Washington Property & Casualty Insurance License Exam — All Questions

To win a negligence claim, an injured party generally must prove all of the following EXCEPT:

• a.A legal duty was owed
• b.Actual damages resulted from the breach
• c.The duty was breached
• d.The defendant intended to cause harm✓

Negligence requires proving duty, breach of that duty, proximate cause, and actual damages, but it does not require intent to cause harm; negligence is about carelessness, not intent. An intentional act that causes harm is a separate category (an intentional tort) and is generally excluded from liability insurance. This makes intent the element that does not belong in a negligence claim.

Liability that is imposed on a party regardless of fault or negligence, such as for abnormally dangerous activities, is called:

• a.Absolute (strict) liability✓
• b.Comparative liability
• c.Vicarious liability
• d.Contributory negligence

Absolute or strict liability is imposed without regard to fault when a party engages in inherently dangerous activities (such as blasting) or under certain statutes; the injured party need not prove negligence. Vicarious liability holds one party responsible for another's acts (such as an employer for an employee). Contributory and comparative concepts address how an injured party's own fault affects recovery.

In a liability policy, the coverage that responds to bodily injury or property damage the insured becomes legally obligated to pay is triggered by:

• a.Legal liability of the insured to a third party✓
• b.Medical expenses the insured incurs personally
• c.Any loss the insured reports, whether liable or not
• d.Damage to property the insured owns or rents

Liability (third-party) coverage responds when the insured is legally obligated to pay damages to another party for bodily injury or property damage, and it typically includes the cost of the insured's legal defense. It does not pay for the insured's own property or injuries, which are first-party coverages. The legal obligation, usually arising from negligence, is what triggers the coverage.

An umbrella liability policy primarily provides:

• a.First-dollar coverage with no underlying insurance
• b.Coverage limited to the property the insured owns
• c.Extra liability limits above the underlying policies✓
• d.A substitute for auto physical damage coverage

A personal umbrella policy provides an extra layer of liability limits that sits above the insured's underlying home and auto liability coverage, and it may cover some claims the underlying policies exclude (subject to a self-insured retention). It generally requires the insured to maintain specified underlying limits. It is excess liability protection, not a first-dollar or property coverage.

A grocer mops an aisle and leaves no warning sign; a shopper slips and fractures a wrist. Which pair of negligence elements does the unmarked wet floor most directly establish?

• a.damages and the doctrine of vicarious liability
• b.the duty of care owed and its breach✓
• c.proximate cause and the shopper's assumed risk
• d.strict liability and an intervening cause

A store owes customers reasonable care, and mopping without posting a warning falls below that standard, so the unmarked wet floor supplies duty and breach. The fracture and its costs supply damages, and the causal chain supplies proximate cause; those are separate elements the claimant still has to prove. Strict liability does not apply, because routine floor cleaning is not an abnormally dangerous activity.

States take different approaches to a plaintiff who is partly at fault. Under a comparative negligence approach, the plaintiff's recovery is:

• a.unaffected, because the defendant breached a duty
• b.reduced in proportion to the plaintiff's fault✓
• c.shifted onto the defendant's insurer
• d.barred completely once any fault is assigned

A comparative negligence approach reduces the award by the plaintiff's own share of fault: a $100,000 award to a plaintiff found 30% at fault becomes $70,000. The answer that bars recovery entirely once any fault is assigned describes contributory negligence, the older approach a small number of states still follow. Which approach governs is set by each state's law, so the two must not be treated as interchangeable.

A spectator sits behind the dugout at an amateur ball game, is struck by a foul ball, and sues the club. The club's strongest defence is that the spectator:

• a.knew of and accepted an obvious inherent risk✓
• b.owed the club a reciprocal duty of reasonable care
• c.was a licensee rather than an invitee that day
• d.failed to prove the club carried enough insurance

Assumption of risk defeats a negligence claim when the injured person knew of a hazard inherent in an activity and voluntarily accepted it; foul balls reaching the seats are the classic illustration. The licensee-versus-invitee answer misuses premises status, which changes the degree of care owed rather than defeating the claim. How much insurance the club bought is not an element of the plaintiff's case.

