CU Insurance Policies and Contracts 3 — Questions and Answers
Question 1: The doctrine of 'reasonable expectations' in insurance contract interpretation holds that:
- Insurers must pay all claims regardless of policy language
- Courts honor the objectively reasonable expectations of the insured even if policy language is ambiguous (Correct answer)
- Insureds must read and understand all policy exclusions
- Coverage is determined solely by the plain language of the policy
Correct answer: Courts honor the objectively reasonable expectations of the insured even if policy language is ambiguous
The reasonable expectations doctrine protects insureds by enforcing what an ordinary person would reasonably expect the policy to cover, especially when exclusions are hidden or complex.
Question 2: Under the 'other insurance' clause, when two policies cover the same loss and both contain a 'pro rata' provision, losses are shared:
- Entirely by the policy with the higher premium
- In proportion to each policy's limit relative to the total insurance (Correct answer)
- By whichever policy is listed first on the declaration page
- Equally regardless of policy limits
Correct answer: In proportion to each policy's limit relative to the total insurance
Pro rata other insurance clauses divide the loss between insurers in proportion to the amount each policy would independently pay.
Question 3: A 'non-renewal' notice by an insurer differs from a 'cancellation' notice in that non-renewal:
- Takes effect immediately upon issuance
- Occurs at the end of the existing policy term rather than mid-term (Correct answer)
- Does not require any advance notice to the insured
- Voids the policy from its inception date
Correct answer: Occurs at the end of the existing policy term rather than mid-term
Non-renewal means the insurer declines to continue coverage when the current policy period expires, while cancellation terminates an in-force policy before its expiration date.
Question 4: Which element distinguishes an 'insuring agreement' from an 'exclusion' in a standard insurance policy?
- The insuring agreement lists conditions; exclusions list covered perils
- The insuring agreement broadly grants coverage; exclusions narrow or eliminate specific covered claims (Correct answer)
- Exclusions are negotiable; insuring agreements are not
- Insuring agreements only apply to property; exclusions apply to liability
Correct answer: The insuring agreement broadly grants coverage; exclusions narrow or eliminate specific covered claims
The insuring agreement defines the scope of coverage granted, while exclusions carve out specific risks, situations, or types of damage that the insurer will not cover.
Question 5: The 'named insured' on a commercial policy has rights that 'additional insureds' typically do not, including the ability to:
- File claims directly with the insurer
- Cancel the policy or receive return premiums (Correct answer)
- Receive notice of adverse loss developments
- Request certificates of insurance
Correct answer: Cancel the policy or receive return premiums
Only the named insured holds full contractual rights such as cancelling the policy, receiving premium refunds, and making changes to coverage terms.
Question 6: Which provision allows a property insurer to take over the insured's legal rights against a negligent third party after paying a loss?
- Salvage rights
- Subrogation (Correct answer)
- Assignment clause
- Indemnification agreement
Correct answer: Subrogation
Subrogation transfers the insured's right to sue a negligent third party to the insurer after the insurer has compensated the insured for the loss.
Question 7: A 'manuscript policy' in commercial insurance refers to a policy that is:
- Printed using standardized ISO forms without modification
- Individually drafted or customized to meet a specific insured's unique coverage needs (Correct answer)
- Issued only for fine arts and collectibles
- Automatically renewed without underwriter review
Correct answer: Individually drafted or customized to meet a specific insured's unique coverage needs
A manuscript policy is a custom-written policy negotiated between the insured and the insurer to address risks or coverage terms not available in standard forms.
CU Insurance Policies and Contracts 3
The doctrine of 'reasonable expectations' in insurance contract interpretation holds that: