Question 1

Exclusions are used in insurance policies for all of the following reasons EXCEPT
A)to reduce moral hazard.
B)to waive policy conditions.
C)to eliminate coverage for uninsurable perils.
D)to eliminate coverage not needed by typical insureds.

Accepted Answer

Exclusions are used to limit coverage and reduce the insurer's risk exposure. They are typically included to eliminate coverage for uninsurable perils, reduce moral hazard, and eliminate coverage not needed by typical insureds. Exclusions are not used to waive policy conditions; rather, policy conditions are specific requirements that must be met in order for coverage to apply.

Question 2

The portion of a property and liability insurance contract that contains information about the property or activity to be insured is called the
A)declarations.
B)insuring agreement.
C)exclusions.
D)conditions.

Accepted Answer

The declarations section of an insurance contract contains information about the specific property or activity to be insured, such as the name and address of the policyholder, the location of the property, and the type of coverage provided. The insuring agreement outlines the specific risks covered by the policy, while exclusions and conditions set limitations or exceptions to the coverage.

Question 3

Reasons why a peril may be considered uninsurable and therefore excluded from insurance contracts include which of the following?
I.The losses from the occurrence of the peril may be due to a predictable decline in value.
II.The losses from the occurrence of the peril may be incalculable and catastrophic.
A)I only
B)II only
C)both I and II
D)neither I nor II

Accepted Answer

Both reasons are valid for considering a peril uninsurable. A predictable decline in value does not meet the criteria for insurability since insurance is designed to protect against unforeseen losses. Incalculable and catastrophic losses are also uninsurable because they can overwhelm an insurer's ability to pay claims, leading to financial instability.

Question 4

David owns a commercial building with a replacement cost of $4 million.The building is insured on a replacement cost basis for $2.4 million under a fire insurance policy that has an 80 percent coinsurance clause.How much will David collect if the building sustains a covered fire loss with a replacement cost of $80,000?
A)$50,000
B)$60,000
C)$66,667
D)$80,000

Accepted Answer

The answer of David owns a commercial building with a...

Question 5

Which of the following statements about a calendar-year deductible is (are)true?
I.It requires the insured to pay a specified amount of each claim regardless of when the claim occurs during the year and regardless of any previous claims during the year.
II.It is used only in policies which cover direct property losses.
A)I only
B)II only
C)both I and II
D)neither I nor II

Accepted Answer

I is incorrect because a calendar-year deductible requires the insured to pay a specified amount out-of-pocket each calendar year before the insurance coverage pays for any claims, not for each claim. II is incorrect because calendar-year deductibles are not exclusive to policies covering direct property losses; they are also used in health insurance and other types of policies.

Question 6

Connie has a major medical policy with a $200 deductible.She is required to pay 25 percent of covered expenses in excess of the deductible.The insurer will pay 75 percent of expenses in excess of the deductible.If Connie has eligible medical expenses of $10,000,how much will be paid by her insurer?
A)$7,300
B)$7,350
C)$7,500
D)$9,800

Accepted Answer

Connie's out-of-pocket expenses will be:
$200 (deductible) + 0.25($10,000 - $200) = $2,425
Her insurer will cover:
0.75($10,000 - $200) = $7,350. 
Therefore, the total paid by her insurer is $7,350.

Question 7

What information is contained in the insuring agreement of an insurance policy?
A)a description of the property or life to be insured
B)a summary of the major promises of the insurer
C)a summary of the obligations of the insured
D)a list of the property,losses,and perils that are not covered

Accepted Answer

The insuring agreement of an insurance policy typically contains a summary of the major promises of the insurer, such as the scope of coverage, limits of liability, and conditions for payment. It does not usually include a description of the property or life to be insured (this is usually included in the declarations section), a summary of the obligations of the insured (which are typically included in the policy conditions), or a list of the property, losses, and perils that are not covered (which are typically included in the exclusions section).

