Insurance General Insurance 3 — Questions and Answers
Question 1: Which insurance principle requires that a policyholder must have a financial stake in the insured item?
- Indemnity
- Insurable interest (Correct answer)
- Subrogation
- Contribution
Correct answer: Insurable interest
Insurable interest means the policyholder must stand to suffer a financial loss if the insured event occurs, preventing speculative policies.
Question 2: What is the purpose of a 'declarations page' in an insurance policy?
- To list all exclusions from coverage
- To summarize key policy details such as coverage limits, premiums, and named insured (Correct answer)
- To explain the claims filing process
- To outline the insurer's financial rating
Correct answer: To summarize key policy details such as coverage limits, premiums, and named insured
The declarations page (dec page) is a summary sheet at the front of a policy that provides the essential facts of coverage at a glance.
Question 3: In insurance, what is a 'peril'?
- A dangerous occupation classification
- The cause of a potential loss, such as fire, theft, or wind (Correct answer)
- A clause that limits coverage
- The dollar amount of a claim
Correct answer: The cause of a potential loss, such as fire, theft, or wind
A peril is a specific risk or cause of loss that an insurance policy may or may not cover.
Question 4: What does 'actual cash value' (ACV) mean when settling a property insurance claim?
- The original purchase price of the item
- The replacement cost minus depreciation (Correct answer)
- The appraised market value set by a third party
- The cost to repair the item regardless of age
Correct answer: The replacement cost minus depreciation
ACV is calculated as replacement cost minus depreciation, accounting for the item's age and wear at the time of loss.
Question 5: Which of the following is an example of an 'open perils' (all-risk) policy?
- A policy that covers only fire and theft
- A policy that covers all causes of loss except those specifically excluded (Correct answer)
- A policy that covers named perils listed in the contract
- A policy that only covers natural disasters
Correct answer: A policy that covers all causes of loss except those specifically excluded
An open perils or all-risk policy covers any cause of loss that is not specifically excluded, offering broader protection than named-peril policies.
Question 6: Why do insurers use 'exclusions' in a policy?
- To limit the insurer's liability for certain high-risk, uninsurable, or separately coverable losses (Correct answer)
- To increase the policyholder's premium without justification
- To avoid paying any claims under the policy
- To comply with state laws requiring shorter policies
Correct answer: To limit the insurer's liability for certain high-risk, uninsurable, or separately coverable losses
Exclusions define what the policy will not cover, which allows insurers to manage specific risks, keep premiums manageable, and avoid covering intentional or catastrophic losses.
Question 7: What is 'coinsurance' in the context of property insurance?
- Sharing a policy between two policyholders
- A clause requiring the insured to carry coverage equal to a minimum percentage of the property's value (Correct answer)
- A premium discount for bundling policies
- The portion of a claim paid by a secondary insurer
Correct answer: A clause requiring the insured to carry coverage equal to a minimum percentage of the property's value
Coinsurance clauses require the insured to maintain coverage at a specified percentage (often 80%) of the property's full replacement value or face a penalty at claim time.
Insurance General Insurance 3
Which insurance principle requires that a policyholder must have a financial stake in the insured item?