Insurance Case Studies & Practical Application 5 — Questions and Answers
Question 1: A flood destroys a home in a special flood hazard area (SFHA). The homeowner has a standard homeowners policy but no flood insurance. What is the coverage outcome?
- The homeowners policy covers flooding from any source
- Flood damage is excluded from standard homeowners policies; no coverage applies (Correct answer)
- The homeowners policy covers up to $50,000 for flood losses
- FEMA automatically reimburses uninsured flood victims
Correct answer: Flood damage is excluded from standard homeowners policies; no coverage applies
Standard homeowners policies universally exclude flood damage; coverage must be purchased separately through the NFIP or a private flood insurer.
Question 2: A software company's data breach exposes 50,000 customers' personal information. The company faces regulatory fines, notification costs, and third-party lawsuits. Which policy is designed to address these exposures?
- Commercial general liability
- Cyber liability insurance (Correct answer)
- Technology errors and omissions
- Professional liability insurance
Correct answer: Cyber liability insurance
Cyber liability insurance covers first-party costs (notification, forensics, credit monitoring) and third-party liability arising from data breaches and cyber incidents.
Question 3: An insured purchases a $500,000 whole life policy with a $50,000 accelerated death benefit rider for terminal illness. Diagnosed as terminal, the insured receives $50,000. Upon death, what does the beneficiary receive?
- $500,000
- $450,000 (Correct answer)
- $550,000
- $50,000
Correct answer: $450,000
Accelerated death benefit payments reduce the total death benefit dollar-for-dollar; the beneficiary receives the original face amount minus the accelerated benefit paid ($500,000 - $50,000 = $450,000).
Question 4: A restaurant employee is injured by a customer during a robbery. The employee files a workers' compensation claim. The insurer pays the claim and wants to sue the criminal. What doctrine applies?
- Waiver
- Subrogation (Correct answer)
- Estoppel
- Indemnification
Correct answer: Subrogation
After paying a workers' compensation claim, the insurer can exercise subrogation rights to pursue the responsible third party (the criminal) for recovery.
Question 5: A car dealership test drives a customer's vehicle for repair, and the mechanic causes an accident. The customer's personal auto policy excludes vehicles used by an auto business. Which policy covers the damage?
- The customer's personal auto policy
- The dealership's garage keepers liability policy (Correct answer)
- The mechanic's personal auto policy
- The state uninsured motorist fund
Correct answer: The dealership's garage keepers liability policy
Garage keepers liability insurance covers damage to customers' vehicles while in the care, custody, or control of an auto dealer or repair shop.
Question 6: A policyholder receives a non-renewal notice 30 days before expiration and cannot find comparable coverage due to a recent claim. What state-mandated protection may be available?
- The insurer must renew all policies regardless of claims history
- The insured may apply to the state's FAIR Plan or assigned risk pool for coverage (Correct answer)
- The state automatically extends the policy for 60 days at no cost
- The prior insurer must provide coverage until replacement is found
Correct answer: The insured may apply to the state's FAIR Plan or assigned risk pool for coverage
State FAIR Plans and assigned risk pools serve as insurers of last resort for individuals who cannot obtain coverage in the standard market, including those denied due to claims history.
Question 7: An insured reports a home burglary and claims a stolen $10,000 diamond ring. The insurer suspects fraud because no scheduled jewelry endorsement exists and the insured cannot provide documentation. What tool can the insurer use to investigate?
- The insurer must pay immediately to avoid bad faith
- The insurer can demand an Examination Under Oath (EUO) and request proof of ownership (Correct answer)
- The insurer can only deny the claim without investigation
- The insured's word alone is legally sufficient proof of loss
Correct answer: The insurer can demand an Examination Under Oath (EUO) and request proof of ownership
Insurers have the contractual right to conduct an Examination Under Oath and require documentation as part of the claims investigation process before paying a loss.
Insurance Case Studies & Practical Application 5
A flood destroys a home in a special flood hazard area (SFHA).
The homeowner has a standard homeowners policy but no flood insurance.
What is the coverage outcome?