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WV Property & Casualty practice questions

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Question 1Insurance Principles and Concepts

Which type of risk offers only the possibility of loss or no loss, with no possibility of gain?

  1. Speculative risk
  2. Pure risk Correct answer.
  3. Strategic risk
  4. Investment risk

Explanation

Pure risk involves only the chance of loss or no loss and is the category generally considered insurable. Speculative risk, which contains the possibility of gain as well as loss, is normally not insurable.

Question 2Insurance Principles and Concepts

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

  1. At the time of the loss Correct answer.
  2. Only on the policy anniversary date
  3. Only after the claim is approved
  4. Only when the application is signed

Explanation

For property coverage, the insured must have an economic interest in the property when the loss occurs, since indemnity cannot exceed the actual financial harm. In life insurance the timing rule differs, because interest is measured at the time of application.

Question 3Insurance Principles and Concepts

The principle of indemnity means that after a covered loss an insured should be:

  1. placed in a better position than before the loss
  2. reimbursed by every policy that applies
  3. paid a fixed benefit regardless of loss size
  4. restored to the pre-loss financial position Correct answer.

Explanation

Indemnity restores the insured to roughly the same financial position occupied before the loss, no better and no worse. It is why policies limit recovery to the actual amount of the loss and why other-insurance and subrogation provisions exist.

Question 4Insurance Principles and Concepts

A store owner who intentionally ignores security measures, hoping to collect insurance money after a theft, creates which type of hazard?

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

Explanation

Moral hazard arises from dishonesty or a character defect that increases the likelihood or size of a loss, such as a deliberate plan to collect insurance. Morale hazard, by contrast, is mere carelessness or indifference toward loss.

Question 5Insurance Principles and Concepts

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

  1. according to the producer's notes
  2. in favor of the insurer
  3. in favor of the insured Correct answer.
  4. by the state insurance department

Explanation

The insurer drafts the policy and the applicant accepts it as written, so ambiguity is construed against the drafter and in favor of the insured. This rule is often called contra proferentem.

Question 6Insurance Principles and Concepts

An insurance policy is best described as aleatory because:

  1. it can be enforced only after a loss has occurred
  2. the values exchanged depend on an uncertain event Correct answer.
  3. the insured must accept all policy terms exactly as written
  4. equal values are exchanged when the policy takes effect

Explanation

In an aleatory contract the parties exchange unequal amounts, and the amounts depend on whether an uncertain event occurs. A policyholder may pay small premiums and receive a large claim payment, or pay for years with no loss.

Question 7Insurance Principles and Concepts

Under the principle of utmost good faith, an applicant for insurance is expected to:

  1. prove insurable interest at the time of application
  2. file a proof of loss within 24 hours of a claim
  3. schedule a physical inspection of the property
  4. disclose all facts material to the risk Correct answer.

Explanation

Utmost good faith obligates the applicant to disclose every fact that would influence the insurer's decision to accept or rate the risk. Concealment or material misrepresentation can give the insurer grounds to rescind.

Question 8Insurance Principles and Concepts

In an insurance contract, the insured's consideration is the:

  1. deductible the insured agrees to absorb at claim time
  2. promise by the insurer to pay covered claims
  3. declarations page attached to the policy
  4. payment of the premium Correct answer.

Explanation

Each party supplies consideration: the insured pays premium and stands behind the application statements, while the insurer promises to pay covered claims. The premium is the insured's principal consideration.

Question 9Insurance Principles and Concepts

After paying a covered collision claim, an insurer learns that another driver caused the damage. Subrogation permits the insurer to:

  1. increase the insured's premium at the next renewal
  2. recover from the insured the deductible already paid
  3. cancel the insured's policy without giving advance written notice
  4. recover amounts it paid from the at-fault party Correct answer.

Explanation

Subrogation transfers the insured's right of recovery against the responsible third party to the insurer, but only to the extent the insurer has paid. It prevents the insured from collecting twice and helps hold down rates.

Question 10Insurance Principles and Concepts

On a property claim settled at actual cash value, the payment is based on:

  1. replacement cost minus depreciation Correct answer.
  2. the original purchase price of the property
  3. the policy limit regardless of the damage
  4. full replacement cost with no deduction

Explanation

Actual cash value equals replacement cost less depreciation, reflecting the used value of the damaged property. Replacement cost coverage, in contrast, pays the cost to repair or replace without a depreciation deduction.

