Free Massachusetts Property & Casualty Practice Questions

Moral hazard equals dishonesty. It's the risk that someone deliberately causes or exaggerates a loss to profit, like torching a failing business for the payout. Don't mix it up with morale hazard (carelessness, choice B) or physical hazard (the actual physical conditions in A and D).

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.

Reinsurance is insurance for insurance companies. The original insurer (the ceding company) hands off part of its risk to a reinsurer so one giant loss doesn't sink it. Individuals never deal with reinsurers directly; it all happens behind the scenes between carriers.

A stock insurer is owned by its stockholders (shareholders), who receive taxable dividends when the company profits. Policyholders are just customers. Contrast that with a mutual insurer, which is owned by its policyholders. Stock equals stockholders; mutual equals members/policyholders.

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.

An admitted (or authorized) insurer holds a certificate of authority from the state and plays by that state's rules. A non-admitted (unauthorized) insurer hasn't been granted one, which is where surplus lines come in for hard-to-place risks. Also worth knowing: domestic equals home state, foreign equals another state, alien equals another country.

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.

A contract of adhesion is written by one party (the insurer) and accepted as-is by the other, with no line-by-line negotiating. The practical kicker: because the insured didn't get to write it, any ambiguity is interpreted in the insured's favor. That's a courtroom rule worth knowing.

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.

A waiver is voluntarily surrendering a known right, say, an insurer choosing not to enforce a policy condition. Estoppel is the follow-on: once you've waived something, you can be legally prevented (estopped) from later trying to enforce it. Waiver is the giving up; estoppel is being held to it.

The deductible is the amount the insured absorbs on each loss, which screens out small, frequent claims and reduces the premium. Hook: the deductible knocks out the small stuff and trims your premium.

If the insured met the coinsurance requirement, carrying at least the required percentage of value, no penalty applies and the loss is paid in full up to the limit. The penalty only bites when coverage falls short. Hook: meet the coinsurance requirement and there's no penalty.

The four elements of negligence are a duty owed, a breach of that duty, the breach being the proximate cause, and actual damages. Intent is not required; in fact, negligence is unintentional, which separates it from an intentional tort. Hook: duty, breach, causation, damages, but never intent for negligence.

Compensatory damages reimburse the victim's actual losses (special damages like medical bills and lost wages, plus general damages like pain and suffering). Punitive damages go beyond that to punish egregious conduct and deter others. Hook: compensatory makes the victim whole; punitive punishes the wrongdoer.

Comparative negligence reduces the claimant's award by their percentage of fault, so someone 30% responsible recovers 70% of their damages. It's more forgiving than the older contributory negligence rule, which could bar recovery entirely for any fault at all. Hook: comparative negligence trims your recovery by your share of the blame.

After paying the insured for a loss caused by someone else, the insurer steps into the insured's shoes (subrogation) and pursues the at-fault party to recover what it paid. It prevents the insured from collecting twice. Hook: subrogation lets the insurer go after whoever caused the loss to get its money back.

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.

Property policies typically prohibit abandonment: the insured can't simply dump damaged property on the insurer and demand the full amount. The insurer decides whether to repair, replace, or pay. Hook: you can't abandon the wreck to the insurer and demand a full check.

When an insurer pays for a loss, it generally gains rights to the salvage, the damaged property, which it can then sell to recover part of what it paid. Hook: salvage is the leftover the insurer can sell after paying the claim.

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.

HO-6 covers condominium and co-op unit owners. It insures personal property and provides limited building coverage for improvements inside the unit, since the association's master policy covers the structure itself. Hook: HO-6 is the condo form, your belongings plus the walls-in.

HO-8 fits older homes whose replacement cost far exceeds market value. It settles dwelling losses on a modified, functional, or actual cash value basis instead of full replacement cost, which keeps the coverage affordable and realistic. Hook: HO-8 is for older homes and pays on a modified or ACV basis, not full replacement.

