The insurance transaction on the P&C exam

Agency, underwriting, rating, premium handling and claims, in no fixed order.

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 insurer ends its contract with an agent but lets the agent keep its signs, applications and binder forms. Before learning of the termination, a customer binds coverage through the agent. The insurer is bound because of:

   • AImplied authority
   • BExpress authority
   • CFiduciary responsibility
   • DApparent authority
   1. AImplied authority flows from the agency contract, and that contract has already ended.
   2. BExpress authority is what the contract grants, and the contract was terminated.
   3. CFiduciary responsibility is about the agent handling premiums in trust, not whether the insurer is bound to a customer.
   4. DCorrect: by leaving its signs and forms with the agent, the insurer let the public reasonably believe the agent still represented it, which is apparent authority.

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2. Item 02

   An agent's written contract with an insurer authorizes the agent to bind homeowners coverage up to $500,000 of dwelling value. This is an example of the agent's:

   • AApparent authority
   • BImplied authority
   • CExpress authority
   • DRatified authority
   1. AApparent authority rests on what the public believes from the insurer's conduct, not on a written grant.
   2. BImplied authority is unwritten authority needed to carry out the express duties; a stated binding limit is written.
   3. CCorrect: express authority is authority specifically granted in the agency contract, such as a stated binding limit.
   4. DRatification is the insurer's later approval of an act the agent was not authorized to do.

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3. Item 03

   A contractor's general liability premium is $12 per $1,000 of payroll. The deposit premium was based on an estimated payroll of $500,000, and the year-end audit shows actual payroll of $650,000. What is the result of the audit?

   • AAn additional premium of $7,800
   • BA return premium of $1,800
   • CAn additional premium of $1,800
   • DNo change, since the deposit is final
   1. A$7,800 is the total earned premium on actual payroll, not the amount still owed.
   2. BA return premium arises only when actual payroll is below the estimate, and here it is higher.
   3. CCorrect: earned $650 × $12 = $7,800 minus the $6,000 deposit ($500 × $12) leaves an additional $1,800 due.
   4. DA deposit premium is always adjusted at audit; it is never final.

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4. Item 04

   An underwriter gives a building a debit for poor housekeeping and a credit for an automatic sprinkler system. This rating method is:

   • ASchedule rating
   • BRetrospective rating
   • CExperience rating
   • DManual rating
   1. ACorrect: schedule rating adjusts a base rate with debits and credits for physical features of the risk, such as housekeeping and sprinklers.
   2. BRetrospective rating adjusts premium after the policy period based on that period's losses.
   3. CExperience rating uses the insured's own past losses, not physical features.
   4. DManual rating applies the same published class rate to every risk with no individual debits or credits.

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5. Item 05

   An insurer investigating a liability claim that may fall under an exclusion continues to defend the insured but notifies the insured in writing that it may later deny coverage. This notice is a:

   • AProof of loss
   • BDeclination of coverage letter
   • CReservation of rights letter
   • DNonwaiver agreement
   1. AA proof of loss is the insured's sworn statement of the claim, not an insurer notice.
   2. BA declination is a final denial, while this insurer is still defending and only holding the right to deny later.
   3. CCorrect: a reservation of rights letter is a one-sided notice that the insurer is proceeding while keeping its right to deny coverage later.
   4. DA nonwaiver agreement does the same job but is signed by both parties; a notice sent by the insurer alone is the tell for reservation of rights.

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6. Item 06

   An agent with binding authority tells a new client by phone that coverage on her home is in force immediately, before the insurer issues the policy. This temporary agreement is a:

   • AConditional receipt
   • BBinder
   • CCertificate of insurance
   • DDeclarations page
   1. AA conditional receipt is the life and health counterpart given with a premium payment, not a P&C binder.
   2. BCorrect: a binder is temporary oral or written evidence of P&C coverage until the policy is issued.
   3. CA certificate of insurance shows coverage under a policy that already exists.
   4. DThe declarations page is part of an issued policy, not a temporary agreement made beforehand.

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7. Item 07

   Under the Gramm-Leach-Bliley Act, before an insurer shares a customer's nonpublic personal financial information with a nonaffiliated third party for marketing, it must:

   • AProvide the customer a copy of any consumer report
   • BObtain the state insurance commissioner's approval
   • CWait until the policy's first renewal date
   • DGive a privacy notice and a chance to opt out
   1. AGiving a copy of a consumer report is an FCRA right, not the GLBA condition for sharing data.
   2. BGLBA does not require the commissioner's approval before an insurer shares information.
   3. CNothing in GLBA ties sharing to a renewal date; the notice and opt-out must come first.
   4. DCorrect: GLBA requires a privacy notice and an opportunity to opt out before nonpublic personal information goes to nonaffiliated third parties.

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8. Item 08

   Under the Fair Credit Reporting Act, an insurer that orders an investigative consumer report on an applicant must disclose this in writing within:

   • A3 days
   • B10 days
   • C5 days
   • D30 days
   1. ACorrect: the FCRA requires written disclosure of an investigative consumer report within 3 days of requesting it.
   2. B10 days is not an FCRA disclosure period for investigative reports.
   3. C5 days is the separate notice when disputed information is put back into a report.
   4. D30 days is too long; the FCRA disclosure window for investigative reports is 3 days.

