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 CONGRATULATIONS, YOU PASSED!

If you are reading this it is because you have received

your PreLicenseTraining.com certificate and are on the right
track to passing your State exam the first time.

This workbook will give you several examples and items to

work on to help you retain the information you’ve learned,
while you watch our videos.

Happy Studying!

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 GENERAL
PRINCIPLES
The purpose of the General Principles Section is to provide an overview of facts. These facts
include basic insurance concepts and principles as well as insurance regulations. The facts are
simply to reinforce concepts. Please refer to your class material for more detailed information.

This information is strictly for review and only emphasizes areas that have been consistently
tested. Questions can appear on the test from any material published in your classroom
manual.

This review stresses key wording and phrasing that is associated with the concepts that are
tested and not a substitute for the actual class manual.

The retention questions are to familiarize the student with test wording. In the video the
presenter will explain how many of these questions may appear and additional questions that
could be asked.

Your course material will contain the information that is being reviewed.
`

IMPORTANT - The General Insurance portion of the test includes basic principles,
contracts, concepts and insurance regulations (ethics & code). Each test includes this
section and laws pertaining particular to each license as well as all licenses and
licensees.

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General Principles - Section 1 Basics
Example of words used interchangeably on the test:
• Insurance Company: insurer, entity, principal, underwriter, carrier, or company.
The terms used for “insurer” in policy language are: “we”, “us” and “our”. The
insurer is the second party to the contract.
• The Life and A&H test will use the following terms when referring to the person who is receiving
the benefits: insured, policyholder, policyowner, subscriber, Medicare beneficiary, annuitant or
recipient and employer. Group insurance will use the term: employer, or plan sponsor and
employee or member. Insured is the first party to the contract.
• Other tests will use the following terms when referring to the person who is receiving the
benefits: insured, policyholder, owner.
• The terms used for “Named insured” in policy language are: “you” and “your”.
• Insured is the first party to the contract. In liability the insured is also referred to as the
defendant. The third party is called the claimant or plaintiff.
• Claimant - Person seeking recovery. In property=insured. In liability = 3rd party. In life
insurance=beneficiary. Annuities=annuitant. Medicare=Medicare beneficiary.
• Falsification Provision - warning found on claim forms that those filing a false or fraudulent
claim are subject to fines and imprisonment.
• CIC - California Insurance Code = Statutes = State insurance laws = Proposed, written,
enacted and changed only by State Legislature
• California Code of Regulations = CCRs = Rules and procedures written by the
Commissioner to carry out the intent of the Code (law). Commissioner writes and
changes the regulations
• Pooling = sharing = spreading the risk
• Department of Insurance = DOI, California Department of Insurance = CDI
• Rescind = voiding or revoking a contract back to its Inception date (beginning) as though it
never existed. This is also a flat cancellation. Can only be done for material
misrepresentation, material concealment, breach of warranty or fraud.

Definitions of Insurance
(written) (restore/whole)
• CIC - Insurance is a contract in which one undertakes to indemnify another
against loss, damage or liability arising from a contingent or unknown event.
(may or may not happen)
• Layman Definition - substitution/exchange of a small certain loss (premium)
for a large uncertain loss (claim);

• Conceptual Definition - social device transferring risk from individuals to a group.

Insurance contract = policy = written instrument = indemnity agreement = legal document

Benefits of Insurance
• Benefits - Device that allows individuals and society to recover from unexpected loss; secure
credit; satisfy legal requirements; source of investment income; reduce social burdens; promotes
loss control; reduces anxiety, uncertainty
• Costs
• Increases moral and morale hazards Dishonesty, lack of care
• Premiums

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Loss - any reduction in quantity, quality, or value of something. Loss is defined in the policy and can
mean death, bodily injury, property damage, incurred expenses, reduction in quality of life, etc., or an
obligation to pay for any such loss.
• Property Insurance Loss = Direct to tangible property or indirect
• Liability Insurance Loss = Obligation to pay for bodily injury, property damage, personal injury,
advertising injury. Harm caused by the insured to others.

Loss Exposure - Possibility of loss. There are 3 dimension of loss exposure: Type of value exposed to
loss; the peril causing loss; the extent of the potential financial consequences. Normally written as:
Property, Liability, Human/Personnel.

• Property loss exposure - damage to insured’s property =

• Liability loss exposure - harm cause to others/another
• Personal loss exposure - death, retirement, unemployment, disability, etc =
• Human loss exposure - considered personal unless they give work scenario
• Personnel loss exposure - death, resignation, termination, disability, etc =

Note: Financial loss is not a loss exposure it’s a consequence of all of them

Peril - (“cause of loss” or “reason for loss”)

• In life insurance what caused the death such as an auto accident. Health insurance it would be
the cause of the illness or injury.

Property Insurance:

• Named Peril - Fire , Lightning etc. The perils are named/listed/stated in the contract.
Not listed claim is not paid. The burden is on the insured to prove the damage was caused by a
listed peril. Forms/Policies that are considered to be named peril policies are:
Basic form (DP-1, HO-8), Broad form (DP-2, HO-2, HO-4, HO-6)

• Open Peril/All Risk - Lists exclusions - Does not name/state/list the perils but states it covers all
or any peril, except those specifically excluded. This type of policy shifts the burden of proof to
the insurer. The insurer must pay unless they can show the cause of loss was an exclusion
under the policy/contract. Form/Policies that are open peril/all risk are:
Special (DP-3, HO-3, Comprehensive HO-5, Inland/Ocean Marine

Note: Open Peril/All Risk policy insuring real property (structures) has several exclusions. An open
peril/all-risk policy used to cover Ocean or Inland Marine Risk has only a few exclusions.

Hazard - (key phrases increases or leads to - chance/likelihood/severity of loss)

• Types of Hazards
 Moral – dishonest, ethics/habits/fraud - liar, fraud, exaggerating a loss, felony, alcoholism,
drug addiction, judgments
 Morale – irresponsibility/carelessness - reckless driving, leaving keys in car, not
exercising, splurging, paying bills late
 Physical – location, materials, value, operations, height, weight, occupation - next to a
dynamite factor, kerosene, blindness, avocation (hobbies)
 Court – legal decisions - Lawsuits, mold

RISK - chance/uncertainty/possibility of loss occurring

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 (uncertainty not certain)

Types of Risk - 2
Pure - loss, no loss, not a chance of gain. Insurable Ex: When will death occur? Health not when but if
Illness or injury strike, medical expenses, loss of income. Annuities risk is outlive income

Speculative - loss or gain. Not Insurable Ex: gambling, lottery, new business, market value of home

Risk Management (identify and handle)

Identify
o Life and A&H - Clients objectives, assets, liabilities, the develop and implement a plan
o PC - Checklists, surveys, inspections, interviews, financial statements
Not copying previous apps or declaration pages

Methods to Handle Risk - STARR (PC) or TARR (Life/A&H)

Risk Sharing = Reinsurance

More than one primary

Risk Transfer = Insurance

Means purchasing insurance

Risk Avoidance = Elimination Life /A&H - Don’t bungee cord jump/don’t participate
PC - Not installing swimming pool. Not purchasing motorboat

Risk Retention = Self Insure. Self insure portion of risk = deductible. Not benefit of
insurance. Choosing not to insure something.