The HO-2 Broad Form covers both the dwelling and personal property on a named-perils basis, using the broad list of covered perils. It is narrower than the HO-3, which opens the dwelling up to open perils. Hook: HO-2 is named perils on everything, the broad list applied to both house and contents.

Section I is the property side, Coverages A through D (dwelling, other structures, personal property, loss of use). Section II is the liability side, Coverages E and F (personal liability and medical payments). Hook: Section I is property A through D; Section II is liability E and F.

The dwelling under Coverage A is generally settled on a replacement cost basis, as long as the insured carries at least the required percentage, usually 80%, of replacement cost. Personal property defaults to actual cash value unless a replacement-cost endorsement is added. Hook: the dwelling is replacement cost if insured to value; contents default to ACV.

Coverage E pays sums the insured is legally liable for when they cause bodily injury or property damage to others, and it also pays the cost of legal defense. It is third-party coverage. Hook: Coverage E covers what you owe others when you are legally liable.

Raising Coverage C does not lift the special jewelry theft sublimit. Scheduling the ring on a personal articles floater (scheduled personal property endorsement) insures it for its full appraised value, usually on an open-perils basis and often with no deductible. Hook: beat the jewelry sublimit by scheduling the item, not by raising Coverage C.

The loss settlement condition usually requires carrying at least 80% of the dwelling's replacement cost to be paid full replacement cost on partial losses. Carry less and the payout is reduced. Hook: insure the dwelling to at least 80% of replacement cost to get full replacement on partial losses.

Underinsuring below 80% drops the insured to the larger of the actual cash value of the loss or a reduced amount figured by the loss-settlement proportion, but never the full replacement cost. Hook: under 80%, you fall back to the greater of ACV or the prorated amount, not full replacement.

Earth movement, including earthquake, is excluded by the standard homeowners policy, but the insured can usually add earthquake coverage by endorsement or buy a separate earthquake policy. Hook: earthquake is excluded but can be bought back by endorsement.

A combined single limit gives one pool of money per accident that can be used for bodily injury and property damage in any combination, instead of separate per-person and per-accident caps. It offers more flexibility on large losses. Hook: combined single limit is one bucket for everything per accident.

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.

For the named insured and resident family members, Med Pay follows the person: it applies when they are struck by a vehicle as pedestrians or while riding in other autos, not only in the insured's car. Other passengers are covered while occupying the insured auto. Hook: for you and your family, Med Pay follows the person, not just the car.

UIM fills the gap when the at-fault driver does carry liability insurance but the limits run out before the insured's injuries are fully paid. It picks up where the other driver's insufficient coverage stops. Hook: underinsured means they had some coverage, just not enough, and UIM bridges the shortfall.

Other-than-collision, often called comprehensive, covers the non-crash perils: theft, fire, hail, falling objects, vandalism, glass breakage, and animal strikes. Crashing or overturning is collision, not comprehensive. Hook: comprehensive is everything but the crash, fire, theft, hail, and Bambi.

A deductible is the insured's share of each physical damage loss, paid before the insurer pays the remainder. Choosing a higher deductible lowers the premium. Hook: the deductible is your slice of the loss you pay first.

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.

Towing and labor coverage, sometimes called roadside assistance, pays for towing and on-site labor costs after a disablement. It is a low-cost optional endorsement. Hook: towing and labor is the tow-truck and roadside endorsement.

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.

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 dwelling policy is built for residences that fall outside standard homeowners eligibility, especially rentals and non-owner-occupied homes, plus seasonal or older dwellings. Homeowners forms assume the owner lives there. Hook: the DP is the rental and non-owner-occupied house policy.

An owner-occupant of a typical home is the target customer for a homeowners policy, which bundles broad property and liability coverage. The dwelling policy is the fallback for homes that do not fit homeowners. Hook: live there yourself and qualify, you want homeowners, not a DP.

The DP-1 is the narrowest form: it insures a short list of named perils and generally pays losses on an actual cash value basis (replacement cost minus depreciation). Hook: DP-1 is basic, named perils paid at ACV.

