Property and Liability Insurance
Exam Answer Key
Course Introduction
This course provides a comprehensive overview of property and liability insurance, examining the fundamental principles, policies, and practices involved in insuring against property losses and third-party liabilities. Students will explore the structure and function of insurance markets, types of property and liability coverage, key concepts in underwriting and risk assessment, claims processes, and legal/regulatory frameworks. Emphasis is placed on personal lines, such as homeowners and automobile insurance, as well as commercial policies covering businesses. By the end of the course, students will understand how property and liability insurance products protect individuals and organizations from financial loss due to damage, theft, or legal claims.
Recommended Textbook Principles of Risk Management and Insurance 13th Edition by George E. Rejda
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27 Chapters
1397 Verified Questions
1397 Flashcards
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Page 2
Chapter 1: Risk and Its Treatment
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Sample Questions
Q1) Which of the following is a reason why premature death may result in economic insecurity?
I.Additional expenses associated with death may be incurred.
II.The income of the deceased person's family may be inadequate to meet its basic needs.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
Q2) Ben is concerned that if he injures someone or damages someone's property he could be held legally responsible and required to pay damages. This type of risk is called a
A) speculative risk.
B) liability risk.
C) nondiversifiable risk.
D) property risk.
Answer: B
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Page 3
Chapter 2: Insurance and Risk
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47 Verified Questions
47 Flashcards
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Sample Questions
Q1) Which of the following is classified as casualty insurance?
A) workers compensation insurance
B) fire insurance
C) marine insurance
D) life insurance
Answer: A
Q2) Which of the following is a result of adverse selection?
A) The insurer's financial results will be substantially improved.
B) Persons most likely to have losses are also most likely to seek insurance at standard rates.
C) It is unnecessary for the insurance company to use underwriting.
D) Insurance can be written only by the federal government.
Answer: B
Q3) Which of the following is a basic characteristic of insurance?
A) pooling of losses
B) avoidance of risk
C) payment of intentional losses
D) certainty about specific losses that will occur
Answer: A
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Page 4
Chapter 3: Introduction to Risk Management
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60 Verified Questions
60 Flashcards
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Sample Questions
Q1) Parker Department Stores has been hurt in recent months by a large increase in shoplifting losses. Parker's risk manager concluded that while the frequency of shoplifting losses was high, the severity is still relatively low. What is (are) the appropriate risk management technique(s) to apply to this problem?
A) retention
B) loss prevention
C) transfer through insurance
D) avoidance
Answer: B
Q2) A college professor stores class grading records on a spreadsheet on her office computer. Each time she updates a grading file she makes a printout and a backup copy of the grading file. The professor is using which risk management method to address the risk of losing her class grading records?
A) risk avoidance
B) duplication
C) separation
D) noninsurance transfer
Answer: B
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Page 5
Chapter 4: Enterprise Risk Management and Related Topics
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56 Verified Questions
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Sample Questions
Q1) Millie is risk manager of JKL Company. She is considering an investment in a loss control project. The project will cost $40,000. Assuming a 10 percent discount rate, the present value of the future net cash flows that this project will generate is $60,000. What is the net present value (NPV) of this project?
A) $20,000
B) $26,000
C) $60,000
D) $100,000
Q2) The property and liability insurance industry is characterized by a repetitive pattern of loose underwriting standards with low premiums followed by tight underwriting standards with high premiums. This repetitive pattern is called the
A) underwriting by exception method.
B) business cycle.
C) underwriting cycle.
D) account underwriting method.
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Chapter 5: Types of Insurers and Marketing Systems
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Sample Questions
Q1) Which of the following is a characteristic of a typical mass merchandising plan?
A) higher commission scales for agents and higher administrative expenses
B) payment of premiums through payroll deduction
C) group rather than individual underwriting
D) contributions by the employer to the cost of coverage
Q2) Jim would like to start a business raising thoroughbred racehorses. Obtaining insurance on the horses is a key concern, and he was dismayed to learn that none of the insurers authorized to operate in his state offer this specialty insurance. What is the name of the intermediary that Jim can use to place this coverage with an insurer not admitted to his state?
A) alien insurer
B) general agent
C) surplus lines broker
D) direct writer
Q3) Which of the following statements about mutual insurers is true?
