Principles of Risk Management and Insurance - Chapter 25

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1

Which of the following is (are) included in the common declarations page of a commercial package policy?

  1. A description of the insured property
  2. A listing of the causes-of-loss that are covered by the policy
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: A

2

Which of the following items is (are) contained in the common policy conditions page of the commercial package policy?

  1. A description of the property that is insured.
  2. A provision describing the insurer's right to audit the insured's books and records
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: B

3

Which of the following is covered under the building and personal property coverage form?

  1. A) the insured's stock and inventory when located inside the insured building
  2. B) vehicles owned by the insured
  3. C) aircraft and watercraft owned by the insured
  4. D) a manufacturing building owned by a key customer or key supplier of the insured.

Answer: A

4

Which of the following statements about the building and personal property coverage form is (are) true?

  1. A limited amount of coverage is provided for pollutant cleanup and removal at the described premises if the release or discharge of the pollutant results from a covered cause of loss.
  2. Fire department service charges are specifically excluded because they are a normal cost of doing business.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: A

5

All of the following are extensions of coverage under the building and personal property coverage form EXCEPT

  1. A) newly acquired or constructed property.
  2. B) valuable papers and records.
  3. C) personal property temporarily off the premises.
  4. D) currency and securities.

Answer: D

6

Which of the following statements about the provisions of the building and personal property coverage form is (are) true?

  1. A separate deductible must be satisfied for each building damaged in the same occurrence.
  2. Under the replacement cost option, there is no deduction for depreciation.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: B

7

One of the additional coverages under the building and personal property coverage form is "increased cost of construction." The coverage is payable if

  1. A) a skilled artisan is needed to duplicate the construction of the damaged property.
  2. B) a labor strike or materials shortage increases construction costs.
  3. C) an ordinance or building code increases the cost of construction.
  4. D) the materials necessary to rebuild the damaged structure are more expensive than ordinary building materials.

Answer: C

8

What is the effect of the optional agreed value provision in the building and personal property coverage form?

  1. A) It provides replacement cost coverage.
  2. B) It increases insured values along with inflation.
  3. C) It suspends the coinsurance clause.
  4. D) It reduces the deductible to $50.

Answer: C

9

Which of the following perils is not included in the causes-of-loss basic form of the ISO commercial package policy?

  1. A) fire
  2. B) lightning
  3. C) explosion
  4. D) flood

Answer: D

10

Which of the following statements about the causes-of-loss special form of the ISO commercial package policy is (are) true?

  1. The causes-of-loss special form provides open perils coverage and insures against direct physical loss.
  2. The causes-of-loss special form excludes loss caused by earthquake.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: C

11

Which of the following statements is (are) true concerning the value reporting form?

  1. Failure to report accurately suspends coverage.
  2. If the insured underreports the property values at a location, and a loss occurs at that location, recovery is limited to the proportion that the last value reported bears to the value that should have been reported.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: B

12

Which of the following types of forms is used to insure fluctuations in business personal property, such as inventory and finished goods?

  1. A) accounts receivable coverage form
  2. B) a value reporting form
  3. C) difference in conditions insurance
  4. D) business income insurance

Answer: B

13

Which of the following statements about the business income coverage form is true?

  1. A) Business income is defined as gross earnings before taxes.
  2. B) Payroll is excluded unless it is specifically added.
  3. C) The form covers loss of business income and extra expenses incurred during restoration.
  4. D) The form can be used by a manufacturing operation only.

Answer: C

14

The building and personal property coverage form provides several optional coverages. Under one optional coverage, no deduction is taken for depreciation when settling a covered loss. This optional coverage is called

  1. A) extra expense.
  2. B) agreed value.
  3. C) replacement cost.
  4. D) inflation guard.

Answer: C

15

Which of the following statements about the extra expense coverage form is (are) true?

  1. It provides coverage for the increased cost that must be paid to continue operations during a period of restoration.
  2. It provides coverage for lost business income if a key customer or key supplier experiences a loss.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: A

16

XYZ, Inc. would suffer serious financial consequences if either of its two major customers were shut down and could not purchase XYZ products. Which of the following types of consequential loss protection would provide protection against this exposure?

  1. A) leasehold interest
  2. B) extra expense
  3. C) marine insurance
  4. D) business income from dependent properties

Answer: D

17

Which of the following forms is used to insure buildings that are under construction?

  1. A) builders risk coverage form
  2. B) floor plan coverage form
  3. C) new construction coverage form
  4. D) labor and materials coverage form

Answer: A

18

Which of the following statements about the condominium commercial-unit owners coverage form is (are) true?

  1. It provides coverage for the unit owner's proportionate financial interest in the condominium building.
  2. It provides coverage for the business personal property of the unit owner.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: B

19

All of the following statements about business income insurance are true EXCEPT

  1. A) Business income is defined as total sales that would have been made if the loss had not occurred.
  2. B) Payroll is considered a continuing normal operating expense.
  3. C) Business income insurance does not cover the physical damage caused by a peril which created the interruption in business.
  4. D) The business income coverage form can be purchased with a coinsurance requirement.

