Named PerilP&C producer exam prep

Coverage partFoundations

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The insurance contract on the P&C exam

The insurance contract part covers the legal labels a policy runs on: offer and acceptance, representation and warranty, waiver and estoppel, cancellation and nonrenewal. Each pair splits on one feature, and unilateral means only the insurer makes an enforceable promise.

How a policy becomes a contract

A policy needs the four elements of any contract: agreement (offer and acceptance), consideration, competent parties and a legal purpose. The applicant usually makes the offer by sending the application with the first premium, and the insurer accepts by issuing the policy. The insured's consideration is the premium plus a promise to follow the policy conditions; the insurer's is the promise to pay covered losses. A 15-year-old signing an application raises the competent-parties question; a policy on a smuggling operation fails legal purpose.

Reading a policy: DICE plus endorsements

Forms follow one map. Declarations personalize the policy: who, what, where, how much and when. The insuring agreement states the promise. Conditions set the rules both sides follow. Exclusions carve out what the promise leaves behind. Definitions explain the quoted words, and endorsements modify the printed form. Many insurers adopt standardized forms rather than drafting their own; who drafts them and who approves them is part of insurers and regulation.

The named insured is the person or entity shown in the declarations; an insured is anyone the definitions extend coverage to. On commercial policies the first named insured carries extra duties: under the Common Policy Conditions (ISO IL 00 17) that party pays the premium, receives return premium, may cancel and requests changes. Other insureds on the policy cannot cancel it.

Five contract characteristics

Contract characteristics and the fact that signals each
CharacteristicWhat it meansThe fact that signals it
AleatoryAn unequal exchange that depends on chance: a small premium may buy a large payment, or nothingunequal values, an uncertain event; more on the aleatory contract page
AdhesionThe insurer drafts every word and the buyer takes it or leaves it, so courts read ambiguity in the insured's favorambiguous wording, drafted by the insurer
UnilateralOnly the insurer makes a legally enforceable promiseone promise, made by the insurer
ConditionalThe insurer pays only if the insured meets the conditions, such as notice and cooperationduties, must comply
PersonalIt insures a person's interest in property, so assignment needs the insurer's consentsells the house, assigns the policy

Representation, warranty, concealment, fraud

Four application problems and what each does to coverage
PointRepresentationWarrantyConcealmentFraud
What it isA statement believed trueA statement guaranteed true and written into the policySilence about a material factA deliberate falsehood meant to deceive
Voids coverage whenFalse and materialBreached (read strictly)Intentional and materialIntent to deceive is shown
Our exampleAn applicant guesses a roof is 10 years old; it is 12A fleet owner guarantees no driver under 21 will operate the trucksAn applicant leaves out a woodworking shop in the garageAn insured invents receipts for a stolen laptop

Utmost good faith runs both ways: the applicant must disclose, and the insurer must deal honestly. That shared duty is why these four labels carry so much weight.

Conditions in the policy

Cancellation ends a policy mid-term; nonrenewal declines the next term. The 2011 HO-3 gives 10 days' notice for nonpayment, 30 days' notice of nonrenewal, and refunds premium pro rata when the insurer cancels. IL 00 17 on commercial policies uses 10 days for nonpayment and 30 days for any other reason. State law can lengthen these periods, and insurers can modify forms.

Assignment needs the insurer's written consent because the contract is personal; the exception is the named insured's death, when coverage passes to the legal representative. Liberalization hands the insured any broadening the insurer adopts without extra premium; the 2011 HO-3 applies it to changes implemented within 60 days before or during the policy period. Subrogation lets the insurer, once it has paid, step into the insured's right to recover from whoever caused the loss; subrogation has its own page, including when a written waiver before a loss is allowed.

Appraisal settles the amount of a loss and never whether it is covered. Under the 2011 HO-3 each side names an appraiser within 20 days of a written request, the two choose an umpire within 15 days, and agreement by any two sets the figure. Insurable interest in property has to exist at the time of loss; the insurable interest page sets that against life insurance, where the interest has to exist when the policy is bought. How two policies split one loss is worked on property insurance basics.

