Common Insurance Policy Provisions: Practice Questions and Solutions

This section of the study guide is intended to provide practice problems and solutions to accompany the pages of Foundations of Risk Management and Insurance, cited below. Students are encouraged to read these pages before attempting the problems. This study guide is entirely an independent effort by Mr. Stolyarov and is not affiliated with any organization(s) to whose textbooks it refers, nor does it represent such organization(s).

Some of the questions here ask for short written answers based on the reading. This is meant to give the student practice in answering questions of the format that will appear on Exam 5. Students are encouraged to type their own answers first and then to compare these answers with the solutions given here. Please note that the solutions provided here are not necessarily the only possible ones.

Source:
Nyce, C.M. Foundations of Risk Management and Insurance (Second Edition). 2006. American Institute for Chartered Property Casualty Underwriters. Chapter 11, pp. 11.12-11.29.

Original Problems and Solutions from The Actuary's Free Study Guide

Problem S5-29-1. Which of the following items of information are typically found in the Declarations section of an insurance policy? More than one answer may be correct.

(a) The name of the insured
(b) The steps the insured needs to take to enforce the policy
(c) The circumstances under which the insurer agrees to pay
(d) The policy number
(e) The name of the insurance agent
(f) The definitions of terms in the policy
(g) The address of the covered property
(h) The dollar limits applicable to the policy
(i) The premium amount
(j) A list of excluded persons, places, things, or actions

Solution S5-29-1. This question is based on the discussion in Nyce 2006, pp. 11.13-11.14. The following choices are correct:
(a) The name of the insured
(d) The policy number
(e) The name of the insurance agent
(g) The address of the covered property
(h) The dollar limits applicable to the policy
(i) The premium amount

Choice (b) is not correct; this information is typically found in the Conditions section.
Choice (c) is not correct; this information is typically found in the Insuring Agreements section.
Choice (f) is not correct; this information is typically found in the Definitions section.
Choice (j) is not correct; this information is typically found in the Exclusions section.

Problem S5-29-2. Which of the following statements about the Definitions and the Insuring Agreements sections of insurance policies are true? More than one answer may be correct.

(a) The definitions typically appear toward the beginning of a personal lines policy.
(b) The definitions typically appear toward the beginning of a commercial lines policy.
(c) The definitions section is used to resolve ambiguities surrounding definitions of terms that had been used in previous policies.
(d) When a term in an insurance policy is undefined in the policy and has an everyday meaning, it is typically interpreted according to any technical meaning it may have - even though the technical meaning may diverge from the everyday meaning.
(e) Insurance policies are always based on the formal definitions of terms, and, therefore, more nebulous meanings, such as local and cultural connotations, are never considered.
(f) For every type of coverage they provide, insurance policies typically have a separate insuring agreement.
(g) The term "insuring agreement" is only used to refer to the section of the policy that introduces the coverage - not to any supplementary payments, coverage extensions, or additional coverages.
(h) Unlabeled statements within the Declarations, Exclusions, Definitions, or Conditions sections of an insurance policy can sometimes serve as insuring agreements.

Solution S5-29-2. This question is based on the discussion in Nyce 2006, pp. 11.14-11.19. The following choices are correct:

(a) The definitions typically appear toward the beginning of a personal lines policy.
(c) The definitions section is used to resolve ambiguities surrounding definitions of terms that had been used in previous policies.
(f) For every type of coverage they provide, insurance policies typically have a separate insuring agreement.
(h) Unlabeled statements within the Declarations, Exclusions, Definitions, or Conditions sections of an insurance policy can sometimes serve as insuring agreements.

Choice (b) is incorrect; the definitions typically appear toward the end of a commercial lines policy.
Choice (d) is incorrect; when a term in an insurance policy is undefined in the policy and has an everyday meaning, the everyday meaning is what is used in policy interpretation.
Choice (e) is incorrect; local, cultural, and trade-usage meanings of words are considered in interpreting many insurance policies.
Choice (g) is incorrect; supplementary payments, coverage extensions, or additional coverages can also be considered parts of the insuring agreements.

Problem S5-29-3. Which of the following statements about insuring agreements are true? More than one answer may be correct.

