Connecticut Property & Casualty Insurance License Exam — All Questions

Which type of risk is insurable by a property and casualty insurer?

• a.Speculative risk, because it offers a chance of gain
• b.Pure risk, because it involves only the chance of loss or no loss✓
• c.Market risk, because prices are predictable
• d.Dynamic risk, because it changes with the economy

Insurers cover pure risk, which is a situation with only two possible outcomes: a loss or no loss, with no possibility of gain. Speculative risk (such as gambling or investing) includes a chance of gain and is not insurable, because insurance is meant to restore a loss, not create profit. Market and dynamic risks generally involve speculative elements and broad economic change that are not suited to insurance pooling.

A hazard that arises from a person's carelessness or indifference to a loss because insurance exists is called a:

• a.Physical hazard
• b.Moral hazard
• c.Morale hazard✓
• d.Legal hazard

A morale hazard is an attitude of carelessness or indifference to loss because the person knows insurance will pay (for example, leaving a car unlocked). A physical hazard is a tangible condition that increases the chance of loss, such as an oily rag pile. A moral hazard involves dishonesty, such as intentionally causing a loss to collect. Distinguishing morale from moral hazard is a common exam point: morale is carelessness, moral is dishonesty.

The principle of indemnity is best described as:

• a.Restoring the insured to the same financial position held before the loss, without gain✓
• b.Paying the full policy limit for every covered loss
• c.Guaranteeing a profit to the insured after a loss
• d.Replacing property with brand-new items regardless of age

Indemnity means restoring the insured to the approximate financial condition they were in just before the loss, so they are made whole but do not profit. Paying the full limit regardless of the actual loss would violate indemnity by allowing gain. Property insurance is built on indemnity, which is why concepts like actual cash value, deductibles, and other-insurance clauses exist to prevent overpayment.

For a property insurance claim to be valid, the insured must have an insurable interest in the property:

• a.Only when the policy is first purchased
• b.Only when the policy is renewed
• c.At no particular time; ownership is enough
• d.At the time of the loss✓

In property and casualty insurance, insurable interest must exist at the time of the loss, because the purpose is to indemnify an actual financial loss. This differs from life insurance, where insurable interest must exist only when the policy begins. A person who has sold the covered property before a loss no longer has an insurable interest and cannot collect.

An insurance contract is described as a contract of adhesion. This means:

• a.Both parties draft the wording together
• b.One party writes the contract and the other must accept or reject it as written✓
• c.The contract can be changed by either party at any time
• d.Only the insured makes an enforceable promise

A contract of adhesion is prepared by one party (the insurer) and offered to the applicant on a take-it-or-leave-it basis, with no negotiation of terms. Because the insured did not write the wording, any ambiguity is generally interpreted in favor of the insured. This is separate from the contract being unilateral (only the insurer makes a legally enforceable promise) and aleatory (an unequal exchange of value dependent on chance).