CPCU 551 Exam Questions and Answers: Risk Management and Insurance Principles, Exams of Commercial Law

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An example of an administrative expense that can minimize the cost of risk is - ANSWERRisk management consulting The availability of funds to pay for losses is most important to organizations when - ANSWEROperations have been disrupted A self-supporting solid wall that prevents a fire from passing through or around it is a - ANSWERFire wall A building with concrete exterior walls and wooden support beams as defined by Insurance Services Office, Inc. (ISO) - ANSWERJoisted masonry The analysis step of the risk management process involves considering the four dimensions of a loss exposure. If any of these dimensions of loss exposure analysis involve empirical distributions developed from past losses, what needs to be determined? - ANSWERThe credibility of the data being used In theory, liability losses are limited only by the - ANSWERDefendant's total wealth Customer Mary gave dry cleaner Ike her fur coat so he could remove a large stain. Ike could not eliminate the stain so he asked restoration specialist Peter to attempt to remove it. The bailor in this scenario is - ANSWERMary Jack and Susan own and manage a hotel. They are concerned about their responsibility for the property of their guests and whether they have an insurable interest in that property and thus could buy insurance to cover their responsibility. Most courts would hold that they do have an insurable interest in their guests' property based on the legal basis of - ANSWERExposure to legal liability What is the primary advantage of using retention as a risk financing measure to help an organization meet its risk financing goals? - ANSWERManaging the cost of risk One way of jointly considering frequency and severity is to combine both frequency and severity into - ANSWERA total claims distribution What type of captive typically operates as a formalized retention plan rather than a transfer measure? - ANSWERSingle-parent captive What is correct with respect to retention's ability to meet risk financing goals? - ANSWERRetention enables an organization to manage its cost of risk

What is correct with respect to retrospective rating plans? - ANSWERAn organization must have a substantial insurance premium to benefit from retrospective rating What is correct with respect to the timing dimension in the analysis of loss exposures? - ANSWERMoney held in reserve to pay for a loss can earn interest until the actual payment is made Each insured member of a pool contributes premium based on its loss exposures. In exchange, - ANSWERThe pool pays for each insured's covered losses Ships and their cargoes represent a special category of property insurance. What is correct with respect to this category? - ANSWEREven more than other property, ocean cargoes fluctuate in value according to their location In insurance terminology, equipment such as tractors, bulldozers, road graders, front- end loaders, and forklifts designed primarily for off-road use are considered to be - ANSWERMobile equipment Sandi purchased a $130,000 home three years ago and took out a $100,000 mortgage. Today her home is worth $150,000 and she still owes $55,000 on the home. The mortgage holder has an insurable interest of how much in Sandi's home? - ANSWER$55, A hazard is defined as - ANSWERAnything that increases the frequency or the severity of a loss Charlotte, Chloe, and Jessica have concurrent ownership in a restaurant, each owning one third. Their combined interests equal the value of the restaurant. If one of them should die, her share would pass to her heirs. This type of ownership is referred to as - ANSWERTenancy in common Securing outside materials and maintaining roof tie-downs are risk control measures particularly important for the peril of - ANSWERWindstorm One dimension of analyzing loss exposures is timing of losses. The timing of losses is significant because - ANSWERMoney held in reserve to pay for a loss can earn interest until the actual payment is made A risk financing goal is - ANSWERManaging uncertainty of loss outcomes When analyzing loss exposures, total dollar losses can be determined by multiplying loss frequency by - ANSWERLoss severity In loss analysis, the Prouty approach primarily involves - ANSWERLoss frequency and severity

