Principles of Risk Management and Insurance - Chapter 20

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1

Which of the following statements about the liability limits of the PAP is (are) true?

  1. The policy can be written with split limits of liability.
  2. Prejudgment interest is considered part of the damage award and is subject to the policy limit of liability.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: C

2

Which of the following statements about the payment of defense costs by the PAP is (are) true?

  1. They are paid in addition to the policy limits.
  2. They are payable even after the limit of liability is exhausted.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: A

3

All of the following are covered autos under the liability section of the PAP EXCEPT

  1. A) a nonowned van which is driven by the insured on a regular basis.
  2. B) a trailer owned by the named insured.
  3. C) a borrowed auto used by the insured as a substitute for a stolen covered auto.
  4. D) a newly acquired auto which replaces a vehicle previously described in the policy.

Answer: A

4

All of the following are insured persons under the liability coverage of the PAP EXCEPT

  1. A) a friend to whom the named insured loans a covered auto.
  2. B) the employer of the named insured for actions resulting from the named insured's use of a covered auto.
  3. C) the former spouse of the named insured who moved out of the home 2 years ago when the divorce was finalized.
  4. D) a relative of the named insured if a member of the same household.

Answer: C

5

Which of the following persons is (are) covered for liability insurance under the PAP?

  1. a family member who drives a covered auto
  2. a family member who occasionally drives a friend's auto
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: C

6

All of the following are covered as supplementary payments under the liability section of the PAP EXCEPT

  1. A) the cost of an appeal bond in a lawsuit stemming from an auto accident.
  2. B) the cost of a bail bond for a traffic violation when no accident is involved.
  3. C) interest which accrues on a liability judgment covered by the policy.
  4. D) reasonable expenses incurred by the insured to testify at a trial involving a lawsuit covered by the policy.

Answer: B

7

Which of the following situations would be covered by the liability section of an unendorsed PAP if the insured is legally liable?

  1. A) The insured injures a pedestrian while operating a friend's new motorcycle.
  2. B) The insured backs into and damages the garage door of his rented house.
  3. C) The insured intentionally runs into another motorist’s car after the driver cut in front of him.
  4. D) The insured damages a parked car while driving a dump truck for his employer.

Answer: B

8

What is the purpose of the extended nonowned liability coverage endorsement to the PAP?

  1. A) to provide liability coverage for an insured's employer when an insured uses his or her auto for business purposes
  2. B) to provide liability coverage for an insured who occasionally operates a nonowned auto
  3. C) to provide liability coverage for anyone who loans a covered auto to another driver
  4. D) to provide liability coverage for an insured who operates a nonowned auto on a regular basis

Answer: D

9

Which of the following situations would be covered under the liability section of the PAP?

  1. A mechanic is sued by a pedestrian who is injured when the mechanic has an accident while road testing the insured's auto.
  2. The daughter of the named insured is sued after she has an accident when a new friend she just met at a campus hangout lets her drive his car.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: B

10

Larry has $25,000 of bodily injury liability coverage under his PAP. This limit is the minimum amount required by his state to be considered financially responsible. While on a vacation, Larry visited a neighboring state which has a minimum financial responsibility limit of $50,000 for bodily injury. Which of the following statements describes the situation for Larry while he was in the neighboring state?

  1. A) Larry's policy was suspended while he was in the neighboring state.
  2. B) Larry had only $25,000 of liability coverage.
  3. C) Larry's policy automatically provided $50,000 of liability coverage.
  4. D) Larry's policy automatically provided $100,000 of liability coverage.

Answer: C

11

John occasionally borrows the car of his friend, Sophie. Sophie has a PAP with liability limits of 100/300/50. John also has a PAP, and his liability limits 250/500/50. John had an accident while using Sophie's car and was found to be legally liable for $300,000 in bodily injury liability for injuries suffered by one person. How much will be paid by each policy?

  1. A) Sophie's policy will pay $150,000, John's policy will pay $150,000.
  2. B) Sophie's policy will pay $50,000, John's policy will pay $250,000.
  3. C) Sophie's policy will pay $100,000, John's policy will pay $200,000.
  4. D) John's policy will pay the entire amount.