A driver negligently blocks a traffic lane; twenty minutes later an unrelated drunk driver strikes the stopped car. The drunk driver's conduct is best described as:

• a.res ipsa loquitur applied to the second collision
• b.a form of vicarious liability for the first driver
• c.a comparative fault share owed by a passenger
• d.an intervening cause that may cut off liability✓

An intervening cause is a new and independent act arising after the original negligence; when it is unforeseeable it supersedes that negligence and breaks the chain of proximate cause, ending the first party's liability. Vicarious liability fails here because the two drivers share no employment or agency relationship. Res ipsa loquitur is an evidentiary inference drawn from how an accident happened, not a causation doctrine.

Absolute (strict) liability differs from ordinary negligence liability because the claimant does not have to prove:

• a.that a defective product left the plant
• b.that the defendant conducted the activity
• c.that the claimant suffered measurable damages
• d.that the defendant failed to use reasonable care✓

Strict or absolute liability attaches to a narrow set of exposures — abnormally dangerous activities such as blasting or keeping wild animals, and defective products — where fault simply is not an issue and carelessness need not be shown. Damages still must be proved, so the answer that removes the damages element is wrong: there is no claim without harm. The claimant also still has to tie the defendant to the activity or to the defective product.

A delivery driver rear-ends a car while making scheduled company deliveries. The employer is held liable for the driver's negligence under the doctrine of:

• a.res ipsa loquitur, as the facts speak for themselves
• b.assumption of risk transferred to the employer
• c.vicarious liability for an employee's acts on the job✓
• d.absolute liability for an ultrahazardous activity

Vicarious liability imputes one party's negligence to another because of their relationship, most often employer to employee for acts within the scope of employment, which scheduled deliveries plainly are. Res ipsa loquitur is an inference of negligence drawn from the nature of an accident, not a way of transferring one person's negligence to another. Ordinary driving is not an ultrahazardous activity, so absolute liability does not reach it.

A surgical sponge is left inside a patient and is found on a later scan. The patient invokes res ipsa loquitur, which allows a court to:

• a.hold the hospital liable regardless of fault
• b.shift the loss onto the patient's own insurer
• c.infer negligence from the nature of the accident✓
• d.award punitive damages without proof of malice

Res ipsa loquitur — the thing speaks for itself — lets a court infer negligence where the accident is of a kind that does not ordinarily happen without it, the instrumentality was under the defendant's exclusive control, and the injured party did not contribute. It is an evidentiary inference, so the answer describing liability regardless of fault confuses it with strict liability. Punitive damages still require proof of the conduct that would justify them.

A jury awards an injured claimant $300,000 in compensatory damages and $500,000 in punitive damages. The punitive portion is best described as:

• a.repayment of the claimant's medical bills
• b.the value of the claimant's future lost earnings
• c.a sum meant to punish and deter the wrongdoer✓
• d.an award restoring the claimant's actual losses

Punitive damages punish conduct a court finds willful, malicious, or grossly reckless and deter its repetition; they go beyond making the claimant whole. Medical bills, future lost earnings, and restoration of actual losses are all compensatory and make up the $300,000 portion of this award. Many liability policies do not cover punitive damages, and whether they may be insured at all is a question decided under each state's law.

A claimant's award includes $48,000 for medical bills and lost wages plus $75,000 for pain and suffering. The $75,000 portion is classified as:

• a.supplementary payments made outside the limit
• b.punitive damages, awarded to punish the defendant
• c.general damages for intangible, unreceipted loss✓
• d.special damages, because a figure was assigned

Special damages are the measurable out-of-pocket losses — medical bills, lost wages, repair costs — which here total $48,000. General damages compensate intangible harm such as pain, suffering, disfigurement, and loss of consortium, which is exactly what the $75,000 represents. Punitive damages are a separate category aimed at the defendant's conduct, and supplementary payments are a policy provision rather than a class of damages.

