Nevada Property & Casualty Insurance License Exam — All Questions

Actual cash value (ACV) is most accurately calculated as:

• a.Replacement cost minus depreciation✓
• b.The amount the insured paid in premiums
• c.Replacement cost plus the cost of upgrades
• d.The original purchase price of the property

Actual cash value equals the current replacement cost of the property minus depreciation for age, wear, and obsolescence. It reflects what the property is actually worth at the time of loss, not what it would cost to buy new. Replacement cost coverage, by contrast, pays to repair or replace with new property of like kind and quality without deducting depreciation, subject to policy conditions.

A commercial building is insured under a policy with an 80% coinsurance clause. The building's replacement cost is $500,000, but it is insured for only $300,000. After a $100,000 covered loss, how much will the insurer pay before any deductible?

• a.$80,000
• b.$60,000
• c.$75,000✓
• d.$100,000

The coinsurance formula is: (amount carried / amount required) x loss = payment. The amount required is 80% of $500,000 = $400,000. The amount carried is $300,000. So $300,000 / $400,000 = 0.75, and 0.75 x $100,000 = $75,000. Because the insured carried only 75% of the required amount, the insurer pays 75% of the loss and the insured absorbs the rest as a penalty for underinsurance.

Under a named-perils property policy, the burden of proving that a loss was caused by a covered peril rests with:

• a.The insurer
• b.The insured✓
• c.The state regulator
• d.An independent adjuster only

Under a named-perils (specified perils) form, only perils listed in the policy are covered, so the insured must prove the loss was caused by one of those named perils. Under an open-perils (all-risk) form, coverage applies to any cause of loss not excluded, so the burden shifts to the insurer to prove an exclusion applies. This distinction is a core property concept and does not vary by state.

The purpose of a deductible in a property policy is to:

• a.Reduce premiums and discourage small or frivolous claims✓
• b.Guarantee the insured a profit on each covered loss
• c.Remove the need for a coinsurance clause entirely
• d.Increase the insurer's exposure to very small claims

A deductible is the portion of a loss the insured pays before the insurer pays. It reduces premiums by eliminating small claims that are costly to process, and it gives the insured a stake in preventing losses. Deductibles do not guarantee profit and are a separate concept from coinsurance, which addresses the adequacy of the amount of insurance carried.

The clause that determines how a loss is shared when two or more policies cover the same property is the:

• a.Coinsurance (insurance-to-value) clause
• b.Salvage and abandonment clause
• c.Subrogation (right of recovery) clause
• d.Other insurance (pro rata) clause✓

An other-insurance clause, commonly using a pro rata method, coordinates payment when more than one policy covers the same loss so the insured is indemnified but not overpaid. Each insurer pays its share based on the proportion of total coverage it provides. Coinsurance addresses whether enough insurance was purchased, and subrogation lets an insurer recover from a responsible third party after paying a claim.

A commercial flat roof would cost $48,000 to replace today. It has a 20-year expected life, it was 15 years old when a covered windstorm destroyed it, and the policy settles building losses on an actual cash value basis with no deductible. What does the insurer pay?

• a.$12,000✓
• b.$48,000
• c.$24,000
• d.$36,000

Actual cash value is replacement cost minus depreciation. The roof had used 15 of its 20 years, so 75 percent of its life was gone: $48,000 x 0.75 = $36,000 of depreciation, leaving $48,000 - $36,000 = $12,000. Paying the full $48,000 would be a replacement cost settlement, and $36,000 is the depreciation itself rather than the value that remained.

When an adjuster depreciates a nine-year-old commercial carpet to reach actual cash value, the deduction is measured by the carpet's:

• a.Gap between market value and the limit
• b.Share of the limit the loss represents
• c.Total premium the insured has paid in
• d.Age, wear and remaining useful life✓

Depreciation measures the value the property has already used up: its age, its physical wear, and how much serviceable life was left the moment before the loss. Premium paid is irrelevant to valuation, because premium buys the promise rather than measuring the loss. The proportion of the limit a loss represents belongs to the coinsurance test, which asks whether enough insurance was bought, not what the carpet was worth.

A store's water-damaged interior would cost $30,000 to replace and is worth $18,000 on an actual cash value basis. The replacement cost policy carries a $1,000 deductible. Before any repair work is done, the insurer's first payment is:

• a.$18,000
• b.$17,000✓
• c.$12,000
• d.$29,000

A replacement cost policy normally advances the actual cash value and holds back the recoverable depreciation until the property is actually repaired or replaced. The advance here is $18,000 of actual cash value less the $1,000 deductible, or $17,000, and the $12,000 gap between $30,000 and $18,000 is the recoverable depreciation still held back. Paying $29,000 up front would release that holdback before any work was done.

The recoverable depreciation held back under a replacement cost policy becomes payable once the insured has:

• a.Completed the repair or replacement✓
• b.Accepted the actual cash value check
• c.Paid the deductible to the contractor
• d.Filed a sworn proof of loss form

Replacement cost settlement is conditioned on actually repairing or replacing the damaged property, so until the work is done the insurer owes only actual cash value. Cashing the actual cash value draft settles nothing further by itself, and a proof of loss documents the claim rather than releasing the holdback. An insured who takes the money and never rebuilds keeps the actual cash value and loses the depreciation.

A century-old building has hand-plastered walls and ornamental tin ceilings. A policy written on a functional replacement cost basis settles a covered loss by paying to:

• a.Deduct depreciation from the tin ceiling
• b.Pay market value of the whole building
• c.Repair with modern equivalent materials✓
• d.Rebuild with the same historic materials

Functional replacement cost pays to restore the property with modern, readily available materials that do the same job, rather than duplicating obsolete or ornamental construction. It keeps the amount of insurance realistic for buildings whose faithful reproduction would cost far more than the building is worth. Reproducing the plaster and tin is straight replacement cost, and taking depreciation off is an actual cash value settlement, which is a different valuation basis.

Why is the value of the lot left out when an agent sets the amount of insurance on a house?

• a.Land value is added at the time of loss
• b.Land cannot be destroyed by insured perils✓
• c.Land is covered by the mortgage clause
• d.Land is insured under a separate policy

Insurable value is the cost to replace the structure, and the lot survives the fire that destroys the house, so there is no loss on the land to indemnify. That is why a purchase price and an insurable value rarely match: market value bundles in the land and the neighborhood, while insurable value does not. No property policy issues separate land coverage, and the mortgage clause protects a lender's financial interest rather than the ground itself.

A buyer pays $420,000 for a house. A recent appraisal values the lot alone at $130,000, and a contractor estimates $310,000 to rebuild the structure. The dwelling limit should be based on:

• a.$290,000
• b.$420,000
• c.$130,000
• d.$310,000✓

Dwelling coverage is written on the cost to rebuild the structure, which is the contractor's $310,000 figure, because the $130,000 lot is not exposed to fire. Insuring to the $420,000 purchase price buys coverage the owner can never collect, since indemnity limits recovery to the actual loss. The $290,000 figure is the price less the lot, which is a real estate calculation rather than a rebuilding cost and understates what construction would take.

A warehouse with a $1,200,000 replacement cost is insured for $810,000 under a 90 percent coinsurance clause. A covered fire causes $150,000 of damage and the policy carries no deductible. The insurer pays:

• a.$150,000
• b.$135,000
• c.$112,500✓
• d.$101,250

The coinsurance formula is the amount carried divided by the amount required, times the loss. The amount required is 90 percent of $1,200,000, or $1,080,000, and $810,000 / $1,080,000 = 0.75, so 0.75 x $150,000 = $112,500. Multiplying the loss by the 90 percent coinsurance figure gives $135,000 and is the most common wrong turn, because the clause compares the limit carried with the amount required, not the loss with the percentage.

A building with a $750,000 replacement cost carries $675,000 of insurance, an 80 percent coinsurance clause and a $2,500 deductible. A covered loss of $95,000 occurs. The insurer pays:

• a.$95,000
• b.$83,000
• c.$85,500
• d.$92,500✓

The clause required 80 percent of $750,000, or $600,000, and the insured carried $675,000, so the coinsurance test is met and there is no penalty: $95,000 - $2,500 = $92,500. Comparing the $675,000 limit with the building's full $750,000 value produces $85,500 and is wrong, because the ratio is built on the amount required, not on total value. Paying $95,000 satisfies coinsurance but forgets the deductible.

An apartment building worth $800,000 is insured for $480,000 with an 80 percent coinsurance clause and a $5,000 deductible. A covered fire causes an $80,000 loss. How much does the insurer pay?

• a.$56,250
• b.$55,000✓
• c.$80,000
• d.$60,000

Run the coinsurance formula on the loss first, then subtract the deductible. The amount required is 80 percent of $800,000, or $640,000, and $480,000 / $640,000 = 0.75, so 0.75 x $80,000 = $60,000, less the $5,000 deductible = $55,000. Taking the deductible off before applying the ratio gives $56,250 and understates the underinsurance penalty, while $60,000 is the figure of a candidate who stops before the deductible.

A commercial building is insured for $600,000 under a policy with a 5 percent deductible that applies to the amount of insurance. A covered loss of $125,000 occurs. The insurer pays:

• a.$125,000
• b.$118,750
• c.$30,000
• d.$95,000✓

A percentage deductible is figured on the stated base, here 5 percent of the $600,000 amount of insurance, or $30,000, and that comes off the loss: $125,000 - $30,000 = $95,000. Taking 5 percent of the loss instead gives $118,750 and is the classic error, because this deductible grows with the amount of insurance rather than with the size of the claim. The $30,000 figure is the deductible itself, the share the insured absorbs.

Compared with a flat dollar deductible, a percentage deductible on a commercial property policy:

• a.Is capped at the flat deductible amount
• b.Applies once a policy year, not per loss
• c.Rises as the amount of insurance rises✓
• d.Replaces the coinsurance clause entirely

A flat deductible is a fixed dollar figure taken off each covered loss, while a percentage deductible is computed from a stated base such as the amount of insurance, so raising the limit raises the deductible with it. It is not an annual aggregate; like a flat deductible it applies to each occurrence. And a deductible only reduces what the insurer pays, which leaves the adequacy of the limit to the coinsurance clause.

A commercial property policy written on a special, open-perils causes-of-loss form covers a physical loss unless:

• a.The insurer shows an exclusion applies✓
• b.The peril is missing from a listed schedule
• c.The loss happened away from the premises
• d.The insured cannot name the peril involved

An open-perils form insures risk of direct physical loss except as excluded or limited, so once the insured shows a fortuitous physical loss, the insurer carries the burden of proving that an exclusion removes it. A named-perils form reverses that arrangement: nothing is covered until the insured shows the cause of loss appears on the policy's list. Requiring the insured to name the peril applies the named-perils rule to the wrong form.

A restaurant's kitchen burns and the owner also loses six weeks of profit while it is rebuilt. The lost profit is an example of:

• a.An indirect, consequential loss✓
• b.A liability loss to a third party
• c.An excluded speculative business risk
• d.A direct loss to business property

Direct loss is the physical damage the peril does to the property itself; indirect or consequential loss is the financial harm that follows from that damage, such as lost net income and continuing expenses during the shutdown. Business income coverage exists precisely because the property forms pay for the burned kitchen and stop there. Calling it a liability loss confuses harm the owner suffers with damages the owner owes to someone else.

Lightning strikes a building, the fire it starts is put out with water, and the water ruins stock in the basement. Under proximate cause reasoning, the water damage is:

• a.Split evenly between the two named perils
• b.Covered only if water damage is also listed
• c.Covered, as lightning set the chain in motion✓
• d.Excluded, because water is the actual cause

Proximate cause asks what set in motion an unbroken chain of events leading to the damage, and when a covered peril starts that chain the resulting damage is treated as loss by that peril. Lightning is the proximate cause here, so water used to fight the fire it started is a covered consequence even though water by itself is not a listed peril. Treating the last event in the chain as the cause would defeat most fire claims, since smoke and water do much of the damage.

Two policies with no special other-insurance wording cover the same building, one for $300,000 and one for $200,000. A covered $80,000 loss occurs. On a pro rata basis, the $200,000 policy pays:

• a.$32,000✓
• b.$40,000
• c.$48,000
• d.$80,000

Pro rata sharing splits a loss in proportion to each policy's limit against the total insurance in force. The $200,000 policy is 40 percent of the $500,000 total, and 40 percent of $80,000 is $32,000, while the larger policy pays the remaining $48,000. Splitting the loss evenly at $40,000 ignores that the limits differ. Either way the insured collects the $80,000 once and not twice, which is what an other-insurance clause is for.

Which of these parties holds an insurable interest in a commercial building?

• a.A lender holding a mortgage on it✓
• b.A prior owner who sold it last year
• c.A contractor who bid on the job
• d.An insurer's appointed loss adjuster

Insurable interest means standing to suffer a financial loss if the property is damaged, and a mortgagee's loan is secured by that building, so the lender plainly qualifies. A seller gives up that interest at closing, which is why a prior owner cannot collect on a fire the following year. A losing bidder and an adjuster have a business relationship with the property rather than a financial stake in whether it survives.

The limit of insurance shown on the declarations for a building tells the insured:

• a.The floor beneath which payment cannot fall
• b.The most the insurer can be asked to pay✓
• c.The value the insurer places on the building
• d.The amount payable for any covered loss

A limit is a ceiling and not a promise: the insurer pays the loss as the valuation clause measures it, up to that figure and no further. An insured who reads the limit as the amount payable for any covered loss expects a full-limit check for a broken window. Nor is the limit the insurer's opinion of value; choosing an adequate limit is the insured's job, which is the behavior the coinsurance clause polices.