Answer: C

12

Which of the following statements about the medical payments coverage of the PAP is true?

  1. A) The amount of the benefit typically is $100,000.
  2. B) Covered expenses must be incurred within 30 days of the accident.
  3. C) Covered expenses include the cost of funeral services.
  4. D) The benefit limit applies on a per-accident basis rather than on a per-person basis.

Answer: C

13

Which of the following is a covered person under the medical payments coverage of the PAP?

  1. A) a family member of the named insured if struck by an auto while crossing the street
  2. B) a pedestrian struck by the named insured's auto
  3. C) the named insured while she is operating her car as a taxi
  4. D) a carjacker who is involved in an accident after stealing the insured's car

Answer: A

14

Tony has an unendorsed Personal Auto Policy which provides medical payments coverage. Under which of the following circumstances would the injured person be eligible for benefits under Tony's policy?

  1. A friend in the car is injured while Tony is driving a covered auto.
  2. A passenger on a motorcycle driven by Tony is injured when Tony hit another vehicle.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: A

15

In which of the following situations would medical payments be paid under an unendorsed PAP?

  1. A) injuries incurred while riding a motorcycle
  2. B) injuries incurred while an auto is being used without the presumption that permission would have been granted to use the auto
  3. C) injuries incurred in an auto while it is used in a share-the-expense car pool
  4. D) injuries incurred during the course of employment if workers compensation benefits are available

Answer: C

16

Which of the following statements about the uninsured motorists coverage of the PAP is true?

  1. A) The coverage usually applies only to property damage.
  2. B) The coverage applies only if the uninsured motorist is legally liable.
  3. C) Unless higher amounts are purchased, the maximum benefit is normally limited to $1,000.
  4. D) A covered person's only recourse is to sue the insurer if there is a disagreement over the amount of damages.

Answer: B

17

Which of the following persons is (are) insured under the uninsured motorists coverage of the PAP?

  1. A pedestrian struck by a covered auto if he or she has no insurance to pay medical expenses
  2. The spouse of a named insured who is killed by an uninsured motorist
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: B

18

All of the following are considered to be uninsured vehicles for purposes of the uninsured motorists coverage of the PAP EXCEPT

  1. A) a vehicle owned by an individual who is insured, but for less than the amount required by the state's financial responsibility law.
  2. B) a hit-and-run vehicle, the ownership of which cannot be determined.
  3. C) a vehicle owned by an individual who purchased just enough liability insurance to satisfy the state's financial responsibility law.
  4. D) a vehicle insured by a company which becomes insolvent before a claim can be paid.

Answer: C

19

Joyce was injured by an uninsured drunk driver while she was riding in a friend's car. Joyce and her friend each have a PAP with an uninsured motorists limit of $50,000. How much will be paid by each policy if it is determined that Joyce has $70,000 of bodily injuries?

  1. A) Each policy will pay $35,000.
  2. B) Joyce's policy will pay $50,000, and the friend's policy will pay nothing.
  3. C) Joyce's policy will pay $50,000, and the friend's policy will pay $20,000.
  4. D) The friend's policy will pay $50,000, and Joyce's policy will pay $20,000.

Answer: D

20

All of the following statements about Part D (coverage for damage to your auto) of the PAP are true EXCEPT

  1. A) Coverage may be purchased with or without collision insurance.
  2. B) Losses are paid regardless of fault.
  3. C) Coverage applies to a nonowned auto occasionally driven by an insured.
  4. D) No coverage is provided for newly-acquired vehicles.

Answer: D

21

Which of the following is considered to be a collision loss under Part D (coverage for damage to your auto) of the PAP?

  1. A) The covered auto was damaged when the car hit a deer.
  2. B) The covered auto is vandalized by a thief after it is stolen.
  3. C) The covered auto is damaged when it slid off an icy road and hit a fence.
  4. D) The covered auto is damaged by a fire after the engine overheated.

