2044 Personal Lines Exam 2026: Chapter 1: Property and Casualty Insurance Terms and Related Concepts

What is the purpose of the coinsurance clause found in property insurance policies?

To encourage the insured to insure the property closer to its full value

• In return for the insured’s promise to insure the property to some certain percent of its value, the insurer agrees to give the insured a reduced rate per hundred on the insurance and pay partial losses in full.

• Usually 80%

Is the coinsurance formula applied to total losses?

No

• In the event of a total loss, the coinsurance clause does not apply, and the face amount of the policy is paid.

What is the coverage used in dwelling and homeowners policies for indirect losses?

Loss of use

• Loss of use coverage applies only after a direct loss caused by a covered peril has occurred

What is proximate cause?

Negligence that leads to an injury

• Proximate cause is the reasonably foreseeable act or event that results in an injury or damage

• Negligence may often be the proximate cause of the damage; without it, the accident would not have happened

• This is also called direct liability

What is likely to occur if it is determined by an audit that the deposit premium was too high?

The insured will receive a return premium

• If the audit shows that the initial (deposit) premium to the insured was too high (the exposures were overestimated), the insured will receive a return premium

Describe contributory negligence

Any degree of negligence by the injured party may bar recovery

• In states that have contributory negligence laws, the defendant must have been 100% at fault for an accident and the claimant free of fault if the claimant is to be successful in collecting damages

Deposit premiums are not

Any percentage/amount of the actual premium. However:

• They can be adjusted by the audit

• It is an estimated premium paid upon policy issue

• It must be paid in advance

What types of damages may be awarded by the court to create disincentives that discourage behavior that is deemed highly undesirable by society?

Punitive

• Punitive damages are a form of punishment, intended to serve as an example to others to discourage undesirable behavior.

A policy that insures all property at multiple locations for a single amount is referred to as:

Blanket

• Blanket coverage provides one limit of insurance for multiple locations or classes of property with the entire limit of insurance available to respond to any loss

• No single item is assigned a single amount of insurance. However, different amounts of insurance may be shown for buildings in general and contents in general

With respect to the business of insurance, a hazard is:

Any condition or exposure that increases the probability of loss

• Generally classified as physical, moral, or morale

The crime of forced entry into the premises of another by a person or persons with felonious intent is defined as a:

Burglary

• Insurance policies covering the peril of burglary require that there are visible signs of forced entry of exit from the premises following a loss

An insured’s 9-year-old son threw a ball, accidentally breaking a neighbor’s plate glass window. The insured was found legally liable for the cost of replacing the window. This is an example of:

Vicarious liability

• Under vicarious liability, an insured may be held responsible for the acts of other family members or independent contractors engaged by the insured to perform work

Strict Liability is not:

Imposed on defendants engaged in hazardous activities. However:

• Claimants may need to provide proof that a produce defect caused an injury

• It is imposed regardless of fault

• It is applied in produce liability cases

• Strict liability is commonly applied in product liability cases. The business is then liable for defective products, regardless of fault or negligence

What type of liability would a person who owns wild animals have?

Absolute liability

• Any conduct that is inherently dangerous, such as using explosives or keeping wild animals, imposes absolute liability.

• The claimant does not have to prove anything.

What term includes damage where the insured peril was the proximate cause of loss?

Direct loss

• Direct loss is direct, physical damage to buildings and/or personal property.

• Direct loss also includes other damage where the insured peril was the proximate cause of loss.

• Direct = proximate

  
  

An insured is applying for a casualty insurance policy. One of the conditions of the policy allows the insurance company to inspect the insured's books at the end of the policy term to make sure sufficient premium has been collected for the exposure she plans to insure. Which condition is part of the insured's policy?

Deposit premium audit

• A deposit premium audit is a condition that allows an insurer to inspect the insured's books at the end of the policy term to make sure sufficient payment has been collected for the exposure.

  
  

A beauty parlor burns to the ground. What type of loss is this to the owner?

A direct loss

• Damage caused by a peril that is insured against is classified as direct loss.

  
  

A [blank] is the basis for a claim against an insurance policy:

Loss

• Claims result from losses by a peril insured against in an insurance policy.

  
  

Robbery is:

Taking of property by use of force, violence, or fear.

• When one's property is taken by another by use of force, violence, or fear, it is robbery.

Burglary is defined as:

Taking of property from within the premises leaving visible signs of forced entry.

• Signs of forced entry or exit to closed premises must be present for burglary coverage to apply.

  
  
  

To purchase insurance, the policyowner must have financial interest in the property being insured. This is known as:

Insurable interest.

• The insured must have an insurable interest in the person or property covered by an insurance policy.

• In property insurance, this means the insured would incur a financial loss if the insured property was damaged.

  
  

Which law is the foundation of the statistical prediction of loss upon which rates for insurance are calculated?

