Insurance Property & Casualty Insurance 1 — Questions and Answers
Question 1: Which peril is typically covered under a standard homeowners insurance policy (HO-3) on an open-perils basis?
- Flood damage
- Earthquake damage
- Fire damage (Correct answer)
- Sewer backup
Correct answer: Fire damage
An HO-3 policy covers the dwelling on an open-perils basis, meaning fire damage is covered unless specifically excluded.
Question 2: What does 'subrogation' mean in the context of property and casualty insurance?
- The insured transfers their right to recover losses from a third party to the insurer (Correct answer)
- The insurer cancels a policy mid-term
- The policyholder increases their coverage limit
- The insurer shares risk with another carrier
Correct answer: The insured transfers their right to recover losses from a third party to the insurer
Subrogation is the legal right of an insurer to pursue a third party that caused an insurance loss in order to recover the amount paid to the insured.
Question 3: In homeowners insurance, what is the purpose of 'loss of use' coverage?
- Covers theft of personal belongings
- Pays for additional living expenses if the home is uninhabitable after a covered loss (Correct answer)
- Replaces the home's structure
- Covers liability for injuries on the property
Correct answer: Pays for additional living expenses if the home is uninhabitable after a covered loss
Loss of use coverage (Coverage D) pays for temporary housing and additional living expenses when a covered loss makes the insured home uninhabitable.
Question 4: What is the difference between 'actual cash value' (ACV) and 'replacement cost value' (RCV) in property insurance?
- ACV pays more than RCV
- RCV deducts depreciation; ACV does not
- ACV pays to replace the item new; RCV deducts depreciation (Correct answer)
- They are identical in most states
Correct answer: ACV pays to replace the item new; RCV deducts depreciation
Actual cash value equals replacement cost minus depreciation, while replacement cost value pays the full cost to replace the item with a new one of like kind.
Question 5: Under a standard auto insurance policy, which coverage pays for damage to the insured's own vehicle caused by a collision?
- Comprehensive coverage
- Collision coverage (Correct answer)
- Uninsured motorist property damage
- Medical payments coverage
Correct answer: Collision coverage
Collision coverage pays for damage to the insured's vehicle resulting from a collision with another vehicle or object, regardless of fault.
Question 6: What is 'inland marine' insurance primarily designed to cover?
- Boats docked at inland lakes
- Property in transit and movable property away from a fixed location (Correct answer)
- Flood damage to coastal homes
- Commercial fishing vessels
Correct answer: Property in transit and movable property away from a fixed location
Inland marine insurance covers property that is mobile or in transit, such as cargo, equipment, and fine art, whether or not it is near water.
Insurance Property & Casualty Insurance 1
Which peril is typically covered under a standard homeowners insurance policy (HO-3) on an open-perils basis?