Coverage A is the dwelling, the main structure on the described location. It mirrors Coverage A in homeowners. Hook: in any dwelling or homeowners form, Coverage A is the dwelling.

Coverage E is Additional Living Expense, paying the extra costs an owner-occupant runs up living elsewhere while a covered loss is repaired. Coverage D, by contrast, is for lost rent on a rented dwelling. Hook: Coverage E is ALE for the owner who lives there; Coverage D is lost rent for a rental.

Like the HO-3, the DP-3 splits its basis: the dwelling and other structures get open perils, but personal property is covered on a named-perils basis. Hook: DP-3 is open perils on the building, named perils on the contents, just like HO-3.

The DP-1 settles dwelling losses at actual cash value, which deducts depreciation from replacement cost. The broader DP-2 and DP-3 can pay full replacement cost when the insured-to-value condition is met. Hook: DP-1 pays ACV; step up to DP-2 or DP-3 for replacement cost.

Settlement basis is a major dividing line: the DP-1 pays ACV on the dwelling, while the broader DP-2 and DP-3 pay replacement cost when the insured carries enough coverage. Hook: DP-1 means ACV; DP-2 and DP-3 mean replacement cost.

Dwelling policies are flexible on occupancy: they can cover owner-occupied, tenant-occupied, or even vacant dwellings, with endorsements and conditions adjusting the coverage for each situation. Hook: a DP can insure owner-occupied, rented, or vacant homes.

Coverage C protects the named insured's (owner's) personal property kept at the dwelling, like appliances or upkeep equipment. The tenant insures their own belongings under a renters (HO-4) policy. Hook: on a rental DP, Coverage C is the owner's property; the tenant buys HO-4.

Packaging usually lowers the premium (a package credit) and reduces the chance of gaps or overlaps between separately written policies. It does not erase deductibles, conditions, or exclusions. Hook: packages save money and close the gaps between separate policies.

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.

The first named insured may cancel by mailing or delivering notice, and the insurer may cancel by sending advance written notice (the number of days is set by the condition and state law). The first named insured acts on behalf of all insureds. Hook: the first named insured cancels by notice; the insurer cancels with advance written notice.

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.

Required coverage is 80% of 500,000, or 400,000. Divide carried by required (300,000 / 400,000 = 0.75) and apply that to the loss: 0.75 times 50,000 equals 37,500. Hook: coinsurance pays did over should, times the loss, here 300/400 of 50,000 = 37,500.

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.

A claims-made form is triggered by when the claim is first reported, not when the injury happened, and a retroactive date sets the earliest loss date it will respond to. Extended reporting (tail) coverage can fill gaps at expiration. Hook: claims-made looks at when the claim is reported, bounded by the retro date.

Inland marine covers property that moves or is hard to value at a fixed location: contractors' equipment, fine arts, goods in transit, and similar floating risks. Despite the name, it is largely land-based. Hook: inland marine insures property on the move and hard-to-rate items.

Company vehicles are insured under the commercial (business) auto coverage part, which provides liability and physical damage on the business's autos. Hook: company trucks go on the commercial auto coverage part.

Where the CPP is built piece by piece and fits businesses of any size, the BOP is a ready-made bundle designed for eligible small to mid-size firms, trading flexibility for simplicity. Hook: CPP is build-your-own; BOP is the ready-made small-business bundle.

Modern BOPs commonly insure property on an open-perils (special) basis, covering any cause of loss that is not specifically excluded, which is broader than named-perils. Hook: BOP property usually runs open perils, covered unless excluded.

A defining simplification of the BOP is that it usually has no coinsurance clause, so the insured is not penalized for underinsuring the way a coinsurance form would penalize them. Insuring to value is still wise but not enforced by a coinsurance penalty. Hook: the BOP drops the coinsurance clause, no did/should penalty.

The BOP builds in business income and extra expense automatically, so a covered shutdown is protected without the owner having to remember to add the coverage. That is a key BOP advantage for small businesses. Hook: business income comes built into the BOP, no add-on needed.

