepts and Principles

A roof with a replacement cost of $60,000 has a 20-year useful life and is 10 years old. A covered loss destroys the entire roof, and the policy settles on an actual cash value basis. Ignoring any deductible, the payment is:

  1. $45,000
  2. $20,000
  3. $30,000 Correct answer.
  4. $60,000

Explanation

Actual cash value equals replacement cost less depreciation. Depreciation here is 10 of 20 years, or 50 percent of $60,000 ($30,000), so the ACV payment is $60,000 minus $30,000.

Question 50General Insurance Concepts and Principles

After paying a covered claim, an insurer's right of subrogation allows it to:

  1. Cancel the policy without returning any unearned premium
  2. Recover the paid amount from the party responsible for the loss Correct answer.
  3. Deny coverage to a third party who was also negligent
  4. Reimburse the insured for the deductible on the claim

Explanation

Subrogation lets the insurer step into the insured's shoes and pursue recovery from the party that caused the loss, after paying the claim. It prevents double recovery by the insured and helps hold down premiums.