CIA Client Advisory Services 2 — Questions and Answers
Question 1: A property insured for $600,000 has a replacement cost of $1,000,000 and an 80% coinsurance requirement. What is the coinsurance penalty applied to a $200,000 loss?
- $200,000 paid in full
- $150,000 (Correct answer)
- $120,000
- $50,000
Correct answer: $150,000
The coinsurance formula is (Amount Carried / Amount Required) × Loss = ($600,000 / $800,000) × $200,000 = $150,000.
Question 2: When advising a client on replacement cost versus actual cash value coverage, which factor most significantly differentiates the two?
- Premium cost difference
- Depreciation deduction applied to the loss settlement (Correct answer)
- The deductible amount
- Coverage territory limitations
Correct answer: Depreciation deduction applied to the loss settlement
ACV coverage deducts depreciation from the settlement amount, whereas replacement cost coverage pays the full cost to repair or replace without depreciation.
Question 3: A client's building was appraised at $500,000 replacement cost two years ago but construction costs have risen 20%. What should the appraiser advise?
- Keep current limits since the policy covers inflation automatically
- Increase coverage limits to approximately $600,000 (Correct answer)
- Switch to ACV coverage to reduce premiums
- File an endorsement removing the coinsurance clause
Correct answer: Increase coverage limits to approximately $600,000
Rising construction costs create underinsurance risk, and the appraiser should recommend updating limits to reflect the current replacement cost of approximately $600,000.
Question 4: Agreed value coverage differs from standard replacement cost coverage primarily because it:
- Pays claims faster after a loss
- Suspends the coinsurance clause and guarantees payment of the stated amount at total loss (Correct answer)
- Provides broader named perils
- Eliminates the deductible for total losses
Correct answer: Suspends the coinsurance clause and guarantees payment of the stated amount at total loss
Agreed value coverage eliminates coinsurance penalties by having insurer and insured agree in advance on the property's value, which is paid in full at total loss.
Question 5: A blanket insurance policy covering multiple locations is MOST advantageous for a client when:
- All locations have identical values and risk profiles
- Some locations are undervalued relative to others, allowing the aggregate limit to offset individual shortfalls (Correct answer)
- The insurer requires separate appraisals for each location
- The client wants to minimize the total premium paid
Correct answer: Some locations are undervalued relative to others, allowing the aggregate limit to offset individual shortfalls
Blanket coverage allows the total limit to apply to any one location, so higher-value sites benefit from the aggregate without requiring precisely scheduled per-location values.
Question 6: An inflation guard endorsement is BEST described as an automatic mechanism that:
- Increases the deductible annually to match inflation
- Periodically increases property coverage limits by a set percentage to keep pace with rising costs (Correct answer)
- Adjusts the premium based on the consumer price index
- Requires annual reappraisal to maintain coverage adequacy
Correct answer: Periodically increases property coverage limits by a set percentage to keep pace with rising costs
An inflation guard endorsement automatically increases coverage limits at a predetermined percentage, helping clients maintain insurance-to-value between formal appraisals.
Question 7: When a client asks how to achieve proper insurance-to-value, the appraiser's PRIMARY recommendation should be to:
- Purchase the maximum available coverage regardless of cost
- Base coverage limits on a current, professionally conducted replacement cost appraisal (Correct answer)
- Use the county tax assessed value as the insurance limit
- Set coverage at 150% of the mortgage balance
Correct answer: Base coverage limits on a current, professionally conducted replacement cost appraisal
A current replacement cost appraisal provides the most accurate basis for setting coverage limits and satisfying coinsurance requirements.
CIA Client Advisory Services 2
A property insured for $600,000 has a replacement cost of $1,000,000 and an 80% coinsurance requirement.
What is the coinsurance penalty applied to a $200,000 loss?