What is true regarding the risk financing goal of maintaining an appropriate level of liquidity? - ANSWERBoth the amount of cash to pay for retained losses and the timing of the payments are important in deciding on an appropriate level of liquidity. Captive insurers are - ANSWERSometimes used to insure property loss exposures that are difficult to insure in the primary market Jeremy is a bailee who insures bailor Sam's property for Sam's benefit. Jeremy has an insurable interest in the property, but if Sam's property becomes damaged or destroyed, Jeremy - ANSWERPays any awarded insurance proceeds to Sam Generally, funds used to pay for property losses are - ANSWERDisbursed relatively soon after the losses occur Bentley Organization has a retrospective rating plan. It experiences $1.5 million in losses subject to the policy limit; however, Bentley's adjusted premium is limited to $ million. This is likely because - ANSWERBentley has a maximum premium of $1 million Many businesses have refrigeration equipment, production equipment, steam boilers, and air condition systems. These are all examples of - ANSWERBoilers and machinery Spouses Ed and LeeAnn own a home. If Ed dies, LeeAnn will become the sole owner of the house. Both Ed and LeeAnn have an insurable interest in the property equal to the full value of the property. This is a - ANSWERTenancy by the entirety Self-insurance is particularly well-suited for financing losses that are - ANSWERPaid out over a period of time With respect to self-insurance as a risk financing measure, - ANSWERIt is often used to cover workers compensation and other loss exposures that have claim payouts that extend over time When liability is assumed under a hold-harmless agreement, the indemnitor may be required to demonstrate proof of financial responsibility. What is often used to demonstrate this proof of financial responsibility? - ANSWERCertificate of Insurance "Merchandise, raw materials and in-process or finished goods" is the Building and Personal Property Coverage Form's (BPP) definition for - ANSWERStock Under which provision of the Building and Personal Property Coverage Form (BPP) is the maximum payment $10,000 or five percent of the building limit, whichever is less? - ANSWERIncreased Cost of Construction additional coverage Worldwide Warehousing has a Building and Personal Property Coverage Form (BPP) with a $1,000,000 limit on a building and a $5,000 deductible. The warehouse suffers a $1,010,000 fire loss. What amount will Wordwide's insurer pay? - ANSWER$1,000,

danger of collapse does not constitute a covered collapse-there must be an abrupt falling down or caving in of the building or part of the building. In the Causes of Loss - Broad Form, the weight of snow, ice, or sleet cause of loss - ANSWERDoes not cover damage to personal property in the open The BPP lists several classes of property or kinds of property losses that - ANSWERDo not qualify as covered property Billy owns a baseball souvenir store in Cooperstown, NY. He insured his store under a BPP Form with a $275,000 limit and a $1,500 deductible. A large fire in the store caused significant damage amounting to $310,000 in covered damages. How much would Billy's insurer pay under his BPP? - ANSWER$275, The deductible is subtracted from the loss, not the limit. Damage to the interior of the building caused by melting ice, sleet, or snow on the building or structure is covered under - ANSWERThe Causes of Loss - Special Form Personal property owned by the insured and used to maintain or service the building or its premises is - ANSWERIncluded in the BPP's definition of "building" Which items, owned or installed by the insured, is covered under the BPP form as business personal property? - ANSWERBuilding contents such as furniture An exclusion contained in the Causes of Loss - Basic Form eliminates coverage for damage caused by - ANSWERMechanical breakdown, including rupture or bursting caused by centrifugal forces Property in Transit is an Additional Coverage Extension covered under the - ANSWERCauses of Loss - Special Form but under the Causes of Loss - Broad Form The Non-Owned Detached Trailers coverage extension of the BPP Form - ANSWERPermits the insured to extend "your business personal property" to include trailers leased to expand office space or to provide additional storage or work areas Except for limited off-premises coverage, coverage for business personal property applies only when - ANSWERThe property is located in or on the described building or in the open (or in a vehicle) within 100 feet of the building or structure or within 100 feet of the premises, whichever is greater Damage due to weight of snow is covered under - ANSWERThe broad form but not under the basic form Under the Basic Form, there is coverage for building damage caused by - ANSWERBurglars breaking in or exiting the insured's property