A distributor keeps stock in three warehouses and the amounts shift between them week to week. Blanket insurance suits this better than specific insurance because:

• a.Each building carries its own stated limit
• b.One limit applies across all the locations✓
• c.It removes the coinsurance clause entirely
• d.It pays regardless of the stock's real value

A blanket limit applies to all the described property at all the described locations, so the insured is not penalised when values move from one warehouse to another. Specific insurance is the opposite arrangement, a separate stated limit for each building or class of property, and it is the one that leaves a location short when stock shifts. Blanket writing does not delete coinsurance either; the test is simply run against the combined values on the statement of values.

A blanket limit of $900,000 covers two buildings reported at $700,000 and $500,000 on the statement of values, under an 80 percent coinsurance clause with no deductible. A $250,000 covered fire loss strikes the smaller building. The insurer pays:

• a.$187,500
• b.$234,375✓
• c.$250,000
• d.$200,000

Under a blanket limit the coinsurance test runs against the combined values on the statement of values, not building by building. The amount required is 80 percent of $1,200,000, or $960,000, and only $900,000 was carried, so the insurer pays $900,000 / $960,000 x $250,000 = $234,375. Dividing by the full $1,200,000 of values gives $187,500 and skips the 80 percent step, and multiplying the loss by 80 percent gives $200,000, which misreads the clause as a flat copayment.

An agreed value provision on a commercial property policy works by:

• a.Suspending the coinsurance clause for a term✓
• b.Paying the full limit for any covered loss
• c.Fixing the deductible for the policy term
• d.Raising the limit as construction costs rise

Agreed value is written after the insured files a statement of values that the insurer accepts, and in exchange the coinsurance condition is suspended, so a partial loss is settled without any underinsurance penalty. It does not turn the policy into a promise to pay the limit for every loss: the loss is still measured and the deductible still applies. Automatic increases in the limit as costs climb are the work of an inflation guard, not of agreed value.

A policy with a $900,000 agreed value limit insures a building whose replacement cost has climbed to $1,050,000 by the time a $300,000 covered loss occurs. The deductible is $10,000. The insurer pays:

• a.$257,143
• b.$290,000✓
• c.$300,000
• d.$247,143

Because the agreed value provision suspends coinsurance, the climb in replacement cost creates no penalty: the insurer pays the $300,000 loss less the $10,000 deductible, or $290,000. Running a coinsurance ratio of $900,000 against the $1,050,000 value would produce about $257,143 before the deductible, and that penalty is exactly what the agreed value provision was bought to remove. Paying $300,000 forgets the deductible.

Property written on a stated amount basis is settled at a covered total loss by paying:

• a.The stated amount plus the accrued inflation guard
• b.The stated amount, whatever the property is worth
• c.The replacement cost with no depreciation taken
• d.The least of stated amount, value or repair cost✓

A stated amount is a ceiling the insured declares for hard-to-value property, and settlement is the smallest of that figure, the property's value at the time of loss, and what it costs to repair or replace the item. That is what separates it from agreed value, where the figure the insurer accepted is binding. Reading a stated amount as a guaranteed payout is the common misunderstanding, and it leaves an insured paying premium on a number no claim will ever produce.

An inflation guard provision attached to a property policy:

• a.Waives the coinsurance clause at renewal
• b.Increases the limit through the policy term✓
• c.Pays extra when materials cost more to buy
• d.Indexes the deductible to building costs

An inflation guard raises the amount of insurance automatically during the term, so limits keep pace with construction costs and the insured stays near the amount coinsurance requires. It moves the limit only, leaving the deductible and the coinsurance condition alone. It also adds no money at claim time: whatever the limit has grown to on the day of loss is still the ceiling on what the insurer will pay.

In property underwriting, a building is described as vacant rather than unoccupied when:

• a.It holds no contents and no operations✓
• b.The owner has listed it for sale
• c.It is furnished but nobody sleeps there
• d.The residents are away on a long trip

Vacancy means the building is empty of the contents and the activity needed to carry on customary operations, while unoccupancy means it is still furnished and equipped but nobody is present for a time. The difference matters to underwriters because an empty building invites vandalism, undetected water damage and late discovery of fire, and property forms restrict certain perils once a vacancy has run long enough. A family away on a long trip leaves a home unoccupied, not vacant.

