Texas Property and Casualty Practice Exam Questions & Answers

Unilateral Contract - Answer In a (Blank), only one party is legally obligated to perform. The Insured's duty after a loss - Answer Which one of the following would you find in the Conditions section of an insurance policy? The principle of indemnity - Answer Greg plays trombone in his school band during football games. During a rally song in the stands one day, Greg annoys one of the opposing team's fans, who grabs his $400 trombone and hurls it down the bleachers, completely destroying it. Greg's insurance pays him $400 to replace the trombone, but then the opposing team's coach also offers to replace the instrument, at whatever the cost. So Greg orders a new $3,200 trombone and has the opposing team's athletic department absorb the cost. Which principle has Greg violated? Indemnification - Answer Which of the following refers to being restored to the financial condition you were in before a loss? mutual insurance company. - Answer Cindy holds an insurance policy from Sine Nomine Insurance. This is not a publicly traded company, and Cindy can participate in the election of the board, receiving dividends if the company does well. Sine Nomine Insurance could be best described as a: After a loss, the insured should be restored to his approximate financial condition before the loss. - Answer Which of the following best defines the principle of indemnity? explosion - Answer All of the following are typical exclusions in an insurance policy, EXCEPT: Premium - Answer The fee paid by the insured in exchange for an insurance policy is called a: It must be a notarized document. - Answer Which of the following is NOT a requirement for a legally binding contract? Exclusions - Answer Which section of an insurance policy is designed to OMIT certain risks from coverage? exists solely to provide insurance for its parent company. - Answer A captive insurance company: Bobby has been diagnosed as mentally incompetent. - Answer Bobby just purchased an insurance policy for his home from XYZ Insurance. Which of the following would be a reason this policy may not be legally binding? Principle of Indemnity - Answer Mark incurred $8,000 damage to his car in an accident. He received $8,000 from his insurance company and $4,000 from the other driver. By receiving a profit from the loss, Mark could be in violation of: re-insurance. - Answer When an insurer buys insurance to reduce its exposure to loss, this is called: ****A moral hazard involves consciously risky behavior because of the existence of insurance coverage. - Answer Which of the following statements about a moral hazard is FALSE? a high crime neighborhood. - Answer An insurance company might consider any of the following a risk, EXCEPT: Dale just bought 30 shares of a hot new startup company online. - Answer Which of the following situations does NOT involve an insurable risk? A football stadium - Answer Which of the following is an insurable risk? Increasing your insurance coverage when you think a loss is likely. - Answer Which of the following is NOT a form of insurance fraud? the ring is a pure risk. - Answer Steve has just purchased a wedding ring for his new bride. If something were to happen to the ring, he'd be out a lot of money, so he purchases an insurance policy. He is able to do this because: A squadron of police cars - Answer Which of the following would be considered an insurable risk? committing health insurance fraud. - Answer Dr. Nelson routinely schedules her patients for lab tests that they don't need so she can charge their insurers for more money. Dr. Nelson is: The roads present a physical condition that increases the chance of a loss. - Answer Adam has a treacherous drive to work every day. Not only does he have to drive down the pothole-strewn access road to the highway, but he also must traverse several icy bridges on the way to work. Why does the insurance company call these hazards "physical hazards"? risk retention. - Answer Six Stars Development Company has just purchased several large properties in Las Vegas. As a result of this large purchase, they are a little short on money and decide to save money by not purchasing insurance on their new properties. Six Stars is practicing: risk reduction. - Answer Jared hopes to purchase a new insurance policy for his car, but he has an extremely poor driving record. The insurance company decides to issue Jared an insurance policy, but charges him a premium much higher than the average driver. The insurance company is practicing: eliminates risk. - Answer Risk avoidance is a risk management technique that: hard fraud. - Answer When a car stops short in front of Mike's car, he manages to hit the brakes in time and avoids a collision. To Mike's surprise, the other driver then throws the car into reverse and backs into Mike's car! The other driver's actions are an example of: moral hazard. - Answer John owes a lot more on his car than it is worth. He figures he would be better off if he burned the car and collected an insurance settlement. He has someone set fire to his garage to destroy the car. John's behavior would be considered a: risk. - Answer When an insurer issues an insurance policy, the actual item, person, or organization that is being insured is called the: Rafael accidentally slipped on a wet floor at the supermarket. Although his only injury was a sprained ankle, he claimed he had back and neck pain when he sued the supermarket in an effort to get more money in the settlement. - Answer Which of the following people committed soft fraud? The power surge - Answer A power surge sparks a small electrical fire in an office building. The electrical fire triggers the automatic sprinkler system. The water from the sprinklers soaks the carpets and shorts-out all the computers, causing thousands of dollars in damage. What is the proximate cause of the loss? representations. - Answer The factual statements of the insured upon which an insurance policy is based are called: warranty. - Answer In order to qualify for an insurance policy, Lydia's Fine Jewels must agree to have a security guard on the premises 