Law of large numbers

• The law of large numbers, which states that the larger a group is, the more accurately losses reported will equal the underlying probability of loss, is the basis for statistical prediction of loss upon which rates for insurance are calculated.

  
  

Which of the following is a statutory defense that divides damages according to the degree to which each party was responsible for the accident?

Comparative negligence

• Many states, by statute, require that damages be apportioned based upon the degree of negligence of each party in an accident.

  
  
  

Which of the following best defines the term "accident"?

A sudden, unplanned and unexpected event, not under the control of the insured, resulting in injury or damage neither expected nor intended

For the reported losses of an insured group to become more likely to equal the statistical probability of loss for that particular class, the insured group must become:

Larger

• According to the law of large numbers, the larger a group becomes, the easier it is to predict losses.

• Insurers use this law in order to predict certain types of losses and set appropriate premiums.

  
  

A Certificate of Insurance is a written document that:

Shows the types and amounts of insurance issued to the insured.

• A Certificate of Insurance is a written document showing the types and amounts of insurance purchased by the insured; it does not obligate the insurer to the person to which the certificate was issued.

  
  

An additional loss that results from a direct loss of property is called a/an:

Indirect loss.

• Direct losses come about because of perils named in the policy.

• Indirect losses, also known as consequential losses, come about as a result of a direct loss.

  
  

What is the purpose of the coinsurance clause found in property insurance policies?

To encourage the insured to insure the property closer to its full value

• In return for the insured's promise to insure the property to some certain percent of its value, the insurer agrees to give the insured a reduced rate per hundred on the insurance and pay partial losses in full.

  
  
  

One driver makes a left turn on a red light and is hit by another driver who is speeding through the intersection. The driver who was making an illegal turn is found to be 80% guilty of the accident, while the speeding driver is 20% at fault. According to the principle of comparative negligence that is applied in auto accident claims, how much will the speeding driver be able to collect on the claim?

80%

• Insurance adjusters apply the comparative negligence rule to determine each party's liability, or the degree of negligence, based on the percentage each person is found to be at fault.

  
  

Replacement cost is defined as

Full replacement of property at its current cost, new and without reduction for depreciation.

• Replacement cost policies do not consider depreciation if the proper amount of insurance is maintained.

• Policies that provide replacement cost coverage require that the amount of insurance written be 80% or more of the replacement cost of the property at the time of loss.

  
  

An insured relocated to another state for work. Nobody has been living in the home in this state for 3 months; however, the insured still carries insurance on the home and stores some furniture in it. In insurance terms, the insured's house is considered

Unoccupied

• Unoccupancy refers to an insured structure in which no people have been living or working within the required period of time, but that contains contents.

  
  

Property insurance that provides $100,000 coverage for a building and $50,000 coverage for personal property at a single location is called

Specific coverage

• One location is insured for a specific amount of insurance on the structure and contents.

  
  

An insured owns a building that is valued at $400,000. To comply with the 80% coinsurance provision of his insurance policy, how much should he insure the property for?

80% of the property's replacement cost or more

• The coinsurance clause states that in consideration of a reduced rate, the insured agrees to maintain a certain minimum amount of insurance on the insured property.

• In the event of a covered loss, insurance is designed to pay replacement cost minus depreciation.

  
  

When the amount of insurance written in a property policy is not subject to any coinsurance provision and that amount is paid in the event of a covered loss, the coverage is said to be written as:

Stated Amount

• In stated amount coverage, the value of the insured property is determined at the time the policy is written.

• In the event of a loss, that amount is paid without regard to any coinsurance provision.

• However, if the loss is less than total, the insurer has salvage rights with the insured having first right of refusal of the salvage.

  
  

What are the two types of compensatory damages?

Special and general

• Compensatory damages are intended to compensate someone for both tangible and intangible elements of a loss.

• Special damages are for the actual measurable losses, such as value of property or medical bills. General damages cannot be specifically measured in dollars, such as pain and suffering.

What do individuals use to transfer their risk of loss to a larger group?

Insurance

• Insurance is the mechanism whereby an insured is protected against loss by a specified future contingency or peril in return for the present payment of premium.

• Because many other individuals with the same or similar risk of loss are paying premiums, funds are available to indemnify those who actually suffer that loss.

  
  

The transfer of an insured's right to seek damages from a negligent party to the insurer is found in which of the following clauses?

Subrogation

• After an insured accepts payment from the insurer, they have been indemnified.

• Insurance policies require the insured to transfer any right to recovery to the insurer so that it may seek recovery up to the amount paid as loss.

  
  

Negligence is defined as

The failure to do what a reasonable prudent person would do under given circumstances.

• Negligence is defined as the failure to use care that a reasonable, prudent person would have in a similar situation or circumstance.

  
  

Insurance is the transfer of

Risk

• Insurance is a transfer of risk of loss from an individual or a business entity to an insurance company.

• Hazards are conditions that increase the probability of an insured loss occurring, and perils are causes of loss.

• Losses cannot be transferred.

