RMIN 4000 BROWN EXAM 3
COMPREHENSIVE TEST PAPER WITH
COMPLETE SOLUTIONS
●● Principal of Indemnity
Answer: insurer pays no more than actual amount of the loss; insurer
should not profit from the loss
●● Replacement Cost (RC)
Answer: The cost to replace property with an item of like kind
and quality (similar workmanship and materials).
• Not the same as historical cost
●● Actual Cash Value (ACV)
Answer: replacement cost less depreciation
in property insurance, indemnification is usually based on the actual
cash value of the property at the time of loss
●● Market Value
Answer: Price a buyer would be willing to pay in a free market.
,●● Valued Policy
Answer: a policy that pays the face amount of insurance if a total loss
occurs (life insurance)
●● Value Policy Law (some states)
Answer: requires payment of the face amount of insurance if a total loss
to real property occurs from a peril specified in law
●● Principle of Insurable Interest
Answer: • The insured must be in a position to lose financially if a
covered loss occurs
•Prevents gambling on losses/reduces moral hazard
●● Examples of Insurable Interest
Answer: -ownership of property (house, car)
-potential legal liability (business owners)
-secured creditors (mortgage company, auto lender)
-contractual rights (goods in transit)
●● When must an insurable interest exist?
Answer: Property Insurance
• At time of loss.
,• Can't collect on an insurance policy after you sell your
home.
Life Insurance
• At inception of policy.
• Ex-spouse can still collect on life insurance if listed as
policy beneficiary.
●● Principle of Subrogation
Answer: substitution of the insurer in place of the insured for the
purpose of claiming indemnity from a third party for a loss covered by
insurance
Examples:
• Someone else hits your car.
• Your insurance company pays you for the damages to
your vehicle.
• Your insurance company sues the other driver for
reimbursement
●● Reasons for subrogation
Answer: -prevents insured from collecting twice (once from insurer,
once from responsible party)
, - holds the negligent party responsible for the loss
- reduces insurance claims costs and therefore rates
●● principle of upmost good faith
Answer: a higher degree of honesty is imposed on both parties to
insurance contracts than is imposed on parties to other contracts
●● What three legal doctrines support the principle of upmost good
faith?
Answer: -representations
-concealment
-warranty
●● Representations
Answer: statements made by the applicant for insurance
●● Contract is voidable if the misrepresentation is...?
Answer: 1. material
2. false, and
3. relied on by the insurer
●● concealment
COMPREHENSIVE TEST PAPER WITH
COMPLETE SOLUTIONS
●● Principal of Indemnity
Answer: insurer pays no more than actual amount of the loss; insurer
should not profit from the loss
●● Replacement Cost (RC)
Answer: The cost to replace property with an item of like kind
and quality (similar workmanship and materials).
• Not the same as historical cost
●● Actual Cash Value (ACV)
Answer: replacement cost less depreciation
in property insurance, indemnification is usually based on the actual
cash value of the property at the time of loss
●● Market Value
Answer: Price a buyer would be willing to pay in a free market.
,●● Valued Policy
Answer: a policy that pays the face amount of insurance if a total loss
occurs (life insurance)
●● Value Policy Law (some states)
Answer: requires payment of the face amount of insurance if a total loss
to real property occurs from a peril specified in law
●● Principle of Insurable Interest
Answer: • The insured must be in a position to lose financially if a
covered loss occurs
•Prevents gambling on losses/reduces moral hazard
●● Examples of Insurable Interest
Answer: -ownership of property (house, car)
-potential legal liability (business owners)
-secured creditors (mortgage company, auto lender)
-contractual rights (goods in transit)
●● When must an insurable interest exist?
Answer: Property Insurance
• At time of loss.
,• Can't collect on an insurance policy after you sell your
home.
Life Insurance
• At inception of policy.
• Ex-spouse can still collect on life insurance if listed as
policy beneficiary.
●● Principle of Subrogation
Answer: substitution of the insurer in place of the insured for the
purpose of claiming indemnity from a third party for a loss covered by
insurance
Examples:
• Someone else hits your car.
• Your insurance company pays you for the damages to
your vehicle.
• Your insurance company sues the other driver for
reimbursement
●● Reasons for subrogation
Answer: -prevents insured from collecting twice (once from insurer,
once from responsible party)
, - holds the negligent party responsible for the loss
- reduces insurance claims costs and therefore rates
●● principle of upmost good faith
Answer: a higher degree of honesty is imposed on both parties to
insurance contracts than is imposed on parties to other contracts
●● What three legal doctrines support the principle of upmost good
faith?
Answer: -representations
-concealment
-warranty
●● Representations
Answer: statements made by the applicant for insurance
●● Contract is voidable if the misrepresentation is...?
Answer: 1. material
2. false, and
3. relied on by the insurer
●● concealment