A) They are legally organized as partnerships.
B) They have a board of directors which is selected by state insurance departments.
C) They are owned by their stockholders.
D) They may pay dividends to their policyholders.
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Page 7
Chapter 6: Insurance Company Operations
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52 Verified Questions
52 Flashcards
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Sample Questions
Q1) Antonio is a claims adjustor for LMN Insurance Company. After the insurer is notified that there has been a loss, Antonio meets with the insured. The first step in the claims process that Antonio should follow is to
A) determine the amount of the loss.
B) attempt to deny the claim regardless of whether he believes the claim is covered.
C) verify that a covered loss has occurred.
D) delay paying the claim if the claim is covered.
Q2) Sue double-majored in mathematics and statistics in college. She also enrolled in a number of finance courses. After graduation, she was hired by Econodeath Insurance Company. Her job is to calculate premium rates for life insurance coverages. Sue is a(n) A) actuary.
B) underwriter.
C) claims adjustor.
D) producer.
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Chapter 7: Financial Operations of Insurers
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48 Verified Questions
48 Flashcards
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Sample Questions
Q1) Which of the following statements about experience rating is (are) true?
I.The insured's past loss experience is used to determine the premium for the next policy period.
II.Its use is generally limited to small firms whose actual experience lacks credibility.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) The portion of an insurance premium allocated to expenses, profit, and a margin for contingencies is called the
A) loading.
B) pure premium.
C) gross premium.
D) experience rate.
Q3) The assets of a property and liability insurance company are primarily
A) investments such as stocks and bonds.
B) loss reserves.
C) plant and equipment.
D) premiums paid by policyholders.
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Page 9
Chapter 8: Government Regulation of Insurance
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51 Verified Questions
51 Flashcards
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Sample Questions
Q1) To correct abuses in the financial services industry, Congress passed an Act in 2010 that included numerous provisions to reform the financial services industry. This Act was the
A) Financial Modernization Act.
B) McCarran-Ferguson Act.
C) Dodd-Frank Act.
D) Biggert-Waters Act.
Q2) The risk-based capital requirements for life insurers are based on a formula that considers four types of risk. One risk reflects whether the insurer will have enough surplus if claims are higher than expected. This risk is called
A) asset risk.
B) insurance risk.
C) interest rate risk.
D) business risk.
Q3) Which of the following is a method used to help ensure the solvency of insurers?
A) commercial lines deregulation
B) risk-based capital standards
C) use of credit-based insurance scores
D) use of no filing required rating laws
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Page 10
Chapter 9: Fundamental Legal Principles
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Sample Questions
Q1) ABC Life Insurance Company insures both smokers and nonsmokers. Beth lied on her life insurance application, checking the box for "no" in response to the question of whether she smokes cigarettes or uses other tobacco products. Even though Beth smokes 10 to 15 cigarettes each day, the policy was issued at the "preferred nonsmoker rate." Beth's lie is materiel in this case because
A) it was in writing on the application.
B) it was given with the intent to deceive.
C) the policy would have been issued on different terms if the insurer knew the true facts. D) the policy would have been issued for a lower face value if the insurer knew the true facts.
Q2) A false material statement made by an applicant for insurance is an example of A) concealment.
B) breach of warranty.
C) lack of offer and acceptance.
D) misrepresentation.
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11
Chapter 10: Analysis of Insurance Contracts
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Sample Questions
Q1) Ann Parks and Robert Evans jointly own a grocery store. Ann and Robert are both named insureds on the property insurance covering the store, but Ann is the first named insured. Which of the following statements is true with regard to Ann's status as the first named insured?
A) Any loss settlement is paid to Ann only.
B) Ann is responsible for making sure that the premium has been paid.
C) Ann can assign the policy without the consent of the insurer.
D) Ann can waive policy conditions.
Q2) An elimination (waiting) period is an example of a(n)
A) exclusion.
B) deductible.
C) other-insurance provision.
D) coinsurance provision.
Q3) An insurance policy provision that specifies how a property loss will be settled if more than one property insurance policy covers the loss is the
A) insuring agreement provision.
B) loss settlement provision.
C) other insurance provision.
D) coinsurance provision.