With respect to the BPP Form, some property, such as building foundations below the lowest basement floor, is - ANSWERExcluded because it may not be subject to loss by the perils insured against Due to coverage extensions, it is possible for - ANSWERThe total payment for one loss to exceed the policy limit Under the BPP Form, the insurer is not obligated to pay anything to the insured unless - ANSWERThe loss exceeds the deductible The Special Form provides coverage for - ANSWERDirect physical losses other than those that are specifically excluded Under the Basic Form, Explosion includes - ANSWERThe explosion of gases or fuel in a furnace or flue The Causes of Loss - Broad Form differs from the Causes of Loss - Basic Form in that - ANSWERThe Broad Form provides coverage for loss caused by collapse of a building or personal property resulting from specified perils Alterations or additions made to the building at the expense of an insured who does not own the building and who cannot legally remove them are referred to as - ANSWERImprovements and betterments Ace Accounting has a Building and Personal Property Coverage Form (BPP) through Delta Insurance with a limit of $300,000 on business personal property. The insured's computer system is valued at $150,000 and it is insured for $100,000 under a separate electronic data processing (EDP) equipment policy issued by Omicron Insurance. The computer system is totally destroyed by fire, a cause of loss insured under both policies. How would the loss would be settled? - ANSWERBecause Omicron's policy more specifically describes the computer system, it must pay its limit before Delta pays anything; Delta would pay the remaining $50,000. Sherman's Shoe Store files an insurance claim for damage to stock. The claim representative realizes that Sherman's property is covered under two separate coverages of its commercial policy. With respect to the Insurance Under Two or More Coverages condition of the Commercial Property Conditions Form, it states that - ANSWERThe total payment under all applicable coverage parts is limited to the actual amount of the loss The Examination of Books and Records condition - ANSWERPermits the insurer to examine the insured's records (via verification of property and business income values necessary for premium rating purposes) to determine the final premium

Drake's Dry Cleaners damages $800 worth of linen tablecloths owned by Christopher's Cafe. When Christopher asks for reimbursement, Drake tells Christopher that according to language on the service slip, it is not liable for the damage. Christopher files a claim with its insurance company for the damaged tablecloths. Which one of the following statements is the purpose of the No Benefit to Bailee condition of the Commercial Property Conditions Form? - ANSWERIt reinforces the insurer's right of subrogation against the bailee An insured is reviewing the commercial package policy (CPP) to determine which conditions apply to all coverage parts in the policy. One of those conditions states that - ANSWERThe insurer has the right to do an on-site inspection of the insured's books and records Cameron has a Commercial Package Policy (CPP) that has a Building and Personal Property Coverage Form (BPP) with a Causes of Loss - Broad Form covering his building with a $750,000 limit. A tropical storm struck Cameron's building and the strong winds tore most of the shingles from the building's roof and shattered multiple windows with flying debris. The total amount of damages was $20,000 for the windows and $20,000 for the shingles. How much will Cameron's insurer pay for damage to his windows and shingles? - ANSWER$40, Windstorm is a covered cause of loss for building damage, which includes the roof and windows. No exclusions apply. With respect to the Mortgageholder condition of the BPP Form, - ANSWERThe insurer is sometimes obligated to make a loss payment to the mortgage holder even though it has denied coverage, for example, to an insured who has committed arson. Curly Company, a candy manufacturer, produces candy from a brand new factory, warehouses inventory in two buildings at other locations, and sells direct to the public from three retail locations. The risk manager for Curly is concerned about being able to track inventory values at the various locations. What should the manager consider to provide maximum coverage with a minimum of valuation management? - ANSWERBlanket Insurance coverage An insured chooses the "Agreed Value" option for its Building and Personal Property Coverage Form (BPP). The agreed value for the property is $100,000 and the limit of insurance is $120,000. The building is totally destroyed by a covered cause of loss. At the time of the loss, the value of the building was $130,000. Ignoring any deductible and rounded to the nearest $1,000, the insurer would pay - ANSWER$120, Because the limit exceeds the agreed value, there is no penalty

Under the Legal Action Against Us condition of the CPP, if the insured wishes to bring legal action against the insurer, he or she must do so within - ANSWERTwo years after the date on which the direct physical loss occurred Under the BPP Form, Insureds who have selected the replacement cost option - ANSWERMay also elect to have the personal property of others valued at replacement cost With respect to the Vacancy condition of the BPP Form, - ANSWERThe conditions under which a building is considered to be vacant are different for a tenant than for an owner Peter has a Commercial Package Policy (CPP) that has a Building and Personal Property Coverage Form (BPP) with a Causes of Loss - Broad Form covering his building with a $750,000 limit. A tropical storm struck the area near Peter's building and the strong winds tore most of the shingles from the building's roof and shattered multiple windows with flying debris. An outside fixture also sustained heavy damage due to the wind. The total amount of damages was $40,000 for the windows and shingles; and $10, for the outside fixture. How much will Peter's insurer pay for damage to his outside fixture? - ANSWER$10, The BPP's definition of Building includes outdoor fixtures and windstorm is a covered cause of loss in the Broad Form. Outdoor fixtures do not fall under the Outdoor Property coverage extension, which excludes coverage for windstorm damage. The Control of Property condition of the Commercial Property Conditions Form states that - ANSWERCoverage under the policy will not be affected by acts or omissions of persons other than the insured, if the others are not acting under the direction or control of the insured Upon submitting a claim to its insurer, an insured discloses that he has a written waiver of recovery against the other party. The insured asks the insurer how the waiver will impact the settlement of his claim. With respect to the Transfer of Rights of Recovery Against Others to Us condition of the CPP, a Waiver of recovery against any other party - ANSWERMay be given by the insured, provided the waiver is made in writing before the loss occurs The cost to replace property with new property of like kind and quality less depreciation is referred to as the - ANSWERActual cash value While discussing a claim for an insured, a claim representative and agent realize that there are inconsistencies between the information given to the agent when the insured