(a) Special-form coverage is a kind of named perils coverage.
(b) Basic-form coverage is a kind of named perils coverage.
(c) Broad-form coverage is a kind of named perils coverage.
(d) All-risks coverage requires a peril to be specifically mentioned in the policy in order for that peril to be covered.
(e) Broad-form coverage typically covers more causes of loss than basic-form coverage.
(f) Only all-risks coverage requires exclusions; named perils coverage does not have associated exclusions, because only the listed perils are covered.
(g) An exception within a definition can have the effect of restoring coverage that would otherwise be excluded.
(h) An "additional coverages" section can extend coverage to types of losses that would not otherwise be covered.

Solution S5-29-3. This question is based on the discussion in Nyce 2006, pp. 11.20-11.22. The following answers are correct:
(b) Basic-form coverage is a kind of named perils coverage.
(c) Broad-form coverage is a kind of named perils coverage.
(e) Broad-form coverage typically covers more causes of loss than basic-form coverage.
(g) An exception within a definition can have the effect of restoring coverage that would otherwise be excluded.
(h) An "additional coverages" section can extend coverage to types of losses that would not otherwise be covered.

Choice (a) is incorrect; special-form coverage is a kind of all-risks coverage.
Choice (d) is incorrect; all-risks coverage covers all perils that are not specifically excluded.
Choice (f) is incorrect; policies offering named perils coverage often also have exclusions, which can serve to eliminate ambiguity about what aspects of the named perils are or are not covered.

Problem S5-29-4. What section of an insurance policy discusses the behaviors (or lack of certain behaviors) that an insured much exhibit in order to receive payment for a covered loss? Give three examples of such behaviors or lack of behaviors.

Solution S5-29-4. This question is based on the discussion in Nyce 2006, p. 11.23.

The Conditions section of an insurance policy discusses the behaviors (or lack of certain behaviors) that an insured much exhibit in order to receive payment for a covered loss. Examples of such required behaviors/lack of behaviors can be any of the following:
1. Payment of premiums;
2. Prompt reporting of losses;
3. Cooperation with the insurer in legal proceedings;
4. Providing appropriate documentation for losses;
5. Refraining from interference with the insurer's right of subrogation.

Problem S5-29-5. Nyce 2006, p. 11.24, discusses the following six purposes of exclusions in insurance policies:
1. Eliminate coverage for uninsurable loss exposures;
2. Assist in managing moral and morale hazards;
3. Reduce likelihood of coverage duplications;
4. Eliminate coverages not needed by the typical insured;
5. Eliminate coverages requiring special treatment;
6. Assist in keeping premiums reasonable.

Each of the following exclusions can be primarily identified with one of the above purposes. Match the exclusion with the purpose it serves.

(a) A certain homeowners' insurance policy excludes coverage for the insured's intentional acts of damage to his own home.
(b) A certain personal automobile insurance policy excludes coverage on special decals and custom paint jobs.
(c) A certain insurance policy excludes coverage for losses due to war.
(d) A certain homeowners' insurance policy excludes coverage for damage to the insured's automobile.
(e) A certain homeowners' insurance policy excludes coverage for flood damage on a beachfront home. The coverage could be provided, but the likelihood of flood in the area during the next 10 years is virtually certain.
(f) A certain personal property insurance policy excludes coverage for property exhibited at a trade fair or convention.

Solution S5-29-5.

Exclusion (a) serves primarily to assist in managing moral and morale hazards, as it reduces the insured's incentive to intentionally damage his home.

Exclusion (b) serves primarily to eliminate coverages not needed by the typical insured, since most insureds do not have special decals or custom paint jobs on their cars.

Exclusion (c) serves primarily to eliminate coverage for uninsurable loss exposures, since war losses typically cannot be insured.

Exclusion (d) serves primarily to reduce likelihood of coverage duplications, since the insured can obtain coverage for his automobile via an automobile insurance policy.

Exclusion (e) serves primarily to assist in keeping premiums reasonable, since the premium for coverage of a loss that is virtually certain to occur would be quite high.

Exclusion (f) serves primarily to eliminate coverages requiring special treatment, since property exhibited at a trade fair or convention is exposed to a variety of perils that are atypical for personal property and so would require different underwriting, loss control, and risk evaluation methods that the insurer may not be willing to undertake, except for additional premium.

See other sections of The Actuary's Free Study Guide for Exam 5.