Question 11Insurance Principles and Concepts

A $500 straight deductible in a homeowners policy means the insured pays:

  1. 500 percent of the loss up to the policy limit
  2. $500 once each policy year regardless of the number of losses
  3. the first $500 of every covered loss Correct answer.
  4. a $500 service charge in addition to the premium

Explanation

A straight deductible is subtracted from each covered loss before the insurer's payment is calculated. An aggregate deductible, by contrast, applies to the total of all losses during the policy period.

Question 12Insurance Principles and Concepts

The law of large numbers helps an insurer to:

  1. eliminate the need to reinsure catastrophic losses
  2. forecast losses more accurately as exposures grow Correct answer.
  3. guarantee that no single loss will exceed the premium
  4. set rates using only one policyholder's claim history

Explanation

As the number of similar independent exposure units increases, actual loss experience tends to approach the expected loss level, making rates more reliable. This is why insurers seek a broad spread of similar risks.

Question 13Insurance Principles and Concepts

Adverse selection is best described as:

  1. the claim audit process used by the insurer
  2. the insurer's practice of declining poor risks
  3. higher-than-average risks seeking insurance Correct answer.
  4. the loss of preferred customers to competitors

Explanation

Adverse selection occurs when applicants who expect to have losses are more likely to buy or keep coverage, skewing the pool toward poor risks. Underwriting and accurate rating are used to control it.

Question 14Insurance Principles and Concepts

By ceding part of a risk to a reinsurer, the primary insurer can:

  1. avoid reporting the risk on its financial statements
  2. set policyholder rates without any regulatory review
  3. transfer its claim investigation duties to the state
  4. raise its capacity to write additional business Correct answer.

Explanation

Reinsurance shifts part of the insurer's exposure to another insurer, freeing surplus so the company can write more business and absorb large or catastrophic losses. The original insured still deals with the primary insurer.

Question 15Insurance Principles and Concepts

The proximate cause of a loss is the cause that:

  1. appears first in the sequence of events
  2. accounts for the largest share of the damage
  3. the insured lists first on the claim form
  4. dominantly and unbrokenly produces the loss Correct answer.

Explanation

Proximate cause is the dominant, effective cause that sets the loss in motion and is not interrupted by a new and independent force. Coverage depends on how the loss chain runs, not on what happened chronologically first.

Question 16Insurance Principles and Concepts

A warranty in an insurance policy is:

  1. a statement the applicant believes true to the best of her knowledge
  2. a marketing illustration that is not part of the contract
  3. an oral statement that need only be substantially true
  4. a condition that must be met exactly as stated Correct answer.

Explanation

A warranty is a promise or condition that becomes part of the contract and must be met as written. A representation, by contrast, is a statement of belief that need only be substantially true and material.

Question 17Insurance Principles and Concepts

An agent accepts late premium payments from an insured for six months without objection, then denies coverage for a loss that occurred during a late payment. The insured's best argument is:

  1. the doctrine of estoppel Correct answer.
  2. the principle of subrogation
  3. the doctrine of contra proferentem
  4. the rule of indemnity

Explanation

Estoppel prevents a party from asserting a right after conduct led another to rely on that conduct to their detriment. The insurer's consistent acceptance of late payments is the kind of conduct that can bar a later coverage denial.

Question 18Insurance Principles and Concepts

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

  1. duty, breach, causation, and damages Correct answer.
  2. purely economic loss by the claimant
  3. an intent by the defendant to cause harm
  4. a written contract between the parties

Explanation

Negligence requires a legal duty owed to the claimant, a breach of that duty, proximate cause linking the breach to the harm, and actual damages. Intent to harm is a feature of intentional torts, not negligence.

Question 19Insurance Principles and Concepts

The coinsurance clause in a commercial property policy encourages insureds to:

  1. report inventory values on a monthly basis
  2. renew the policy before each anniversary
  3. insure property close to its full value Correct answer.
  4. buy coverage from several insurers at once

Explanation

Coinsurance requires the insured to carry a stated percentage of the property's value, and a penalty applies to partial losses when the requirement is not met. This discourages underinsurance, which would otherwise reduce premium without reducing exposure.

Question 20Insurance Principles and Concepts

A trucking firm sets aside its own funds to cover collision damage instead of buying physical damage insurance. This is an example of:

  1. risk retention Correct answer.
  2. risk avoidance
  3. risk transfer
  4. risk reduction

Explanation

Retention means the business knowingly keeps the financial consequences of a risk rather than shifting them to an insurer. Avoidance would mean eliminating the activity, and transfer would mean purchasing insurance.

Question 21Insurance Principles and Concepts

A building valued at $200,000 is insured for $120,000 under a policy with an 80% coinsurance clause and no deductible. A covered fire loss is $50,000. How much will the insurer pay?

