Exercise Question, FIN360, part II
1. Deductibles are used for all of the following reasons EXCEPT
a. to reduce loss control efforts.
b. to reduce moral and attitudinal hazard.
c. to reduce premiums.
d. to eliminate small claims.
Answer: A
2. Which of the following statements about "open-perils" coverage is (are) true?
I. All losses are covered except those losses specifically excluded.
II. The burden of proof is on the insured to prove that a loss is covered.
a. I only
b. II only
c. both I and II
d. neither I nor II
Answer: A
3. The deductible used for automobile collision losses is an example of a(n)
a. calendar year deductible.
b. elimination period.
c. straight deductible.
d. aggregate deductible.
Answer: C
4. Which of the following statements about a calendar-year deductible (an aggregate deductible)
is (are) true?
I. It requires the insured to pay a specified amount of each claim regardless of when the
claim occurs during the year and regardless of any previous claims during the year.
II. It is used only in policies which cover direct property losses.
a. I only
b. II only
c. both I and II
d. neither I nor II
Answer: D
5. At what point in time must an insured meet the coinsurance requirement in a property
insurance policy in order to avoid having to pay a portion of the loss?
a. only at the time of loss
b. only at the time when the policy is issued
c. only at the time of policy application
d. both at the time when the policy is issued and at the time of loss
Answer: A
6. Janice insured a building valued at $200,000 for $150,000 under a property insurance policy
that included an 80 percent coinsurance provision. If a $32,000 insured loss occurs, how
much will Janice collect from her insurer, assuming no deductible?
a. $30,000
b. $32,000
c. nothing
d. $25,000
Answer: A
7. XYZ Company insured its building on a replacement cost basis for $450,000 under a
property insurance policy that included an 80 percent coinsurance clause. The building had a
replacement cost of $500,000 when it sustained a $50,000 loss. How much will XYZ
Company receive from its insurer, assuming no deductible applies?
a. $42,500
b. $45,000
c. $50,000
d. $56,250
Answer: C
8. Bill borrowed Linda's car with her permission. Both Bill and Linda have automobile liability
insurance with a $100,000 liability limit. While driving Linda's car, Bill negligently caused
an accident. The accident victim was awarded $80,000 in damages. How will this claim be
settled, assuming that the policy written by Linda's insurer is primary and Bill's insurance
coverage is excess?
a. Each insurer will pay $40,000 to settle the claim.
b. Linda's insurer will pay the entire $80,000 claim.
c. Bill’s insurer will pay the entire $80,000 claim
d. Neither insurer is liable as duplication of insurance voids coverage.
Answer: B
9. Dale and his wife Jenny are legally separated. The couple owns a vacation cabin. Dale
purchased a $25,000 property insurance policy on the cabin. Unaware that Dale had
purchased this coverage, Jenny purchased a $50,000 property insurance policy on the cabin.
While both policies were in force, a $12,000 covered loss occurred. The insurers agreed to
settle the claim on a pro rata basis. What is each insurer’s liability?
a. Dale’s insurer pays $3,000 and Jenny’s insurer pays $9,000.
b. Dale’s insurer pays $12,000 and Jenny’s insurer pays nothing.
c. Dale’s insurer pays nothing and Jenny’s insurer pays $12,000.
d. Dale’s insurer pays $4,000 and Jenny’s insurer pays $8,000.
Answer: D
10. Randy was driving through a wooded area late at night when a deer ran in front of his car.
Randy's car hit the deer, causing extensive damage to the car. Which of Randy's Personal
Auto Policy (PAP) coverages will cover the damage to Randy's car?
a. other-than-collision loss coverage
b. uninsured motorists coverage
c. collision coverage
d. property damage liability coverage
Answer: A
11. Which of the following statements is (are) true with respect to the Personal Auto Policy
(PAP)?
I. Your PAP covers you while you are driving in Mexico.
II. In addition to paying up to the limit of liability if the insured is negligent, the insurer also
pays legal defense costs.
a. both I and II
b. II only
c. I only
d. neither I nor II
Answer: B
12. All of the following are exclusions under the liability coverage of the Personal Auto Policy
(PAP) EXCEPT
a. intentional injury.
b. temporary substitute vehicles.
c. liability arising while using the vehicle as a taxi.
d. vehicles used in the automobile business.
