Free Iowa Casualty Insurance Practice Questions

Insurance only deals with pure risk: situations where there's a chance of loss or no loss, but no chance of gain (like your house burning down). Speculative risk involves a chance of loss, no loss, OR gain. That's gambling and investing, and insurers won't touch it. If there's an upside, it's not insurable.

Keep these three straight and you'll bank easy points all day: a peril is the cause of loss (fire, wind, theft), a hazard is something that increases the chance or severity of that loss, and risk is the uncertainty of loss itself. The peril is the thing that actually does the damage.

Indemnity is the whole heartbeat of insurance: you get made whole, not rich. The goal is to put you back where you were financially right before the loss, no better, no worse. That's why you can't insure a $20,000 car for $80,000 and cash in. Insurance reimburses a loss; it doesn't hand out winnings.

The company giving away (ceding) the risk is the ceding company; the company taking it on is the reinsurer. Easy hook: to 'cede' is to give up, so the one giving up the risk is the ceding company.

The law of large numbers needs lots of similar exposures to make predictions reliable. A big pool of comparable homes lets the insurer forecast losses; a handful of wildly different ones doesn't. And concentrating them all in one spot is actually bad: one hurricane could wipe out the whole pool at once.

A mutual insurer is owned by its policyholders, so a 'dividend' is really a return of overpaid premium, which is why it's generally not taxable. And it's never guaranteed; it depends on the company's results. Stock dividends, by contrast, go to stockholders and are taxable.

Apparent authority is about appearances: what a reasonable customer believes the agent can do based on how the insurer let the agent act (business cards, signage, company applications). Express authority is spelled out in the contract; implied is what's needed to carry out the express. Apparent is the 'looks legit' bucket.

Premiums an agent collects belong to the insurer, not the agent, so the agent holds them in a fiduciary capacity, a position of financial trust. Mixing that money with personal funds (commingling) is a big no-no and a fast way to lose a license.

A broker works for the insured, shopping the market on the client's behalf, while an agent works for the insurer. Same exam, different masters: keep them straight. Broker equals the buyer's side; agent equals the company's side.

Representations are statements the applicant believes are true, and they only need to be true to the best of the applicant's knowledge. A warranty is a stronger animal: it's guaranteed to be absolutely true. Concealment is hiding a material fact. For most applications, you're dealing with representations.

ACV pays what the damaged property was actually worth at the time of loss: replacement cost minus depreciation for age and wear. It leaves the insured to absorb the depreciation. Hook: ACV equals replacement cost minus depreciation, today's worn-down value.

Replacement cost coverage pays to rebuild or replace with new property of like kind and quality, with no depreciation subtracted, so the insured isn't out-of-pocket for wear and tear. It usually requires meeting a coinsurance or insurance-to-value condition. Hook: replacement cost pays new-for-old, depreciation ignored.

With agreed value, the parties set the insured amount up front (often for hard-to-value items like fine art), and that agreed figure is paid for a total loss, with the coinsurance requirement waived. Hook: agreed value locks in the payout amount ahead of time, no coinsurance fight later.

The coinsurance clause pushes insureds to insure their property to an agreed percentage of value (commonly 80%). Carry less, and a penalty reduces partial-loss payments. It keeps premiums fair across policyholders. Hook: coinsurance nudges you to insure to value, or share the loss.

Required coverage is 80% of $200,000, or $160,000. The insurer pays the loss times the ratio of coverage carried to coverage required: ($120,000 / $160,000) times $50,000 equals 0.75 times $50,000, or $37,500. The owner absorbs the $12,500 coinsurance penalty for underinsuring. Hook: did-over-should times the loss, $120k over $160k times $50k equals $37,500.

Negligence is the failure to act with the care a reasonable, prudent person would under the same circumstances. It's the foundation of most liability claims and is unintentional, unlike an intentional tort. Hook: negligence is falling short of the reasonable-person standard of care.

A pro rata provision splits a loss among insurers in proportion to each policy's limit, so a policy carrying half the total coverage pays half the loss. It keeps the insured from collecting more than the actual loss. Hook: pro rata splits the loss by each policy's share of the total limits.

A physical hazard is a tangible condition of property or environment that increases risk, like icy steps, faulty wiring, or stored chemicals. It exists in the physical world, unlike moral or morale hazards. Hook: a physical hazard is a real-world condition you could point to.

A moral hazard arises from a person's character, a dishonest tendency that increases risk, such as someone who would intentionally cause or exaggerate a loss to collect. Hook: moral hazard is dishonesty, the intent to cheat the insurer.

