New Jersey Personal Lines Insurance License Exam — All Questions

Actual cash value (ACV) of personal property is calculated as:

• a.Replacement cost with no adjustment
• b.Replacement cost minus depreciation✓
• c.The original price the insured paid
• d.The total premiums paid on the policy

Actual cash value equals the current cost to replace the item minus depreciation for age, wear, and condition. It reflects what the used property is actually worth at the time of loss. Replacement cost coverage, by contrast, pays to replace the item with a new one of like kind and quality without deducting depreciation, subject to policy conditions, and is a valuable option for personal property.

Under an open-perils (all-risk) property form, a loss is covered:

• a.Only if the insurer approves in advance
• b.Unless it is caused by a specifically excluded peril✓
• c.Only for perils listed on the declarations page
• d.Only if the peril is specifically named

An open-perils form covers any cause of loss that is not specifically excluded, so the insurer must prove an exclusion applies to deny a claim. This is broader than a named-perils form, which covers only the perils listed and requires the insured to prove the loss came from a named peril. Open-perils coverage generally costs more because it is broader.

A homeowner has a $1,000 deductible and suffers a covered $6,000 loss. How much will the insurer pay?

• a.$6,000
• b.$5,000✓
• c.$0
• d.$1,000

A deductible is the portion of a covered loss the insured pays before the insurer pays. With a $1,000 deductible on a $6,000 loss, the insured absorbs $1,000 and the insurer pays the remaining $5,000. Deductibles lower premiums and discourage small claims by giving the insured a financial stake in each loss.

Which of the following is typically NOT covered under a standard homeowners property form?

• a.Flood✓
• b.Theft
• c.Fire
• d.Windstorm

Standard homeowners forms exclude flood; flood coverage must be obtained separately. Earth movement (such as earthquake) is also typically excluded and added by endorsement or a separate policy. Fire, windstorm, and theft are covered perils under standard forms. Knowing which catastrophic perils are excluded from the base policy is essential for identifying coverage gaps.

After paying a claim, an insurer's right to recover from the person who caused the loss is called:

• a.Subrogation✓
• b.Indemnity
• c.Coinsurance
• d.Salvage

Subrogation is the insurer's right, after paying a covered claim, to step into the insured's position and pursue the third party responsible for the loss. It prevents the insured from collecting twice and supports the principle of indemnity. The insured must avoid any action after a loss that would impair the insurer's ability to subrogate, such as signing away claims against the responsible party.

Depreciation, when an insurer computes the actual cash value of damaged property, is measured mainly by the property's:

• a.share of premium the insured has paid
• b.drop in resale price since purchase
• c.age, wear and remaining useful life✓
• d.gap between cost and the policy limit

Actual cash value is replacement cost minus depreciation, and depreciation estimates the value used up through age, wear and the remaining useful life of the item. The answer built on resale price confuses depreciation with market movement, which can rise or fall for reasons unrelated to wear. The premium an insured has paid has no bearing on how much value the property has lost.

A roof with a 20-year useful life is 15 years old when hail destroys it. Replacement cost is $16,000, the roof is settled at actual cash value, and the deductible is $1,000. The insurer pays:

• a.$4,000
• b.$11,000
• c.$15,000
• d.$3,000✓

Fifteen of the twenty years of life are used up, so depreciation is 75% of $16,000 and the actual cash value is $4,000; subtracting the $1,000 deductible leaves $3,000. The $4,000 figure stops before the deductible. The $15,000 figure settles at replacement cost and ignores depreciation entirely, and $11,000 comes from depreciating only 25% of the roof.

On a standard unendorsed homeowners form, how do the loss settlement bases for the dwelling and for personal property differ?

• a.The dwelling is actual cash value, contents replacement cost
• b.Both the dwelling and the contents settle at replacement cost
• c.The dwelling is replacement cost, contents actual cash value✓
• d.Both the dwelling and the contents settle at market value

The unendorsed homeowners form pays replacement cost for the dwelling but settles personal property at actual cash value, so contents are depreciated unless a replacement-cost-on-contents endorsement is added. The choice that reverses the two bases is the common mix-up. The market-value answer confuses what a buyer would pay with what it costs to repair or replace.