Answer: A

20

Which of the following statements about the equipment breakdown protection coverage form is (are) true?

  1. The covered cause of loss is a breakdown of covered equipment, including boilers, machinery, and electrical and mechanical equipment.
  2. It provides coverage for the reasonable cost of expediting permanent repair or replacement of damaged property.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: C

21

Reimbursement for spoilage of frozen food caused by failure of a refrigeration unit at a frozen foods processor can be covered under

  1. A) equipment breakdown insurance.
  2. B) extra expense insurance.
  3. C) builders risk insurance.
  4. D) difference in conditions insurance.

Answer: A

22

One inland marine coverage form is the accounts receivable coverage form. In which of the following cases would the purchaser of this form (the insured) be indemnified through the coverage?

  1. A) if the insured cannot pay amounts owed because the purchaser has become insolvent
  2. B) if the insured cannot pay amounts owed because the purchaser has incurred an insured physical damage loss
  3. C) if the insured cannot collect accounts receivable because of the destruction of records
  4. D) if the insured cannot collect accounts receivable because the purchaser extended credit to poor credit risks

Answer: C

23

Which of the following statements describes a Difference in Conditions (DIC) Policy?

  1. A) It is a type of commercial umbrella liability policy.
  2. B) It is an open perils policy that covers perils not insured by basic property insurance contracts.
  3. C) It is designed to cover indirect losses for which the insured has direct damage coverage.
  4. D) It is used to settle disputes when an insured has more than one insurance policy with differing policy provisions.

Answer: B

24

Which of the following statements about ocean marine insurance coverages is (are) true?

  1. Hull insurance limits coverage to the breakdown of a ship's machinery and equipment.
  2. Protection and indemnity insurance provides liability insurance to the ship owner for bodily injury and property damage to third parties.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: B

25

There are a number of implied warranties in ocean marine insurance. One implied warranty is that the vessel is properly constructed and maintained, and that it is properly equipped for the voyage to be undertaken. This implied warranty is the warranty of

  1. A) seaworthiness.
  2. B) barratry.
  3. C) no deviation from planned course.
  4. D) legal purpose.

Answer: A

26

Which of the following statements about ocean marine insurance is true?

  1. A) The coverage is narrow and excludes perils of the sea.
  2. B) Hull insurance includes collision liability covering the ship's owner if the ship collides with another ship.
  3. C) Protection and indemnity (P&I) insurance covers the shipper of goods for cargo losses.
  4. D) A particular average loss is a loss incurred only if a ship is totally lost or destroyed.

Answer: B

27

All of the following are considered to be instrumentalities of transportation and communication for purposes of inland marine insurance EXCEPT

  1. A) trains.
  2. B) tunnels.
  3. C) transmission lines.
  4. D) television towers.

Answer: A

28

All of the following statements about inland marine forms are true EXCEPT

  1. A) A mail coverage form covers securities in transit by first-class mail, registered or certified mail, or express mail.
  2. B) A commercial articles coverage form is used to insure photographic equipment and musical instruments.
  3. C) A jewelers block coverage form is used by individuals to insure jewelry limited in coverage by the homeowners form.
  4. D) The signs coverage form covers neon, mechanical, and electrical signs.

Answer: C

29

A firm wishing to insure a single shipment of merchandise sent by a common carrier would purchase a(n)

  1. A) annual transit policy.
  2. B) trip transit policy.
  3. C) bailee's liability policy.
  4. D) equipment floater.

Answer: B

30

Which of the following statements about the businessowners policy is (are) true?

  1. It is designed to meet the insurance needs of large manufacturing firms.
  2. It is a package policy designed to meet the basic property and liability needs of an insured in a single contract.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: B

31

All of the following statements about the businessowners policy are true EXCEPT

  1. A) Coverage for business personal property includes coverage for leased personal property which the named insured has a contractual responsibility to insure.
  2. B) The amount of insurance on the buildings increases by a stated percentage each year.
  3. C) Additional coverages include pollutant cleanup and removal.
  4. D) The policy must be written with a deductible of at least $2,000 for property losses.

Answer: D

32

Renee is risk manager of XYZ Company. She purchased a Commercial Package Policy for her company and added one optional coverage. This option suspends the coinsurance clause and substitutes a new agreement covering any loss in the same proportion that the limit of insurance purchased bears to a value specified in the declarations. This provision is known as

  1. A) waiver of inventory coverage.
  2. B) inflation guard coverage.
  3. C) agreed value coverage.
  4. D) replacement cost coverage.

Answer: C

33

Frank's property insurance requires periodic reporting of inventory values. Frank believes he can save money by under-reporting the inventory. Last period, Frank reported $200,000 when the value was really $400,000. Shortly after filing the report, when the value was $500,000, the inventory was destroyed. Ignoring any deductible, how much will Frank's insurer pay?