Answer: B
13. After you have been involved in an auto accident, you should do all of the following
EXCEPT
a. admit fault if you believe you are at fault.
b. exchange your name, address, and insurance information with the other driver.
c. determine if anyone is injured and call an ambulance if necessary.
d. promptly notify your insurer of the accident.
Answer: A
14. Which of the following statements is (are) true with respect to the medical payments
coverage of the Personal Auto Policy (PAP)?
I. Medical payments benefits are paid regardless of fault.
II. If the insured negligently injures another driver while operating the insured auto, injuries
to the other driver are paid under the insured’s medical payments coverage.
a. both I and II
b. II only
c. I only
d. neither I nor II
Answer: C
15. Helen carries liability limits of 50/100/25 under her Personal Auto Policy (PAP). Jason
carries liability limits of 100/300/50 under his PAP. Jason borrowed Helen’s auto with her
permission. While driving Helen’s car, Jason caused an accident in which the driver of the
other car suffered bodily injuries totaling $80,000. How will this claim be settled?
a. Helen’s insurer will pay $40,000 and Jason’s insurer will pay $40,000.
b. Helen’s insurer will pay $80,000.
c. Helen’s insurer will pay $50,000 and Jason’s insurer will pay $30,000.
d. Jason’s insurer will pay $80,000.
Answer: C
16. Carl lost control of his vehicle on an icy road. His car slid off the road and hit a tree. The
physical damage to Carl’s vehicle will be covered under which of Carl’s Personal Auto
Policy (PAP) coverages?
a. collision coverage
b. property damage liability coverage
c. uninsured motorist coverage
d. other-than-collision coverage
Answer: A
17. Uninsured motorists coverage under the Personal Auto Policy (PAP) pays for the bodily
injury of an insured in all of the following situations EXCEPT:
a. bodily injury caused by a business vehicle
b. bodily injury caused by a hit-and-run driver
c. bodily injury caused by a driver whose insurance company is insolvent
d. bodily injury caused by a driver who does not have liability insurance
Answer: A
18. If your covered auto is damaged in a collision, what is the insurer’s liability for the damage
under the Personal Auto Policy (PAP)?
a. the replacement cost of the vehicle
b. the lesser of the actual cash value of the loss or the amount necessary to repair or
replace the vehicle
c. the amount necessary to repair the vehicle
d. the greater of the actual cash value of the loss or the amount necessary to repair or
replace the vehicle
Answer: B
19. All of the following statements regarding “Part D: Coverage for Damage to Your Auto”
under the Personal Auto Policy are true EXCEPT
a. Part D coverages also apply to certain nonowned autos.
b. Part D coverages only apply if the insured was not responsible for causing an accident.
c. Part D provides a supplementary payment for temporary transportation expenses.
d. Part D coverages are typically written with a deductible.
Answer: B
20. Chuck just purchased a new sports car. His previous car, a late model sedan, was destroyed
in an accident that Chuck caused because he was speeding. Chuck’s auto insurance consists
of liability coverage, medical payments coverage, uninsured motorists coverage, and physical
damage coverage written without a deductible. Chuck just learned that his auto insurance on
the new vehicle will cost over three times what he was paying previously on the sedan. All of
the following will help Chuck reduce his premiums EXCEPT
a. driving the vehicle more miles every week.
b. improving his driving record by driving more safely.
c. driving a sedan instead of a sports car.
d. using a physical damage deductible.
Answer: A
21. Ken purchased a PAP with liability limits of 100/300/50, medical payments coverage, and
collision coverage. Ken fell asleep while driving late at night. He crossed the center line and
hit a car approaching from the other direction. The following losses occurred.
–The driver of the other car suffered $30,000 in bodily injuries.
–Ken's car sustained $5,000 in damages.
–Ken incurred $5,000 in medical expenses.
–The car that Ken hit was a total loss.