Under a replacement cost settlement, why does the insurer first pay only the actual cash value of the damage?

• a.Depreciation is recoverable once the repairs are done✓
• b.Depreciation is the insured's share of every repair
• c.Depreciation is kept by the insurer as its salvage
• d.Depreciation is released only if the mortgagee agrees

Replacement cost policies pay the depreciated amount first and hold the depreciation back, releasing it after the insured completes the repair or replacement and submits proof of the cost. Calling that hold-back salvage confuses the insurer's right to damaged property with a timing device. The held-back sum is not a permanent share of the loss borne by the insured, provided the work is done.

A covered fire causes damage with a replacement cost of $32,000; the actual cash value of that damage is $23,000 and the deductible is $1,000. What does the insurer pay before any repairs are made?

• a.$22,000✓
• b.$31,000
• c.$23,000
• d.$9,000

The first payment on a replacement cost policy is the actual cash value of the damage less the deductible: $23,000 minus $1,000 is $22,000. The $23,000 figure forgets the deductible. The $31,000 total becomes payable only after the repairs are finished and receipts are submitted, when the $9,000 of recoverable depreciation is released.

Functional replacement cost settles a building loss by:

• a.Repairing with modern materials that do the same job✓
• b.Paying the cost to duplicate the original materials
• c.Deducting depreciation from the builder's estimate
• d.Paying what a willing buyer would give for the house

Functional replacement cost pays to rebuild with modern, commonly available materials that do the same job, drywall in place of plaster for example, rather than duplicating obsolete construction. The answer describing what a buyer would pay is market value, a different measure. Deducting depreciation describes actual cash value, and duplicating the original materials is full replacement cost.

Insurable value for a dwelling differs from the home's market value chiefly because insurable value:

• a.Excludes the roof, which is depreciated
• b.Includes the land plus the closing costs paid
• c.Excludes the land, which cannot burn down✓
• d.Includes the land at its assessed value

Insurable value is the cost to rebuild the structure, and the lot underneath it is not exposed to fire, wind or theft, so land value is left out of the dwelling limit. Market value includes the land and reflects location, demand and financing. The answers that fold land into the amount insured lead owners to buy far more coverage than a rebuild would ever cost.

A house sold recently for $460,000. A builder puts the cost to rebuild the structure at $310,000, the lot alone is worth $150,000, and the mortgage balance is $370,000. The dwelling limit should be set near:

• a.$310,000✓
• b.$150,000
• c.$370,000
• d.$460,000

The dwelling limit insures the cost to rebuild the structure, which is the builder's $310,000 estimate; land is not insured because it cannot be destroyed. The $460,000 sale price is market value and includes the lot. Setting the limit at the $370,000 mortgage balance insures the lender's debt rather than the building, and $150,000 is the land by itself.

The coinsurance formula settles a partial loss by multiplying the loss by:

• a.Insurance required over insurance carried
• b.The property value over insurance carried
• c.Insurance carried over the property value
• d.Insurance carried over insurance required✓

The fraction is the amount of insurance carried divided by the amount required, which is the coinsurance percentage times the property's value, and that fraction is applied to the loss. Flipping the fraction so the required amount sits on top produces a payment larger than the loss, which indemnity forbids. Dividing by full value rather than the required amount understates every payment.

A dwelling with a $250,000 replacement cost carries $150,000 of insurance under an 80% coinsurance clause. A covered loss of $40,000 occurs and there is no deductible. The insurer pays:

• a.$30,000✓
• b.$24,000
• c.$40,000
• d.$32,000

The required amount is 80% of $250,000, or $200,000; carrying $150,000 gives a ratio of 0.75, and 0.75 of the $40,000 loss is $30,000. Paying the full $40,000 ignores the coinsurance clause altogether. The $24,000 answer divides the insurance carried by the full $250,000 value instead of the $200,000 required, and $32,000 simply takes 80% of the loss.