Question 8

Which of the following statements about the definition of the insured is (are)true?
I.In some cases,a person who is not specifically named may be classified as an insured.
II.Under no circumstances can more than one person be named as an insured.
A)I only
B)II only
C)both I and II
D)neither I nor II

Accepted Answer

Statement I is true, as there are situations where additional individuals other than those specifically named may be classified as insured. Statement II is false, as there can be more than one person named as an insured in some insurance policies.

Question 9

Deductibles are not used in which of the following type of insurance?
A)life insurance
B)health insurance
C)property insurance
D)disability income insurance

Accepted Answer

Deductibles are not used in life insurance as it is a form of insurance that pays out a lump sum upon the death of the insured, rather than covering a specific cost or event that could require a deductible.

Question 10

A provision in a disability income insurance policy that requires a person to be disabled for 60 days before receiving benefits is an example of a(n)
A)calendar year deductible.
B)grace period.
C)elimination period.
D)probationary period.

Accepted Answer

An elimination period is a waiting period during which time benefits are not payable. The policyholder must be disabled for a certain period of time (in this case, 60 days) before benefits begin to accrue. This is similar to a deductible, in that the policyholder is responsible for a portion of the loss before benefits are paid. However, a deductible is a fixed dollar amount, while the elimination period is a fixed period of time. A grace period allows the policyholder to make a late payment without losing coverage, and a probationary period is a specified length of time during which the insurer may cancel the policy if the policyholder does not meet certain conditions (such as passing a medical exam).

Question 11

Purposes of the coinsurance clause in health insurance contracts include which of the following?
I.To reduce premiums.
II.To exclude coverage for certain medical procedures.
A)I only
B)II only
C)both I and II
D)neither I nor II

Accepted Answer

The coinsurance clause in health insurance contracts is used to reduce premiums by requiring the insured to share a percentage of the cost of covered medical services. It does not exclude coverage for certain medical procedures.

Question 12

The policy provision requiring the filing of proof of loss with the insurer is an example of a(n)
A)declaration.
B)condition.
C)insuring agreement.
D)miscellaneous provision.

Accepted Answer

The provision requiring the filing of a proof of loss is a condition, which is a requirement that must be met in order for coverage to be provided under the policy.

Question 13

At what point in time must an insured meet the coinsurance requirement in a property insurance policy in order to avoid having to pay a portion of the loss?
A)only at the time of loss
B)only at the time when the policy is issued
C)only at the time of policy application
D)both at the time when the policy is issued and at the time of loss

Accepted Answer

The answer of At what point in time must an...

Question 14

Which of the following statements about problems arising from the use of a coinsurance clause is (are)true?
I.The amount of insurance should be periodically evaluated to avoid a coinsurance penalty because of inflation.
II.An agreed value coverage option is one method used to solve the problem of values that fluctuate throughout the policy term.
A)I only
B)II only
C)both I and II
D)neither I nor II

Accepted Answer

Statement I is true because inflation can increase the value of property, making the original amount of insurance insufficient in the event of a loss, resulting in a coinsurance penalty. Therefore, the amount of insurance should periodically be evaluated to ensure it is adequate to cover the property's current value.

Statement II is also true because agreed value coverage solves the problem of values that fluctuate throughout the policy term. This option allows the policyholder and insurer to agree upon a fixed value for the insured property, eliminating the need for coinsurance calculations.

Question 15

Which of the following statements about "open-perils" coverage is (are)true?
I.All losses are covered except those losses specifically excluded.
II.The burden of proof is on the insured to prove that a loss is covered.
A)I only
B)II only
C)both I and II
D)neither I nor II

Accepted Answer

Open-perils coverage, also known as all-risk coverage, provides coverage for all losses except those specifically excluded in the policy. The burden of proof is on the insurer to prove that a loss is excluded, not on the insured to prove that a loss is covered. Therefore, statement I is true and statement II is false.

