P&C Policy Provisions and Options 3

Question 1

What does the term 'pro rata cancellation' mean in the context of insurance?

Accepted Answer

The insurer returns the unearned premium proportionally based on the time remaining in the policy period

Answer

Pro rata cancellation means the insurer refunds the exact unearned premium — the portion of the premium corresponding to the remaining policy period — with no penalty.

Question 2

A 'consent to settle' (hammer) clause in a liability policy allows the insurer to:

Accepted Answer

Require the insured to share in any additional damages above the insurer's recommended settlement if the insured refuses to consent to a proposed settlement

Answer

The hammer clause penalizes an insured who refuses a settlement the insurer recommends: if the insured vetoes the settlement and the case proceeds to a higher verdict, the insured may bear the cost of the excess.

Question 3

Under the 'vacancy' provision of a commercial property policy, coverage may be affected if the building has been vacant for more than:

Accepted Answer

60 days

Answer

Most commercial property policy vacancy clauses define a building as vacant if it has been empty for more than 60 consecutive days; after that threshold, coverage for certain perils (such as vandalism) is suspended or reduced.

Question 4

What is the purpose of a 'mortgagee clause' in a property insurance policy?

Accepted Answer

To protect the lender's (mortgagee's) insurable interest by ensuring the lender receives insurance proceeds even if the insured's coverage is voided by the insured's acts

Answer

The standard mortgagee clause (also called the 'union mortgage clause') gives the lender independent rights under the policy, meaning the insurer must pay the mortgagee even if the insured commits an act that would otherwise void the policy.

Question 5

An 'agreed value' clause in a property policy means:

Accepted Answer

The insured and insurer have agreed in advance on the value of the insured property, and the insurer will pay that amount in full in the event of a total loss without applying coinsurance

Answer

An agreed value (stated amount) policy eliminates coinsurance penalties by fixing the insured value in advance; if a total loss occurs, the insurer pays the agreed amount without depreciation or coinsurance calculation.

Property & Casualty Insurance License Test Practice Test

Property & Casualty Insurance License Test Practice Test

P&C Policy Provisions and Options 3