24/7. This is called a: indirect loss. - Answer As Jonathan was driving through an intersection, another driver ran a red light and crashed into the side of Jonathan's car, which caused significant physical damage to both vehicles. Jonathan must now rent a car while his is being repaired. The rental car expense would be considered a/an: Estoppel protects the insured party from an insurer who initially approves coverage, but then later denies coverage after the insured pays for repairs. - Answer Which of the following statements about the principle of estoppel is TRUE? Temporary coverage for an insurance applicant until the policy is issued - Answer What is a binder? Wind - Answer Jane's shed burns to the ground during a tornado, when the high winds break a wall of the shed, knocking over a lantern inside. What is the proximate cause of the loss? an unexpected event that causes loss. - Answer An "occurrence" is defined as: an indirect loss. - Answer Driving home after a 14-hour shift, Sam falls asleep at the wheel and plows into Sandra's home, causing extensive damage to the East wall and roof. As a result, Sandra and her family must move into a hotel until the repairs are completed. The cost of staying in a hotel is: an occurrence. - Answer Driving home after a 14-hour shift, Sam falls asleep at the wheel and plows into Sandra's home, causing extensive damage to the East wall and roof. As a result, Sandra and her family must move into a hotel until the repairs are completed. Sam's car crashing into the house would be considered: Under replacement cost valuation, insurers may safeguard the principle of indemnity by requiring policyholders to replace insured items before making full reparations. - Answer Which of the following statements applies to replacement cost valuation? $10,000 - ACV pays at current market value minus depreciation - Answer Clara plays the harp in an orchestra. Her harp cost $12,000, and she had it for 5 years before it was stolen from her locker at a symphony hall. She recently found out a new harp will cost $15,000. Assuming her harp depreciated at $1,000 a year, how much will an actual cash value policy indemnify Clara? Maintaining property values allows your neighbor to have an insurable interest in your house. - Answer Which of the following statements about insurable interest is FALSE? Adam may file a third party claim with the dealership's insurance company. - Answer Adam is shopping for a car in a local automobile dealership. While visiting the showroom, he trips over a rug that has folded over and breaks his arm in the fall. Which of the following is true? a reason for denying the claim. - Answer When Jim is involved in an accident, he immediately calls his insurer and files a claim. When his insurer denies the claim, it is required to provide Jim with: A woman files an insurance claim when she is injured by an employee at a local bar. - Answer Which of the following is most likely a third party claim? general damages. - Answer Mental anguish would be an example of: Andy's insurer will send Joan a reservation of rights. - Answer Joan files a lawsuit against Andy because his dog escaped and caused her to fall on an icy sidewalk. Which of the following statements is FALSE? special damages. - Answer Tim is the plaintiff in a case involving an auto accident. To recover monies he feels are due him, Tim produces documents to prove he had to pay over $55,000 in medical bills. If the court were to award Tim $55,000, the damages would be classified as: general damages - Answer Ricky was watching a baseball game at XYZ Stadium, when the railing on which he was leaning gave way and he fell two stories. As a result of his fall, Ricky broke his back and is now paralyzed from the waist down. Ricky sued the owners of XYZ Stadium and was awarded $150,000 to cover his medical bills and $2.5 million in __________ because of the permanent nature of his injury. issue a complaint against the policyholder. - Answer A few weeks ago Christopher's garage was destroyed by an out-of-control motorist. Fortunately, the motorist had sufficient liability insurance to cover the damages. However, the insurer insists that Christopher's garage is worth far less than the appraisals he has received from contractors. Christopher and the insurer have gone back and forth in negotiations for weeks, making little headway. Christopher decides it's time to: Contributory negligence - Answer Sam is a claimant seeking damages from XYZ Insurance. The XYZ adjuster comes to meet with Sam to hear the circumstances of her injury. The adjuster determines that Sam played an active role in her own injuries, and therefore XYZ Insurance will pay her nothing at all for her injuries. What defense is the adjuster using? Res Ipsa Loquitur. - Answer A passenger on a commercial airline flight was injured when the plane crashed due to a mechanical problem. In court, the injured passenger's lawyer could invoke the doctrine of: a joint tortfeasor. - Answer James and Eric want to play a prank on Bob for Halloween. They dress up like headless horsemen and throw ignited Jack O'Lanterns at his house. Unfortunately, one of the inflamed pumpkins catches the porch on fire, causing $3,500 in damages. Bob doesn't find this tomfoolery very entertaining and sues both James and Eric for the cost of the repairs. In court, James and Eric would be: states that any change to a policy form that broadens coverage without increasing the premium will automatically apply to existing policies. - Answer The Liberalization Clause in an insurance policy: Under the pro rata apportionment clause, each insurer pays its share of the loss according to its share of all policy limits. Combined total limits of both policies = $125,000. Policy X has 80% of the total and Policy Y has 20% of the total, so Policy X will pay 80% of the $75,000 loss ($60,000) and Policy Y will pay the remaining 20% ($15,000). - Answer Tina has two policies (Policy X and Policy Y) that cover the same risk on a pro rata basis. Policy X has a limit of $100,000 and Policy Y has a limit of $25,000. When Tina suffers a loss totaling $75,000, how will the two policies respond?