CRECI Property Risk Management 3 — Questions and Answers
Question 1: Which clause in a commercial property insurance policy specifies the minimum percentage of a property's value that must be insured to collect full reimbursement on partial losses?
- Subrogation clause
- Coinsurance clause (Correct answer)
- Waiver of subrogation clause
- Pro-rata clause
Correct answer: Coinsurance clause
The coinsurance clause penalizes policyholders who underinsure their property by reducing claim payments proportionally when coverage falls below the required percentage of value.
Question 2: A commercial real estate investor uses a ground lease structure instead of purchasing land outright primarily to reduce which category of risk?
- Environmental risk
- Capital risk / equity exposure (Correct answer)
- Leasing risk
- Construction defect risk
Correct answer: Capital risk / equity exposure
A ground lease reduces the investor's capital at risk because the land (often the largest component of value) is not purchased, lowering total equity exposure.
Question 3: Which document produced during the due diligence phase of a commercial acquisition identifies physical deficiencies and deferred maintenance that represent potential future capital expenditures?
- Title commitment
- Property condition assessment (PCA) (Correct answer)
- ALTA survey
- Phase I ESA
Correct answer: Property condition assessment (PCA)
A property condition assessment (PCA) evaluates the physical state of a building's systems and structure, flagging items that may require near-term capital investment.
Question 4: An owner of a multi-tenant office building wants to limit exposure to large, infrequent losses while keeping premiums low. Which policy structure accomplishes this?
- First-dollar coverage with no deductible
- High-deductible policy with excess coverage (Correct answer)
- Named-peril policy without endorsements
- Actual cash value policy only
Correct answer: High-deductible policy with excess coverage
A high-deductible policy reduces premiums by retaining smaller losses and relies on excess coverage to protect against catastrophic events.
Question 5: In commercial real estate, which risk arises specifically from a tenant failing to pay rent or abandoning the premises before lease expiration?
- Market risk
- Credit/default risk (Correct answer)
- Interest rate risk
- Liquidity risk
Correct answer: Credit/default risk
Credit or default risk refers to the possibility that a tenant will not fulfill its financial obligations under the lease, resulting in lost income for the owner.
Question 6: A property manager conducts a quarterly review of all tenant certificates of insurance to verify current coverage. This activity mitigates which specific risk?
- The risk of the owner being held liable for a tenant-caused injury without available tenant insurance (Correct answer)
- The risk of rent escalation disputes
- The risk of property tax reassessment
- The risk of zoning non-compliance
Correct answer: The risk of the owner being held liable for a tenant-caused injury without available tenant insurance
Verifying tenant insurance certificates ensures the owner has recourse against tenant liability claims and confirms that required contractual coverages remain in force.
Question 7: Which type of environmental assessment evaluates the presence of hazardous materials such as asbestos, lead paint, and mold within a commercial building's structure?
- Phase I ESA
- Phase II ESA (Correct answer)
- Phase III ESA
- Building Condition Assessment
Correct answer: Phase II ESA
A Phase II ESA involves actual sampling and laboratory analysis to confirm or quantify contamination identified in the Phase I review, including hazardous building materials.
CRECI Property Risk Management 3
Which clause in a commercial property insurance policy specifies the minimum percentage of a property's value that must be insured to collect full reimbursement on partial losses?