A mortgagee named under the mortgage clause of a property policy holds rights that are:

• a.Separate from the owner's own rights✓
• b.Identical to the owner's in every way
• c.Cancelled when the owner's coverage is
• d.Created only after the owner is paid

The standard mortgage clause creates a separate contract between the insurer and the lender, so the mortgagee can still be paid its interest when the owner's own claim is denied for something like arson or misrepresentation. The lender is also entitled to its own notice of cancellation or non-renewal and may pay the premium to keep coverage alive. That independence is what distinguishes it from a bare loss payee, whose rights rise and fall with the owner's.

After a fire claim, either party invokes the appraisal clause. What will the appraisal decide?

• a.The amount of the loss, not whether it is covered✓
• b.Whether the insured breached a policy condition
• c.Whether a policy exclusion applies to the loss
• d.The premium owed for the remainder of the term

Appraisal is a valuation mechanic rather than a coverage forum: each side names an appraiser, the two appraisers select an umpire, and agreement by any two of the three sets the amount of the loss. Coverage questions, such as whether an exclusion applies or a condition was breached, stay with the parties and, if it comes to that, the courts. An insurer that pays an appraisal award normally keeps its right to contest coverage on other grounds.

After paying a fire claim in full, the insurer takes the damaged inventory and sells what it can. This is:

• a.Salvage, which cuts the insurer's net cost✓
• b.Abandonment, which the insured may compel
• c.A breach of the indemnity principle
• d.Subrogation against the property itself

Salvage is the insurer's right to take and dispose of damaged property once it has paid the loss in full, and the proceeds offset what the claim cost. It is not abandonment: property policies state that the insured may not abandon property to the insurer and demand a total loss payment on it. Subrogation is a different recovery, aimed at the third party whose negligence caused the loss rather than at the damaged goods.

A contractor's welding starts a fire in a store. Before the insurer pays, the store owner signs a paper releasing the contractor from all liability. The likely result is that:

• a.The store owner may collect twice over
• b.The release binds only the contractor
• c.The claim can be reduced or denied✓
• d.The insurer must pay and then sue

Property policies require the insured to do nothing after a loss that impairs the insurer's right of recovery, because the insurer expects to step into the insured's place and pursue whoever caused the fire. Signing away the claim against the welding contractor destroys that right, and the insurer may cut or refuse payment to the extent it was prejudiced. An insured cannot settle privately with the wrongdoer and still collect the whole loss, which would be a double recovery.

A set of four matched showroom chairs is worth $2,400 as a set. A covered peril destroys one chair, and the three that remain are worth $1,500 together. Under the pair or set clause, the insurer pays:

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

The pair or set clause measures the difference between the value of the set before the loss and the value of what is left: $2,400 - $1,500 = $900. That captures the loss in value the survivors suffer from no longer being a set. Paying one quarter of the set value gives $600 and ignores that damage entirely, while the insured cannot force the insurer to pay the full $2,400 and take the three good chairs away.

Settlement of a covered building loss differs between a partial loss and a total loss because:

• a.A total loss is settled at the purchase price
• b.A partial loss ignores the coinsurance test
• c.A partial loss is paid at the cost to repair✓
• d.A total loss removes the deductible from it

A partial loss is measured by what it costs to repair or replace the damaged portion, valued as the policy's valuation clause requires, while under the policy's own valuation terms a total loss is settled at the lesser of the property's value and the limit, which is why an underinsured owner feels the limit at a total loss. Coinsurance is tested on partial losses as usual, and the deductible comes off either kind of loss. Purchase price does not govern, because it carries land and market factors the policy does not insure.

A standard homeowners form covers trees, shrubs and plants for up to 5 percent of the Coverage A limit, but no more than $500 for any one tree, shrub or plant. Coverage A is $360,000 and a covered fire destroys six ornamental trees worth $1,200 each. The insurer pays:

• a.$3,000✓
• b.$500
• c.$18,000
• d.$7,200

Two caps run at the same time. Five percent of the $360,000 Coverage A limit is $18,000, far more than this loss needs, so the per-item cap controls: six trees at $500 each is $3,000. The $7,200 figure is the trees' actual value and ignores the per-item limit, while $18,000 is the outer ceiling the loss never reaches. A percentage sublimit sets the boundary, and an inner per-item limit can bind long before it.

Under a value reporting form, an insured reports $200,000 of stock at a location where the actual value on the reporting date was $250,000. A $100,000 covered loss later occurs there. The insurer pays:

• a.$80,000✓
• b.$100,000
• c.$50,000
• d.$75,000

The full reporting condition limits recovery to the proportion the last reported value bears to the value that should have been reported: $200,000 / $250,000 = 80 percent, and 80 percent of $100,000 is $80,000. Reporting forms exist so a business with a heavy peak season pays premium on the values it actually holds month by month instead of insuring the seasonal high all year. Under-reporting buys the cheaper premium and the smaller recovery with it.