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

Explanation

The required amount of insurance is 80% of $200,000, or $160,000. Because only $120,000 was carried, the ratio $120,000/$160,000 = 0.75 is applied to the $50,000 loss, producing $37,500.

Question 22Insurance Principles and Concepts

An insured with a $15,000 limit suffers a $20,000 loss and is paid the full limit. The insured later collects $20,000 from the negligent third party. Under subrogation, the proceeds are distributed so that:

  1. the insurer receives the entire $20,000 and the insured receives nothing
  2. the insured keeps the entire $20,000 and the insurer absorbs its payment
  3. the insurer and the insured split the recovery in equal shares
  4. the insurer recovers $15,000 and the insured keeps $5,000 Correct answer.

Explanation

Subrogation entitles the insurer to reimbursement only up to the amount it paid, because the insured must still be made whole for the uninsured portion of the loss. Here the insurer recovers its $15,000 and the insured keeps the remaining $5,000.

Question 23Insurance Principles and Concepts

A policy obtained after the applicant concealed a material fact is:

  1. voidable at the insurer's election Correct answer.
  2. valid but subject to a reduced limit
  3. cancellable only by the insured
  4. void from inception whether or not the insurer acts

Explanation

Material concealment renders the contract voidable, meaning the insurer may elect to rescind it and return premium. It is not automatically void, because the insurer must choose to exercise the remedy.

Question 24Insurance Principles and Concepts

Compared with the duty to indemnify, an insurer's duty to defend is:

  1. triggered only after a court enters a judgment against the insured
  2. broader, applying when allegations may fall within coverage Correct answer.
  3. limited to claims the insurer has already investigated and paid
  4. owed only after the insured requests counsel in writing and the insurer agrees

Explanation

The duty to defend is broader than the duty to pay, because it is triggered by allegations that could potentially fall within coverage even if the suit turns out to be groundless. Defense costs are typically paid in addition to limits and can exceed the amount of any eventual judgment.

Question 25Insurance Principles and Concepts

An insurer collected $4,000,000 in earned premium and incurred $2,400,000 in losses and loss adjustment expenses. Its loss ratio is:

  1. 40%
  2. 75%
  3. 160%
  4. 60% Correct answer.

Explanation

The loss ratio divides incurred losses and loss adjustment expenses by earned premium. Here $2,400,000 divided by $4,000,000 equals 0.60, or 60%, leaving the remainder to cover expenses, taxes, and profit.

Question 26Insurance Principles and Concepts

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

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

Explanation

Property insurance rests on the principle of indemnity, so the insured must stand to suffer a financial loss when the damage occurs; the interest is therefore measured at the time of loss. Life insurance is different, because insurable interest there is tested when the policy is issued.

Question 27Insurance Principles and Concepts

Which of these situations is an example of a pure risk?

  1. Purchasing shares of a newly offered stock
  2. Introducing an untested product line
  3. Wagering on the outcome of a race
  4. A fire damaging a warehouse Correct answer.

Explanation

A pure risk offers only the chance of loss or no loss, with no possibility of gain, which is the type of exposure insurance is designed to handle. Fire damage to a building fits that description exactly.

Question 28Insurance Principles and Concepts

When a court construes an ambiguity in an insurance policy against the insurer that drafted it, the court is applying which characteristic of insurance contracts?

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

Explanation

An insurance policy is a contract of adhesion because the insurer writes the terms and the applicant must accept or reject them as written. Because the insured has no bargaining power over the wording, ambiguous language is resolved in the insured's favor.

Question 29Insurance Principles and Concepts

The declarations page of a property policy typically provides which information?

  1. The insured's duties after a loss occurs
  2. The insurer's promise to pay covered losses
  3. The named insured, policy period, and limits Correct answer.
  4. The perils excluded from coverage

Explanation

The declarations identify the parties, the property insured, the policy term, the limits, and the premium. The remaining elements of the contract appear in the insuring agreement, conditions, and exclusions.

Question 30Insurance Principles and Concepts

An insured deliberately burns a vacant building in order to collect the insurance money. This conduct is an example of which type of hazard?

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

Explanation

Moral hazard involves dishonesty or a lack of integrity on the part of the insured, such as intentionally causing or fabricating a loss. Insurers address it through careful underwriting, investigations, and policy conditions.

Question 31Insurance Principles and Concepts

An insurer terminates its agency agreement with a producer but never collects the producer's signs, rate manuals, or blank policy forms. The producer continues to write business, and a court holds the insurer bound by a policy the producer issued. The court is relying on which doctrine?