Question 16

All of the following statements about endorsements and riders are true EXCEPT
A)They are usually written.
B)They can be used to add or delete policy provisions.
C)They normally take precedence over other conflicting policy provisions.
D)They are primarily used to circumvent legislation requiring specific policy provisions.

Accepted Answer

Endorsements and riders are used to modify or add policy provisions. They are usually written and can take precedence over conflicting policy provisions. However, they are not primarily used to circumvent legislation.

Question 17

The deductible used for automobile collision losses is an example of a(n)
A)calendar year deductible.
B)elimination period.
C)straight deductible.
D)aggregate deductible.

Accepted Answer

The deductible used for automobile collision losses is an example of a straight deductible. A straight deductible is a fixed dollar amount that the insured must pay before the insurance policy takes over payment. Other types of deductibles, such as calendar year or aggregate deductibles, are used for different types of insurance policies. Elimination periods are used in disability insurance policies.

Question 18

The primary purpose of coinsurance in property insurance is to
A)reduce moral hazard.
B)achieve equity in rating.
C)minimize problems in settling claims.
D)eliminate small losses.

Accepted Answer

Coinsurance is a mechanism used to achieve equity in rating, as it ensures that insureds are not underinsured and therefore paying a lower premium than they should be. It requires the insured to carry a specified percentage of the total value of the property as insurance, typically 80% or 90%. If the property is insured for less than the specified percentage, then the insured is considered a co-insurer and is responsible for a portion of the loss proportional to the amount of insurance they should have carried. This encourages insureds to obtain adequate insurance coverage for their property, which in turn helps insurance companies accurately price their policies.

Question 19

The exclusion of flood in a homeowners policy is an example of an
A)excluded activity.
B)excluded condition.
C)excluded property.
D)excluded peril.

Accepted Answer

The exclusion of flood in a homeowners policy is an example of an excluded peril, which means that damage or loss caused by floods are not covered by the policy.

Question 20

One of the purposes that deductible are used in insurance policies is to
A)eliminate coverage for small claims.
B)place restrictions or limits on the insurer's promise to perform.
C)provide broader coverage by increasing the number of perils covered.
D)exclude perils that are not insurable.

Accepted Answer

Deductibles are used to eliminate coverage for small claims by requiring the insured to pay a portion of the loss, thus reducing the number of minor claims and keeping insurance premiums lower.

Quiz 10: Analysis of Insurance Contracts

Exclusions are used in insurance policies for all of the following reasons EXCEPT

The portion of a property and liability insurance contract that contains information about the property or activity to be insured is called the

Connie has a major medical policy with a $200 deductible.She is required to pay 25 percent of covered expenses in excess of the deductible.The insurer will pay 75 percent of expenses in excess of the deductible.If Connie has eligible medical expenses of $10,000,how much will be paid by her insurer?

What information is contained in the insuring agreement of an insurance policy?

Which of the following statements about the definition of the insured is (are) true? I.In some cases,a person who is not specifically named may be classified as an insured. II.Under no circumstances can more than one person be named as an insured.

Deductibles are not used in which of the following type of insurance?

A provision in a disability income insurance policy that requires a person to be disabled for 60 days before receiving benefits is an example of a(n)

Purposes of the coinsurance clause in health insurance contracts include which of the following? I.To reduce premiums. II.To exclude coverage for certain medical procedures.

The policy provision requiring the filing of proof of loss with the insurer is an example of a(n)

At what point in time must an insured meet the coinsurance requirement in a property insurance policy in order to avoid having to pay a portion of the loss?

Which of the following statements about "open-perils" coverage is (are) true? I.All losses are covered except those losses specifically excluded. II.The burden of proof is on the insured to prove that a loss is covered.

All of the following statements about endorsements and riders are true EXCEPT

The deductible used for automobile collision losses is an example of a(n)

The primary purpose of coinsurance in property insurance is to

The exclusion of flood in a homeowners policy is an example of an

One of the purposes that deductible are used in insurance policies is to