Risk Reductions = Control loss/severity. Life/A&H - Quit Smoking, exercise, wear

seatbelt. PC - burglar alarms, sprinkler systems

RISK = CHANCE HAZARD = INCREASES CHANCE/SEVERITY PERIL = CAUSE

Law of Large Numbers - the greater the number of exposure units (cars, homes) the more predictable
the loss. (Used to establish appropriate rates - benefits the insured).

• Require a large number of similar/like risks or exposure units to be combines.

• Predicts losses within a particular group, not individual loss
• Reduces the degree of error in predicting future losses as the number of individual exposures
units increases. This allows insurers to set appropriate premiums

Exposure unit - Measure used to establish rates. In life its per thousand in property it’s the number of
cars.

Elements of Insurability
Insurance is not an appropriate mechanism for protecting against all risks. There are certain rules that
establish a practical basis regarding who can be insured and for what exposures. These rules determine
a risk’s insurability (the ability of an individual to obtain an insurance policy to cover the risk.

Insurable event - is any contingent (may or may not happen) or unknown event, whether past or future,
which may damnify a person having an insurable interest or create a liability against him may be insured

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against, except gambling and lotteries. CIC 250 (Can’t insure stock market, real estate ventures,
gambling, lotteries, market value of home)

Ideally Insurable Risk - not all pure risks are insurable

• must be unintentional;
• creates for the insured an economic hardship;
• requires large grouping of like/similar/homogeneous units;
• measurable in money and definable in time, place, cause;
• must EXCLUDE catastrophic losses.
• must calculable - frequency (number of times an event will occur in a period of time) and severity
(damage the event causes)
• premium must be reasonable

Insurable Interest - Policyholder has a legitimate financial interest in preserving the property or life
insured. It requires a person face personal risk of loss; has a legitimate finance interest; no potential for
gain due to the insurance.

• In property and casualty it means ownership. In life and health it is based on relationships.
• In property & casualty it is proven twice: at application and again at claim.
• In Life and Disability (health) it is only proven once: at application.
• Lack of insurable interest voids contract. Contingent or expectant interests are not insurable

Underwriting - Process of reviewing application and additional information to decide whether the risk will
be accepted or denied (rejected). This is known as risk selection. The underwriter is also responsible for
selecting rating factors (classification), policy terms, and conditions.

The application is the major source of information. It is an Agents duty to assist

the applicant in completing the application, to full disclose information to the
insurer and make sure it is signed properly. The underwriters rely on
producers to be good field underwriters. Field underwriting is the Producers
personal contact with the proposed insured/applicant. This includes screening
out unacceptable risks. Analyzing risks and exposures, taking steps to avoid or
reduce risks, considering lost control efforts, and submitting risks to the proper market.
• Preselection - is reviewing the original application and gathering need information from other
sources to evaluate the risk. Other sources include information gathering agencies, government
bureaus, industry bureaus, loss runs, previous insurers, claims. Once gathered the underwriter
decides to accept or deny.
• Postselection - involves review after policy is in force to determine whether to renew, cancel or
non-renew. Postselection is not allowed for Life and A&H
• Selection of risk is to avoid adverse selection. Adverse selection is the tendency of poor/higher
risks to seek and maintain insurance to a greater extent than better/lower risks.
• Underwriters protect the insurer against adverse selection by attempting to make a higher risk fall
within the normal range to achieve profitable distribution by:
 Charging a higher rate
 Place restrictions or limitations These are considered adverse underwriting
 Decline the risk decisions

Insurers make their money two ways - Maintaining their combined ratio, and premiums being invested to
produce investment income.

Combined ratio - loss ratio plus expense ratio divided by premium

• Loss ratio = losses dived by premium

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 • Expense Ratio = expenses divided by premium (cost of operations)
• If Combined ratio is less than 100 the insurer is profitable. If it is at 100 the insurer is breaking
even. If it greater than 100 the insurer is losing money.

Pricing of Individual Risks - used to also achieve profitable distribution. Actuaries set the rates for groups
of insureds but underwriters decided the premium on individual risks.

• Rating a policy - There are different ways in which a premium can be computed:
 Judgment rating - based on the underwriters evaluation
 Manual rates - aka class rating. Looked up in a manual or stored on the computer and are
arranged by various classes and categories.
 Merit rating - starts with manual/class rates which are modified. Experience rating is based
on insured’s loss experience over period of time. Usually 3 years back but not current year.
Retrospective rating bases premium on losses in the current year. Scheduled rating applies
debits and credits.

Review Section 1 - Basics

Answer Without Looking and Underline Key Words

1. Purpose of insurance to avoid or eliminate risk. T/F Insurance= transfer of risk

2. Chance/possibility/uncertainty about a loss occurring is called __________________.

Risk

lottery/gamboling/stock market/market value/new business venture

3. Events that are not insurable: ____________________________________
not insurable
4. Expectant interests are ______ ____________
insurance
5. Transferring risk/losses from individuals to a group is a social device called _______________
claim
6. Substitution of a smallpremuim
certain loss for a large uncertain loss is the layman definition for
____________________.
insurance
pure
7. When there is only the outcome of loss occurring this is called what type of risk _________________

8. According to the Code an insurable event is when an insured suffers a financial loss in their home
when the price of housing goes down. T/F speculative risk
insurance
9. A contract whereby one undertakes to indemnify another is _______
peril
10. What causes the loss is known as _____________.