A hardware store owes its highest degree of care to a customer shopping during business hours because that customer is:

• a.an invitee, present for the occupier's benefit✓
• b.a trespasser, owed only a duty to avoid traps
• c.a bailee, holding the occupier's property safely
• d.a licensee, present with the occupier's permission

An invitee enters premises with permission and for the occupier's commercial benefit, so the occupier must inspect for hazards and either correct them or warn of them. A licensee, such as a social guest, enters with permission but for their own purposes and is owed a warning of known dangers rather than an active inspection. A trespasser is generally owed only the duty not to be injured willfully or by a hidden trap.

A contractor leaves an unfenced excavation full of water on a vacant lot and a neighbourhood child drowns. The attractive nuisance doctrine matters here because it:

• a.makes the child's parents solely responsible
• b.shifts the claim to first-party medical payments
• c.raises the care owed to a trespassing child✓
• d.converts the loss into an ultrahazardous activity

Attractive nuisance holds an occupier responsible when an artificial condition likely to draw children — a pool, an open pit, discarded machinery — is left unguarded and a child too young to appreciate the danger is hurt, even though that child is technically a trespasser. The doctrine changes the duty owed, so calling the excavation an ultrahazardous activity misstates it. Weak parental supervision may reduce an award but does not extinguish the occupier's duty.

A restaurant's own kitchen equipment burns for a $60,000 loss and, in a separate incident, a diner sues the restaurant for $80,000 over food poisoning. Which statement classifies these two claims correctly?

• a.both are first-party claims under the same policy
• b.both are third-party claims made by the restaurant
• c.the fire is third party and the diner's suit first party
• d.the fire is a first-party loss, the suit third party✓

A first-party claim is made by the insured against their own insurer for the insured's own loss, which is what the burned kitchen equipment is. A third-party claim is brought by someone outside the contract against the insured, which the diner's food-poisoning suit is, and it is the liability policy that supplies defence and indemnity. Reversing the two is the common error: the identity of the claimant, not the size of the loss, decides which it is.

Coverage A of a commercial general liability policy responds to sums the insured becomes legally obligated to pay as damages because of:

• a.medical bills of an injured guest, without fault
• b.libel, slander and wrongful eviction claims
• c.bodily injury and property damage from an occurrence✓
• d.damage to the insured's own building and stock

Coverage A insures bodily injury and property damage caused by an occurrence — an accident, including continuous exposure to substantially the same harmful conditions — that happens in the coverage territory during the policy period. Libel, slander, and wrongful eviction are personal and advertising injury offences answered under Coverage B. Medical payments made without regard to fault sit in Coverage C, and the insured's own building and stock are a property exposure this policy excludes.

Which of these losses would a commercial general liability policy address under personal and advertising injury rather than under Coverage A?

• a.A falling pallet injures a customer in the aisle
• b.A delivery van backs into a dockworker
• c.An advertisement copies a rival's slogan✓
• d.A cleaning crew breaks a client's glass door

Coverage B answers a defined list of offences: false arrest or detention, malicious prosecution, wrongful eviction or invasion of a right of private occupancy, material that libels, slanders, or disparages, invasion of privacy, and use of another's advertising idea or infringement of copyright, trade dress, or slogan in the insured's advertisement. Lifting a rival's slogan into an advertisement sits squarely on that list. The pallet, the broken door, and the van striking a worker are bodily injury and property damage handled under Coverage A.

A visitor trips on a showroom step and runs up $3,000 in emergency-room bills, but the retailer is plainly not at fault. Coverage C of the retailer's general liability policy:

• a.pays the reasonable bills without regard to fault✓
• b.pays the bills only from the products aggregate
• c.pays only after a court assigns the retailer fault
• d.denies the claim because no negligence was shown

Coverage C is a goodwill provision that pays reasonable medical expense for injuries occurring on premises the insured owns or rents, or arising out of the insured's operations, with no finding of negligence required, so long as the injury occurs and is reported within the periods the form states. Requiring a court finding of fault describes Coverage A, not medical payments. These payments erode the each-occurrence limit and the general aggregate rather than the products–completed operations aggregate.

