Property & Casualty Insurance Basics Flashcard

Front

What is the requirement for insurable interest in property insurance for Benjamin?

Back

It must exist at the time of loss.

Answer explanation

For property insurance, insurable interest must exist at the time of loss. This ensures that the policyholder has a legitimate stake in the property, making the claim valid.

Front

Abigail is inspecting a building and notices that the wiring is faulty. Which of the following best describes the type of hazard present?

Back

Faulty wiring in a building.

Answer explanation

Faulty wiring in a building is a physical hazard as it poses a direct risk of electrical shock or fire. The other options relate to behavior or attitudes, not physical dangers.

Front

What does the term 'loss ratio' measure in the context of an insurance company's financial performance?

Back

The profitability of an insurer.

Answer explanation

The term 'loss ratio' measures the profitability of an insurer by comparing the premiums collected to the claims paid. A lower loss ratio indicates better profitability.

Front

Rohan owns a construction company and uses explosives to demolish old buildings. If an accident occurs during the demolition and causes damage to nearby properties, which type of liability would apply to Rohan?

Back

Absolute liability

Answer explanation

Absolute liability applies to inherently dangerous activities, such as using explosives, where the party is held responsible for damages regardless of fault or intent.

Front

What is the primary difference between named perils coverage and special/open perils coverage in homeowners insurance policies?

Back

Named perils list covered perils, while special/open perils cover everything unless excluded.

Answer explanation

The correct choice states that named perils list specific covered perils, while special/open perils provide coverage for everything unless explicitly excluded. This highlights the fundamental difference in their coverage approach.

Front

Which of the following is NOT a component of insurance rates?
Options: Reserves, Policyholder's credit score, Profit margin, Loss costs.

Back

Policyholder's credit score

Answer explanation

The policyholder's credit score is not a direct component of insurance rates. Instead, rates are typically based on reserves, profit margins, and loss costs, which reflect the insurer's financial planning and risk assessment.

Front

Nora visits a grocery store and slips on a wet floor, even though there is a visible 'Wet Floor' sign. What defense against negligence applies?

Back

Assumption of risk

Answer explanation

The defense of 'Assumption of risk' applies here because the customer was aware of the wet floor, as indicated by the visible sign, and chose to proceed anyway, accepting the potential danger.

Front

Which loss valuation method pays the full face amount of an insurance policy for a total loss?

Back

Valued policy

Answer explanation

A valued policy pays the full face amount for a total loss, such as in fire cases, regardless of the property's current market value or replacement cost. This ensures the insured receives the agreed amount.

Front

What is the purpose of the New Mexico P&C Insurance Guaranty Fund if an insurance company goes bankrupt and cannot pay its claims?

Back

To pay claims if an insurer becomes insolvent.

Answer explanation

The New Mexico P&C Insurance Guaranty Fund is designed to pay claims if an insurer becomes insolvent, ensuring that policyholders are protected and can receive compensation even if their insurer fails.

Front

What is the primary purpose of coinsurance in a property insurance policy?

Back

To ensure the insured carries a percentage of the property value.

Answer explanation

The primary purpose of coinsurance in property insurance is to ensure the insured carries a percentage of the property value. This encourages policyholders to insure their property for its full value, reducing the risk of underinsurance.