A building valued at $400,000 is insured for $280,000 with an 80% coinsurance clause and a $2,500 deductible. A covered loss of $50,000 occurs. The insurer pays:

• a.$47,500
• b.$43,750
• c.$41,250✓
• d.$35,000

Eighty percent of $400,000 is $320,000 required; the $280,000 carried gives 0.875, and 0.875 of $50,000 is $43,750, from which the $2,500 deductible leaves $41,250. Stopping at $43,750 forgets the deductible, which comes off after the ratio is applied. Paying $47,500 takes the deductible but ignores the penalty, and $35,000 divides by the $400,000 value rather than the $320,000 required.

A dwelling with a $320,000 replacement cost is insured for $300,000 under a 90% coinsurance clause with a $1,000 deductible. A covered $60,000 loss occurs. The insurer pays:

• a.$60,000
• b.$55,250
• c.$56,250
• d.$59,000✓

Ninety percent of $320,000 is $288,000 required, and the $300,000 carried exceeds it, so no coinsurance penalty applies and the loss is paid in full less the $1,000 deductible: $59,000. The $60,000 figure forgets the deductible. The two lower figures apply a ratio of $300,000 to the $320,000 value, but the formula compares insurance carried with the amount required, not with full value.

A dwelling with a $300,000 replacement cost is insured for $240,000, meeting the form's 80% requirement. Fire damages one wing: $18,000 to replace, $12,000 depreciated, deductible $1,000. The insurer pays:

• a.$11,000
• b.$14,400
• c.$18,000
• d.$17,000✓

Because the amount of insurance is at least 80% of full replacement cost, the form settles a partial building loss at replacement cost, so the insurer pays the $18,000 repair cost less the $1,000 deductible. The $11,000 answer settles the damaged portion at its depreciated $12,000 value, which is what applies when that 80% test is failed. Taking 80% of the loss is no part of the settlement.

When a coinsurance penalty applies to a property loss, the deductible is:

• a.Subtracted before the coinsurance ratio is applied
• b.Reduced by the same ratio as the loss payment
• c.Subtracted after the coinsurance ratio is applied✓
• d.Waived once a coinsurance penalty is charged

The loss is first multiplied by the carried-over-required fraction, and the deductible then comes off that reduced figure, so the insured absorbs both. Taking the deductible off first changes the base the ratio is applied to and yields a different number. The deductible is neither prorated by the ratio nor forgiven because a penalty was assessed.

A percentage deductible on a homeowners policy differs from a flat deductible in that it is:

• a.Figured as a percent of the annual premium
• b.A fixed dollar amount taken from each loss
• c.Figured as a percent of the dwelling limit✓
• d.A fixed dollar sum applied once per year

A percentage deductible is stated as a percent of the amount of insurance on the dwelling, so it grows every time that limit is raised, while a flat deductible stays at a set dollar figure until it is changed. The premium-based answer is not how any deductible is computed. The two fixed-dollar descriptions define the flat deductible, which is the thing being contrasted.

A homeowners policy shows a dwelling limit of $280,000 and a 2% deductible; the home's full replacement cost is $350,000. A covered $34,000 loss occurs. The insurer pays:

• a.$33,320
• b.$28,400✓
• c.$34,000
• d.$27,000

The percentage deductible runs on the amount of insurance, so it is 2% of $280,000, or $5,600, leaving $28,400 of the $34,000 loss. The $27,000 answer takes 2% of the home's $350,000 replacement cost instead of the limit shown on the declarations. Applying the 2% to the loss itself gives only a $680 deductible, and $34,000 ignores the deductible.

Under a named-perils property form, who carries the burden of proof when a claim is filed?

• a.The insured proves no exclusion applies to it
• b.The insurer proves an exclusion bars the claim
• c.The insured proves the cause is a listed peril✓
• d.The insurer proves the cause is a listed peril

A named-perils form covers only the causes of loss it lists, so the insured carries the burden of showing the damage came from one of them. The answer that puts the exclusion burden on the insurer states the open-perils rule, which is the reverse arrangement. Making the insurer prove a listed peril would turn a named-perils form into open-perils coverage.

