CPCU 500 Predicted Questions and Verified Answers

Key questions in determining insurable interest - 1. What is insurable interest 2. When must insurable interest exist 3. Why require insurable interest 4. What is the legal basis of insurable interest 5. What happens when insurable interest overlap Problems associated with maintain insurance to value - 1. The amount of insurance required to maintain insurance to value is based on the property's value at the time of loss, but the limit is chosen at the time of policy inception 2. The insured often selects the policy limits based on his best guess, not on a valid appraisal. 3. Even with an appraisal, the true insurable value at the time of loss cannot be measured exactly until the property is actually repaired or replaced 4. Values fluctuate over time Insurance buyers can minimize those four problems by - 1. Using a professional appraiser to determine the current replacement cost value and then reappraising the property every few years 2. Adjusting the appraisal annually using indexes and/or a record of additions and deletions 3. Reviewing and revising limits periodically 4. Using appropriate coverage options such as Agreed value optional coverage Inflation guard protection Peak season endorsement Approaches used in property insurance to value property - 1. actual cash value 2. replacement cost 3. agreed value approach 4. functional value Valuation of Liability Losses are typically based on - 1. The relevant policy provisions and 2. The extent of the bodily injury and/or property damage to others The most the insurer will pay is the lesser of - 1. The applicable policy limit 2. The compensable amount of the loss Purposes of deductibles - 1. To reduce the insurer's cost by eliminating the inefficiencies of dollar trading and eliminating insurer loss settlement and other administrative expense for loss under the deductable. 2. To encourage risk control 3. To reduce the morale and moral hazard incentive How deductibles are handled in liability insurance: the insurer - 1. Defends the claim on a first - dollar basis 2. Pays all covered losses 3. Bills the insured for the amount of losses up to the deductible. Limited use of liability deductibles - 1. The insurer wants the insured to report every claim and not play adjuster and attorney. Simply, the insurer wants to control the claim settlement. 2. The premium credit would be small 3. Few people sue for small amounts 4. The insurer must try to collect the deductible amount from the insured. Other sources of recovery that affect amounts payable - 1. Noninsurance agreements, warranties, guarantees, lease agreements, service agreements etc. 2. Third parties 3. Other insurance in the same policy 4. Other insurance in a similar policy