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

Explanation

Apparent authority arises from the impression the insurer creates in the eyes of the public, even when the producer has been given no actual authority. By leaving the producer equipped and identified as an agent, the insurer leads reasonable applicants to believe authority exists.

Question 32Insurance Principles and Concepts

An insured carries two property policies on the same building. Policy A has a $300,000 limit and Policy B has a $100,000 limit, and both contain a pro rata other insurance clause. A covered loss of $40,000 occurs. How much does Policy A pay?

  1. $10,000
  2. $30,000 Correct answer.
  3. $20,000
  4. $26,667

Explanation

Under pro rata sharing, each policy pays the loss in the proportion its limit bears to the total insurance. Policy A's share is $300,000 divided by $400,000, or 75 percent of $40,000, which equals $30,000.

Question 33Insurance Principles and Concepts

An insurer reports incurred losses and loss adjustment expenses of $6,000,000, underwriting expenses of $2,000,000, and earned premiums of $8,000,000. What is the combined ratio and what does it indicate?

  1. 75%; underwriting profit
  2. 100%; break-even Correct answer.
  3. 133%; underwriting loss
  4. 125%; underwriting loss

Explanation

The loss ratio is $6,000,000 divided by $8,000,000, or 75 percent, and the expense ratio is $2,000,000 divided by $8,000,000, or 25 percent. Adding the two gives a combined ratio of 100 percent, meaning underwriting produced neither a profit nor a loss.

Question 34Insurance Principles and Concepts

A valued policy differs from a standard indemnity policy in that a valued policy does which of the following?

  1. It pays the lesser of the limit or the actual cash value at the time of loss
  2. It pays the full face amount on a total loss Correct answer.
  3. It pays only after the property has been repaired or replaced
  4. It pays a daily amount while the property cannot be used

Explanation

A valued policy states in advance the agreed value of the insured property, and a total loss is settled by paying that amount without a later valuation dispute. Indemnity policies instead measure the payment by the actual cash value or replacement cost at the time of loss.

Question 35Property Insurance Basics and Policy Provisions

For a property insurance claim to be paid, insurable interest must exist at which point in time?

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

Explanation

Property insurance requires insurable interest at the time of loss, because the purpose of the coverage is to make the insured whole for a financial loss actually suffered. A person who has already sold or given up the property has nothing to be indemnified for.

Question 36Property Insurance Basics and Policy Provisions

Which part of a property policy identifies the named insured, the covered location, the policy period, and the limits of insurance?

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

Explanation

The declarations page personalizes the policy by listing who is insured, what and where is covered, the term of coverage, and the dollar limits that apply. The remaining sections provide the general promises, duties, and restrictions.

Question 37Property Insurance Basics and Policy Provisions

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

  1. Extend coverage to property otherwise excluded
  2. Shift a small part of each loss to the insured Correct answer.
  3. Increase the amount the insurer pays on a total loss
  4. Waive the insured's duty to submit a proof of loss

Explanation

A deductible is the amount the insured absorbs before the insurer responds, which reduces small nuisance claims and lowers premium. It does not change which property or perils are covered.

Question 38Property Insurance Basics and Policy Provisions

Actual cash value is best described as:

  1. Replacement cost minus depreciation Correct answer.
  2. The market value of the insured's business
  3. The original purchase price of the property
  4. Replacement cost plus depreciation

Explanation

Actual cash value reflects what it would cost to replace damaged property today, reduced by an allowance for the age and condition of the property lost. This keeps the payment tied to the value actually destroyed.

Question 39Property Insurance Basics and Policy Provisions

An insurance policy drafted by the insurer and offered to the applicant on a take-it-or-leave-it basis is known as:

  1. A contract of indemnity
  2. A unilateral contract
  3. An aleatory contract
  4. A contract of adhesion Correct answer.

Explanation

A contract of adhesion is prepared by one party, the insurer, with little or no negotiation by the applicant. Because of this imbalance, ambiguities in the wording are generally construed against the drafter.

Question 40Property Insurance Basics and Policy Provisions

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

  1. Punish an insurer that denies a claim
  2. Restore the insured to the pre-loss financial position Correct answer.
  3. Pay the full face amount on every loss
  4. Guarantee the insured a profit after a loss

Explanation

Indemnity puts the insured back roughly where he or she stood financially before the loss, no better and no worse. This is why valuation methods such as actual cash value and limits of liability exist.

Question 41Property Insurance Basics and Policy Provisions

Why do property policies include exclusions?