11. Person seeking recover is the: beneficiary; insured; claimant; 3rd party. Underline correct answer
life insurance if liability insurance
12. Insurance policies can name the perils they are insuring in the contract, or they can state that all
perils are covered unless specifically excluded by the contract. T/F

13. Reckless driving or malingering are what type of hazards? Morale

14. Unintentional slander of another person would be considered an insurable event according to the
code. T/F
Physical
15. Material, structural, age, location, operations arise from this type of hazard: _______________

16. Blindness is what type of hazard? Physical, but life kind

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17. When there is a likelihood of increase or size of losses due to court decisions this is known as what
type of hazard: _____________________
Legal
Exposure
18. Measure in the law of large numbers used to establish rates are called ______________
______________.
Units
rates/appropriate premium
19. Law of law numbers is used to establish _________

20. A person broke their leg on Tues this is an example of a: risk; loss, peril, hazard. Underline the
correct answer.

21. Death, bodily injury, disease, property damage, loss of income, incurred expenses, a reduction in
quality of life (pain), or an obligation to for any of this fall under “loss” in various policies. T/F
Loss exposure _______________
22. Possibility of just loss is: _____________

23. Property, liability human, personal, personnel, are types of loss exposure. T/F

24. There are three dimensions that make up loss exposure: type of value exposed to loss, peril causing
the loss, and financial consequence of the loss. T/F

25. Loss due to resignation, retirement, or death of a key employee is what type of loss exposure:
______________
Personal
Humans/personal
26. The type of loss exposure that affects individuals and families is called ___________ loss exposure

27. Underwriters guard against adverse selection by charging a higher rate, placing restrictions/limits on
coverage, or rejecting. T/F adverse underwriting decisions

28. Not a benefit of insurance is risk ___________________

retention

29. Financial loss is a type of loss exposure. T/F

30. Type of loss exposure that results in monetary damages to another is __________________
liability loss exposure

property loss exposure

31. Type of loss exposure that happens to real or personal items of the insured: __________________
like or similar
32. Other words that can be used on the test for homogenous units: ________________________

33. Giving false information on an application would be which type of hazard? Moral

34. The larger the number the more ___________________

predictable the loss is the principle behind the law of
large numbers.

35. Giving false information on an application would be which type of hazard? Moral

36. Underwriters do risk selection, rating, and offer coverages. T/F

37. If insurable interest does not exist, an insurance policy will not pay even if it has been issued. T/F

38. Combined ratio is simply adding the __________

loss ratio and the _____________
expense together. If it is less
than 100% the insurer is __________, its 100% the insurer is breaking ________,
profitable even and if it is greater
the insurer _________
losing money.

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Oops this question should be in Section 2

39. Which of the following is true concerning a change in deductible from $1000 to $100? Reduction in
premium and increase in claims; increase in premium and reduction in claims; both; neither.
(underline correct answer)

40. Any contingent or unknown event, whether past or future, which may damnify or hurt a person having
an insurable interest or create a liability against him/her may be insured against is how the State of
California CIC defines _______________________
insurable event

41. Rate based upon underwriter’s evaluation would be: manual rating, merit rating, judgment rating,
experience rating. (Underline correct answer).
Retention
42. Not purchasing collision coverage for your automobile is an example of risk _____________.
risk avoidance/elimination/prevention
43. Not purchasing a motorboat is an example of _____________ _________________.

44. Not proposing to your girlfriend is an example of: _____________ ______________

45. Source of investment funds, payment for losses, reduction in financial uncertainty are considered
___________ __ _______________.
benefit of insurance
lottery/gamboling/stock market/market value/new business
46. Events that may NOT be covered by insurance: _________________________________________
venture

47. Not taking helicopter rides over a 100 feet is an example of risk: _____________________________
risk reduaction

48. To compute combined ratio the insurer uses the components of loss ratio and expense ratio and:
Subtracts, Adds, Multiples or divides. Underline the correct answer.

49. Formula for loss ratio is: ________________________________

losses/premiums

50. An insurer may void the policy because the insured omitted facts on their application they
reasonability did not know about. T/F

51. Good faith communications in insurance contracts according to the code include these parties to the
insured
contract: ____________, ____________,
agent Insurer
and _____________.

Oops - This question belongs in another section under fraud.

claim form
52. Insurers provide falsification information to be prominently printed on the: _____________.

General Principles - Section 2 Coverage Concepts

Principle of Indemnity – the basic principle behind insurance. To restore someone to the same
financial condition they occupied prior to the loss with no intent of loss or gain (to make whole). The
intent is to cover the amount of the actual loss only. Insured cannot collect more than 100% of actual
loss. An insured can only be indemnified to the extent of their insurable interest (ownership) in
property.

In life and health insurance, the concept of indemnity has a slightly different meaning in that the value of
a person’s life is represented by their present and future earning power. Indemnification can take the
form of cash proceeds to replace a wage earners lost income or pay for medical bills.

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 • Purpose of indemnity to prevent insured from profit from
a loss, and reduce moral hazard
• An indemnity agreement restores insured to a condition
they were prior to the loss.
• Indemnification - cannot collect more than your actual
loss under this definition. Life it is represented by their
present and future earning power.

DEDUCTIBLES - In health insurance it is the portion of covered expenses the insured must pay/satisfy
before the insurer pays.

In property insurance the insurer pays the excess over the deductible. It is a form of self-insuring
(retaining a portion) ofthe risk. Form of risk retention.
• Lowering deductible would cause a(n) increase in claims and premiums. Raising the deductible
would cause a(n) decrease in claims and premium.
• Purpose is to eliminate nuisance claims; to keep premiums affordable; to make the insured more
careful about loss control

Reinsurance - is the process of the insurer ceding/transferring all or part of the risk to another insurer so
that they share the risk. The insurer transferring the risk is known as the ceding or primary insurer and
the party agreeing to accept all or a portion of the risk is known as the reinsurer.

Reinsurance
Ceding Insurer
primary Another 3rd
Insurer person

Insured Insurer Reinsurer

cedes
Contract Contract

• Used to spread the risk (catastrophic)

• Insure large risks safely
• Anything we insure we will reinsure
• Solves problems with unearned premium
• Most reinsurance is treaty (automatic) not specific/facultative
• Helps insurers avoid capacity problems
• CIC – Reinsurance is a contract by which an insurer procures a third party to insure it against loss
or liability by reason of such original insurance

Self Funding = risk retention. The owner/employer pays for claims.

For a risk to successfully self-insure, two very important characteristics must be present:
1) The loss must be predictable and known & based large number of homogeneous exposure
units (predictability)
2) Sufficient liquid assets to pay claims and other costs of retaining the risk.
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It is a misdemeanor to suggest stop loss insurance (self insuring a portion) for workers’
compensation under the Code.