A morale hazard is an attitude of carelessness: a person takes fewer precautions simply because they know insurance will cover any loss (the why-worry-I'm-insured mindset). It differs from a moral hazard, which involves outright dishonesty. Hook: morale hazard is carelessness from having coverage; moral hazard is dishonesty.

The first claim is capped at the 25,000 per-person limit, the other two ($20,000 and $15,000) are under that cap and paid in full, summing to 60,000. But the 50,000 per-accident bodily injury limit caps the total payout at 50,000. Hook: apply the per-person cap first, then the per-accident cap can still trim the total.

Collision covers damage from the insured's auto colliding with another vehicle or object, or from overturning (upset). Losses like theft, fire, and hail fall under other-than-collision instead. Hook: collision is crashing into something or flipping over.

Hitting an animal is treated as an other-than-collision (comprehensive) loss, not a collision, even though there is an impact. This usually means the comprehensive deductible applies. Hook: hitting an animal is comprehensive, not collision.

Auto physical damage is normally paid on an actual cash value basis, which is replacement cost minus depreciation, reflecting the car's worth at the moment of loss. Vehicles lose value over time, so ACV is usually less than what was paid. Hook: cars are paid ACV, depreciated value, not what you paid for them.

When repair cost exceeds the vehicle's actual cash value, the insurer totals the car and pays the ACV rather than the higher repair bill, less the deductible. Here that is 8,000 minus 500, or 7,500. Hook: if repairs cost more than the car is worth, you get ACV minus deductible, not the repair bill.

The newly acquired auto rule automatically extends the policy to a car the insured buys during the term, for a limited window (commonly up to 14 days), so the insured is not driving uninsured before reporting it. Hook: buy a new car and you get an automatic grace period to add it.

A temporary substitute auto used because the insured's vehicle is out of service for repair, service, breakdown, or loss is treated as a covered auto, so the policy's coverages extend to it. Hook: a loaner while yours is being fixed is covered like your own car.

The PAP excludes vehicles used as a public or livery conveyance, meaning carrying people or property for a fee. Personal use, commuting, and vacations are fine; for-hire driving needs commercial or ride-share coverage. Hook: the PAP is personal use, driving for a fee needs a different policy.

Insurance covers fortuitous, accidental losses, so intentional damage caused by the insured is excluded. Allowing it would invite fraud and is against public policy. Hook: on-purpose damage is never covered, insurance is for accidents.

Financial responsibility laws make drivers demonstrate the ability to pay for harm they cause, generally by carrying at least the state minimum liability limits. An SR-22 is a filing the insurer makes to confirm that coverage is in force. Hook: financial responsibility means prove you can pay, and SR-22 is the proof on file.

The common declarations identify who and what is insured: named insured, mailing address, policy period, a list of the coverage parts in the package, and the premium for each. Hook: the common dec is the who, when, and what of the whole package.

The Inspections and Surveys condition reserves the insurer's right (but not a duty) to inspect the premises and operations and to make safety recommendations. Hook: the right to walk the premises lives in Inspections and Surveys.

Business personal property is the contents the business owns and uses: furniture, fixtures, machinery, equipment, and stock (inventory) located at the described premises. The building itself is insured separately. Hook: business personal property is the contents, furniture, fixtures, machinery, and stock.

The BPP has a separate Personal Property of Others category for property of others in the insured's care, custody, or control, such as customers' goods left for service. Hook: customers' property in your care goes under Personal Property of Others.

Coinsurance rewards insuring to value: carry at least the required percentage (often 80, 90, or 100 percent) of value and losses are paid in full up to the limit; carry less and a penalty applies. Hook: coinsurance pushes you to insure to value or take a penalty.

Extra expense pays the added costs of staying open or reopening sooner, such as renting a temporary location or leasing equipment, which can reduce the business income loss. Hook: extra expense is the money spent to keep the doors open after a loss.

Coverage C is goodwill medical payments: it pays reasonable medical bills for others injured on the premises or by the insured's operations, no fault required, which can prevent a larger liability claim. Hook: CGL Coverage C pays small injury bills no-fault, just like home med pay.

Coverage B covers personal and advertising injury offenses: libel, slander, false arrest, wrongful eviction, and infringing on copyright or slogans in the insured's advertising. Hook: Coverage B is the reputation and advertising offenses, libel and slander.