Acme Manufacturing has a large number of locations with its building and contents values that change periodically and are difficult to assess at each location. What addition to the Building and Personal Property Coverage Form (BPP) would be most beneficial? - ANSWERBlanket insurance coverage The Loss Payment condition of the BPP Form states that - ANSWERRegardless of the value of the loss, the insurer will pay no more than the insured's financial interest in the covered property Inflation Guard optional coverage - ANSWERAutomatically increases the limit of insurance by the percentage of annual increase shown in the declarations Under an ISO Commercial Package Policy, the insurer reserves the right to examine and audit the insured's books and records related the policy at any time during the policy period and for up to how many years after the termination of the policy? - ANSWERThree An advantage for using blanket insurance over specific insurance is that - ANSWERBlanket insurance would provide additional debris removal coverage at any single location if needed Who can cancel the ISO commercial package policy by mailing or delivering written notice of cancellation? - ANSWERThe first named insured on the declarations page Agreed Value optional coverage is often elected by risk averse firms in order to - ANSWERAlleviate the risk of not complying with the Coinsurance condition A manufacturer has three locations that are not all subject to any one single loss. The amount of stock at each location varies as does the total amount of stock for the three locations combined. The best commercial property coverage option for the manufacturer would be to - ANSWERCombine the agreed value option with blanket insurance The Cancellation provision in the ISO Common Policy Conditions is nearly always - ANSWERSuperseded by state law Wholesale Merchandiser leases five warehouses, each in a different city, to supply retail customers in each city with timely service. The average value of the merchandise at each warehouse is $750,000. What blanket insurance limit would best suit this insured's needs while minimizing the cost of over-insuring? - ANSWERBlanket $3,375,000 limit (5 x $750,000) x 90% = $3,375, The six Common Conditions in the commercial package policy (CPP) are - ANSWER- Cancellation

• Changes

• Examination of Books and Records
• Inspections and Surveys
• Premiums
• Transfer of Rights and Duties Under This Policy The Basic Form perils include - ANSWER- Fire
• Lightning
• Windstorm
• Hail
• Smoke
• Theft
• Vandalism and malicious mischief
• Explosion
• Riot or civil unrest
• Damage from vehicles or aircrafts
• Volcanic eruption In addition to the perils covered under the Basic Form, the Broad Form includes - ANSWER- Falling objects
• Artificial electrical currents
• Accidental water from mechanicals or appliances
• Sudden and unexpected cracking, tearing, or burning of HVAC systems
• Weight of ice, snow, or sleet
• Freezing of appliances, plumbing, or HVAC systems Regarding the use of deductibles in the Equipment Breakdown Protection Coverage Form, - ANSWERThe deductibles may be combined for two or more coverages Under equipment breakdown coverage, what meets the definition of a "breakdown"? - ANSWERFailure of vaccum equipment The Legal Liability Coverage Form differs from other commercial property forms since - ANSWERIt provides liability coverage for damage to buildings of others in the insured's care if the insured is legally liable What is true regarding the Standard Property Policy (SPP) and the Building and Personal Property Coverage Form (BPP) regarding the increase in hazard provision? - ANSWERThe SPP does have it, but the BPP doesn't An equipment breakdown loss associated with an air condition and refrigeration system includes - ANSWERA compressor valve failure Retail Store insures its business personal property under a Building and Personal Property Coverage Form (BPP) with a value reporting form. The limit of insurance is $1,000,000 and the deductible is $5,000. On December 21, a fire destroyed the store and the personal property. The store's last reported value on November 30 was