Answer: C

22

John has an auto which is covered for collision losses subject to a $250 deductible. Kate's auto also has collision coverage but her deductible is $500. Which of the following statements describes how a $2,000 collision loss will be paid if it occurs when John borrows Kate's car because his car is in the shop for repairs?

  1. A) John's policy will pay $1,500, and Kate's policy will pay nothing.
  2. B) John's policy will pay $1,750, and Kate's policy will pay nothing.
  3. C) Kate's policy will pay $1,750, and John's policy will pay nothing.
  4. D) Kate's policy will pay $1,500, and John's policy will pay $250.

Answer: D

23

All of the following losses are excluded under Part D (coverage for damage to your auto) of an unendorsed PAP EXCEPT

  1. A) vandals damaged a portable cell phone kept in the car.
  2. B) theft of a compact disc player which was permanently installed in the auto.
  3. C) damage caused to a car's engine because the named insured never changed the oil.
  4. D) destruction of a radar detector which overheated and caught on fire.

Answer: B

24

The insurance company's options for settling a collision loss to a covered auto under the PAP include which of the following?

  1. Pay the loss in money.
  2. Repair or replace the damaged auto.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: C

25

Duties of an insured after a collision loss covered under the PAP include which of the following?

  1. Take reasonable steps to protect the vehicle from further damage.
  2. Admit fault if the insured believes he or she caused the collision.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: A

26

In addition to providing coverage in the United States, its territories and possessions, and Puerto Rico, where else does the PAP provide coverage?

  1. A) in Mexico
  2. B) in Canada
  3. C) in both Mexico and Canada
  4. D) anywhere in the world

Answer: B

27

All of the following statements about the termination provisions of the PAP are true EXCEPT

  1. A) The insured can cancel the policy for any reason.
  2. B) The insurer can cancel a newly-written policy if it has been in force for fewer than 60 days.
  3. C) The insurer can cancel the policy after it has been in force for 60 days only if the insured has three or more traffic violations.
  4. D) The insurer can refuse to renew the policy at its annual anniversary date as long as proper notice is given prior to the end of the policy period.

Answer: C

28

The purpose of the Miscellaneous-Type Vehicle Endorsement to the PAP is to

  1. A) add coverage for newly-acquired autos.
  2. B) provide coverage for when the insured is using someone else's auto with the permission of the owner.
  3. C) insure motorcycles, mopeds, motor scooters, and similar vehicles.
  4. D) provide coverage for when the insured is using someone else's auto without the permission of the owner.

Answer: C

29

Which of the following statements about the Miscellaneous-Type Vehicle Endorsement to the PAP is (are) true?

  1. It provides bodily injury liability coverage for any vehicle rented by the insured.
  2. It can be added to PAP to insurance motorcycles and motor scooters.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: B

30

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 other driver's medical expenses?

  1. A) bodily injury liability
  2. B) collision coverage
  3. C) medical payments coverage
  4. D) property damage liability

Answer: A

31

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 Ken's car?

  1. A) bodily injury liability
  2. B) collision coverage
  3. C) medical payments coverage
  4. D) property damage liability

Answer: B

32

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 Ken's medical expenses?

  1. A) bodily injury liability
  2. B) collision coverage
  3. C) medical payments coverage
  4. D) property damage liability

Answer: C

33

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?

  1. A) bodily injury liability
  2. B) collision coverage
  3. C) medical payments coverage
  4. D) property damage liability

Answer: D

34

Sarah purchased a Personal Auto Policy with liability limits of 50/100/25. Sarah ran a stop sign and hit a van. The van sustained $15,000 in damages. The following bodily injuries were suffered by passengers in the van: Passenger #1, $15,000; Passenger #2, $60,000; and Passenger #3, $10,000. Sarah sustained $5,000 in medical expenses, and Sarah's car sustained $10,000 in damages. How much will Sarah's insurer pay under Part A: Liability Coverage?

  1. A) $90,000
  2. B) $100,000
  3. C) $115,000
  4. D) $125,000

Answer: A

35

Patricia purchased a Personal Auto Policy (PAP). Her car was rear-ended by a driver who fled the scene. Patricia suffered whiplash, migraine headaches, and she was unable to work. Which of the following coverages will cover her lost work earnings?

