Insurance Concepts Quiz

What is the principle of indemnity?

• To provide coverage for speculative risks

• To pay more than the value of the loss

• To ensure all claims are paid in full

• To restore the insured financially to where they were prior to the loss

Answer explanation

The principle of indemnity aims to restore the insured financially to their pre-loss condition, ensuring they do not profit from the loss. This is why the correct choice is to restore the insured financially to where they were prior to the loss.

What is the effect of a short-rate refund?

• The insurer keeps a little extra of the unearned premium as a penalty

• The deductible is waived

• The insured receives a full refund

• The policy is extended

Answer explanation

A short-rate refund means the insurer retains a portion of the unearned premium as a penalty for early cancellation, rather than providing a full refund. This compensates the insurer for the risk and administrative costs.

What is the result of a policy being non-renewed?

• No refund is owed

• The policy is automatically renewed

• Coverage is extended

• A refund is owed

Answer explanation

When a policy is non-renewed, it means it will not continue into the next term, and typically, no refund is owed for the remaining coverage period.

What is a moral hazard?

• A person who takes unnecessary risks

• A careless person

• A person with a bad credit score

• A physical condition that increases risk

Answer explanation

A moral hazard occurs when a person with a bad credit score may take on excessive risks, knowing they are less likely to face the consequences. This behavior exemplifies the concept of moral hazard.

What is the purpose of medical payments coverage in a homeowner’s policy?

• To increase the policy limits

• To prevent lawsuits by covering others' medical expenses

• To cover property damage

• To cover the insured's medical expenses

Answer explanation

Medical payments coverage in a homeowner's policy is designed to prevent lawsuits by covering others' medical expenses resulting from injuries on the insured property, ensuring prompt care without legal disputes.

What happens if an insured does not carry adequate limits under a coinsurance clause?

• The insured will receive a pro-rata refund

• The insurer will impose a coinsurance penalty or pay on an actual cash value basis

• The insurer will pay the claim in full

• The policy will be canceled

Answer explanation

If an insured does not meet the required limits under a coinsurance clause, the insurer will impose a coinsurance penalty or settle the claim based on actual cash value, reducing the payout.

What is a scheduled personal property floater?

• Coverage on an actual cash value basis for specific items

• Coverage for property in transit

• Coverage for all personal property

• Coverage for unscheduled personal property

Answer explanation

A scheduled personal property floater provides coverage on an actual cash value basis for specific items, ensuring that valuable possessions are insured individually rather than as part of a general policy.

What is the purpose of a deductible in an insurance policy?

• To cover all types of losses

• To provide additional coverage

• To make insurance more affordable and eliminate small claims

• To increase the policy limits

Answer explanation

The purpose of a deductible is to make insurance more affordable by lowering premiums and to eliminate small claims, as policyholders pay a portion of the loss before insurance coverage kicks in.

What does a named peril policy cover?

• All perils except those excluded

• Only perils listed in the policy

• All perils

• Only indirect losses

Answer explanation

A named peril policy specifically covers only the perils that are explicitly listed in the policy. This means that if a peril is not mentioned, it is not covered, making 'Only perils listed in the policy' the correct choice.

What is the definition of actual cash value?

• Replacement cost plus depreciation

• Current value plus depreciation

• Current value minus appreciation

• Replacement cost minus depreciation

Answer explanation

Actual cash value is defined as replacement cost minus depreciation. This means it reflects the current value of an item after accounting for wear and tear, making 'replacement cost minus depreciation' the correct choice.