A roofing contractor finishes a job, leaves the site, and two months later the roof leaks and ruins $40,000 of the owner's ceilings. This claim falls within:

• a.premises and operations at the job site
• b.products and completed operations coverage✓
• c.damage to premises rented to the contractor
• d.personal and advertising injury offences

Completed operations respond to bodily injury or property damage arising out of the insured's work after that work is finished and put to its intended use and the insured has left the site, which is exactly this leaking roof. Premises and operations answers injury while the job is still in progress or on premises the insured occupies. Losses charged to completed operations erode the separate products–completed operations aggregate, not the general aggregate.

A general liability policy carries a $1,000,000 each-occurrence limit and a $2,000,000 general aggregate. The insurer pays $600,000, $500,000 and $400,000 on three separate premises claims in one policy year. How much general aggregate is left?

• a.$1,000,000, because each occurrence resets it
• b.$2,000,000, since premises claims do not erode it
• c.$500,000 for the rest of the policy year✓
• d.$0, because the three claims exhaust it

Each claim is below the $1,000,000 each-occurrence cap, so all three are paid in full: 600,000 + 500,000 + 400,000 = $1,500,000. The general aggregate is the most the policy will pay for such losses in the policy year, so $2,000,000 − $1,500,000 leaves $500,000 for the remainder of the term. The each-occurrence limit caps a single loss and does not reset the aggregate, and premises and operations losses do erode the general aggregate.

A manufacturer's general aggregate is fully exhausted in July by premises claims. In September a customer is injured by a defective product the manufacturer sold. The policy:

• a.pays half the loss and prorates the remainder
• b.denies the claim, as the aggregate is exhausted
• c.reinstates the general aggregate for the claim
• d.pays from the products–completed operations limit✓

A general liability policy carries two annual caps: the general aggregate for premises and operations and most other losses, and a separate products–completed operations aggregate for injury or damage arising out of the insured's products and completed work. Exhausting one leaves the other untouched, so the September product claim is paid from its own aggregate, subject to the each-occurrence limit. Aggregates do not reinstate mid-term, and the form contains no proration of the kind described.

A tenant business rents a storefront, negligently starts a fire, and causes $250,000 of damage to the leased building. Its liability policy shows a $300,000 damage to premises rented to you limit. The insurer:

• a.pays the $300,000 limit and bills the landlord
• b.pays $250,000 from the products aggregate
• c.pays nothing, as the building is not the insured's
• d.pays the $250,000, which is within that limit✓

Damage to premises rented to you is a carve-back restoring coverage for fire and certain other damage to a building the insured rents, which the care, custody, and control exclusion would otherwise strip out. The $250,000 loss sits under the $300,000 sublimit, so it is paid in full and nothing is billed to anyone. Denying the claim because the insured does not own the building ignores the carve-back, and the products aggregate applies to products and completed work.

A liability insurer settles a suit for the full $1,000,000 each-occurrence limit and has already spent $180,000 defending it. On a standard general liability policy the insurer's total outlay is:

• a.$1,000,000 plus half the defence costs
• b.$820,000, the limit less defence costs
• c.$1,180,000, the limit plus defence costs✓
• d.$1,000,000, as defence erodes the limit

Defence costs on a standard general liability policy are a supplementary payment made in addition to the limit of insurance, so the insurer pays the $1,000,000 settlement and the $180,000 of defence expense, a total of $1,180,000. The answers that subtract defence from the limit describe a defence-within-limits or eroding-limits form, common on professional liability but not here. The duty to defend ends once the limit has been exhausted by a judgment or settlement.