Greene Cafe rents retail space on the first floor of an office building. Greene Cafe's CGL Coverage Form provides "fire legal liability" or "damage to premises rented to you". The "fire legal liability" coverage - ANSWERProvides limited coverage for liability arising out of the part of the building rented to Greene In the BPP Form, the peak season endorsement - ANSWERProvides different amounts of insurance for certain time periods during the policy period In an equipment breakdown policy, explosion caused by excessive internal pressure of steam is a breakdown loss than can occur to a - ANSWERBoiler In equipment breakdown insurance, one common type of loss to electrical equipment is

• ANSWERBearing failure in rotating equipment Green Wholesale Food Company suffers a loss as a result of the local utility's electrical transformer shutting off electrical power to the insured premises for several days. The loss includes damage to raw materials and loss of business income. Under their Equipment Breakdown Protection Coverage Form, the insuring agreements that cover Green's losses are - ANSWERSpoilage Damage and Utility Interruption An unendorsed Builders Risk Coverage Form is designed to - ANSWERBe issued at policy inception in an amount of insurance equal to the building's completed value In an equipment breakdown policy, the insurer agrees to pay for direct damage to covered property under the Property Damage insuring agreement. What is true regarding the insuring agreement? - ANSWERIt includes property under the insured's care, custody, or control for which the insured is legally liable Gilbert Industries was considering using the Legal Liability Coverage Form (LLCF) to cover a loss exposure. When using the LLCF, what should be considered when determining the appropriate limit of insurance? - ANSWERThe maximum possible loss, including loss of all covered property of others in Gilbert's care, custody and control - including damages for loss of use. Regina often recommends the Value Reporting Form to insureds in the manufacturing and retail industries. What is an advantage to the Value Reporting Form? - ANSWERValue reporting is an ideal way to insure property values that fluctuate substantially An equipment breakdown protection form can have internal limitations that apply to certain types of losses. Which one of the following losses is subject to such a limitation?
• ANSWERSpoilage damage resulting from ammonia contamination

The Equipment Breakdown Protection Coverage Form insuring agreement under which the insurer agrees to pay reasonable costs the insured incurs in stamping merchandise with the word "Salvage" is - ANSWERBrands and Labels When comparing coverage of the Commercial General Liability (CGL) Coverage Form with the Legal Liability Coverage Form (LLCF), what difference becomes apparent? - ANSWERThe minimum limit for fire legal liability coverage of $100,000 applies to the CGL form only The endorsement that covers the fluctuating values of business personal property providing differing amounts of insurance for certain time periods is called the - ANSWERPeak Season Limit of Insurance endorsement In equipment breakdown insurance, a fired pressure vessel constructed of cast iron or steel in which water is heated to produce steam or hot water is a - ANSWERBoiler The Standard Property Policy (SPP) - ANSWERCovers buildings and personal property on restricted terms An example of an equipment breakdown loss for office equipment and systems is - ANSWERElectrical arcing The type of deductible most often used for spoilage coverage is - ANSWERThe percentage of loss deductible The underwriter for Goshen Mutual required that the Limitation on Coverage for Roof Surfacing endorsement be added to an insured's Building and Personal Property Coverage Form at renewal. When a covered loss occurs, the Limitations on Coverage for Roof Surfacing endorsement covers the - ANSWERRoof's actual cash value immediately before the loss occurred The owners of BB Hotel wanted to make sure that they were covered for damage to the air conditioning and refrigeration equipment. In equipment breakdown insurance, air conditioning and refrigeration equipment includes components such as - ANSWERCoils Henry and Company carriers the Equipment Breakdown Protection Coverage Form including all ten insuring agreements. If the company's steam boiler explodes, what type of loss, caused by the steam boiler explosion, will be covered by Henry's coverage form? - ANSWERDamage to the company's business personal property KMS Wholesale experience a spoilage loss when the refrigeration system in its warehouse failed. What type of loss would be covered by the Spoilage Damage insuring agreement in KMS' equipment breakdown policy? - ANSWERSpoilage damage to finished products while in storage