On an open-perils form, once the insured shows that direct physical loss occurred, the insurer must:

• a.Show an exclusion applies to deny the claim✓
• b.Show the insured could have prevented it
• c.Show the peril appears on a listed schedule
• d.Show the loss exceeds the deductible amount

Open-perils forms cover any direct physical loss unless it is excluded, so after the insured establishes that fortuitous damage happened, the burden moves to the insurer to point at an exclusion. Requiring a listed peril describes named-perils coverage. Preventability and the size of the deductible are separate questions and do not decide whether the loss falls inside the insuring agreement.

The difference between a direct loss and an indirect or consequential loss is that the indirect loss is:

• a.The physical damage the covered peril itself causes
• b.The financial loss that follows the physical damage✓
• c.The damage a neighbor's covered peril causes here
• d.The portion of damage the deductible leaves unpaid

A direct loss is the physical damage the peril causes; an indirect or consequential loss is the money loss that flows from it, such as additional living expense, lost rent or spoiled food. The choice describing physical damage from the peril defines direct loss, the very thing being contrasted. A neighbor's peril and the deductible have nothing to do with the distinction.

A covered kitchen fire drives a family into a hotel for six weeks. Which part of that is the indirect loss?

• a.The burned cabinets and scorched wall
• b.The floor ruined by firefighting water
• c.The smoke damage to the family's clothes
• d.The hotel bills the family has run up✓

Additional living expense is a consequential loss: the hotel bills are not physical damage, they are money the family spends because the damage made the home unfit to live in. Burned cabinets, smoke-damaged clothing and a water-soaked floor are all direct physical damage, whether the water came from the fire hose or the fire itself.

Proximate cause, as property insurance uses the term, refers to:

• a.The event starting an unbroken chain to the loss✓
• b.The last event occurring just before the damage
• c.The person whose carelessness produced the damage
• d.The most expensive item of damage that resulted

Proximate cause is the peril that sets in motion an unbroken chain of events ending in the loss, and coverage turns on whether that peril is insured. Picking the last event in the sequence would let an uncovered final step defeat coverage the original covered peril triggered. Proximate cause identifies a cause of loss, not a responsible person or the biggest repair item.

Firefighters put out a covered kitchen fire and their water ruins the ceiling of the room below. That ceiling damage is:

• a.Excluded, because water damage is a peril
• b.Covered, but only under a water back-up part
• c.Covered, because fire is the proximate cause✓
• d.Excluded, because the fire department did it

Water applied to extinguish a covered fire is part of the unbroken chain the fire started, so the fire remains the proximate cause and the ceiling damage is a fire loss. Calling it excluded water damage misreads the chain and would leave almost every fire claim half paid. Back-up coverage deals with water rising through drains and sewers, which is not what happened here.

Two policies with no conflicting other-insurance wording cover the same building. Pro rata sharing makes each insurer pay:

• a.An equal half of the loss, whatever its limit
• b.Only the amount above the other policy limit
• c.Its share of the limits, applied to the loss✓
• d.The whole loss, then collect from the other

Pro rata sharing divides the loss in proportion to each policy's limit against the total insurance in force, so a larger limit carries a larger share. Splitting the loss down the middle ignores the limits and overcharges the smaller policy. The approach where one policy sits above the other is an excess other-insurance clause, not pro rata sharing.

A building is insured by one policy for $150,000 and another for $100,000, both sharing pro rata. A covered loss of $40,000 occurs. The $150,000 policy pays:

• a.$24,000✓
• b.$20,000
• c.$16,000
• d.$40,000

Total insurance in force is $250,000, so the larger policy carries 150/250, or 60%, of the loss, which is $24,000, and the smaller policy pays the remaining $16,000. The $20,000 answer splits the loss evenly and ignores the limits. The full $40,000 would apply only if the second policy did not exist or sat in excess.