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Page 12
Chapter 11: Life Insurance
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60 Verified Questions
60 Flashcards
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Sample Questions
Q1) Which of the following types of families is likely to have the least need for a large amount of life insurance?
A) a blended family
B) a traditional family
C) a single person family
D) a sandwiched family
Q2) Which of the following statements is (are) true regarding the results of the 2014 study by the Life Insurance Market Research Association (LIMRA) on the adequacy of life insurance owned by households in the United States?
I.The average household is adequately insured against the risk of premature death. II.The average household is significantly underinsured against the risk of premature death.
A) I only
B) II only
C) both I and II
D) neither I nor II
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Chapter 12: Life Insurance Contractual Provisions
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Sample Questions
Q1) Janet is the beneficiary of her uncle's $200,000 life insurance policy. When her uncle died, Janet selected a settlement option that pays monthly benefits for as long as she lives. If Janet dies before receiving $200,000, payments will continue to a contingent beneficiary until a total of $200,000 has been paid. What settlement option did Janet select?
A) joint-and-survivor annuity
B) life income with guaranteed total amount
C) life income with guaranteed period
D) fixed amount option
Q2) A life insurance policyholder may no longer need life insurance. Such a policyholder may sell the policy to a third party for more than its cash value. The purchaser becomes the new beneficiary and is responsible for subsequent premium payments. Such a financial transaction is called a(n)
A) collateral assignment.
B) accelerated death benefits rider.
C) absolute assignment.
D) life settlement.
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14
Chapter 13: Buying Life Insurance
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Sample Questions
Q1) The gross premium for life insurance is equal to
A) the present value of the future death claim plus an expense loading.
B) the present value of the future death claim less the sum of the premiums paid when death occurs.
C) the present value of the future death claim less the present value of the expected dividends.
D) the net premium less the expense loading.
Q2) The gross premium is defined as
A) the net premium plus the loading allowance.
B) the terminal reserve plus the commission.
C) the net premium minus expenses.
D) the sum of all acquisition expenses.
Q3) The net premiums collected by a life insurer for a particular block of policies, plus interest income at an assumed rate, less assumed death benefits paid is called the A) cash value.
B) retrospective reserve.
C) net amount at risk.
D) prospective reserve.
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15
Chapter 14: Annuities and Individual Retirement Accounts
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50 Verified Questions
50 Flashcards
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Sample Questions
Q1) Which statement is true regarding IRA distributions?
A) The minimum distribution rules apply to Roth IRAs, but not to traditional IRAs.
B) Distributions from a Roth IRA are taxed at the individual's marginal tax rate.
C) The IRA penalty tax applies to all traditional IRA distributions before age 59.5 with no exceptions.
D) Unless a life annuity is issued, a retiree may still be alive when the IRA account is exhausted.
Q2) Cassie, age 62, paid a life insurer $100,000 in exchange for a life annuity. If Cassie dies before receiving 120 monthly payments from the insurer, the remaining payments will be made to a beneficiary. If Cassie dies after receiving 120 payments, no additional payments are made by the insurer. The annuity option Cassie selected it
A) life annuity, no refund.
B) life annuity with period certain.
C) installment refund annuity.
D) cash refund annuity.
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16
Chapter 15: Health-Care Reform; Individual Health Insurance Coverages
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47 Verified Questions
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Sample Questions
Q1) Which of the following statements regarding health care expenditures in the United States is (are) true?
I.As a nation, the U.S. spends significantly more per-person on health care than most other industrialized nations.
II.Health care expenditures in the U.S. are high because everyone is covered by a health insurance plan.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Under the Affordable Care Act, which of the following statements are true?
I.Health insurers cannot use pre-existing conditions exclusions.
II.Health insurers cannot impose annual benefit limits and lifetime benefit limits.
A) I only
B) II only
C) both I and II
D) neither I nor II
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Chapter 16: Employee Benefits: Group Life and Health Insurance
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Sample Questions
Q1) Some employers offer employees a choice of health care plans which are designed to make employees more sensitive to health care costs, to provide an incentive to avoid unneeded care, and to seek low-cost health care providers. Such plans are called
A) employee assistance plans.
B) consumer-directed health plans.
C) cafeteria plans.
D) preferred provider organization (PPO) plans.
Q2) Which of the following statements concerning managed care plans is true?
