Principles of Insurance

One reason catastrophes are difficult to insure is because the damage is so unpredictable.

• True

• False

Which of the following is a fundamental purpose of the principle of indemnity?

• to reduce moral hazard

• to minimize physical hazards

• to settle property insurance losses on a replacement cost basis

• to require deductibles in all property insurance policies

The principle of indemnity reduces morale hazard.

• True

• False

Under which of the following rules is actual cash value determined by taking into consideration all

relevant factors an expert would use to determine the value of the property?

• the circumstantial evidence rule

• the broad evidence rule

• the property indemnity rule

• the objective value rule

All of the following are exceptions to the principle of indemnity EXCEPT

• life insurance.

• valued policies.

• replacement cost property insurance.

• actual cash value property insurance.

Samʹs stereo was destroyed by a fire. The stereo cost $1200 when it was purchased, but a similar new stereo now costs $1800. Assuming the stereo was 50 percent depreciated, what is the actual cash value of Samʹs loss?

• $600

• $900

• $1200

• $1800

When must an insurable interest legally exist in life insurance?

• only at the time of the insuredʹs death

• only at the inception of the policy

• only at the time the beneficiary is paid

• both at the time of the insuredʹs death and at the inception of the policy

When must an insurable interest legally exist in property insurance?

• only at the time of the loss

• only at the inception of the policy

• only at the time the loss settlement process takes place

• both at the time of the loss and at the inception of the policy

Sueʹs office building was damaged by a fire caused by a careless tenant. After paying Sue for her loss, the insurance company sued the tenant to recover its loss. This suit is based on the principle of

• indemnity

• insurable interest.

• subrogation

• utmost good faith.

The indemnity principle is difficult to apply to life insurance because the actual cash value rule (replacement cost less depreciation) is meaningless in determining the value of a human life

• TRUE

• FALSE