In health insurance it allows the policyholder to tailor benefits. Cannot self-insure life insurance.

Review Section 2 - Coverage Concepts

Answer Without Looking and Underline Key Words
insurance
1. Type of agreement that restores someone to the same condition as prior to the loss:____________

2. An agreement in which an insurer contracts with a third party to insure itself against losses from
insurance policies it issues is known as: ________________________________________________
re-insurance

3. Insurers must reveal statements on the application to the reinsurer. T/F

4. Self-funding requires the risk to be predictable and unknown T/F

5. When an insurer reinsures they no longer have an interest in the contract. T/F

6. Indemnification is not collecting more than the actual value of the economic loss. T/F

7. The insurer that cedes a portion of the risk is known as the:

________________________________
reinsure

8. Purpose of indemnity to prevent insured from _______________from

profiting a loss,
moral
and reduce __________ hazard

9. Reinsurance reduces the risk of a catastrophic loss, helps avoid capacity

problems, and spreads the risk. T/F

General Principles - Section 3 Types of Insurers

Four Major Categories of Insurers
• Property insurance - covers direct and indirect losses - referred to as first party
insurance/coverage.
• Casualty insurance - includes a wide variety of unrelated coverages such as auto, workers
compensation, general liability, crime insurance, aviation insurance, surety bonds to name
a few
• Life insurance - provides death beds. Annuities - lifetime income
• Accident & Health - protects against loss caused by injury, illness, accidental death and
disability income.

California Code has 22 classes/lines of insurance - For regulator purposes the CIC divides lines of
insurance into classes of insurance. Casualty is not a class but a label for several classes.
Example of classes/lines of insurance
*Life (includes annuities) - Life Agent license
*Fire (property policies) - broker/agent license
*Disability (accident & health) - A&H Agent license

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Property and Casualty broker/agents are known as “Insurance Agents” - sell everything except Life,
Disability (health)

Types of Insurers - Structure and Management

Code=any person capable of making a contract may be an insurer. Certificate of Authority each
class/line transact

Private Insurers and Government Insurers - Insurance is provided to the public by two major
sources: Private insurers and the United States government. Two major insurers are Stock
and Mutual. (Commercial insurer = for profit. Noncommercial = Not for profit.)

• Stock Insurer aka Non-participating – Corporation - stockholders/shareholders/stakeholders own

& elect the Board of Directors. Dividends taxable = return of profit.

• Mutual Insurer aka Participating – Corporation - policyholders/buyer own elect the Board of
Directors. Dividends not taxable, = return of premium.
 DEMUTUALIZATION is when a mutual insurer becomes a stock insurer.

• Reciprocal aka Inter-Insurance Exchange - Unincorporated - Subscribers exchange insurance on

one another (both insured & insurer). Managed by an attorney-in-fact. Can issue assessable
policies. Dividends like mutual insurer = not taxable. Cannot issue life insurance.

• Lloyd’s of London - not an insurance company. A physical meeting place made of individuals who
form syndicates.

• Fraternal - Organized on the basis of a lodge, society, or order. Sell the members.

• Captive Insurer - Company/organization/group of affiliates - forms a subsidiary - purpose of

having the subsidiary provide all insurance on the parent company.

• Service Organization - Blue Cross/Blue Shield, and HMO. Pay directly to the provider of the
service. (Most are nonprofit). Noncommercial

• Reinsurers - Insurers or 3rd parties that accept all or a portion of the risk from the ceding/primary
insurer. The primary/ceding insurer pays the claim. Reinsurer reimburses for portion that is
reinsured.

• Excess and Surplus Lines Insurers - Specialty insurer where there is no market through the
original producer or which is not available through admitted. Placed through a Surplus lines
broker.

• Self-Insurer - The business or individual choose to self-insurer. Risk not insured. Many purchase
Stop-Loss insurance that pays when claims exceed a specified amount in a specified period of
time.

• Risk Retention Groups and Purchasing Groups - Risk retention groups, as providers of insurance,
must be licensed and authorized as liability insurers in at least one state where they operate.
Those in the same trade or industry with similar liability exposures can purchase liability on a
group basis through purchasing groups. Both are regulated by the state where they are domicile,
but can transact in all other states.

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Government as an Insurer - Can be primary insurer or reinsurer. State governments have organized
insurance pools (residual markets) to provide auto or property insurance for individuals who are such
poor risks that they can’t obtain coverage in the normal/standard/voluntary/open market. Assigned risk
(CAARP) and FAIR Plan are examples.

The government programs need to exist because only the government has the ability to tax in order to
provide the financial resources need to insure catastrophic losses or social programs. Also the
government has the ability to make their programs mandatory.

Government Programs
List State Programs List Federal

Workers Comp Flood (NFIP)

Earthquake Crime, Crop, FDIC

Unemployment Social Security

DOMICILE OF INSURER AUTHORIZED VS UNAUTHORIZED

Where insurer was organized, located, Whether insurer can transact or not in
formed, incorporated can be admitted the State
or nonadmitted.
______________________________________________________________________________

Domestic Admitted
Organized under the laws of Ca. Authorized/approved to transact in the
State. Received a Certificate of
Authority.
Foreign
Organized under the laws of another State Non-admitted
Not authorized/nor approved to transact.
Alien Obtained through a Surplus lines broker.
Organized outside of U.S. Resident can go direct.

A Standard Market Insurer - is an insurer who offers rates for insurance to insured’s who have an
average or better than average loss exposure.

Review Section 3 - Types of Insurers

Answer Without Looking and Underline Key Words

1. Casualty is a class of insurance. T/F casualty is a label

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2. Property insurance is a class of insurance. T/F the class in CA is called fire

demutualization
3. Process when mutual insurer becomes a stock insurer _________________________.

4. An insurer who offers rates to insureds who have an average or better than average loss exposure is
considered a _________________ _____________________.
standard market insurer

5. Insurer organized in Nevada would be what type of insurer? _______________________________

foreign

6. Annuities are not a class of insurance they come under the class of _________________________
life insurance

7. Homeowners and Commercial Property are classes of insurance. T/F

8. An insurer organized in Japan and doing business in your state would be: foreign, unauthorized,
domestic, admitted. Underline the correct answer.

9. An insurer organized under the laws of any jurisdiction other than a state of the U.S. of America
would be considered? ___________________________________
alien insurer

10. When a company forms a subsidiary to insure the parent company this is known as a(n)
captive
__________________ __________________.