Which of Ken's Personal Auto Policy (PAP) coverages will cover the damage to the car that
Ken hit?
a. bodily injury liability
b. collision coverage
c. medical payments coverage
d. property damage liability
Answer: D
22. Under which type of no-fault auto insurance plan can an injured person sue a negligent driver
only if the bodily injury claim exceeds a dollar or verbal threshold?
a. add-on no-fault plan
b. modified no-fault plan
c. pure no-fault plan
Answer: B
23. Doe has the personal automobile policy with liability limits as follows: $25,000/$50,000 BI (bodily
injury) and $10,000 PD (property damage). Doe is held liable in an accident in which he must pay for
bodily injuries as follows: Person A, $15,000, Person B, $5,000, and Person C, $30,000. His
insurance company will reimburse him to the extent of
a. $25,000,
b. $30,000,
c. $45,000,
d. $50,000,
e. none of these.
Answer: C
24. Doe has the personal automobile policy with liability limits as follows: $25,000/$50,000 BI
(bodily injury) and $10,000 PD (property damage). Doe is held liable in an accident in which
he must pay for bodily injuries as follows: Person A, $15,000, Person B, $35,000. His
insurance company will reimburse him to the extent of
a. $25,000,
b. $35,000,
c. $40,000,
d. $50,000,
e. none of these.
Answer: C
25. Doe has the personal automobile policy with liability limits as follows: $25,000/$50,000 BI
(bodily injury) and $10,000 PD (property damage). Doe is held liable in an accident in which
he must pay for bodily injuries as follows: Person A, $55,000. His insurance company will
reimburse him to the extent of
a. $25,000,
b. $55,000,
c. $30,000,
d. $50,000,
e. none of these.
Answer: A
26. Mike took his friend, Donna, out to dinner on her birthday. While driving Donna home, Mike
became ill and asked Donna to drive. While driving Mike’s car, Donna negligently injured
another motorist when she failed to stop at a red light. Mike has an auto insurance policy
with a liability insurance limit of $250,000 per person for bodily injury liability. Donna has a
similar auto insurance policy with a liability limit of $100, 000 per person.
If a court awards a liability judgment of $100,000 against Donna, how much, if any, will
each insurer pay?
a.
b.
c.
d.
Mike’s insurer pays $100,000; Donna’s insurer pays nothing
Donna’s insurer pays $100,000; Mike’s insurer pays nothing
Mike’s insurer pays $50,000; Donna’s insurer pays $50,000
Mike’s insurer pays $71,429; Donna’s insurer pays $28,571
ANSWER: A
27. James is driving Hanna’s car with permission. He runs a stop sign and hits another car. The
damage to the other car is $20,000. James and Hanna both have a personal automobile
insurance policy with liability coverage limits as follows: $25,000/$50,000 BI (bodily injury)
and $15,000 PD (property damage). How will the liability coverage between these two
policies most likely be coordinated?
a. James’s policy pays $20,000
b. Hanna’s policy pays $15,000, James’s policy pays $5,000
c. Hanna’s policy pays $20,000
d. James’s policy pays $15,000, Hanna’s policy pays $5,000
e. James’s and Hanna’s policy each pays $10,000
ANSWER: B
28. Martin has an accident with four people (including himself) sitting in his car, and he has a
PAP policy with medical payment coverage limit of $5,000. The maximum his medical
payment coverage will pay for this accident is
a. $5,000,
b. $15,000,
c. $20,000.
ANSWER: C
29. All of the following factors affect the premium you are charged for auto insurance EXCEPT
a. your age and marital status.
b. the territory where you live.
c. your driving record.
d. your ethnic heritage.
Answer: D
30. Which of the following statements is (are) true with respect to shopping for auto insurance?
I. You should consider dropping liability insurance once your car is six or more years old.
II. You should purchase only the minimum limits of liability insurance necessary to satisfy
your state’s financial responsibility law.
a. II only
b. both I and II
c. I only
d. neither I nor II
Answer: D
31. All of the following are covered under "Coverage D: Loss of Use" of the Homeowners 3
policy EXCEPT
a. living expenses if the home cannot be used because of loss from an insured peril.
b. loss of rent if part of the premises rented to a boarder cannot be used.
c. living expenses if the home cannot be used because of order of civil authority.
d. the cost to repair or replace property destroyed by a covered peril.