An insured must post a $500 bail bond after a covered accident and loses three days of work attending the trial at the insurer's request. Under the standard general liability supplementary payments, the insurer pays:

• a.$250 toward the bond and no lost earnings
• b.the full $500 bond and $750 of lost earnings
• c.$250 toward the bond plus $750 of earnings✓
• d.the full $500 bond and no lost earnings

Supplementary payments on a standard general liability policy include the cost of bail bonds up to $250 and reasonable loss of earnings up to $250 a day for time the insured spends helping at the insurer's request. The bond contribution is therefore capped at $250 even though $500 was posted, and three days at $250 a day comes to $750. Paying the whole $500 bond ignores that stated cap, and refusing the earnings ignores the attendance provision.

A firm carried an occurrence-form liability policy one year and switched to a claims-made form the next. A suit filed this year alleges injury that took place in the earlier year. Which policy responds?

• a.Both, sharing the loss on a pro rata basis
• b.Neither, because the coverage forms differ
• c.The occurrence policy, since injury happened then✓
• d.The claims-made policy, since the suit is filed now

An occurrence form is triggered by when the bodily injury or property damage takes place, no matter how many years later the claim arrives, so the earlier policy answers injury that happened during its term. A claims-made form is triggered by when the claim is first made against the insured and reaches back only to injury on or after its retroactive date. Policies triggered on two different bases do not share one loss pro rata.

A claims-made policy in force now shows a retroactive date of three years ago. A claim made today alleges an error committed five years ago. The policy:

• a.covers it once the basic reporting tail expires
• b.covers it under the extended reporting period
• c.covers it because the claim arrives in term
• d.excludes it, as the act predates that date✓

A retroactive date is the earliest date of wrongful act, injury, or damage a claims-made policy will reach; anything happening before it is outside coverage even when the claim itself is made during the policy period. Here the act is five years old and the retroactive date is three years old, so the claim is not covered. An extended reporting period lengthens the window for reporting claims and does not move the retroactive date backwards.

When a claims-made liability policy is cancelled, the supplemental extended reporting period differs from the basic one in that the supplemental period:

• a.must be requested in writing and paid for✓
• b.attaches automatically at no extra cost
• c.moves the retroactive date to the cancellation
• d.changes the policy trigger to occurrence basis

A basic extended reporting period attaches automatically when a claims-made policy ends, at no additional charge, and gives a limited window to report claims for acts before that date. The supplemental period, the purchased tail, must be requested in writing within a stated time and an extra premium paid, and it extends the reporting window far longer. Neither one moves the retroactive date or converts the policy to an occurrence trigger.

A general contractor requires a subcontractor to name it as an additional insured on the subcontractor's liability policy. The practical effect is that the general contractor:

• a.gains first-party coverage on its own equipment
• b.is added as a loss payee for premium refunds
• c.becomes a named insured with the right to cancel
• d.gains defence and indemnity for the sub's work✓

An additional insured endorsement extends the named insured's liability coverage to another party, typically for liability arising out of the named insured's work or premises, so the general contractor gets a defence and indemnity under someone else's policy. It does not make that party a named insured, so no right to cancel, amend, or collect return premium comes with it. It also grants no first-party property coverage, because the endorsement operates only on the liability side.

A general liability policy excludes liability the insured assumes by contract, then gives that coverage back for liability assumed in an insured contract. An insured contract is best described as:

• a.a defined class such as a lease or a rail siding✓
• b.a contract the insurer has separately approved
• c.a bond guaranteeing the insured's performance
• d.any written agreement the insured signs

The contractual liability exclusion is given back only for a listed set of agreements: leases of premises, sidetrack agreements, easement or licence agreements, obligations to indemnify a municipality where required by ordinance, elevator maintenance agreements, and the tort liability of another assumed in a business contract. Coverage turns on the agreement fitting that defined class, not on the insurer having pre-approved it. A performance bond is surety, a three-party guarantee, and not liability insurance at all.

A business carries $1,000,000 of primary general liability and a $5,000,000 umbrella. A jury returns a $3,500,000 verdict on a claim both policies cover. How is the verdict funded?