Two policies share a loss pro rata: one carries an $80,000 limit, the other $120,000. A covered $50,000 loss occurs. The $80,000 policy pays:

• a.$20,000✓
• b.$50,000
• c.$30,000
• d.$25,000

Total insurance is $200,000, so the smaller policy carries 80/200, or 40%, of the $50,000 loss, which is $20,000, while the larger policy pays $30,000. The $25,000 answer divides the loss equally between the insurers. Paying the whole $50,000 would ignore the other-insurance condition entirely.

Which of these people has an insurable interest in one particular house?

• a.A buyer whose offer on it was rejected
• b.A neighbor whose view that house frames
• c.A bank holding a mortgage on that house✓
• d.A roofer who worked on it three years ago

Insurable interest means suffering a real financial loss if the property is damaged, and a mortgagee stands to lose its security, so it may be named on the policy. A neighbor's enjoyment of a view is not a financial stake in the building. A rejected buyer holds no ownership or contract right, and a contractor's interest ended when the finished job was paid for.

Two partners each own an undivided one-half interest in a $300,000 rental building. One buys a policy in her own name with a $300,000 limit. Fire destroys the building. She may collect:

• a.the full $300,000 policy limit
• b.her one-half interest, $150,000✓
• c.the full $300,000 building value
• d.$75,000, one half of her share

Indemnity limits recovery to the insured's own financial interest, and hers is half the building, so $150,000 is the ceiling no matter what limit she bought. Collecting the whole limit or the whole building value would pay her for her partner's loss as well and leave her better off than before the fire. Halving her share a second time has no basis in the ownership.

The limit of insurance shown on the declarations page of a property policy represents:

• a.A sum guaranteed on any covered loss
• b.The most payable, not a sum guaranteed✓
• c.The value the insurer has placed on it
• d.The least the insurer pays per claim

A limit caps what the insurer can be required to pay; the payment itself is measured by the loss, the valuation basis and the deductible, and is usually far smaller. Treating the limit as a guaranteed sum is the misunderstanding behind demands for the whole limit after a small fire. The limit is also not the insurer's appraisal of the property, and it is a maximum rather than a minimum.

Blanket insurance differs from specific insurance in that a blanket limit:

• a.Applies a separate limit to each building
• b.Applies only after specific limits are used
• c.Covers several items under one shared limit✓
• d.Covers one item at one described location

A blanket limit is a single amount standing behind two or more buildings, locations or categories of property, so it can flow to wherever the loss happens. The descriptions naming one item at one location, or a separate limit for each building, both define specific insurance, the arrangement blanket coverage is contrasted with. Blanket is not an excess layer above other limits.

The practical effect of an agreed value provision on a property policy is that:

• a.The limit rises automatically during the term
• b.The coinsurance condition is suspended for the term✓
• c.The deductible is suspended for the policy term
• d.The insurer values all contents at replacement cost

Under an agreed value provision the insurer and the insured settle on a value in advance, usually from a signed statement of values, and the coinsurance condition is set aside so no penalty can be assessed on a partial loss. It does not remove the deductible, which still applies to every loss. Automatic increases in the limit describe inflation guard, a different feature.

Under a stated amount arrangement, a covered loss is settled at:

• a.The greater of the stated sum or repair cost
• b.The stated sum plus the cost of any salvage
• c.The lesser of the stated sum or actual value✓
• d.The stated sum, whatever the actual value

A stated amount fixes a ceiling rather than a promise: the insurer pays the smallest of the stated figure, the actual cash value, or what it costs to repair or replace, so the insured is indemnified rather than enriched. Paying the stated sum regardless of value describes an agreed value approach. Choosing the greater of two figures would pay more than the loss.

A policy with a $240,000 dwelling limit carries a 4% annual inflation guard. At the next renewal, twelve months later, that limit will be about:

• a.$240,000
• b.$259,200
• c.$230,400
• d.$249,600✓

Inflation guard raises the amount of insurance automatically to track construction costs, so 4% of $240,000 adds $9,600 and the limit renews at $249,600. Leaving the limit at $240,000 describes a policy with no inflation guard at all. The $259,200 figure doubles the percentage to 8%, and $230,400 moves the limit in the wrong direction.