Answer: D
32. Which of the ISO homeowners insurance forms is designed specifically for renters?
a. Homeowners 3
b. Homeowners 6
c. Homeowners 4
d. Homeowners 2
Answer: C
33. Which of the following statements is (are) true with respect to perils covered under an
unendorsed ISO Homeowners 3 policy?
I. The dwelling and other structures are covered for all direct physical losses except those
losses that are specifically excluded.
II. Personal property is covered on a named-perils basis.
a. I only
b. both I and II
c. II only
d. neither I nor II
Answer: B
34. All of the following losses are covered under Section I of the ISO Homeowners 3 policy
EXCEPT
a. damage to personal property.
b. cost of a hotel room after a fire damaged the home.
c. personal liability of the homeowner.
d. damage to the dwelling.
Answer: C
35. Which of the following statements is (are) true with regard to the recovery basis under an
unendorsed ISO Homeowners 3 policy?
I. Losses to the dwelling and other structures are settled on an actual cash value basis.
II. Personal property losses are settled on the basis of replacement cost.
a. I only
b. II only
c. both I and II
d. neither I nor II
Answer: D
36. All of the following losses to the dwelling are covered under an unendorsed ISO
Homeowners 3 policy EXCEPT
a. damage caused by an earthquake.
b. damage caused by a falling tree.
c. damage caused by a tornado.
d. damage caused by a fire.
Answer: A
37. Harold's home has a replacement value of $200,000. Harold insured the home for $150,000
under an unendorsed Homeowners 3 policy. The roof of Harold's home was damaged by a
windstorm. The replacement cost of the damaged roof is $16,000. The actual cash value of
the loss is $12,000. How much will Harold receive from his insurer to settle this claim?
(assume no deductible)
a. $12,600
b. $16,000
c. $15,000
d. $12,000
Answer: C
38. Section II of the Homeowners 3 policy covers
a. personal liability and medical payments to others.
b. personal property owned by the named insured.
c. loss of use.
d. the dwelling and other structures.
Answer: A
39. All of the following are excluded from coverage under Section II of the Homeowners 3
policy EXCEPT
a. liability arising out of business activities.
b. bodily injury liability on premise.
c. intentional injury liability.
d. liability arising out of operation of a motor vehicle.
Answer: B
40. Which of the following statements is (are) true with respect to the Personal Liability and
Medical Payments to Others coverages under the Homeowners 3 policy?
I. Personal Liability Coverage applies if the named insured caused bodily injury or property
damage as a result of his or her negligence.
II. It is not necessary to prove that the named insured was negligent for Medical Payments to
Others benefits to be paid.
a. I only
b. neither I nor II
c. both I and II
d. II only
Answer: C
41. Bernice, a homeowner, is concerned that if she libels or slanders someone, she could be held
liable. How can Bernice protect herself against this legal liability?
a. purchase an unendorsed Homeowners 3 policy
b. purchase a Homeowners 3 policy and add a personal injury endorsement
c. purchase a Homeowners 3 policy and add a scheduled property endorsement
d. purchase a Homeowners 3 policy and add a bodily injury endorsement
Answer: B
42. All of the following are additional coverages under Section II of the homeowners policy
EXCEPT
a. damage to the homeowner’s personal property.
b. legal defense costs.
c. damage to the property of others.
d. first-aid expenses.
Answer: A
43. Which of the following statements is (are) true with respect to Section II of the homeowners
policy?
