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Property Policy Structure

Practice questions on property policy structure for the property exam, each with an answer and explanation.

Study questions and answers

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1. Which part of a property policy shows the named insured, the policy period, the location, and the limits of insurance?

  1. Insuring agreement
  2. Conditions
  3. Declarations
  4. Exclusions
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C. Declarations
The declarations page personalizes the policy with the who, what, where, when, and how much of the coverage.

2. Which part of a property policy contains the insurer's basic promise to pay for covered losses?

  1. Insuring agreement
  2. Definitions
  3. Conditions
  4. Declarations
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A. Insuring agreement
The insuring agreement states what the insurer promises to do, such as pay for direct physical loss to covered property.

3. If an endorsement conflicts with the wording of the policy form it is attached to, which generally controls?

  1. The policy form
  2. Whichever favors the insurer
  3. The application
  4. The endorsement
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D. The endorsement
An endorsement modifies the policy, so its terms take precedence over the conflicting policy language.

4. Under an open perils (special form) policy:

  1. Only the perils listed in the policy are covered
  2. All perils are covered except those specifically excluded
  3. The insured must prove which named peril caused the loss
  4. Only fire and lightning are covered
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B. All perils are covered except those specifically excluded
Open perils coverage covers any direct physical loss unless it is excluded. The burden is on the insurer to show an exclusion applies.

5. Replacement cost minus depreciation equals:

  1. Market value
  2. Stated amount
  3. Actual cash value
  4. Agreed value
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C. Actual cash value
Actual cash value is commonly figured as the cost to replace the property new, less depreciation for age and wear.

6. A building worth $400,000 is insured for $240,000 under a policy with an 80% coinsurance clause. A covered $50,000 loss occurs and there is no deductible. How much will the insurer pay?

  1. $30,000
  2. $37,500
  3. $40,000
  4. $50,000
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B. $37,500
The insured needed $320,000 (80% of $400,000). The insurer pays $240,000 / $320,000 x $50,000, which is $37,500.

7. A coinsurance clause in a property policy is designed to:

  1. Encourage insurance to value
  2. Split each loss evenly between two insurers
  3. Eliminate the deductible
  4. Limit the insurer's right of subrogation
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A. Encourage insurance to value
Coinsurance penalizes underinsurance, which encourages insureds to carry limits close to the property's value.

8. Two policies cover the same building: Policy A for $200,000 and Policy B for $300,000. Under a pro rata other insurance clause, how much does Policy A pay on a $50,000 loss?

  1. $20,000
  2. $25,000
  3. $30,000
  4. $50,000
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A. $20,000
Policy A provides 40% of the total insurance ($200,000 of $500,000), so it pays 40% of the loss, or $20,000.

9. After paying a claim, the insurer sues the person who caused the loss to recover what it paid. This right is called:

  1. Abandonment
  2. Contribution
  3. Arbitration
  4. Subrogation
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D. Subrogation
Subrogation transfers the insured's right to recover from the responsible party to the insurer, to the extent of the claim paid.

10. The insured and insurer agree a fire loss is covered but disagree on the amount. Under the appraisal condition:

  1. The insured must accept the insurer's figure
  2. The dispute must go directly to court
  3. Each side picks an appraiser and the appraisers choose an umpire
  4. The agent decides the amount of loss
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C. Each side picks an appraiser and the appraisers choose an umpire
Each party selects an appraiser, and the appraisers pick an umpire. A decision agreed to by any two of the three sets the amount of loss.

11. An insured wants to give damaged property to the insurer and be paid its full value. Under a standard property policy:

  1. The insurer must accept the property
  2. The insurer is not required to accept abandoned property
  3. The insurer must pay double the value
  4. The insured may abandon property only after appraisal
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B. The insurer is not required to accept abandoned property
The abandonment condition says the insurer does not have to accept property the insured gives up. The insurer may choose to take salvage.

12. The mortgage clause in a property policy protects the lender by:

  1. Paying the lender's claim even if the insured's own claim is denied for the insured's act
  2. Letting the lender cancel the policy
  3. Making the lender the named insured
  4. Requiring the lender to pay the premium
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A. Paying the lender's claim even if the insured's own claim is denied for the insured's act
Under the standard mortgage clause, the lender's interest is protected even when the insured violates policy terms, as long as the lender meets its own duties.

13. If an insurer broadens coverage in a policy form without an extra premium, the broader coverage automatically applies to existing policies under the:

  1. Liberalization condition
  2. Concealment condition
  3. Other insurance condition
  4. Assignment condition
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A. Liberalization condition
The liberalization clause gives current policyholders the benefit of a free coverage broadening made during the policy period.

14. After a loss, which of the following is a duty of the insured under a typical property policy?

  1. Protect the property from further damage
  2. Make permanent repairs before notifying the insurer
  3. Admit fault to any other party involved
  4. Wait for the policy to renew before reporting
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A. Protect the property from further damage
Duties after loss include prompt notice, protecting the property from further damage, preparing an inventory, and providing a signed proof of loss when requested.
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