Where $1,400 of premium goes back

WorksheetPro rata share

A $2,400 annual policy canceled by the insurer after 5 months

Annual premium
$2,400
Time in force
5 of 12 months
Who cancels
The insurer (pro rata)
  1. Premium per month$2,400 ÷ 12$200
  2. Earned premium5 × $200$1,000
  3. Unearned premium$2,400 − $1,000$1,400

Returned to the insured$1,400

Read for who canceled. When the insurer cancels, the 2011 HO-3 refunds the unearned premium pro rata; when the insured cancels, some policies apply a short-rate table and keep a penalty on top of the earned premium.

Checking the contract labels

0 of 19 answered · 0 right

Formation, disclosure, policy structure and the conditions above, mixed together.

Notes on each optionCommit to an answer first. The notes under the item then open on every option: what rules it in or out, and the one word that splits the runner-up from the key.

  1. Item 01

    An applicant knows the basement floods every spring but deliberately says nothing about it to keep the premium down. This is BEST described as:

    1. AMisrepresentation is an affirmative false statement, and here the applicant said nothing at all.
    2. BCorrect: deliberately keeping quiet about a known material fact (the spring flooding) to lower the premium is concealment.
    3. CWaiver is the insurer voluntarily giving up a known right, not an applicant's silence.
    4. DA breach of warranty needs a statement written into the contract as a guarantee, and no statement was made here.
  2. Item 02

    In a homeowners policy, words shown in quotation marks, such as "insured" and "residence premises," have their meanings explained in which section?

    1. AThe insuring agreement states the insurer's basic promise to pay; it does not explain the quoted terms.
    2. BConditions set out the duties of both parties after a loss and during the policy, not the meaning of words.
    3. CCorrect: words in quotation marks are defined terms, and their meanings are spelled out in the Definitions section.
    4. DThe Declarations name the insured, the location and the limits, but they define nothing.
  3. Item 03

    Under the HO-3 mortgage clause, all of the following are conditions a mortgagee must meet to recover when the insured's own claim is denied EXCEPT:

    1. ACorrect: the mortgagee's rights are independent of the insured, so the lender never needs the insured's consent to collect.
    2. BThis is a real mortgagee condition: it must file a signed, sworn statement of loss within 60 days after being told the insured failed to.
    3. CThis is a real mortgagee condition: the lender must pay any premium due on demand if the insured has not.
    4. DThis is a real mortgagee condition: the lender must notify the insurer of known changes in ownership, occupancy or substantial change in risk.
  4. Item 04

    After a covered property loss, what must the insured generally do with the damaged property?

    1. ACorrect: the insured must show the damaged property to the insurer as often as reasonably required, so it has to be kept for inspection.
    2. BSelling the property takes away the insurer's chance to inspect it and its right to the salvage.
    3. CThe insured owes only reasonable temporary repairs to prevent further damage, not full repairs before filing.
    4. DThrowing the property away destroys the evidence the insurer is entitled to inspect.
  5. Item 05

    An insurer accepts an application with several questions left blank, collects the premium, and issues the policy without asking for the missing answers. The insurer's act of issuing the policy on the incomplete application is an example of:

    1. ACorrect: by knowingly issuing the policy without the missing answers, the insurer voluntarily gave up its right to them, which is a waiver.
    2. BMisrepresentation is a false statement by the applicant, and here the insurer's own act is in question.
    3. CA representation is a statement the applicant makes on the application, not something the insurer does.
    4. DEstoppel is the consequence that follows a waiver (the insurer is later barred from denying on that ground), not the act of issuing itself.
  6. Item 06

    Forty-five days before a homeowners policy expires, the insurer notifies the insured that it will not offer a new policy term. This is a:

    1. ARescission voids the contract back to the start, usually for material misrepresentation, not at the end of a term.
    2. BCorrect: declining to offer another term once the current one ends is a nonrenewal.
    3. CA lapse happens when the insured fails to pay the premium, not when the insurer gives notice.
    4. DCancellation ends a policy before its expiration date, while this insurer is declining to offer a new term.
  7. Item 07

    Which of the following is NOT an obligation of a property-casualty insurer toward its insured?