  
  

In property and casualty insurance, what is the term for the amount of a loss that the insured must cover out of pocket, and the insurer will only pay for the additional amount of the loss above this limit?

Deductible.

• In property insurance, the amount of loss retained by the insured is called the deductible; in liability insurance, it is called retention.

• Most property coverages include a deductible; most liability policies do not include retention.

  
  

An insured is driving her car through a residential area when she loses control and crashes into a neighbor's front porch. The neighbor, who was sitting on the porch, is injured. The insured's liability policy has a limit of $500,000. This amount applies to the total of damages for any bodily injury and property damage resulting from one accident. Which type of limit of liability does the insured have?

Combined single

• Combined single is a single dollar limit of liability applying to the total of damages for bodily injury and property damage combined resulting from one accident or occurrence.

  
  

The risk of loss may be classified as (two types)

Pure risk and speculative risk.

• Pure risks involve the probability or possibility of loss with no chance for gain.

• Pure risks are generally insurable.

• Speculative risks involve uncertainty as to whether the final outcome will be gain or loss.

• Speculative risks are generally uninsurable.

  
  

Which insurance principle states that if a policy allows for greater compensation than the financial loss incurred, the insured may only receive benefits for the amount lost?

Indemnity

• The principle of indemnity stipulates that the insured can only collect for the amount of the loss even if the policy is written with greater benefit limits.

What best describes negligence?

The failure to use reasonable and prudent care

• Negligence is defined as the failure to use care that a reasonable, prudent person would have in a similar situation or circumstance.

  
  

Payment for medical expenses, loss of wages, funeral expenses, or the cost to repair or replace damaged property are known as what type of compensatory damages? (There are only two types)

Special

• The two classes of compensatory damages that may be awarded are special and general damages.

• Special damages are tangible damages that can be specifically measured in dollar amounts (such as out-of-pocket expenses for medical, miscellaneous expenses, and loss of wages).

  
  

What type of value is used in the formula for calculating the actual cash value (ACV) of a property?

Replacement value

• The actual cash value (ACV) method of valuation reinforces the principle of indemnity because it recognizes the reduction of value of property as it ages.

• To calculate ACV, depreciation is subtracted from the current replacement cost.

  
  

Insurance is a contract by which one seeks to protect another from:

Loss

• Insurance will protect a person, business or entity from loss.

  
  

For the purpose of insurance, risk is defined as

The uncertainty or chance of loss.

• Risk, or the chance of loss occurring, is the basic reason for buying insurance.

  
  

The legal process that gives the insurer, after payment of a loss, the right to seek recovery from a third party that was responsible for the loss is known as

Subrogation

• Subrogation is a provision found in most insurance policies that gives the insurer, after payment of a loss caused by a third party, the insured's rights to recovery against that third party.

• The insurer's rights are only to the extent of the loss payment.

  
  

Events in which a person has both the chance of winning or losing are classified as

Speculative risk

• Speculative risk involves the chance of gain or loss and is not insurable. Like gambling

  
  

The insured’s house is located one mile from the county’s new landfill and across the road from the entrance of a rock quarry. It would cost $150,000 to rebuild the house if something happened to it, but when the insured tried to sell it, the best offer he received was $80,000. The insurance company will insure the house for only $80,000. What method of valuation is used to insure this property?

Market value

• When insured for market value, it is insured for what a willing buyer would pay prior to a loss.

• This is different from actual cash value or replacement cost.

  
  

For property insurance policies, the stated amount is best described as the

Maximum amount the insurer will pay in the event of a loss.

• The stated amount, or stated value, is the maximum amount the insurer will pay in the event of a loss.

• The stated amount is not subject to coinsurance requirements.

  
  
  

If a liability policy had split limits of 50/100/30, what is the maximum amount that would be payable in the event of injury to a single person?

50,000

• The first limit shown ($50,000 in this case) is the most the policy will pay for bodily injury to any one person.

  
  

Most insurance policies exclude losses by

Mysterious disappearance

• Losses by mysterious disappearance are excluded by most insurance policies.

Liability imposed on one party as a result of the actions of another person is known as

Vicarious liability

• Vicarious liability is liability imposed on one party as a result of the actions of another person, i.e., parent/child or employer/employee.

  
  

An insured owns several buildings, each at a different location and insured on a separate policy. What type of coverage does the insured have?

Specific insurance coverage

• Specific insurance provides a specific amount of coverage for each property.

• A blanket insurance policy provides coverage for more than one property with a single limit of coverage.

  
  

Which method of loss valuation is contrary to the basic concept of indemnity?

Replacement cost

• The replacement cost method of loss valuation is contrary to the basic concept of indemnity because following a loss it may provide the insured with a settlement in excess of the property’s actual cash value.

  
  

What type of insurance policy insures against (all risks of loss that are not specifically excluded by the policy?)

Open peril policy

• Open peril (special) policies cover everything except what they say they don't.

• Named peril policies cover only perils named in them.