  1. A) nothing, as underreporting voids coverage
  2. B) $200,000
  3. C) $250,000
  4. D) $400,000

Answer: C

34

Rick is risk manager of Herald News, a daily newspaper in a competitive market. Rick wants to make sure that if Herald's printing facility is damaged or destroyed, the paper will continue to be published. What type of insurance can Rick purchase to cover the added cost of continuing to print the paper after a physical damage loss has occurred?

  1. A) contingent business income coverage
  2. B) product liability insurance
  3. C) business income from dependent properties coverage
  4. D) extra expense coverage

Answer: D

35

One type of commercial property insurance excludes perils that are covered by the basic coverages. Some businesses buy this coverage to fill coverage gaps, including flood and earthquake, and to cover property in other countries. This type of insurance is called

  1. A) protection and indemnity insurance.
  2. B) building and personal property coverage form.
  3. C) difference in conditions insurance.
  4. D) builders risk coverage form.

Answer: C

36

Inter-Ocean Transfer owns 12 large cargo ships which transport goods. Inter-Ocean Transfer can obtain physical damage insurance on these vessels by purchasing

  1. A) hull insurance.
  2. B) cargo insurance.
  3. C) protection and indemnity insurance.
  4. D) freight insurance.

Answer: A

37

An Inter-Ocean Transfer cargo ship was forced to jettison some cargo in heavy seas. The various interests in the voyage at the time the property was jettisoned were

If $400,000 worth of iron ore was jettisoned, for how much of this amount would Inter-Ocean Transfer be responsible under general average?

  1. A) nothing
  2. B) $160,000
  3. C) $200,000
  4. D) $400,000

Answer: B

38

Tom opened a store in a mall. His store is located between a theater and a department store. Tom counts on the theater and department store to generate walk-in business at his store. While his store has been successful, Tom knows that if either or both of the other businesses closed, his store would suffer an economic loss. What type of dependent property situation is illustrated in this scenario?

  1. A) contributing location
  2. B) recipient location
  3. C) manufacturing location
  4. D) leader location

Answer: D

39

The exterior walls, the roof, and the plumbing, heating and air conditioning systems of a residential condominium can be insured through the purchase of which of the following forms?

  1. Condominium association coverage form
  2. Condominium commercial unit-owners coverage form
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: A

40

A navigation error caused a cargo ship to run aground on a reef. The ship, valued at $1.5 million, was carrying $1.5 million in grain and $1.5 in electronic devices. The ship sustained a $150,000 physical damage loss. If this loss is a "particular average" loss, how will the loss be settled?

  1. A) The owners of each of the three interests are responsible for $50,000.
  2. B) The owner of the ship is responsible for the entire $150,000 loss.
  3. C) The two cargo owners are each responsible for $75,000 of the loss.
  4. D) The owner of the ship is responsible for the first $100,000 of the loss, and the two cargo owners are each responsible for $25,000 of the loss.

Answer: B

41

The business income and extra expense coverage form covers loss of business income and continuing normal operating expenses. How is business income (revenue) defined?

  1. A) total sales
  2. B) total sales less cost of goods sold
  3. C) pre-tax net profit
  4. D) after-tax net income

Answer: C

42

John is risk manager of Alpha-2-Omega Company. John wants coverage for "direct physical loss" ("open perils" coverage) under the business and personal property (BPP) coverage form. Which causes-of-loss form should he select?

  1. A) special form
  2. B) basic form
  3. C) standard form
  4. D) broad form

Answer: A

43

If the optional replacement cost coverage provision is not selected, how are losses settled under the building and personal property (BPP) coverage form?

  1. A) market value
  2. B) original purchase price
  3. C) actual cash value
  4. D) book value

Answer: C

44

Which ocean marine coverage provides comprehensive liability insurance for property damage caused by the ship to piers and docks, damage to the ship's cargo, and injury to the passengers or crew?

  1. A) collision liability clause
  2. B) hull insurance
  3. C) freight insurance
  4. D) protection and indemnity insurance

Answer: D

45

Which of the following statements about the ISO businessowners policy is true?

  1. A) The current form is written on a named-perils basis, but an "open-perils" (all risks) endorsement is available.
  2. B) It provides business income and extra expense coverage as an additional coverage.
  3. C) The policy covers business personal property but does not cover buildings.
  4. D) The policy is designed to meet the special needs of large businesses.

Answer: B

46

Which of the following statements concerning terrorism insurance is (are) true?

  1. Terrorism insurance covers direct physical damage to the insured’s property resulting from an act of terrorism.
  2. Terrorism insurance and be added through an endorsement to the commercial property insurance policy or purchased as a separate, stand-alone policy.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: C

47

CompuFix services desktop and laptop computers. The owner of CompuFix is concerned that computers that are left with the business to be repaired may be damaged or destroyed. To address this risk, CompuFix should purchase

  1. A) mobile equipment and property insurance.
  2. B) coverage for property held by bailees.
  3. C) coverage for property of dealers—a “block” policy.
  4. D) equipment breakdown insurance.

Answer: B