    1. AUnfair claims settlement rules do require the insurer to give a reasonable explanation when it denies a claim.
    2. BPrompt investigation of claims is a standard insurer duty under unfair claims practices laws.
    3. CCorrect: an insurer may decline to renew at the end of the term, with proper notice, even when every premium was paid on time.
    4. DInsurers owe their insureds good faith and fair dealing, so this is an obligation.
  8. Item 08

    Which element distinguishes fraud from an ordinary misrepresentation on an insurance application or claim?

    1. AStatements of opinion are generally not misrepresentations at all, so they cannot be what makes something fraud.
    2. BWhether a statement is written or oral does not matter to either doctrine.
    3. CMateriality matters for any misrepresentation, innocent or not, so it does not separate fraud from it.
    4. DCorrect: fraud requires an intent to deceive the insurer to gain an unfair benefit, which an ordinary misrepresentation may lack.
  9. Item 09

    Jeremy crashes his car into a pole but waits six months to tell his insurer, which then denies the claim. Which duty after a loss did Jeremy fail to meet?

    1. ANothing in the facts says Jeremy left the car exposed to further damage.
    2. BCorrect: waiting six months to report the crash breaches the duty to give prompt notice of loss.
    3. CInspection was never refused; the problem is the insurer did not hear about the loss for six months.
    4. DProof of loss is due after the insurer asks for it, and the insurer never got that far.
  10. Item 10

    Stephen pays a $1,200 annual premium in advance and cancels his policy after three months. The policy applies a short-rate penalty of 10% of the unearned premium. How much will he get back?

    1. A$900 is the pro rata refund (9/12 × $1,200) and forgets the 10% short-rate penalty.
    2. B$1,080 takes 10% off the full premium and ignores the three months already earned.
    3. CCorrect: unearned premium is 9/12 × $1,200 = $900, less the 10% penalty of $90, leaving $810.
    4. D$780 wrongly takes 10% of the whole $1,200 premium instead of 10% of the unearned $900.
  11. Item 11

    John prepays a $1,200 annual premium. Four months into the policy term, which statement about the premium is CORRECT?

    1. AThis reverses the figures; only 4 of 12 months have passed, so the smaller share is earned.
    2. BPremium is earned day by day as coverage is provided, not all at expiration.
    3. CCorrect: 4/12 × $1,200 = $400 is earned and the remaining $800 is unearned and would come back on a pro rata cancellation.
    4. DPaying in advance does not earn the premium; it is earned only as time passes.
  12. Item 12

    An applicant leaves out a prior kitchen fire on his homeowners application, and the insurer learns of it after a later loss. For the insurer to void the policy for concealment, the omitted fact generally must be:

    1. AAn insurer can act on concealment it discovers after the policy is issued, even after a loss.
    2. BCorrect: concealment voids a policy only when a material fact was withheld on purpose.
    3. CA fact written into the policy as a guarantee is a warranty, a different doctrine from concealment.
    4. DAn honest omission (a forgotten fact) is generally not concealment, because concealment requires intent.
  13. Item 13

    In which part of an insurance policy would an insured find the policy period, the limits of insurance, and the premium?