  1. A) medical payments
  2. B) uninsured motorists
  3. C) underinsured motorists
  4. D) bodily injury liability

Answer: B

36

Rob purchased a Personal Auto Policy (PAP) with collision and other-than-collision coverage. Which of the following losses would be covered under his policy?

  1. A) Rob wrecked his car while using it as a taxi cab.
  2. B) Thieves took Rob's radar detector from his car.
  3. C) A flash flood washed Rob's car off the road and damaged it.
  4. D) The new tires Rob had on the car were defective and wore out after 2 months.

Answer: C

37

Angie was injured when her car was struck by a driver who ran a red light. The other driver carried the minimum liability coverage necessary to be considered financially responsible. Angie's injuries were $15,000 above the minimum bodily injury limit. There is a coverage that can be added to the PAP that applies when a negligent driver carries the minimum liability insurance required by the state, but is less than the insured's actual damages for bodily injury. This coverage is called

  1. A) medical payments coverage.
  2. B) underinsured motorists coverage.
  3. C) bodily injury liability coverage.
  4. D) uninsured motorists coverage.

Answer: B

38

Dennis was involved in an accident. He believes the damage to his auto is $7,000. His insurer believes the damage is only $3,500. Which PAP provision is designed to handle disputes between the insurer and the insured over the amount of the loss?

  1. A) other insurance provision
  2. B) agreed amount endorsement
  3. C) coinsurance provision
  4. D) appraisal provision

Answer: D

39

Which of the following statements concerning the collision damage waiver when renting an auto is true?

  1. It relieves the renter from legal liability to third parties arising out of operation of the rented car.
  2. It relieves the renter from legal liability for the vehicle if it is damaged or stolen.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: B

40

Which of the following statements is (are) true with respect to the collision damage waiver on rented cars?

  1. It is inexpensive and is provided at no charge by most rental car companies.
  2. It waives the renter's liability for bodily injury liability arising out of use of the rented auto.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: D

41

The purpose of gap insurance is to

  1. A) pay the difference between the bodily injury liability limit purchased and the actual amount of bodily injury liability if it exceeds the limit.
  2. B) pay the difference between the amount the insurer pays if a car is a total loss and the remaining amount owed on a lease or car loan.
  3. C) pay the difference between the medical payments coverage limit and the actual medical expenses of injured family members or passengers in the insured auto.
  4. D) pay the difference between the uninsured motorists coverage limit and the actual amount of the medical expenses incurred by the insured.

Answer: B

42

A car damaged in an auto accident may have reduced market or resale value after it is repaired. Some insureds have sought to recover this reduction in market or resale value. This loss in value is called

  1. A) gap coverage.
  2. B) betterment.
  3. C) diminution.
  4. D) subrogation.

Answer: C

43

If the value of a vehicle is increased after repairs, such as repainting an entire auto when only one fender or door is damaged, the insurer will not pay for the increase in value. Another name for the increase in value is

  1. A) diminution.
  2. B) betterment.
  3. C) appraisal.
  4. D) subrogation.

Answer: B

44

The 2005 PAP states that the insurer has no duty to provide coverage if the insured fails to comply with certain listed duties. In practice, however, the insurer is only relieved of its duty to provide coverage if

  1. A) the insured was unaware of the listed duties.
  2. B) failure to comply with the duties is prejudicial to the insurer.
  3. C) the claim involves bodily injuries of more than $50,000.
  4. D) the claim occurred in another state.

Answer: B

45

Which statement concerning towing and labor coverage under the PAP is (are) true?

  1. There's no coverage for towing if the auto breaks down—towing is only covered if the auto needs to be towed after a collision has occurred.
  2. Towing and labor coverage pays for repairs at a service station or garage.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: D

46

A vehicle is considered a constructive total loss when

  1. A) it cannot be repaired.
  2. B) the repair cost exceeds the actual cash value.
  3. C) it can be repaired, but the insured prefers a cash settlement.
  4. D) it can be repaired, but the insurer prefers a cash settlement.

