CALA Insurance Policy and Regulations 5 — Questions and Answers
Question 1: Under financial responsibility laws, what is an SR-22 filing?
- A type of liability insurance policy for commercial vehicles
- A certificate filed by an insurer with the state certifying that a high-risk driver carries the required minimum liability coverage (Correct answer)
- An application for a vanishing deductible program
- A state-issued identification number for fleet vehicles
Correct answer: A certificate filed by an insurer with the state certifying that a high-risk driver carries the required minimum liability coverage
An SR-22 is a certificate of financial responsibility that an insurer files on behalf of a driver who is required by the state to prove minimum liability coverage.
Question 2: Which of the following best describes the 'principle of indemnity' as it applies to auto insurance?
- The insured must pay the premium before any claim is honored
- The insurer will restore the insured to the same financial position they were in before the loss, without allowing profit (Correct answer)
- The insurer pays the replacement cost of any lost or damaged property
- Coverage is limited to losses caused by the insured's negligence
Correct answer: The insurer will restore the insured to the same financial position they were in before the loss, without allowing profit
The principle of indemnity ensures the insured is compensated for the actual loss suffered but cannot gain financially from an insurance claim.
Question 3: A claimant under a liability policy demands payment in excess of the policy limits. What duty does the insurer have regarding settlement negotiations within limits?
- The insurer must immediately pay the policy limit without negotiation
- The insurer must make good-faith efforts to settle within policy limits to protect the insured from excess judgment exposure (Correct answer)
- The insurer has no obligation to settle and may proceed to trial
- The insured must personally authorize every settlement offer
Correct answer: The insurer must make good-faith efforts to settle within policy limits to protect the insured from excess judgment exposure
Insurers have a duty to act in good faith and attempt to settle claims within policy limits; failure to do so can expose the insurer to liability for any excess judgment.
Question 4: Which of the following changes in circumstance most commonly requires an insured to notify the insurer to maintain proper auto coverage?
- Changing the vehicle's oil
- Adding a teenage driver to the household (Correct answer)
- Moving to a different apartment in the same zip code
- Switching the vehicle's color
Correct answer: Adding a teenage driver to the household
Adding a resident driver — especially a teenager — materially changes the risk profile and must be reported to the insurer to ensure accurate rating and continued coverage.
Question 5: What is the purpose of the 'insuring agreement' in an auto insurance policy?
- To list all exclusions that limit coverage
- To broadly define what the insurer promises to do in exchange for the premium (Correct answer)
- To establish the policyholder's legal responsibilities
- To set the conditions under which the policy may be cancelled
Correct answer: To broadly define what the insurer promises to do in exchange for the premium
The insuring agreement is the core promise section of the policy where the insurer agrees to pay covered losses or defend the insured in exchange for the premium.
Question 6: Under the standard PAP, which exclusion would bar liability coverage for bodily injury caused by the insured while drag racing on a public road?
- The business use exclusion
- The racing exclusion (Correct answer)
- The intentional acts exclusion
- The punitive damages exclusion
Correct answer: The racing exclusion
The PAP contains a specific racing exclusion that eliminates liability coverage for bodily injury or property damage resulting from the insured's participation in racing or speed contests.
Question 7: When an auto insurer non-renews a policy at the end of the policy period, what is typically required by state regulation?
- No notice is required since the policy naturally expires
- Written advance notice to the insured (commonly 30–60 days) stating the reason for non-renewal (Correct answer)
- The insurer must offer a replacement policy through an assigned risk plan
- Federal law mandates a 90-day non-renewal notice period
Correct answer: Written advance notice to the insured (commonly 30–60 days) stating the reason for non-renewal
State regulations generally require insurers to provide written advance notice of non-renewal (typically 30–60 days) so the insured has time to obtain replacement coverage.
CALA Insurance Policy and Regulations 5
Under financial responsibility laws, what is an SR-22 filing?