• a.$1,000,000 primary, the remainder uninsured
• b.$1,750,000 from each, shared equally
• c.$1,000,000 primary and $2,500,000 umbrella✓
• d.$3,500,000 from the umbrella, primary untouched

An umbrella sits above scheduled underlying policies and pays only after the underlying limit is exhausted, so the primary contributes its $1,000,000 and the umbrella pays the remaining $2,500,000 out of its $5,000,000. It does not respond first while the primary sits untouched, and it is not a pro rata sharing arrangement with the primary. Because the umbrella limit far exceeds the shortfall, none of this verdict is left uninsured.

An umbrella covers a claim that the underlying general liability policy excludes entirely. Before the umbrella will respond to that claim, the insured normally must:

• a.first exhaust the underlying aggregate limit
• b.pay the self-insured retention shown on it✓
• c.buy back the underlying exclusion by endorsement
• d.obtain the primary insurer's written consent

Where an umbrella is broader than the underlying insurance it drops down and acts as primary for that loss, and the insured absorbs a self-insured retention — a deductible-like amount stated in the umbrella — before the umbrella pays. Exhausting an underlying aggregate matters when the underlying policy does cover the loss but has run out of limit, which is not the case here. No consent from the primary insurer is needed, and buying back the exclusion would defeat the point of the drop-down.

An architect's drawings contain a calculation error that forces a client to rebuild a foundation. The client's purely financial loss is best insured by:

• a.general liability, as an occurrence caused the loss
• b.professional liability, an errors and omissions form✓
• c.employment practices liability for staff acts
• d.a surety bond guaranteeing the drawings

Professional liability, also written as errors and omissions, covers economic loss caused by a failure to use the skill and care expected of a professional, which a faulty design calculation is. A general liability policy responds to bodily injury and property damage from an occurrence and excludes damages arising out of rendering professional services. Employment practices liability answers claims brought by employees, and a surety bond guarantees performance to a third party rather than insuring the architect's mistake.

Shareholders sue a corporation's board, alleging the directors approved an acquisition without adequate diligence. The coverage designed for this suit is:

• a.directors and officers liability✓
• b.employment practices liability coverage
• c.fidelity coverage for employee dishonesty
• d.commercial general liability, Coverage B

Directors and officers liability responds to claims that the people managing a company breached their duties in that capacity — mismanagement, inadequate diligence, misleading disclosure — whether brought by shareholders, regulators, or others. Employment practices liability answers claims brought by employees over hiring, firing, and workplace conduct. Fidelity coverage insures the employer against theft by its own employees, and Coverage B handles a listed set of offences such as libel and wrongful eviction.

A former employee sues alleging wrongful termination and a hostile work environment. The employer's defence and any damages on that suit would be answered by:

• a.professional liability for the manager's errors
• b.workers compensation, Part Two employers liability
• c.general liability Coverage B, as a listed offence
• d.employment practices liability insurance✓

Employment practices liability insurance covers claims by employees and applicants over wrongful termination, discrimination, harassment, retaliation, and similar workplace conduct, and it pays defence costs as well as damages. Part Two employers liability answers suits arising out of a work-related bodily injury that falls outside the workers compensation benefit, not a termination claim. The general liability offences list does not reach employment practices, and professional liability addresses service errors owed to clients.

A restaurant that serves alcohol asks whether its general liability policy answers a suit claiming it over-served a patron who then caused a crash. The correct response is that:

• a.the liquor liability exclusion applies to it✓
• b.the exclusion drops once a licence issues
• c.Coverage C pays those medical bills anyway
• d.the umbrella responds with no underlying form

A standard general liability policy excludes injury or damage for which the insured may be held liable by reason of causing or contributing to intoxication, furnishing alcohol to a minor or to someone already under the influence, or violating any law relating to the sale of alcoholic beverages. The exposure has to be bought back through a separate liquor liability policy or endorsement. Holding a licence does not remove the exclusion, and whether a server can be held liable at all turns on each state's dram-shop law.