Answer: B

47

Owen’s car is insured under a Personal Auto Policy (PAP). A hail storm occurred one evening, and his car was severely damaged. Which PAP coverage, if Owen purchased it, would cover this damage to his auto?

  1. A) property damage liability
  2. B) uninsured motorists property damage
  3. C) collision
  4. D) other-than-collision

Answer: D

48

Kelly was hit by a car while she was walking to the park. She incurred $750 in medical costs at a hospital emergency room. Kelly has coverage for this charge under which of her Personal Auto Policy (PAP) coverages?

  1. A) bodily injury liability
  2. B) other-than collision
  3. C) medical payments
  4. D) collision

Answer: C

49

Which of the following statements is true about uninsured motorists coverage under the Personal Auto Policy?

  1. A) The benefits are paid without regard to fault.
  2. B) The insured collects from his or her own insurer, and the insurer can recoup the loss payment from the other driver.
  3. C) Uninsured motorists benefits are limited to the medical expenses of the insured.
  4. D) Subrogation is never used when uninsured motorists benefits are paid.

Answer: B

50

The appraisal provision in the Personal Auto Policy is used to determine the

  1. A) value of a loss payable under property damage liability.
  2. B) amount paid for a physical damage loss to the insured's auto if the insured and insurer disagree.
  3. C) amount of auto insurance that should be purchased for an older/antique car.
  4. D) value of the loss payable under the medical payments coverage.

Answer: B

51

Dan picked up his friend Rodney to drive to their softball game. Both Dan and Rodney have a Personal Auto Policy (PAP) with $5,000 of medical payments coverage. Dan hit a parked car, and Rodney was injured, incurring $9,000 of medical expenses. How will this claim be settled under the other insurance provision of the PAP?

  1. A) Both insurers will pay $4,500.
  2. B) Dan's insurer will pay $5,000 and Rodney's insurer will pay $4,000.
  3. C) Dan's insurer will pay $4,000 and Rodney's insurer will pay $5,000.
  4. D) Dan's insurer will pay $3,000, Rodney's insurer will pay $3,000, and Rodney must pay $3,000 out of his own pocket.

Answer: B

52

After the Personal Auto Policy has been in force for 60 days (or is a renewal policy), all of the following are grounds for the insurer to cancel the policy EXCEPT

  1. A) nonpayment of premiums
  2. B) the insured’s license to drive is suspended
  3. C) the insurer discovers material misrepresentation by the insured in the application process
  4. D) the insured received a traffic ticket

Answer: D

53

Jenny purchased a Personal Auto Policy (PAP) that included property damage liability, collision coverage, medical payments coverage, and other-than-collision coverage. Jenny had too much alcohol to drink at a graduation party. While driving home from the party, Jenny ran off the road and hit a tree. Police responded to the accident, and Jenny was arrested for driving under the influence of alcohol. Which of the following statements is true regarding the damage to Jenny’s car?

  1. A) Damage to the car is covered under Jenny’s property damage liability coverage.
  2. B) Damage to the car is covered under Jenny’s collision coverage.
  3. C) Damage to the car is covered under Jenny’s other-than-collision loss coverage.
  4. D) There is no coverage as Jenny was intoxicated at the time of the accident.

Answer: B

54

Gary purchased a Personal Auto Policy (PAP) that included collision coverage. Gary lost control of his vehicle on an icy road. He slid across the center line into oncoming traffic. Another vehicle hit his car, causing severe damage to it. Ignoring any deductible, what is the insurer’s liability for damage to Gary’s car?

  1. A) the greater of the actual cash value or the amount necessary to repair or replace the vehicle
  2. B) the replacement cost of the vehicle
  3. C) the lesser of the actual cash value or the amount necessary to repair or replace the vehicle
  4. D) the original purchase price of the vehicle

Answer: C

55

All of the following are considered to be a covered auto under the Personal Auto Policy EXCEPT

  1. A) a trailer owned by the insured.
  2. B) a temporary substitute auto loaned to the insured while her care is being repaired.
  3. C) a motorcycle owned by the insured.
  4. D) a newly acquired auto.

Answer: C