Policy Provisions, Conditions, and Related State/Federal Laws — Property & Casualty Insurance License practice questions

The declarations page of a property and casualty policy typically shows:

1. Named insured, address, policy period, coverages, limits, and premiums
2. Only the exclusions section that limits coverage under the policy
3. Only the insuring agreement stating the core promise of the insurer
4. Only the state statutory endorsement required by the insurance code

Answer: A — Named insured, address, policy period, coverages, limits, and premiums

A) Correct — declarations summarize the essential deal terms. B) Direction reversal — exclusions are in a separate section. C) Direction reversal — the insuring agreement is a separate section. D) Off-by-one — statutory endorsements are attached separately.

A first-party bad-faith claim generally requires proof that the insurer:

1. Delayed payment by more than 24 hours after receiving a covered claim from insured
2. Requested a recorded statement from the insured during claim investigation activities
3. Denied or delayed a valid claim without a reasonable basis, knowing or reckless
4. Referred the pending claim to coverage counsel for a coverage-position analysis

Answer: C — Denied or delayed a valid claim without a reasonable basis, knowing or reckless

A) Off-by-one — statutory prompt-pay windows are distinct from bad faith. B) True-but-irrelevant — recorded statements are a lawful investigation tool. C) Correct — dual standard: no reasonable basis + knowledge or recklessness. D) True-but-irrelevant — coverage counsel is standard, lawful practice.

A policy endorsement generally functions to:

1. Replace the underlying policy entirely with a new stand-alone contract
2. Confirm the insured has read the policy declarations and conditions
3. Amend the policy to add, remove, or modify coverage when attached
4. Waive the duty of utmost good faith between insurer and the insured

Answer: C — Amend the policy to add, remove, or modify coverage when attached

A) Direction reversal — an endorsement amends; it does not replace. B) True-but-irrelevant — endorsements are not receipts of reading. C) Correct — endorsements amend the policy when attached. D) Direction reversal — utmost good faith cannot be waived unilaterally.

Replacement cost differs from actual cash value (ACV) in that RC:

1. Deducts accumulated depreciation from the cost of a new replacement
2. Pays the fair market value of used comparable items on the loss date
3. Pays the cost of a new replacement with no deduction for depreciation
4. Pays the historical purchase price paid by the insured for the property

Answer: C — Pays the cost of a new replacement with no deduction for depreciation

A) Direction reversal — that formula describes ACV, not RC. B) Look-alike — that is one common ACV valuation method. C) Correct — RC pays new-for-old; ACV subtracts depreciation. D) True-but-irrelevant — historical cost is not a P&C valuation basis.

A binder in property and casualty insurance is best described as:

1. A permanent contract of insurance that replaces the formal policy document
2. A temporary contract of insurance in force until the formal policy is issued
3. A rate filing submitted by the insurer to the state department of insurance
4. A written waiver of the insured's duty to give notice of a covered loss

Answer: B — A temporary contract of insurance in force until the formal policy is issued

A) Direction reversal — a binder is temporary, not permanent. B) Correct — a binder is temporary coverage pending policy issuance. C) Look-alike — that is a rate filing, not a binder. D) Direction reversal — binders do not waive notice duties.

The conditions section of a policy generally sets forth:

1. Duties of both parties, including notice of loss and cooperation clauses
2. The specific perils, property, and losses excluded from any coverage
3. The rate factors that determine the annual premium for the policy
4. The named insured, mailing address, and policy period for the contract

Answer: A — Duties of both parties, including notice of loss and cooperation clauses

A) Correct — conditions bind duties like notice, cooperation, subrogation. B) Look-alike — that is the exclusions section, a different part. C) True-but-irrelevant — rating information is not in conditions. D) Look-alike — that information is on the declarations page.

Reservation of rights letters are used by insurers to:

1. Waive coverage defenses so the insurer can move a claim toward quick settlement
2. Automatically extend the applicable policy limits for the pending covered claim
3. Deny defense outright while denying indemnity under the policy for the claim
4. Preserve coverage defenses while still providing a defense under a reservation

Answer: D — Preserve coverage defenses while still providing a defense under a reservation

A) Direction reversal — the letter preserves, not waives, defenses. B) Look-alike — no automatic limit increase results from an ROR letter. C) Direction reversal — the insurer typically DEFENDS under an ROR. D) Correct — an ROR letter's core function is to preserve defenses.

Deductible?

Amount the insured pays out of pocket on a covered loss before insurance pays. Reduces premium and discourages small claims.