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9. Item 09

   A pedestrian injured by an insured driver files a claim with the insured's auto liability insurer. This is a:

   • AContribution claim
   • BSubrogation claim
   • CFirst-party claim
   • DThird-party claim
   1. AContribution is how two insurers share one loss, not a claim by an injured stranger.
   2. BSubrogation is the insurer's recovery from a responsible party after it pays, not the injured person's claim.
   3. CA first-party claim is made by the insured for their own loss, and the pedestrian is not the insured.
   4. DCorrect: a pedestrian outside the contract claiming against the insured's liability coverage is making a third-party claim.

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10. Item 10

    Before investigating a questionable claim, an adjuster has the insured sign a document stating that the investigation does not waive the insurer's right to deny coverage. This document is a:

    • ANonwaiver agreement
    • BProof of loss
    • CReservation of rights letter
    • DGeneral release
    1. ACorrect: a nonwaiver agreement is signed by the insured and the insurer and preserves the insurer's right to deny coverage during the investigation.
    2. BA proof of loss is the insured's sworn statement of the amount claimed.
    3. CA reservation of rights letter has the same purpose but is a one-sided notice; the insured signing it is the tell for nonwaiver.
    4. DA general release ends the claim after payment; it does not preserve coverage defenses.

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11. Item 11

    An applicant applies for a homeowners policy with replacement cost on contents, but the insurer issues the policy with actual cash value on contents. Legally, issuing this different policy is:

    • AA counteroffer the applicant may accept
    • BA void contract that must be rescinded
    • CAcceptance of the applicant's original offer
    • DA binder until the requested policy issues
    1. ACorrect: issuing different terms is a counteroffer, and the applicant is bound only by accepting it, for example by paying the premium.
    2. BThe contract is not void; it simply does not exist until the applicant accepts the new terms.
    3. CAcceptance must mirror the offer, so a policy on different terms cannot be an acceptance.
    4. DA binder is a separate temporary agreement made before issuance, not the issued policy itself.

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12. Item 12

    A personal auto insurer gives a 10% discount to drivers who have had no accidents or violations in the past three years. This is an example of:

    • ASchedule rating
    • BClass rating
    • CRetrospective rating
    • DMerit rating
    1. ASchedule rating applies debits and credits for physical features of a commercial risk, not a driving record.
    2. BClass rating is the base rate shared by the whole group; the discount adjusts it for one driver.
    3. CRetrospective rating adjusts a large account's premium after the period based on its losses.
    4. DCorrect: merit rating adjusts an individual's class rate for their own record, such as a safe-driver discount.

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13. Item 13

    Under a direct bill arrangement, how are the premium and the agent's commission handled?

    • AThe insurer collects it and pays the commission
    • BThe agent advances the premium and is repaid by the insured
    • CThe agent bills the insured and sends the premium net of commission
    • DA premium finance company pays the premium and bills the insured
    1. ACorrect: in direct billing the insurer bills and collects the premium itself and then pays the agent's commission.
    2. BAgents advancing premiums is generally prohibited as an inducement, and it is not how direct billing works.
    3. CThe agent billing the insured and remitting net of commission describes agency billing, the reverse of direct billing.
    4. DA premium finance company making a loan is a separate arrangement, not direct billing.

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14. Item 14

    Under the Fair Credit Reporting Act, most adverse information other than a bankruptcy may generally remain on a consumer report for:

    • A10 years
    • B7 years
    • C3 years
    • D5 years
    1. A10 years is the limit for bankruptcies, which the stem specifically excludes.
    2. BCorrect: the FCRA generally limits most negative items, other than bankruptcy, to 7 years on a consumer report.
    3. C3 years is not an FCRA reporting period.
    4. D5 years is not an FCRA reporting period.

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15. Item 15

    An adjusting firm that is paid a fee by several different insurers to handle their claims employs which type of adjuster?

    • APublic adjuster
    • BAgent with claims authority
    • CStaff adjuster
    • DIndependent adjuster
    1. AA public adjuster is hired by the insured, not by insurers.
    2. BAn agent with claims authority settles small claims for the insurer the agent represents, not for several insurers through a firm.
    3. CA staff adjuster is a salaried employee of a single insurer.
    4. DCorrect: independent adjusters work for adjusting firms hired by insurers on a fee basis to handle their claims.

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16. Item 16

    An insurer cancels a $1,200 annual policy after it has been in force for 3 months. What is the return premium?

    • A$300
    • B$1,200
    • C$900
    • D$810
    1. A$300 is the premium earned for the 3 months, not the refund.
    2. BReturning the full $1,200 ignores the 3 months of coverage already provided.
    3. CCorrect: when the insurer cancels, return premium is pro rata: 9 unused months ÷ 12 × $1,200 = $900.
    4. D$810 applies a short-rate penalty, which can apply only when the insured cancels.

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