I. Most employees are covered under some form of managed care plan.
II. Managed care plans emphasize cost controls and preventative care.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q3) Advantages of cafeteria plans include all of the following EXCEPT
A) simplicity of benefit administration.
B) employees can select benefits that best match their needs.
C) reduced taxes for employees.
D) greater employer control over increasing benefit costs.
Page 18
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Chapter 17: Employee Benefits: Retirement Plans
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Sample Questions
Q1) Which of the following statements about retirement benefits under pension plans is true?
A) Under a flat percentage of annual earnings defined benefit formula, each employee receives the same dollar benefit.
B) A benefit using final pay is usually based on an employee's earnings during the last month of plan participation.
C) A unit-benefit formula considers both earnings and years of service.
D) Past service benefits are the result of bonuses and overtime pay during the period an employee participated in the plan.
Q2) Winslow Corporation has many long-term employees. The company has never had a pension plan. Recently, a new management team was hired. The new president said he would like to start a pension plan through which he could reward the long-term service provided by many employees. Which of the following types of plans should Winslow Corporation adopt?
A) section 403(b) plan
B) section 401(k) plan
C) money-purchase plan
D) defined benefit plan
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Chapter 18: Social Insurance
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Sample Questions
Q1) Which of the following statements regarding the Emergency Unemployment Compensation (EUC) program is true?
A) EUC benefits are limited to individuals who have exhausted regular state benefits and have annual incomes below the federal poverty level.
B) EUC benefits are funded entirely by the federal government.
C) EUC benefits are limited to employees who have lost their job because of a labor dispute.
D) EUC benefits are available on a case-by-case based and awarded at the discretion of the Secretary of Labor.
Q2) Beth was injured at work and is eligible to receive workers compensation benefits. All of the following benefits are provided under workers compensation EXCEPT
A) disability income.
B) retirement benefits for dependents.
C) rehabilitation benefits.
D) medical care.
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Chapter 19: The Liability Risk
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Sample Questions
Q1) Which of the following statements about the elements of negligence is (are) true?
I.The negligence of the tortfeasor may arise from a failure to act.
II.The damage that results must be in the form of property damage.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Malcolm was involved in an auto accident. He was judged to be 20 percent at fault in the accident, and the other party was judged to be 80 percent at fault. Malcolm's actual damages were $40,000. Under a pure comparative negligence rule, how much will Malcolm receive for his injuries?
A) $8,000
B) $24,000
C) $32,000
D) $40,000
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Chapter 20: Auto Insurance
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Sample
Questions
Q1) Sarah purchased a Personal Auto Policy with liability limits of 50/100/25. Sarah ran a stop sign and hit a van. The van sustained $15,000 in damages. The following bodily injuries were suffered by passengers in the van: Passenger #1, $15,000; Passenger #2, $60,000; and Passenger #3, $10,000. Sarah sustained $5,000 in medical expenses, and Sarah's car sustained $10,000 in damages. How much will Sarah's insurer pay under Part A: Liability Coverage?
A) $90,000
B) $100,000
C) $115,000
D) $125,000
Q2) The 2005 PAP states that the insurer has no duty to provide coverage if the insured fails to comply with certain listed duties. In practice, however, the insurer is only relieved of its duty to provide coverage if A) the insured was unaware of the listed duties. B) failure to comply with the duties is prejudicial to the insurer. C) the claim involves bodily injuries of more than $50,000. D) the claim occurred in another state.
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Page 22
Chapter 21: Auto Insurance (continued)
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Sample Questions
Q1) Which of the following statements about joint underwriting associations for insuring high-risk drivers is (are) true?
I.Underwriting losses are proportionately shared by all auto insurers based on premiums written in the state.
II.Each company participating in a joint underwriting association sets it own rates.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) In Maryland, drivers who are unable to obtain auto insurance in the voluntary market are insured through a(n)
A) state fund.
B) reinsurance facility.
C) joint underwriting association
D) automobile insurance plan.
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Chapter 22: Homeowners Insurance, Section I
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Sample Questions
Q1) Mike and Susan built their "dream home." They insured their home for its full replacement cost. They also added an endorsement that will pay up to an additional 20 percent of the policy limit in case the cost of rebuilding the home after a loss is greater than the policy limit. The basis under which Mike and Susan insured their home is called A) actual cash value.