A furnished house whose owners have been travelling for two months is best described as:

• a.abandoned, since the owners left it
• b.vacant, because the furniture stayed
• c.unoccupied, since the contents remain✓
• d.vacant, since nobody has been living there

Unoccupied means people are away while the property stays furnished and the owners intend to return; vacant means the building is empty of both occupants and contents. Because the furnishings are still in place the house is unoccupied, and that matters because forms restrict certain perils once a building has stood vacant. Abandonment means giving up all claim to the property.

A dwelling is destroyed and the insurer denies the owner's claim because he set the fire. Under the standard mortgage clause:

• a.The mortgagee may still be paid its interest✓
• b.The mortgagee is paid after the owner is
• c.The mortgagee's claim dies with the owner's
• d.The mortgagee must first sue the owner in court

The standard mortgage clause is a separate agreement between the insurer and the lender, so the lender's right to payment survives acts of the owner, such as arson or misrepresentation, that void the owner's own claim. Treating the two claims as one destroys the security the clause exists to give. The mortgagee need not sue the borrower first and is not paid out of the owner's settlement.

The appraisal clause resolves a dispute over the amount of a loss in this way:

• a.The appraisers decide coverage and loss amount
• b.The insurer's own appraiser decides, subject to appeal
• c.An umpire chosen by the insurer decides it alone
• d.Two appraisers pick an umpire; any two agreeing decide✓

Each party selects and pays its own competent appraiser, the two appraisers choose an umpire, and an agreement signed by any two of the three sets the amount of loss. Letting one side's appraiser or a one-sided umpire decide would defeat the balance the clause is built on. Appraisal settles value only; whether the loss is covered at all stays with the policy.

After a serious fire the insured tells the insurer to keep the damaged building and pay the full limit. The policy provides that:

• a.Property may not be abandoned to the insurer✓
• b.Salvage proceeds belong to the insured alone
• c.Abandoned property must be bought at its limit
• d.The insurer must sell salvage within a year

Property policies contain an abandonment condition: the insured cannot hand damaged property to the insurer and demand the limit, because the insurer chooses whether to pay, repair, replace or take the property at an agreed value. Salvage the insurer does take belongs to the insurer, which has already paid for the loss. The condition sets no deadline for disposing of it.

An insurer pays $80,000 for fire damage a contractor's crew caused. Subrogation means the insurer may:

• a.Require the insured to sue the contractor
• b.Keep any recovery beyond what it has paid
• c.Reduce the payment by the contractor's share
• d.Pursue the contractor for what it has paid✓

Subrogation transfers the insured's right of recovery to the insurer once the claim is paid, so the insurer steps into the insured's place and pursues the contractor for the $80,000 it paid out. It does not let the insurer pay less up front because someone else was at fault; the insured is paid first and recovery comes later. Amounts recovered beyond the insurer's outlay are not its to keep.

A set of four matching chairs is worth $2,400; after a covered loss destroys one, the remaining three are worth $1,500. Ignoring the deductible, the pair or set clause pays:

• a.$600
• b.$900✓
• c.$1,500
• d.$2,400

The pair or set clause measures the loss as the difference between the value of the set before the loss and the value of what is left, which is $2,400 minus $1,500, or $900. That is more than the $600 one chair alone would fetch, because breaking the set destroys value in the survivors. The insurer need not pay the whole $2,400 unless it chooses to take the set.

A homeowners policy shows a dwelling limit of $260,000, with other structures at the standard 10% of that limit. A detached garage suffers $31,000 of covered damage and the deductible is $1,000. The insurer pays:

• a.$30,000
• b.$25,000
• c.$26,000✓
• d.$31,000

Other structures is a percentage sublimit, 10% of the $260,000 dwelling limit, so $26,000 is the most available for the garage even though the loss less the deductible comes to $30,000. Paying $30,000 ignores the sublimit. Subtracting the deductible from the limit to reach $25,000 reverses the order: the deductible comes off the loss, and the sublimit then caps the result.