General Principles - Section 4 Contract Basics

Contract law = formation and enforcement of contracts. Ex. Breach of contract which entitles the injured
party to damages, attorney fees and costs

Tort law = establishes who did the harm and therefore obligated to pay. Excludes: breach of contract
and criminal acts. Intentional tort = a deliberate act - assault, libel, slander, false arrest. Unintentional
tort = negligence. Absolute and Strict liability are forms of torts.

Elements of an Enforceable Contract = ACCL = Agreement (offer and acceptance), Consideration,

Competent parties, Legal purpose.
• Agreement = offer and acceptance. Applicant makes an offer by completing an application and
submitting it with the premium. Consideration = exchange of values. Competent parties = legal
capacity. Legal Purpose = Activity must be legal.

Features/Characteristics of insurance contract = adhesion, unilateral, utmost good faith, conditional,

personal, and aleatory.
• Adhesion – Take or leave it, no negotiation on the insured’s part. Vague/ambiguous courts will
rule in favor of insured
• Unilateral – Only one side (insurer) is legally bound to contractual obligations (promise)
• Conditional – The contract conditions must be met before the insurer’s promise is fulfilled.
• Personal – means the contract is between the insured and insurer. The contract cannot be
assigned without insurer’s written consent.
• Aleatory – performance depends upon an uncertain future event (claim). It also means an
unequal exchange of money.
• Indemnity – to restore. The amount paid will be determined at the time of loss. An indemnity
health plan requires you submit your own claim form. In health insurance an indemnity payment
is a stated amount regardless of the actual expense
• Valued - Amount paid is agreed upon and printed upon face of contract.

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 • Utmost Good Faith - Both parties have a reasonable expectation that the other neither is trying to
deceive the other.
• Open Policy - Amount to be paid at claim will be determined at time of claim

Fraud – intentional (knowingly) misrepresentation, omission (oversight/leaving out) , concealing

material info.contract or claim.
• Falsification provision - warning on claim forms; fraud is crime = fines imprisonment.
• Signing a false or fraudulent claim form your guilty of perjury

Truths
• Warranties – Express (in writing) or implied (not in writing). Statements guaranteed to be true.
Express warranties = signed = part of the contract. Relate to past, present, future Intent to do or
not to do something - materially affects the risk

• Representation – oral/written statement - best belief/knowledge - made/altered/withdrawn at app

or BEFORE issuance - to future could= promise. Representation can qualify as an implied
warranty

Untruths

• Concealment – not communicating/silent/failing to disclose/withheld, information

that should/ought to be communicated to the other party. Material concealment -
intentional or unintentional - injured party to rescind (void). No inquiry/no
concealment.

Not required to communicate - already knows, should know, immaterial, waived or omitted -only
relevant facts, not opinion or judgment.

• Misrepresentation – oral/ written representation/statement that is false. False means the

facts do not correspond with assertions or stipulation. If the misrepresentation is material
(matters) the injured party can rescind the contract.

Materiality = means not knowing the information placed the person at a disadvantage. It is based on the
influence of the facts not an event, whether it is a representation or concealment. Materiality is judged
the same whether its representation is false (misrepresentation) or concealment.

Producer Misrepresentation - An insurer, officer, agent, broker, or solicitor shall not cause or allow
misrepresentation of: policy terms - policy benefits or privileges - future dividends payable.

Twisting – a producer conceals, misrepresents, or makes a misleading comparison that INDUCES the
insured to drop what they have and buy from them.
• Both violations of Unfair Practices/Unfair competition - misdemeanor-$25K and/or 1year-
knowingly 1 yr suspension. Insurer knowingly - suspension of Certificate/that class.

Waiver – legal abandonment/relinquishment of a known right

Estoppel - prevents reasserting a right previously waived.

CIC requires 6 policy specifications – Parties involved, risk to be insured (property or life), interest in the
property, risk insured against, policy period, premium.
• The insured’s property address is not a requirement of the code.

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 • The insurer’s rating is not required

Rescission = Voiding = The contract is terminated from the beginning and treated as if it had never
existed. Requires material concealment, misrepresentation or breach of warranty.

Review Section 4 - Contract Basics

Answer Without Looking and Underline Key Words
Consideration
1. ____________________________ is when insured pays initial premium, completes applications
including statements in the application and the insurer promises to covered the loss.

2. If we enter into a contract with a minor its binding on both parties. T/F

3. Judge ruled in favor the Insured due to policy vagueness is an example of a Contract of
__________________________.
adhesion

4. Performance depends upon an uncertain future event as well as an equal exchange of money
describes aleatory. T/F
unilateral
5. A ________________________ contract is when only one party is legally bound to contractual
performance.

6. “Take or leave it”, equal exchange of money, and insurable interest, are all characteristics of an
insurance contract. T/F

7. When both parties rely on statements/disclosures made to each other this is said to be a contract of
_______________________
at most good faith ______________ __________________ __________________.

8. The principle of indemnity keeps insurance from being a form of gambling since it prevents the
Insured from profiting from a loss. T/F

9. Oral or written statements to the clients best belief but not guaranteed as true in all respects
describes ____________________________.
representation
warranty
10. A material stipulation in the contract that if breached voids coverage is called a _________________.
warranty
11. ________________________ can relate in time to the past, present, or future.

12. An insurer can cancel a policy only when concealed facts are material to the loss. T/F
censalmente
13. Withheld, failed to communicate, failed to mention describes ________________________.
Materiality
14. __________________________ is judged by the disadvantage placed on the other party by not
informing them.

15. Materiality does not apply to health insurance. T/F

require specification
16. Parties, risks insured against, interest of the insured in the property are 3 of the 6: _____________

17. Insured’s address and rating is a contract requirement according to the Code? false

18. Statements that are guaranteed as true in all respects are called ________________________.
warranties

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19. In reference to an insurance contract representations and warranties are made either at the time of
______________
application or before policy __________________.
issuance

false
20. If a person gives an erroneous statement on an application unintentionally, this is ___________.
implied warrantee
21. An insurance representation can qualify as an ________________ ________________

22. Unless it is merely a statement of an expectation or a belief, a representation as to the future is

promise
considered a _____________________.

23. If there has been material misrepresentation or material concealment the injured party can
_____________
rescind (void) the contract.
written
24. An insurance contract is a ____________ instrument in which a contract is set forth.