B) valued policy coverage.
C) extended replacement cost.
D) guaranteed replacement cost.
Q2) Which of the following statements about the coverage for other structures (Coverage B) under the Homeowners 3 policy is true?
A) The coverage applies to a detached garage or tool shed on the residence premises.
B) Structures attached to the dwelling by a fence or utility line are considered to be part of the dwelling rather than other structures.
C) Coverage applies even if the other structure is used for business purposes.
D) There is no coverage for a private garage if it is rented to a tenant of the dwelling.
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Chapter 23: Homeowners Insurance, Section II
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Sample Questions
Q1) All of the following are endorsements that can be added to an ISO Homeowners 3 policy EXCEPT:
A) personal property replacement cost endorsement.
B) scheduled personal property endorsement.
C) earthquake endorsement.
D) personal liability endorsement.
Q2) All of the following situations are excluded from coverage under Section II of the homeowners policy EXCEPT
A) the rental of a spare bedroom which is used by the tenant as an office.
B) the use of a rented airplane to take a vacation.
C) the ownership of a ten-unit apartment house as an investment.
D) the performance of professional services by the insured at the residence premises.
Q3) All of the following are considered insured locations for medical payments to others (Coverage F) under a homeowners policy EXCEPT
A) a new vacation home purchased by an insured during the policy period.
B) a motel room where an insured is temporarily residing.
C) a hall rented by the insured for her daughter's graduation party.
D) farmland owned by the insured.
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25
Chapter 24: Other Property and Liability Insurance Coverages
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Sample Questions
Q1) Reasons why an insured might add a scheduled personal property endorsement to a homeowners policy include which of the following?
I.To lower the premium by limiting the perils covered
II.To obtain higher limits for certain personal property
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) Which of the following statements about Dwelling Property 3 (special form) is (are) true?
I.Personal property is covered only for those perils specifically named in the policy. II.The dwelling and other structures are covered on an "open perils" (all risks) basis.
A) I only
B) II only
C) both I and II
D) neither I nor II
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Chapter 25: Commercial Property Insurance
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Sample Questions
Q1) The business income and extra expense coverage form covers loss of business income and continuing normal operating expenses. How is business income (revenue) defined?
A) total sales
B) total sales less cost of goods sold
C) pre-tax net profit
D) after-tax net income
Q2) Which of the following statements about the building and personal property coverage form is (are) true?
I.A limited amount of coverage is provided for pollutant cleanup and removal at the described premises if the release or discharge of the pollutant results from a covered cause of loss.
II.Fire department service charges are specifically excluded because they are a normal cost of doing business.
A) I only
B) II only
C) both I and II
D) neither I nor II
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Chapter 26: Commercial Liability Insurance
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Sample Questions
Q1) Which of the following losses would be covered under a Commercial General Liability Policy that has no endorsements?
I.The named insured rented a building and an employee of the named insured negligently started a fire at the rented building.
II.The cost to recall defective products
A) I only
B) II only
C) both I and II
D) neither I nor II
Q2) The Commercial General Liability (CGL) Policy covers liability for which of the following loss exposures?
I.Bodily injury of an employee of the insured arising out of and in the course of employment
II.Bodily injury of a customer injured by a defective product manufactured by the insured A) I only
B) II only
C) both I and II
D) neither I nor II
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Chapter 27: Crime Insurance and Surety Bonds
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Sample Questions
Q1) A burglar took some blank checks during a break-in at XYZ Company. He was careful to make sure that the theft would be difficult to discover. Three months later, he wrote himself a check for $20,000 and signed the company treasurer's name on the check. After the check was cashed, the loss was discovered. Which commercial crime coverage form would cover this loss?
A) Inside the Premises-Theft of Money and Securities
B) Money Orders and Counterfeit Currency
C) Forgery or Alteration
D) Outside the Premises
Q2) Metro City would like a pedestrian bridge constructed across Big Creek. The city will accept bids on the project until a specified date. Bidders must submit a bid bond that guarantees if the bid is accepted, the bidder will sign the construction contract and furnish a bond that guarantees the construction work will be completed according to contract specifications. This second bond the bidder must post is a
A) performance bond.
B) payment bond.
C) maintenance bond.
D) completion bond.
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