Property & Casualty Insurance License Test Property Insurance Policies Questions and Answers 1 — Questions and Answers
Question 1: A commercial property is valued at $1,000,000 and insured for $600,000. The policy includes an 80% coinsurance clause and a $1,000 deductible. If a covered fire causes $200,000 in damages, how much will the insurance company pay for the loss?
- $149,000 (Correct answer)
- $150,000
- $199,000
- $200,000
Correct answer: $149,000
The coinsurance clause requires the property to be insured for at least 80% of its value ($1,000,000 * 0.80 = $800,000). Since the property is only insured for $600,000, a penalty is applied. The formula is: [(Amount of Insurance Carried / Amount of Insurance Required) * Loss] - Deductible. So, [($600,000 / $800,000) * $200,000] - $1,000 = (0.75 * $200,000) - $1,000 = $150,000 - $1,000 = $149,000.
Question 2: Which section of a standard property insurance policy personalizes the contract by specifying the named insured, property address, policy period, coverages, and premium amounts?
- Insuring Agreement
- Conditions
- Exclusions
- Declarations (Correct answer)
Correct answer: Declarations
The Declarations page contains all the specific information that is unique to the policyholder and the insured property. It identifies the named insured, location of the property, policy term, specific coverages, limits, and the policy premium.
Question 3: A landlord owns a rental house and wants to purchase a Dwelling Policy. They desire broad, named-peril coverage for the structure and its contents, including protection against risks like the weight of ice and snow, and falling objects. Which policy form best suits their needs?
- DP-1 (Basic Form)
- DP-3 (Special Form)
- DP-2 (Broad Form) (Correct answer)
- HO-4 (Contents Broad Form)
Correct answer: DP-2 (Broad Form)
The DP-2 (Broad Form) is a named-perils policy that covers all the perils of the DP-1 plus several additional ones, such as falling objects and the weight of ice and snow. The DP-1 is more basic, and the DP-3 provides open-peril coverage for the dwelling, which is more than what is described.
Question 4: Under the Standard Mortgage Clause in a property insurance policy, if an insured intentionally sets fire to their own home, how will the claim be handled for the mortgagee?
- The claim will be denied for both the insured and the mortgagee.
- The mortgagee's claim will be paid to the extent of their financial interest, but the insured's claim will be denied. (Correct answer)
- The insurer will pay the full limit of the policy to the mortgagee, regardless of their interest.
- The claim will be paid to the insured, who is then responsible for paying the mortgagee.
Correct answer: The mortgagee's claim will be paid to the extent of their financial interest, but the insured's claim will be denied.
The Standard Mortgage Clause creates a separate contract between the insurer and the mortgagee. This clause protects the mortgagee's insurable interest even if the policyholder's claim is denied due to their own acts (like arson) or negligence. The insurer will pay the mortgagee up to the amount of their outstanding loan balance.
Question 5: Which of the following is an example of an 'Additional Coverage' commonly found in a standard Homeowners or Commercial Property policy, provided at no extra premium?
- Earthquake Damage
- Debris Removal (Correct answer)
- Flood Damage
- Scheduled Personal Property
Correct answer: Debris Removal
Debris Removal is a standard additional coverage included in many property policies. It covers the cost of removing debris of covered property after a covered loss. Earthquake and Flood are typical exclusions that require a separate policy or endorsement. Scheduled Personal Property is an endorsement used to provide specific, higher limits for valuable items.
Question 6: A homeowner's policy includes Coverage D - Loss of Use. A covered peril makes the home uninhabitable for two weeks during repairs. Which of the following expenses would be covered under Loss of Use?
- The full cost of a luxury hotel suite.
- The mortgage payment for the two-week period.
- The cost to rent a similarly sized apartment, exceeding the insured's normal housing costs. (Correct answer)
- The cost of groceries for the two weeks.
Correct answer: The cost to rent a similarly sized apartment, exceeding the insured's normal housing costs.
Coverage D, Loss of Use, covers the 'additional living expenses' incurred by the policyholder while their home is uninhabitable due to a covered loss. This means it pays for costs above and beyond their normal expenses. It would cover the reasonable cost of temporary housing (like a comparable apartment), but not normal, ongoing expenses like a mortgage payment or standard grocery bills.
Property & Casualty Insurance License Test Property Insurance Policies Questions and Answers 1
A commercial property is valued at $1,000,000 and insured for $600,000.
The policy includes an 80% coinsurance clause and a $1,000 deductible.
If a covered fire causes $200,000 in damages, how much will the insurance company pay for the loss?