    1. AThe insuring agreement states the insurer's broad promise to pay, not the policy period or premium.
    2. BCorrect: the Declarations page personalizes the policy with the named insured, policy period, limits and premium.
    3. CConditions set out the duties of the insurer and the insured, not the policy's specific figures.
    4. DDefinitions explain the meaning of defined terms; they carry no limits or premium.
  14. Item 14

    On a commercial property application, the owner states that the building has a working sprinkler system, and the statement is written into the policy as a condition of coverage. This statement is:

    1. ACorrect: a statement of present fact (the sprinklers work now) written into the policy as a condition of coverage is an affirmative warranty.
    2. BA promissory warranty promises something will be kept up in the future, such as maintaining the sprinklers all term.
    3. CA representation stays on the application; once it is written into the policy as a condition, it becomes a warranty.
    4. DConcealment is withholding a fact, and here the owner stated the fact openly.
  15. Item 15

    A homeowners policy form contains a special theft limit for jewelry, but an endorsement attached to the policy schedules a ring for its full value. If the two conflict, which controls?

    1. AThe base form is exactly what the endorsement was attached to change, so it gives way.
    2. BThe insuring agreement is part of the printed form the endorsement modifies.
    3. CCorrect: an endorsement is a written change to the policy and overrides the printed form it conflicts with.
    4. DSection I conditions are also part of the base form, so they yield to the endorsement.
  16. Item 16

    A visibly intoxicated applicant signs an insurance application in an agent's office. Which element of a valid contract is in question?

    1. AOffer and acceptance come from the signed application and the issued policy, and nothing suggests a problem there.
    2. BConsideration is the premium and the insurer's promise, which are not in question.
    3. CInsuring property or people is a legal purpose, so that element is fine.
    4. DCorrect: a visibly intoxicated person may lack the legal capacity to contract, so the competent-parties element is at issue.
  17. Item 17

    Which statement about notice of loss and proof of loss in a property policy is CORRECT?

    1. ACorrect: proof of loss is a signed, sworn statement, while the initial notice of loss can be informal.
    2. BThis reverses the two; notice can be informal, and it is proof of loss that must be sworn.
    3. CNotice comes first and proof of loss follows it, not the other way around.
    4. DNotice is due promptly, and proof of loss is typically due 60 days after the insurer asks for it, not 60 days after the loss.
  18. Item 18

    Eva buys a policy, then cancels it on its effective date before any coverage is provided, and the insurer refunds the entire premium. This is a:

    1. ACorrect: canceling on the effective date, before any coverage is provided, is a flat cancellation with the full premium returned.
    2. BA nonrenewal ends coverage at the end of the term, not on day one.
    3. CA short-rate cancellation keeps a penalty, so the refund would not be the entire premium.
    4. DA pro rata cancellation returns only the unearned part after some coverage has been provided.
  19. Item 19

    Under the 2011 ISO HO-3, when must the insured send the insurer a signed, sworn proof of loss?

    1. AThe 60 days run from the insurer's request, not from the date of loss.
    2. BCorrect: the 2011 HO-3 requires a signed, sworn proof of loss within 60 days after the insurer asks for it.
    3. COne year is not the HO proof-of-loss rule; the form gives two years to bring suit.
    4. D30 days is a near-miss number; the HO-3 figure is 60 days after the request.
Mixed practice test · Timed mock

Adhesion, indemnity and where the agent fits

Who wins when policy wording is ambiguous?

The insured. Insurance is a contract of adhesion: the insurer wrote the wording, so courts read unclear language against it.

Has the insured promised anything enforceable?

The contract is unilateral, so only the insurer's promise can be enforced. Paying premium and giving notice are conditions the insured must meet to keep coverage, which is why the same policy is also called conditional.

What does the principle of indemnity rule out?

Profit from a loss. The policy aims to put the insured back where they were, and insurable interest, subrogation, other-insurance clauses and actual cash value (ACV) settlement all keep a payment from exceeding the loss. The risk vocabulary underneath is on principles of insurance.

Where do agents, binders and applications fit?

In the insurance transaction: how an agent's authority binds the insurer, how a binder starts coverage, and how premium and claims are handled once the policy exists.

Contract law, one label at a time

Warranties, waivers, conditions and refunds can be rehearsed in spare minutes with the app, which runs on both iPad and iPhone and holds more contract questions than this page.

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