Equipment breakdown, the modern boiler and machinery coverage, pays for sudden and accidental breakdown of boilers, pressure vessels, and mechanical or electrical equipment, plus resulting damage. Hook: equipment breakdown covers the machine blowing up, not wear and tear.

A CPP is built piece by piece from chosen coverage parts and suits a wide range of businesses, while a BOP is a standardized bundle of property and liability designed for eligible small to mid-size businesses. Hook: CPP is build-your-own; BOP is the prepackaged small-business bundle.

The grand bargain of workers compensation: the worker gets prompt, certain benefits and in return gives up the right to sue the employer in court over the work injury. Hook: guaranteed benefits in, the right to sue the employer out, that is exclusive remedy.

The two-part test is that the injury must arise out of the employment (be connected to job duties) and occur in the course of employment (during work). Both prongs generally must be met. Hook: covered injuries arise out of and happen in the course of the job.

Workers compensation covers not just sudden accidents but also occupational diseases, illnesses that develop from job conditions over time, such as repetitive stress or exposure to harmful substances. Hook: comp covers both the sudden accident and the slow occupational disease.

Part One promises to pay whatever benefits the listed states' workers compensation laws require, with no dollar limit, because the insurer is standing in for the employer's full statutory obligation. Hook: Part One pays the statute in full, no dollar limit.

Part Two protects the employer against lawsuits for work-related injuries that escape the exclusive-remedy bar, such as a third-party-over action or a consequential injury claim by a family member. It backstops the gaps Part One does not address. Hook: Part Two catches the work-injury suits that slip past exclusive remedy.

Part Three provides coverage if the employer begins operations in a state listed there during the policy period, protecting against gaps when the business expands into new states. Hook: Part Three is the just-in-case coverage for states you might expand into.

Workers compensation rates are quoted as a dollar rate per $100 of payroll for each classification, so payroll drives the premium. Hook: comp rates are dollars per $100 of payroll.

Many states let sole proprietors, partners, and corporate officers opt out of their own workers compensation coverage or elect to be included, since they are owners rather than ordinary employees. Hook: owners can often opt in or out of their own comp coverage.

In a monopolistic state, workers compensation must be purchased from the state fund, and private insurers do not write the coverage there. Hook: monopolistic means one seller, the state fund.

The Jones Act gives seamen (crew members of vessels) the right to seek damages from their employer for job injuries. Railroad workers use FELA instead. Hook: seamen sail under the Jones Act; railroaders ride FELA.

Umbrellas require the insured to carry stated minimum underlying limits (for example on auto and homeowners liability). The umbrella then picks up above those limits. Hook: keep your required underlying limits, or the umbrella will not sit on top.

The NFIP is a federal program run through FEMA, offering flood insurance in communities that adopt and enforce floodplain management rules. Private insurers may sell and service it under write-your-own arrangements. Hook: NFIP is federal flood insurance, available where the community participates.

A floater insures scheduled items for an agreed or appraised value on a broad, open-perils basis, getting past the low special theft sublimits a homeowners policy places on jewelry. Hook: schedule the ring on a floater to beat the homeowners jewelry sublimit.

Homeowners policies give limited coverage for small, low-powered watercraft, but larger or faster boats require a dedicated boatowners or yacht policy. Hook: little boats may ride on the homeowners; real boats need their own policy.

A surety bond is a three-party guarantee: the surety guarantees to the obligee that the principal will perform an obligation. Insurance, by contrast, is a two-party contract covering accidental loss. Hook: surety is three parties and a guarantee; insurance is two parties and a loss.

The obligee is the party protected by the bond, the one the principal must perform for. The principal is the one who must perform, and the surety backs that promise. Hook: the obligee is owed the obligation, the one the bond protects.

FAIR Plans are state residual-market programs that make basic property insurance available to applicants who cannot get it in the voluntary market, often because of location or risk. Hook: FAIR Plans are the property safety net for hard-to-insure risks.

Title insurance covers losses from title defects, such as liens, errors in records, or competing ownership claims, that already existed but surface after the property is bought. Hook: title insurance protects against ownership defects hiding in the property's past.

Mobile and manufactured homes have unique construction and transport exposures, so they are commonly written on a specialized mobile-homeowners form rather than a standard HO-3. Hook: mobile homes get their own mobile-homeowners policy.

The residual or shared market is the insurer of last resort, providing coverage (auto through assigned risk plans, property through FAIR Plans) to applicants the voluntary market turns down. Hook: the residual market is the last resort for risks no one else will write.