A machine shop's underground solvent tank leaks and contaminates neighbouring soil. Under its unendorsed general liability policy the cleanup claim is:

• a.paid from the products aggregate instead
• b.excluded by the pollution exclusion✓
• c.covered under Coverage A as property damage
• d.covered because the release was accidental

A standard general liability policy carries a broad pollution exclusion removing bodily injury and property damage arising out of the discharge, dispersal, seepage, migration, release, or escape of pollutants, together with the cost of testing for and cleaning them up. Whether the release was sudden or gradual does not restore coverage on the unendorsed form; the exposure is written back only through separate environmental or pollution liability coverage. The products–completed operations aggregate is a limit, not a source of coverage for an excluded loss.

Commercial General Liability (CGL) coverage most typically protects a business against:

• a.Damage to the business's own building and its contents
• b.Loss of the business's own inventory in a warehouse fire
• c.Third-party injury and property damage from its operations✓
• d.Injuries suffered by its own employees while on the job

Commercial General Liability covers a business's legal liability to third parties for bodily injury and property damage arising from its premises, operations, products, and completed work, plus personal and advertising injury. Damage to the company's own building or inventory is covered by commercial property insurance, and on-the-job injuries to the company's employees are handled by workers compensation, not CGL.

A Businessowners Policy (BOP) is best described as:

• a.A package of property and liability for small businesses✓
• b.A policy that covers only commercial auto exposures
• c.A life insurance product sold to the business owner
• d.A stand-alone workers compensation policy for a firm

A Businessowners Policy is a packaged commercial policy that bundles commercial property and general liability coverage (and often business income) tailored for eligible small and mid-sized businesses. It is convenient and cost-effective but has eligibility restrictions. Workers compensation and commercial auto are generally written separately, not inside a BOP.

Business income (business interruption) coverage is designed to pay for:

• a.The cost of replacing inventory stolen in a theft
• b.Lost net income and continuing expenses while shut✓
• c.Liability claims brought by injured customers on site
• d.The physical repairs to the damaged building itself

Business income coverage replaces the net income the business would have earned and pays continuing normal operating expenses (such as payroll and rent) during the period of restoration after a covered physical loss suspends operations. It addresses the indirect financial consequences of a loss, complementing the direct property coverage that pays to repair or replace the damaged property itself.

An inland marine policy is typically used to cover:

• a.Movable property and property in transit over land✓
• b.An employee's medical and hospital care expenses
• c.Ocean-going cargo on international voyages only
• d.A building's permanent foundation and its footings

Inland marine coverage evolved from ocean marine to insure property that moves over land or is otherwise mobile or in transit, as well as certain fixed property tied to transportation or communication (such as bridges) and hard-to-value items like fine art and contractors' equipment. Ocean marine covers vessels and cargo on the water; buildings and employee health are covered by other lines.

A commercial package policy is built from a common declarations page, common policy conditions, interline endorsements, and:

• a.two or more separate coverage parts✓
• b.exactly one coverage part per policy
• c.a mandatory workers compensation part
• d.a common causes of loss form for all parts

A package binds one common declarations page and one set of common policy conditions to two or more coverage parts, such as commercial property, general liability, crime, inland marine and commercial auto, with interline endorsements applying across them. A policy carrying a single coverage part is a mono-line policy, not a package. Each coverage part brings its own declarations, coverage form and causes of loss selection, so no single causes of loss form governs the whole package, and workers compensation is written separately.

In a commercial package policy, an interline endorsement is one that:

• a.applies to more than one coverage part✓
• b.adds an additional insured to a part
• c.changes just the property coverage part
• d.turns the package into a mono-line policy

Interline endorsements are the endorsements that cut across the package rather than belonging to a single line, so one attachment can amend the property, liability and crime parts at once. A nuclear energy liability exclusion is the classic example. An endorsement that touches only the property part is a coverage-part endorsement, and adding an additional insured amends one part rather than crossing lines.

Under the building and personal property coverage form, which of these is insured as part of the building?