  1. To transfer risk back to the mortgagee
  2. To reduce the premium charged to the insured
  3. To remove uninsurable or catastrophic perils Correct answer.
  4. To satisfy state filing requirements only

Explanation

Exclusions keep the policy from promising coverage for losses that are catastrophic, unavoidable, or intentionally caused, such as war, nuclear hazard, and wear and tear. Without them the premium could not be calculated and the insurer could not remain solvent.

Question 42Property Insurance Basics and Policy Provisions

The insuring agreement of a property policy does which of the following?

  1. States the insurer's promise to pay for covered loss Correct answer.
  2. Lists the duties owed by the insured after a loss
  3. Sets out cancellation and nonrenewal rules
  4. Identifies the rights of the mortgagee

Explanation

The insuring agreement is the core promise of the contract, describing the perils assumed and the property covered in exchange for the premium. The other parts of the policy support or limit that promise.

Question 43Property Insurance Basics and Policy Provisions

A building with a replacement cost of $1,000,000 is insured for $600,000 under an 80% coinsurance clause. A covered loss of $100,000 occurs. Ignoring any deductible, how much will the insurer pay?

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

Explanation

The required amount of insurance is 80% of $1,000,000, or $800,000. Because only $600,000 was carried, the insured recovers 600,000 divided by 800,000, or 75%, of the $100,000 loss, which is $75,000.

Question 44Property Insurance Basics and Policy Provisions

After paying a covered property loss caused by a negligent third party, the insurer's right to recover that payment from the third party is called:

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

Explanation

Subrogation lets the insurer stand in the insured's shoes and pursue the party legally responsible for the loss. It supports the principle of indemnity by preventing the insured from collecting twice.

Question 45Property Insurance Basics and Policy Provisions

The insured and the insurer agree that a loss is covered but disagree on the amount of damage. Which policy provision is used to resolve that disagreement?

  1. The appraisal provision Correct answer.
  2. Arbitration
  3. The salvage clause
  4. The liberalization clause

Explanation

The appraisal provision allows each side to select a competent appraiser when only the amount of loss is disputed; the appraisers may then choose an umpire. Coverage disputes themselves are not resolved through appraisal.

Question 46Property Insurance Basics and Policy Provisions

A building is insured under Policy A for $200,000 and under Policy B for $300,000, both covering the same loss on a pro rata basis. A covered loss of $50,000 occurs. How much does Policy A pay?

  1. $20,000 Correct answer.
  2. $50,000
  3. $25,000
  4. $30,000

Explanation

Under pro rata other insurance, each policy pays its share of the total applicable limits. Policy A carries $200,000 of the $500,000 combined limit, or 40%, and 40% of $50,000 is $20,000.

Question 47Property Insurance Basics and Policy Provisions

Under the standard mortgage clause, how is the lender's interest protected?

  1. The mortgagee shares the deductible with the insured
  2. The mortgagee's coverage ends when the property is sold
  3. Loss payment goes to the mortgagee up to its interest Correct answer.
  4. The mortgagee must buy a separate policy for its interest

Explanation

The mortgage clause entitles the lender to loss payment to the extent of its interest and allows the lender to pay premium or submit proof of loss if the insured does not. The lender's protection generally continues even if the insured's own conduct would defeat the insured's claim.

Question 48Property Insurance Basics and Policy Provisions

After a property loss, the sworn statement describing the loss, its amount, and the property involved is known as a:

  1. Binder
  2. Salvage report
  3. Notice of loss
  4. Proof of loss Correct answer.

Explanation

The proof of loss is a formal, usually sworn document the insured submits to support the claim amount. It follows the initial notice of loss and is one of the insured's duties after a loss.

Question 49Property Insurance Basics and Policy Provisions

The assignment provision in a property policy generally provides that:

  1. The insurer may reassign the policy to another carrier
  2. The policy cannot be transferred without the insurer's consent Correct answer.
  3. The insured may freely transfer the policy to a buyer
  4. Coverage automatically follows the property when sold

Explanation

Property policies are written in reliance on the character and conduct of a specific insured, so assignment requires the insurer's written consent. This restriction prevents an unacceptable risk from being transferred into the policy without underwriting.

Question 50Property Insurance Basics and Policy Provisions

An adjuster tells an insured in writing that a late proof of loss will be accepted, and the insurer later denies the claim solely for late filing. Which doctrine most likely bars that denial?

  1. Indemnity
  2. Coinsurance
  3. Estoppel Correct answer.
  4. Subrogation

Explanation

Estoppel prevents a party from asserting a right after its own conduct has led the other party to rely on a contrary position to that party's detriment. A written waiver of the filing deadline, relied on by the insured, can bar a later denial on that ground.