The BOP liability section mirrors a commercial general liability form, covering the business's liability for bodily injury and property damage to third parties, plus defense. Hook: BOP liability works like a CGL, third-party bodily injury and property damage.

Like the CGL, BOP liability covers bodily injury and property damage, personal and advertising injury, and offers limited medical payments to others, with defense costs. Hook: BOP liability covers BI/PD, personal and advertising injury, and a little med pay.

BOP medical payments is a no-fault goodwill coverage that pays modest medical bills for others injured on the premises, which can head off a larger liability claim. Hook: BOP med pay covers others' small injury bills no-fault.

BOPs do not cover professional liability; a business needing errors and omissions protection buys a separate professional liability policy or specific endorsement. Hook: E&O is not in the BOP, that needs its own professional liability policy.

Business personal property is the contents the business owns and uses, furniture, fixtures, machinery, equipment, and stock, at the described premises. The building is separate, and licensed autos are excluded. Hook: BPP is the contents, furniture, fixtures, machinery, and stock.

Fire department service charge coverage reimburses charges a fire department bills the insured for responding to a covered fire, up to a stated limit. Debris removal and ordinance or law are different additional coverages. Hook: the fire department bill is paid by fire department service charge coverage.

Benefit types and amounts are set by each state's workers compensation statute, which is why the policy promises to pay whatever the law requires rather than a chosen dollar limit. Hook: the state statute, not the employer, sets the benefits.

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.

Although comp is no-fault, most statutes still allow benefits to be reduced or denied where the injury results from the worker's intoxication or willful misconduct. No-fault does not mean no defenses. Hook: no-fault still has limits, intoxication and willful misconduct can cut benefits.

Temporary total disability (TTD) replaces a portion of wages while the worker is fully unable to work but is expected to recover and return. Once recovery plateaus, the case may move to a permanent classification. Hook: temporary total is off work now, expected back later.

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.

Workers compensation premium is driven by payroll and the job classifications of the workers, since riskier classes carry higher rates. Premium is typically a rate applied to payroll. Hook: comp premium rides on payroll and job classification.

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.

Because workers compensation covers employees, a true independent contractor is normally not covered by the hiring firm's policy and is expected to carry their own. Misclassifying employees as contractors is a common compliance problem. Hook: real independent contractors are not on the hiring firm's comp.

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.

An umbrella sits on top of the home and auto policies, adding a high layer of liability limits and broadening coverage for some claims the underlying policies exclude. It is excess liability, not property coverage. Hook: the umbrella is extra liability stacked above your home and auto.

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.

A commercial umbrella adds limits above primary liability lines like CGL, business auto liability, and employers liability. It is excess liability, not excess property coverage. Hook: the commercial umbrella tops up the liability lines, not property.

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.

Hull coverage insures the vessel itself against physical damage, much like physical damage coverage on an auto. Cargo, freight, and protection and indemnity cover other ocean marine exposures. Hook: hull is the boat itself, the ship's physical damage.

Because they are driven on the road, motor homes and RVs need auto-style liability and physical damage coverage, often on a specialized RV policy that also addresses their living-quarters contents. Hook: if it drives on the road, it needs auto-type coverage, even a motor home.

Unlike insurance, a surety expects the principal to ultimately bear the loss, so after paying the obligee the surety can seek reimbursement from the principal. Hook: the surety pays, then comes back to the principal to be repaid.

A performance bond is a surety bond guaranteeing the contractor will complete the project according to the contract; if not, the surety makes the obligee whole. Hook: performance bonds guarantee the job gets finished.

A DIC policy is written alongside basic property coverage to fill gaps, commonly adding catastrophic perils such as flood and earthquake that the underlying policy excludes. It supplements rather than replaces. Hook: DIC fills the holes, often adding flood and quake to a property program.

Personal umbrellas typically start at $1,000,000 of additional liability and increase from there, giving high-net-worth and ordinary insureds a large cushion above their home and auto limits. Hook: personal umbrellas usually begin at a cool one million.