• a.A customer's auto parked in the lot
• b.Permanently installed machinery✓
• c.Money and securities kept in the safe
• d.Stock the insured is holding for sale

Building coverage reaches the described structure, completed additions, permanently installed fixtures, machinery and equipment, and property the insured owns and uses to service the building or its premises. Stock held for sale is business personal property, not building. Money and securities are excluded from the property form and need crime coverage, and a customer's vehicle in the lot is a garagekeepers exposure.

A tenant pays to install new partitions and lighting in the space it leases. Under a commercial property policy that work is insured as:

• a.the tenant's business personal property✓
• b.an extra expense under business income
• c.personal property of others in its care
• d.part of the landlord's building coverage

Improvements and betterments made by a tenant are covered as the tenant's use interest within its business personal property, alongside owned stock, furniture and leased property the tenant is contractually required to insure. They are not personal property of others, because the tenant paid for them and holds the use interest rather than holding someone else's goods. The landlord's building limit covers the structure the landlord owns, not the tenant's fit-out.

A repair shop insures personal property of others. A covered fire destroys a customer's machine that was in the shop for repair. Payment for that machine is made to:

• a.the customer's own insurer first
• b.the mortgagee named on the building
• c.the named insured, acting as bailee
• d.the owner of the property✓

Personal property of others covers goods in the insured's care, custody or control at the described premises, and the loss is adjusted with and paid to the owner of that property rather than to the business holding it. Paying the named insured would treat the customer's machine as the shop's own property. A mortgagee has rights in the building, not in a customer's equipment, and the customer's own insurer is not a payee under this coverage.

Compared with the basic causes of loss form, the broad form adds coverage for:

• a.mechanical breakdown of the boiler
• b.falling objects and weight of snow✓
• c.flood and earth movement at the premises
• d.theft of stock and money from the premises

The broad form keeps every basic peril and adds falling objects, the weight of snow, ice or sleet, and water damage from the accidental discharge of water or steam, plus collapse as an additional coverage. Theft is not part of the broad form; it arrives with the special form's open-perils approach. Flood and earth movement are excluded on all three causes of loss forms, and mechanical breakdown needs equipment breakdown coverage.

When a commercial property policy uses the special causes of loss form, what must the insurer do to deny a claim for direct physical loss?

• a.show the insured failed to prove value
• b.show the peril was not listed in the form
• c.prove the loss was not sudden enough
• d.prove that an exclusion applies✓

The special form is open perils: every risk of direct physical loss is covered unless the policy excludes or limits it, so the burden falls on the insurer to identify the exclusion. Requiring the insured to point at a listed peril describes the basic and broad forms, where only named perils are covered. Suddenness is not the test under a property form, and proof of value goes to the amount of the loss rather than to whether it is covered.

A building with a replacement cost of $600,000 is insured for $360,000 under an 80% coinsurance clause, with a $2,500 deductible. A covered fire causes $90,000 of damage. What does the insurer pay?

• a.$90,000
• b.$65,000✓
• c.$87,500
• d.$67,500

The coinsurance formula divides the amount carried by the amount required and multiplies by the loss. The amount required is 80% of $600,000, or $480,000, and the insured carried $360,000, so $360,000 divided by $480,000 is 0.75. That gives 0.75 times $90,000, or $67,500, and the $2,500 deductible then comes off for a payment of $65,000. The $67,500 answer forgets the deductible and the $90,000 answer ignores the underinsurance penalty.

A commercial property policy carries an agreed value of $750,000, a limit of $750,000 and a $5,000 deductible. A covered loss of $200,000 occurs. What does the insurer pay?

• a.$160,000, the agreed value's share
• b.$200,000, with no deductible applied
• c.$150,000, after a coinsurance penalty
• d.$195,000, the full loss less the deductible✓

The agreed value option suspends the coinsurance condition for the term shown, in exchange for the insured filing a statement of values the insurer accepts. With coinsurance out of the way and the limit at least equal to the agreed value, the covered loss is paid in full up to the limit: $200,000 less the $5,000 deductible is $195,000. The answers that apply a coinsurance penalty misread the endorsement, and the deductible is not waived by agreed value.