25. Aleatory, unilateral, and adhesion are what make a contract an enforceable contract. T/F

26. Materiality of a representation is judged the same as materiality involving concealment. T/F

27. Every express warranty made at or before the execution of a policy must be contained in the policy
itself, or in another instrument signed by the insured and made part of the policy. T/F

28. Right to information of material facts may be waived either by terms of insurance to neglect to make
inquiries as to the facts. Therefore there can be no concealment if the is no inquiry. T/F
waver
29. Legal abandonment/relinquishment of a known right: _______________

30. The intent to do or not do something that materially affects the risk is a _____________
warrantee

31. When one party intentionally provides false information in order to benefit from unlawful gain this is
considered _________________
fraud

32. Insurer is prevented from reasserting a right previously waived, or from changing the conduct that the
insured has begun to rely and act, if doing so would be harmful to the insured is ________________
stopple

33. The six required specifications for all insurance policies is required by whom? _________
code or CDIC

34. Contract in which one party promises to indemnify another against loss from an unknown event is
______________________.
insurance

35. Upon inquiry and producer is must, upon inquiry, give an opinion or judgment. T/F must give facts

36. What rule is used to determine the importance of a representation? materiality

General Principles - Section 5 Distribution Systems

Ownership and Marketing Methods
• Independent Agencies/Agent - Appointed to represent more than one insurer. Own their
accounts, policy records and renewals. (expiration dates)
• Exclusive/Captive Agencies/Agent - Appointed to represent a single insurer, or one with common
ownership or affiliates. Insurer owns the accounts, policy records and renewals.
• Direct Writer - Employee. Insurer owns the policies and renewals

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 • Direct Mail/Response - System that does not use an agent. Part of mass marketing. Relies on
mail, phone, vending machines and/or internet.
 CIC requires - Requires all the following to be identified on the internet: Producers name as it
appears on the license; any approved fictitious names, state domicile and principle place of
business; license number. Does not require - phone # or license expiration.

Agent Authority/Powers - The principal (insurer) gives the agent certain authorities or powers.
• Express authority - in writing
• Implied authority - Assumed to establish agency relationship. Not in writing
• Apparent authority - Impression that authority exists when it does not. Exists when an agent
oversteps actual authority (expressed/implied) and the public has no way of knowing the agent
lacks authority and the insurer makes no effort to stop the agent.

Errors& Omissions (E&O) - Professional liability for nonmedical professionals such as Producers. Pays
claim (damages) and defense cost when a Producer fails to use due care and skill and makes a mistake.
The policy is non-standard and usually issued on claims made. Those in the medical field purchase
malpractice
• Covered - negligent acts = mistakes
• Not Covered - breaking law, BI, PD, PI, or AI in E&O

PRODUCERS - consist of agents, brokers, solicitors all which are also considered to be field
underwriters.
• Property and/or Casualty Agents or Personal Lines Agents - appointed to represent the
insurer. Have the authority to bind coverage. Requires license and appointment
• Brokers - Transact property and casualty insurance. Not appointed and transact on behalf of
another (insured/buyer) and not the insurer. Can charge buyer a fee. Cannot bind coverage.
• Solicitor - Employed and appointed by a broker or agent to represent them in transacting
insurance. California requires the agent or broker who appoints them have a permanent broker-
agent license. Must be a natural person (human being/individual). Cannot bind coverage
• Life Agents - Appointed to represent the insurer. Transact life and annuities. Cannot bind
coverage. No life brokers or life solicitors
• A&H Agents - Appointed to represent the insurer. Transact accident, health and disability
income coverage. Cannot bind coverage. No Brokers and No Solicitors.
• Managing General Agent (MGA) - licensed as a broker-agent for property & casualty or Life or
A&H agent. Has a written management agreement with insurer to manage one or more classes
of insurance in a territory. For test purposes can do anything an insurer can do. MGA can be any
person, firm association, partnership or corporation that manages all or part of an insurer’s
business (including a separate division, department or underwriting office) equivalent to 5% or
more of insurer’s premium. Can transact reinsurance on insurer’s behalf. Cannot settle claims.
• Surplus Lines Broker - Only license that may transact with nonadmitted insurers. That means
Aid, Assist or Advertise for a nonadmitted insurer. Any other Producer who transact with a non-
admitted would be fined $500 and $100 for every month continue and it is considered a
misdemeanor. Posts a bond of $50,000 with DOI.
 Property and/or Casualty broker-agents cannot transact on behalf of surplus lines broker’s
organization license. They must now hold an individual surplus lines broker-agent license.

OTHER INSURANCE PROFESSIONALS

• Administrator - Collects premiums, adjusts or settles claims, and handles consumer complaints in
connection with life, health or annuities. Agents, employers, unions and insurers do not need a
Certificate of Registration.
• Insurance Adjustor - settles claims on behalf of the insurer. Cannot be a private investigator.
• Public Adjustor - hired by the public to negotiate on behalf of the insured with the insurer.

Copyright © PreLicenseTraining.com 19
TRANSACTING INSURANCE - California requires anyone who transacts insurance to be licensed. The
State of California uses the term transact to include: SNET OR TENS
• Solicitation of insurance - bulk mail, advertising, recommending products that might be of interest
• Negotiations preliminary/before the execution of a contract - quoting
• Execution of a contract - issuing policy or binder
• Transaction subsequent/after to the contract - servicing existing contracts
Note: Transacting insurance without a license is a misdemeanor. Punishable by fine up to $50,000
and/or 1 year in county jail.

Review Section 5 - Distribution Systems

Answer Without Looking and Underline Key Words
independence
1. Who owns their renewals? _________________________________________

2. Managing General Agent cannot __________

settle claims ___________.
professional liability/ erros and
3. Type of policy that protects an agent when sued for an error or omission: ____________________
omitions

4. Transact on behalf of another and not an insurance company describes a ___________________.

broker
agent/broker with a permeant lic
5. Who appoints a solicitor? ___________________________________

6. A broker/agent, or personal lines agent/broker must have what before they can appoint a solicitor?
______________________________________
permit lic

7. A direct writer is considered to be a(n) ____________

employee of an insurer.

8. Exclusive/captive agents represent a single insurer or one with common ownership. T/F
5%
9. A MGA writes what percentage of premium of the policyholder’s surplus? _____________________

10. Marketing/distribution system that does not use an agent? _________________________________

direct mail/response

malpractice
11. A medical doctor needs what professional liability? _______________________________________
12. Bulk mailing, advertising, recommending other insurance product’s is a form of insurance:
_________________________.
insurance solicitation

13. A company or licensee that negotiates and binds ceding reinsurance on behalf of an insurer is
considered a __________ __________
managing general agent ______________.