I. The personal liability limit applies on a per-occurrence basis.
II. The medical payments coverage applies to the named insured and members of the named
insured's household.
a. I only
b. II only
c. neither I nor II
d. both I and II
Answer: A
44. Betty's personal property is insured for $100,000 under her Homeowners 3 policy. If she
usually keeps some personal property at a mountain cabin that she owns, how much coverage
for this property is available under her homeowners policy?
a. $10,000
b. $20,000
c. $40,000
d. $50,000
Answer: A
45. Which of the following losses would be covered under the personal liability coverage
(Coverage E) of an unendorsed Homeowners 3 policy?
a. liability arising out of the manufacture and sale of illegal narcotics
b. liability arising out of damage to a neighbor's property that occurred over time
c. liability arising out of a business operated in the home.
d. liability arising out of bodily injury to an insured
Answer: B
46. Which of the following losses would be covered under the medical payments coverage of the
Homeowners 3 policy?
a. injuries to another person arising out of the insured's negligent operation of a vehicle
b. medical payments resulting from the transmission of a communicable disease
c. injury to a resident employee at the insured's home
d. workers compensation medical payments
Answer: C
47. All of the following losses are covered under Section II of an unendorsed Homeowners 3
policy EXCEPT
a. The homeowner accidentally dropped a bowling ball, injuring another bowler's foot.
b. A baby sitter slipped and fell at the insured's home, breaking her ankle and incurring
medical expenses.
c. The insured slandered a city council member at a city council meeting.
d. The insured's dog bit a neighbor.
Answer: C
48. Which of the following situations would be covered under Section II of a homeowners policy?
I. The insured is sued by his girlfriend because he infected her with the AIDS virus.
II. The insured's son is sued after a friend suffered serious injury as a result of using illegal
drugs sold to him by the son.
a. I only
b. II only
c. both I and II
d. neither I nor II
Answer: D
49. From an economic perspective, “premature death” is defined as
a. death before reaching life expectancy.
b. death with outstanding financial obligations.
c. death before reaching age 65.
d. death before both parents have died.
Answer: B
50. Some term insurance policies permit the policyowner to exchange the policy for a cash value
policy without having to demonstrate insurability. Such term insurance policies are described
as
a. ordinary.
b. convertible.
c. renewable.
d. decreasing.
Answer: B
51. All of the following are characteristics of variable life insurance EXCEPT
a. the cash value and death benefit vary with investment performance.
b. the policyowner selects where the cash value is invested.
c. flexible premium payments.
d. cash values are not guaranteed.
Answer: C
52. Lynn, age 32, would like to purchase permanent life insurance. She is concerned that
premiums may become a burden after she retires. Given her coverage preferences, which of
the following life insurance policies is the best policy for Lynn to purchase?
a. endowment life insurance
b. limited-payment whole life insurance
c. ordinary whole life insurance
d. renewable term insurance
Answer: B
53. Which of the following statements is (are) true with respect to universal life insurance?
I. Universal life insurance provides premium payment flexibility for the policyowner.
II. Universal life insurance permits the policyowner to select where the cash value is invested.
a. both I and II
b. neither I nor II
c. I only
d. II only
Answer: C
54. All of the following life insurance policies develop a cash value EXCEPT
a. term life insurance.
b. universal life insurance.
c. variable life insurance.
d. whole life insurance.
Answer: A
55. Which of the following statements about variable universal life insurance is (are) true?
I Variable universal life insurance has fixed premium payments.
II. Variable universal life insurance allows the policyowner to decide where the premiums
are invested.
a. I only
b. II only
c. both I and II
d. neither I nor II
Answer: B
56. Which of the following $100,000 whole life insurance policies, issued by the same company
to a man age 32, would require the highest first-year premium?
a. continuous premium (ordinary) life
b. whole life paid-up at 65
c. 10-payment whole life
d. 20-payment whole life
Answer: C
57. Ann is considering the purchase of a life insurance policy with these characteristics: flexible
premium payments, the insurance and savings components are separate, the interest rate
credited to the savings is tied to a market interest rate but a minimum rate is guaranteed, and
a monthly administrative fee is charged. Ann is considering buying
a. whole life insurance.
b. variable life insurance.
c. universal life insurance.
d. current assumption whole life.
Answer: C
58. Michael wants to make sure that life insurance proceeds are available to pay his outstanding
mortgage balance if he dies. He purchased a type of life insurance in which the amount of
coverage gradually declines, just as his outstanding mortgage balance gradually declines.
This type of life insurance is called
a. convertible term life insurance.
b. decreasing term insurance.
c. renewable term insurance.
d. universal life.
Answer: B