Jancey has made a claim for a fire that destroyed an office complex causing $15 million in damage. What dollar amount will each of the insurance companies participation in the layered property program pay toward the $15 million loss? - ANSWERA pays $750,000; B pays $10 million; C pays $4 million; D pays nothing What is a pricing advantage of a layered property program? - ANSWERThe combine premium of layered programs is often less than with a single policy with coinsurance The Browns live in a. community that has recently become eligible for the NFIP. A community that becomes eligible for NFIP participation is placed in the emergency program until - ANSWERThe required floodplain management plan and necessary Rate Maps are developed The Davis Corporation (DC) owns a building covered by the ISO EQ and Volcanic Eruption Endorsement With Percentage Deductible with a 10% deductible. The building is valued at $1.2 million and insured for $1 million, which satisfies the coinsurance requirement. An earthquake causes $250,000 damage to DC's building. How much will DC receive in compensation for the loss? - ANSWER$150, Under the Earthquake and Volcanic Eruption Endorsement With Percentage Deductible form, the percentage deductible applies to the limit of insurance applicable to the property that sustained loss or damage. A DIC policy might exclude basic perils in order to - ANSWERBe classified as an inland marine policy allowing greater flexibility The NFIP consists of two different programs in flood prone areas. What is true regarding the programs? - ANSWERThe emergency program has subsidized rates but limited amounts of insurance Under the ISO Flood Coverage Endorsement, of the following losses from an adjacent river, which is not covered? Silt and debris on the restaurant floor Boat pier washed away Chairs and tables housed in the fully enclosed carport lost in the river - ANSWERLoss to the Boat Pier since it is over water Eastwind Incorporated purchased an EQ and Volcanic Eruption Endorsement (Sub- Limit Form With Percentage Deductible) to attach to a BPP Form. The insured building has an insurable value of $3,000,000. The endorsement is subject to a 10% deductible and a sublimit of $2,000,000. In the event of a covered $450,000 loss, the amount payable is - ANSWER$150, $450,000 - ($3,000,000 x .10) = $150,

The NFIP General Property Form covers direct physical loss caused by "flood" at the premises listed in the declarations form. An example of an exclusion under this policy is

• ANSWERLoss by flood to contents stored in a basement The EQ and Volcanic Eruption Coverage Endorsements (Sub-Limit Form) contains a provision entitled "Ensuing Loss." This provision - ANSWERPrevents stacking of the commercial property limit and the earthquake policy limit when an earthquake loss results in a fire which also damages the property The ISO Flood Coverage Endorsement is subject to exclusions and limitations. What is an exclusion under this endorsement? - ANSWERDamage to property in the open that is not specified in the flood schedule IMA Manufacturing has just purchased a DIC policy with a $5M general limit with a $50k deductible. The company's EQ coverage has a $2M limit with a $100k deductible and 10 percent participation by the insured in all EQ losses over the $100k. If IMA suffers a $1M EQ loss, what coverage is provided? - ANSWER$810,000 provided by EQ coverage; $0 provided by DIC coverage When an insured has a NFIP policy, ISO's Flood Coverage Endorsement - ANSWERIs excess over the maximum NFIP limits available unless waived by the insurer Joel felt obligated to warn his client that there are some potential disadvantages of a layered property program. A potential disadvantage of a layered property program is - ANSWERConflicts in wording among insurance carriers on the various layers can lead to coverage disputes When one of his policyholders inquired about adding the ISO Flood Coverage endorsement to the company's commercial property policy, Greg discussed some of the provisions included in the endorsement. A provision included in the ISO Flood Coverage endorsement is - ANSWERCoverage will be excess over any available NFIP limits available One option for coverage for flood, EQ, and possible other loss exposures not covered under regular commercial property policies is a DIC policy. What is true regarding DIC policies? - ANSWERDIC forms may offer broader coverage for some perils, and some exclusions may be less restrictive Lazar Industries owns a building that is covered by the EQ and Volcanic Eruption Endorsement (Sub-Limit Form With Percentage Deductible) with no coinsurance. The policy has a 10% deductible, a $3,000,000 insurable property value, and a $1,500, earthquake sublimit. The building has suffered a $350,000 EQ loss. The policy will pay - ANSWER$50, One of the chief purposes for buying DIC policies is to cover - ANSWERFlood and EQ exposures not otherwise covered