STATE FARM ADVANCED INSURANCE
CERTIFICATION PREP EXAM
QUESTIONS AND ANSWERS.
1. Who founded State Farm in 1922 and what was his primary profession before starting the
company?
A. Arthur H. Campbell, an automotive engineer
B. Raymond Stevenson, an insurance attorney
C. Silas J. Miller, a commercial banker
D. George Jacob Mecherle, a retired farmer
Answer: D
Conceptual Explanation: State Farm was founded by George Jacob Mecherle in 1922; he
was a retired farmer who believed insurance premiums should be lower for farmers
because they drove less and had fewer accidents than city drivers.
2. In a standard HO-3 policy provided by State Farm, how is Coverage C (Personal Property)
typically valued?
A. Actual Cash Value, unless endorsed for Replacement Cost
B. Market Value at the time of loss
,C. Agreed Value stated on the Declarations Page
D. Guaranteed Replacement Cost regardless of age
Answer: A
Conceptual Explanation: Standard HO-3 policies provide Actual Cash Value (ACV) for
personal property, which is replacement cost minus depreciation. Policyholders often add
an endorsement for Replacement Cost Value (RCV).
3. Under the principle of ‘Indemnity’, what is the primary purpose of an insurance contract?
A. To provide a profit to the insured after a loss
B. To restore the insured to the same financial position held before the loss
C. To punish the party responsible for the loss
D. To guarantee that all risks are eliminated for the policyholder
Answer: B
Conceptual Explanation: The Principle of Indemnity states that an insurance policy
should compensate the insured only for the actual loss sustained, preventing the insured
from profiting from a claim.
4. Which legal doctrine prevents an insurer from reclaiming a right that it has already waived?
A. Subrogation
B. Adhesion
C. Contribution
, D. Estoppel
Answer: D
Conceptual Explanation: Estoppel is a legal principle that prevents a party from asserting
a right or a fact that is inconsistent with a previous position or action taken, especially if it
would harm another party.
5. State Farm is a ‘Mutual Insurance Company.’ What does this designation signify regarding
ownership?
A. It is owned by private stockholders on the NYSE
B. It is owned by the federal government
C. It is owned by its policyholders
D. It is a non-profit charity owned by its employees
Answer: C
Conceptual Explanation: A mutual insurance company is owned by its policyholders.
Profits are often returned to policyholders in the form of dividends or reduced premiums
rather than being paid to external shareholders.
6. What is the difference between a ‘Moral Hazard’ and a ‘Morale Hazard’?
A. Moral involves physical defects; Morale involves criminal intent
B. Moral involves dishonesty; Morale involves carelessness or apathy
C. Moral involves natural disasters; Morale involves human error
CERTIFICATION PREP EXAM
QUESTIONS AND ANSWERS.
1. Who founded State Farm in 1922 and what was his primary profession before starting the
company?
A. Arthur H. Campbell, an automotive engineer
B. Raymond Stevenson, an insurance attorney
C. Silas J. Miller, a commercial banker
D. George Jacob Mecherle, a retired farmer
Answer: D
Conceptual Explanation: State Farm was founded by George Jacob Mecherle in 1922; he
was a retired farmer who believed insurance premiums should be lower for farmers
because they drove less and had fewer accidents than city drivers.
2. In a standard HO-3 policy provided by State Farm, how is Coverage C (Personal Property)
typically valued?
A. Actual Cash Value, unless endorsed for Replacement Cost
B. Market Value at the time of loss
,C. Agreed Value stated on the Declarations Page
D. Guaranteed Replacement Cost regardless of age
Answer: A
Conceptual Explanation: Standard HO-3 policies provide Actual Cash Value (ACV) for
personal property, which is replacement cost minus depreciation. Policyholders often add
an endorsement for Replacement Cost Value (RCV).
3. Under the principle of ‘Indemnity’, what is the primary purpose of an insurance contract?
A. To provide a profit to the insured after a loss
B. To restore the insured to the same financial position held before the loss
C. To punish the party responsible for the loss
D. To guarantee that all risks are eliminated for the policyholder
Answer: B
Conceptual Explanation: The Principle of Indemnity states that an insurance policy
should compensate the insured only for the actual loss sustained, preventing the insured
from profiting from a claim.
4. Which legal doctrine prevents an insurer from reclaiming a right that it has already waived?
A. Subrogation
B. Adhesion
C. Contribution
, D. Estoppel
Answer: D
Conceptual Explanation: Estoppel is a legal principle that prevents a party from asserting
a right or a fact that is inconsistent with a previous position or action taken, especially if it
would harm another party.
5. State Farm is a ‘Mutual Insurance Company.’ What does this designation signify regarding
ownership?
A. It is owned by private stockholders on the NYSE
B. It is owned by the federal government
C. It is owned by its policyholders
D. It is a non-profit charity owned by its employees
Answer: C
Conceptual Explanation: A mutual insurance company is owned by its policyholders.
Profits are often returned to policyholders in the form of dividends or reduced premiums
rather than being paid to external shareholders.
6. What is the difference between a ‘Moral Hazard’ and a ‘Morale Hazard’?
A. Moral involves physical defects; Morale involves criminal intent
B. Moral involves dishonesty; Morale involves carelessness or apathy
C. Moral involves natural disasters; Morale involves human error
