P&C General Practice 3 — Questions and Answers
Question 1: Under the personal auto policy (PAP), which coverage pays for damage to the insured's own vehicle caused by a collision with another car?
- Collision coverage (Correct answer)
- Comprehensive coverage
- Uninsured motorist property damage
- Medical payments coverage
Correct answer: Collision coverage
Collision coverage under the PAP pays for damage to the insured's vehicle resulting from its collision with another vehicle or object.
Question 2: An insured files a false claim by inflating the value of stolen property. This is an example of:
- Hard fraud
- Soft fraud (Correct answer)
- Concealment
- Misrepresentation
Correct answer: Soft fraud
Soft fraud (also called opportunistic fraud) involves exaggerating or inflating a legitimate claim, as opposed to hard fraud, which involves staging or inventing a loss entirely.
Question 3: Which endorsement to a homeowners policy provides coverage for earthquake damage?
- Earthquake endorsement (HO-10) (Correct answer)
- Broad form perils endorsement
- Scheduled personal property endorsement
- Inflation guard endorsement
Correct answer: Earthquake endorsement (HO-10)
The earthquake endorsement (commonly referenced as HO-10 or a similar state-specific form) is added to a homeowners policy to cover earthquake damage, which is excluded under standard forms.
Question 4: A liability policy with a $1 million per-occurrence limit and a $3 million aggregate limit has paid $2.5 million in claims this policy year. What is the maximum the insurer will pay for the next single covered claim?
- $500,000 (Correct answer)
- $1,000,000
- $3,000,000
- $0 — the policy is exhausted
Correct answer: $500,000
With $2.5 million paid against a $3 million aggregate, only $500,000 of aggregate capacity remains, capping payment on any subsequent claim regardless of the per-occurrence limit.
Question 5: What does the term 'pro rata cancellation' mean in insurance?
- The insurer returns the unearned premium proportional to the unused policy period (Correct answer)
- The insured receives a refund equal to 90% of the remaining premium
- The policy is cancelled immediately with no premium refund
- The premium refund is reduced by an administrative penalty
Correct answer: The insurer returns the unearned premium proportional to the unused policy period
Pro rata cancellation refunds the exact unearned portion of the premium based on the number of days remaining in the policy period, with no penalty.
Question 6: Under the homeowners HO-3 policy, Coverage A (dwelling) is written on which basis?
- Open perils (all-risk) (Correct answer)
- Named perils only
- Actual cash value
- Agreed value
Correct answer: Open perils (all-risk)
Under the HO-3, Coverage A (dwelling) is written on an open-perils (all-risk) basis, covering all causes of loss except those specifically excluded.
Question 7: Which of the following describes 'adverse selection' in insurance underwriting?
- High-risk individuals are more likely to seek insurance than low-risk individuals (Correct answer)
- Insurers intentionally charge higher premiums to profitable customers
- Agents steer clients toward policies that pay higher commissions
- Insurers cancel policies when claims exceed expected losses
Correct answer: High-risk individuals are more likely to seek insurance than low-risk individuals
Adverse selection occurs when individuals with higher-than-average risk are disproportionately attracted to purchasing insurance, threatening the insurer's expected loss ratios.
P&C General Practice 3
Under the personal auto policy (PAP), which coverage pays for damage to the insured's own vehicle caused by a collision with another car?