CRECI Property Risk Management 2 — Questions and Answers
Question 1: Which type of insurance covers loss of rental income when a commercial property is rendered uninhabitable due to a covered peril?
- Business interruption insurance (Correct answer)
- General liability insurance
- Umbrella liability insurance
- Directors and officers insurance
Correct answer: Business interruption insurance
Business interruption insurance reimburses lost rental income and operating expenses when a covered peril prevents the property from generating revenue.
Question 2: A commercial property owner discovers that a tenant's operations have caused soil contamination. Which policy is specifically designed to address this environmental liability?
- Workers' compensation policy
- Pollution liability insurance (Correct answer)
- Product liability insurance
- Inland marine insurance
Correct answer: Pollution liability insurance
Pollution liability insurance covers bodily injury, property damage, and cleanup costs arising from pollution events at or from a covered property.
Question 3: In a risk transfer strategy, a commercial landlord requires tenants to carry their own liability insurance and name the landlord as an additional insured. This practice is known as:
- Risk avoidance
- Risk retention
- Contractual risk transfer (Correct answer)
- Risk diversification
Correct answer: Contractual risk transfer
Contractual risk transfer shifts financial responsibility to another party through lease agreements or contracts, such as requiring tenants to carry and share their insurance coverage.
Question 4: What is the primary purpose of a FEMA flood zone determination when acquiring commercial real estate?
- To estimate property tax assessments
- To determine if flood insurance is federally required (Correct answer)
- To calculate depreciation schedules
- To identify zoning classifications
Correct answer: To determine if flood insurance is federally required
A FEMA flood zone determination identifies whether the property lies in a Special Flood Hazard Area, which triggers a federal requirement to carry flood insurance for federally backed loans.
Question 5: Which risk management tool quantifies the maximum probable loss from a single catastrophic event at a commercial property?
- Net operating income analysis
- Probable maximum loss (PML) estimate (Correct answer)
- Debt service coverage ratio
- Capitalization rate analysis
Correct answer: Probable maximum loss (PML) estimate
A probable maximum loss (PML) estimate models the worst-case insurable loss scenario, guiding decisions on coverage limits and self-insurance retention levels.
Question 6: A commercial property manager implements a formal inspection schedule, repairs faulty handrails, and installs security lighting. These actions primarily represent which risk management strategy?
- Risk transfer
- Risk financing
- Risk control/reduction (Correct answer)
- Risk avoidance
Correct answer: Risk control/reduction
Risk control (reduction) involves physical or procedural measures that lower the frequency or severity of losses before they occur.
Question 7: When a property owner self-insures by setting aside reserves for potential losses rather than purchasing a commercial insurance policy, this strategy is called:
- Risk transfer
- Captive insurance
- Risk retention (Correct answer)
- Indemnification
Correct answer: Risk retention
Risk retention means the owner absorbs potential losses using internal funds or reserves instead of transferring the financial exposure to an insurer.
CRECI Property Risk Management 2
Which type of insurance covers loss of rental income when a commercial property is rendered uninhabitable due to a covered peril?