Core Principles & Fundamentals Flashcards

An insured's policy covers fire but excludes earth movement. An earthquake ruptures a gas line, causing a fire that destroys the building. Which concept is most critical in deciding coverage?

Answer: Proximate cause

Proximate cause analysis, along with any anti-concurrent causation wording, decides whether the covered fire or excluded earthquake controls coverage.

Which statement best describes the insurer's duty to defend compared with its duty to indemnify?

Answer: The duty to defend is broader and is triggered by allegations potentially within coverage

The duty to defend applies if the allegations potentially fall within coverage, even when the suit is groundless, false, or fraudulent.

A claim representative discovers several red flags, including a recently increased policy limit and an insured who is pushing hard for a quick cash settlement. What should the representative do?

Answer: Refer the claim to the special investigation unit (SIU) per company guidelines

Red flags are not proof of fraud; they warrant referral to the SIU for further investigation in line with company procedures.

Which policy condition requires the insured to take reasonable steps to protect property from further damage after a loss?

Answer: Duty to mitigate (protect property from further damage)

The post-loss duties condition requires the insured to take reasonable steps to prevent further damage to covered property.

Under an actual cash value (ACV) settlement using the replacement-cost-minus-depreciation method, a 10-year-old roof with a $20,000 replacement cost and a 20-year useful life is valued at:

Answer: $10,000

Half the useful life is gone, so 50% depreciation on $20,000 leaves an ACV of $10,000.

Which characteristic means that only the insurer makes a legally enforceable promise in an insurance contract?

Answer: Unilateral

Insurance is unilateral because only the insurer promises to perform; the insured is not legally required to keep paying premiums.

Which statement about the claim representative's duty of good faith is most accurate?

Answer: It requires giving the insured's interests at least equal consideration with the insurer's

Good faith requires fair, prompt handling that gives the insured's interests at least equal weight, without paying claims that aren't covered.