14. Quoting is a form of: ________________________

negotiating

15. A person authorized to assist a broker or agent in selling insurance is _______________________.

insurance solicitor

16. Not appointed by an insurer and transacts on behalf of others with non admitted’s describes a broker.
T/F

17. A person who acts in the capacity that requires an active license without having a valid license is
guilty of a ___________________.
misdemeanor

18. Between a direct writer and a captive agent who owns the renewals/book of business/expiration
dates? neither
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19. The only licensee that can transact with a non admitted is a _____________ __________ ________.
surplus line broker

General Principles - Section 6 Insurance Regulation

Subsection 1

Levels of Regulation
Insurance is highly regulated to protect the public interest, consumer and to
make sure coverage is available on an equitable basis. In order there are 3
authorities: State, the Self-regulation (NAIC), and lastly Federal.

Federal regulation - Federal jurisdiction applies to individuals or companies whose activities affect
interstate commerce. Its primary function is to oversee those areas not covered by state regulation.
Started with: Paul vs Virginia - 1868 rules insurance is not interstate commerce; South-Eastern
Underwriters Association (SEUA) in 1944 - changed transacting across state lines was in fact interstate
commerce
• McCarron-Ferguson Act (Public Law 15) - Gave jurisdiction back to the states. It stated the
federal government had the right to regulate the business of insurance but only to the extent that
such business was not regulated by state law.

Privacy Act - have both Federal and State. California’s Privacy Act is similar however it is more
restrictive and has more severe penalties than the Federal - established to minimize intrusiveness;
fair/impartial in collecting analyzing and presenting information and reports; to make it known to public
that they can expect personal information to handle in confidence.

It required that applicants/insureds be given advance notice of insurer’s practices regarding collection,
use of personal information, that information can be obtained from 3rd parties, what information, and
information can be disclosed without consent to law enforcement, DOI, or affiliates. Notice must be in
writing and given promptly when: applying, renewing and reinstating. This notice does not need to be
signed.

Fair Credit Reporting Act - This act pertains to regulations regarding consumer reporting agencies such
as Equifax, MIB, etc. It protects consumer by requiring certain notification, establishing provisions for
removal of outdated or incorrect information. The act also imposes obligations on the users of credit
reports.
• Consumer Report- include written, oral and other communication regarding consumer’s credit,
character, reputation or habits which is used in connection with an insurance transaction.
• Investigative Consumer Report - identical except that it also gathers information through personal
interviews with friends, neighbors, and associates of the consumer. A notice must be sent no
later than 3 days after the report is ordered.
• Pretext Interview - This is an interview in which a person pretends to be someone they are not,
pretends to represent someone they are not representing, misrepresents the true purpose of the
interview or refuses to identify him or herself in an attempt to gain personal and confidential
information about someone. These interviews are illegal unless the insurer suspects fraud or
criminal activity.
Note - Fine for obtaining information under false pretense is $10,000 and/or 1 year in jail.
• Postnotification - If insurance is rejected, reduced, or written at a higher premium due to the
information in the report the consumer must be notified and provided the _name_ and _address of
the reporting agency.
• If consumer challenges any information, the reporting agency is required to reinvestigate.

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Gramm-Leach-Bliley Act - Federal Law - The Financial Modernization Act of 1999, also known as the
"Gramm-Leach-Bliley Act" or GLB Act, includes provisions to protect consumers’ personal financial
information held by financial institutions. There are three principal parts to the privacy requirements: the
Financial Privacy Rule, Safeguards Rule, and pretext provisions. Require annual notices and gives
insured right to OPT-OUT of having their information shared with 3rd parties.

Cal-GLBA – California’s version of the GLBA above. Much stricter. Has both opt-in and opt-out options,
easier to read notices and stiffer penalties than the federal act. Insured must OPT-IN before their
information can be shared with 3rd parties.

HIPAA protects the privacy of individually identifiable medical information; the HIPAA Security Rule,
which sets national standards for the security of electronic protected health information; and confidentially
provisions of the Patient Safety Rule, which protects identifiable information being used to analyze
patient safety events and improve patient safety.

HIPAA limits the preexisting condition exclusion period for most people to 12 months reduced further with
creditable coverage. Creditable coverage is health insurance you had before you enrolled in new plan
and as long as it was not interrupted by a period of 63 or more day previous coverage can be used to
offset pre-existing condition exclusion.

Federal Law Title XVIII - Imposes penalties for fraud and false statements made in connection with
insurance transactions. The following will be punished
• Making false material statement, report or willfully and materially overvalues any land, property, or
security in connection with finance financial reports or documents. Any insurance officer, director,
or agent who willfully embezzles, abstracts, purloins, or misappropriates any of the moneys,
funds, premiums, credits or other property of an insurer.
• Civil fines up to $50,000 per violation or amount of compensation the person received for the
prohibited conduct whichever is greater and or/ and up to 10 years imprisonment. If jeopardizes
the safety and soundness of the insurer - 15 years imprisonment
• No person can participate in the business of insurance WITHOUT the written consent of the
Commissioner who:
 Convicted of a felony, dishonesty or breach of trust.
Note: Failure to include a prior felony on the application could result in a violation and/or denial of
license. Licenses producers must now notify the DOI within 30 days of conviction and not wait until
renewal to disclose.

State Level

Statutes - law/code/CIC. State Legislature proposes, writes, enacts and makes changes.

Regulations - rules/CCR’s/Title 10 - Written by the Commissioner to carry out the intent of the law.

Commissioner - Head of DOI - elected by citizens of the State at the same time as the Governor -4 year
term - can hold 2 terms - answers to the Governor - enforces the Code, cannot be insurance licensed -
cannot be affiliated with insurer except by virtue of blood or marriage.

PURPOSE OF THE CODE

• Prevent insurer insolvency

• Make sure rates are not inadequate, excessive, or unfairly discriminatory.
• Prevent fraud
• Set up procedure for operation of insurance business in this state

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 • PURPOSE IS NOT TO INTERPRET POLICY PROVISIONS

The Code provides for the formation of a Department of insurance, which has broad regulatory
powers to enforce the insurance laws. The Commissioner is in charge of the Department of
Insurance who oversees and directs all its affairs and staff in compliance with the Code as well as
enforcing the Code. The Commissioners other duties include:
• issuing rules and regulations to interpret and enforce insurance laws
• licensing and supervising insurers and producers
• controlling the kinds of insurance contracts and policies sold
• regulating insurers investment activity
• determining insurer reserves
• overseeing insurers marketing practices and handling consumer complaints

State Regulation of Insurance Companies - affects numerous aspects of their formation and
operations, ranging from capital and surplus requirements to investment and marketing practices. State
laws require the reporting of financial data and payment of premium taxes, and specifically prohibit a
number of unfair or deceptive practices
• Admitted Insurer’s - is regulated by the State of California and also has the protection of the State
Guaranty Association against insurer insolvency.
• Nonadmitted Insurer - is not subject to solvency and enforcement regulation by the State of
California no are they a member of the State Guaranty Fund.
 An Excess and Surplus Lines insurer write standard coverages in a state where the insurer is
nonadmitted. When coverage cannot be obtained in the admitted market, it may be placed
with a nonadmitted.
 The marketplace needs met by surplus lines - risks which cannot be placed with a majority of
admitted carriers, usually difficult to place such as contractors, product liability, pollution,
hazardous waste, excessive claims
 Any California citizen may negotiate and effect insurance on their own property with a
nonadmitted by dealing directly with the nonadmitted. Upon a written request by the
Commissioner; must produce all policies, contracts, and other documents proving insurance.
They must disclose gross premium paid.
 Agents or Brokers must first attempt to place the business with an admitted insurer and
complete a form that at least 3 insurer have declined the risk.
 At application a written Disclosure Warning in at least 16 point print must be signed by both
the Surplus Lines Broker or Insurer and the Applicant. The disclosure statement warning that
the nonadmitted is not subject to regulation and not a member of the Guarantee Association
must be kept by the surplus lines broker for at least 5 years.
 Surplus lines brokers must pay a 3% gross premium tax which can be transferred to the
insured
 Surplus lines brokers cannot bind cvoverage
 Business must be place with nonadmitted insurers on the LESLI list which is the approved list
of nonadmitted insurers

General Principles - Section 6 Insurance Regulation

Subsection 1
Answer Without Looking and Underline Key Words

1. Where would an agent or broker be likely to find the principles and practices expected of them?
____________________________________________________
CA code- CIC or CCR(codes and regs)

by the residents of CA same/ elected by the citizens

2. How is the Commissioner selected? __________________________

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 excess lines
3. Risks that are unique are usually classified as ___________ _____________ or excess lines.
surplus lines
4. Excess and surplus lines of coverage need to be placed through a _________ _______ __________.

5. You would obtain insurance coverage through excess and surplus lines if you imported exotic
animals. T/F
3%
6. Surplus lines brokers must pay a gross premium tax of: ____________

7. Purpose of using 16 point bold type in the disclosure form for surplus lines is to inform the insured
that policy is being issued by a(n): ____________________
nonadmitted

8. The disclosure form used by surplus lines brokers and surplus lines insurers must also disclose that
the insurer is not subject to state regulation, not a member of the guarantee associations, insured
was denied by admitted insurers, and not subject to protection for insolvency. T/F

9. Commissioner can hold office for: ___________________

8 years

10. What regulation gave jurisdiction of the insurance industry back to the States?
________________________________
Maccarini Furgason Act

11. Purpose of the privacy acts is to minimize intrusiveness and eliminate disclosure. T/F
Pretext interviews
12. These interviews are illegal unless the insurer suspects fraud or criminal activity: ________________

13. A person convicted of a felony, dishonest or breach of trust needs whose written consent to
transaction insurance? __________________________
commissioner

14. Under HIPAA the number of days pertaining to creditable coverage is: _________________
63 days

15. Notice of Information Practices must state information may be collected from other persons than the
proposed insured, what type of information is collected, what information my disclosed without clients
authorization, clients rights to the information and it requires the applicants signature. T/F

General Principle - Section 6 Insurance Regulation

Subsection 2

Key Function of Insurers - Key functions of an insurer are divided amongst four major divisions or
department. The four divisions are actuarial, claims, market/sales, and underwriting.

• Actuarial – is responsible for establishing rates, reserves, dividend scales, and so on.
• Claims – determines validity and processes claims
• Marketing/Sales – is responsible for advertising and selling of the products. Identifies customers
• Underwriting – is responsible for risk selection and rating. Decides who to insurer

Market Conduct Regulations - are the state laws that regulate insurer practices regarding underwriting,
sales, claims, and rate-making.
• Rate-making is the process to determine prices. According to the Code rates must be adequate,
reasonable and equitable. No rate will remain in effect if inadequate, excessive or unfairly
discriminatory. The Commissioner uses the insurer’s investment income to determine this.
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Types of Rating Laws
• Prior approval - Rates must be filed and approved prior to being used. This is the rating law
predominately used in California. Insurers file their rates with evidence they are fair and
reasonable.
• File and Use - Rates may be used as soon as they are filed until the Commissioner instructs
otherwise.
• Use and File - Rates may be used first and filed later.
• Open Competition also known as Open Rating - Competition sets the rates with oversight by the
DOI.

Financial Regulation - State laws impose capital and surplus requirements, requires annual statements
and periodic examinations of the insurer. Purpose: to detect any financial instability of the insurer. This
is accomplished by periodic exams and insurance regulatory information systems. Annually an
accredited financial statement must be given to both the DOI and the NAIC.

Rating - Rating services are just to provide information and ratings on an insurer’s financial strength,
stability, and claim paying ability. There are numerous rating services. A.M. Best, Standard & Poors,
Duff & Phelps, are just a few. Where agents and consumers error is that they assume that each use the
same ratings.

Insolvency - Any impairment in paid in capital. An insurer’s inability to meet its financial obligations
when due. An insurer is considered insolvent if it only has enough assets to cover liabilities and
reinsurance. An insurer must also possess additional assets equivalent to the required paid-in-capital.
Paid in capital = value of an insurer’s assets in excess of its liabilities, expenses, taxes, debt and
reinsurance.

The Commissioner will petition the court for Conservation and become (Conservator) vested with that
insurers books, records, premises and assets. The DOI will attempt to rehabilitate to make the insurer
insolvent again. This might require merging, converging, reinsuring, or selling off a portion of the assets.
If the DOI determines the insurer cannot be saved it will get a court order for liquidation.

• Summary Seizure - If it is apparent that if the insurer does not immediately intervene irreparable
loss will occur without notice and before getting conservatorship the Commissioner can take
possess of the property, business, books, records and accounts, offices and premises. Any
person refusing to deliver needed items when a seizure order has been issued by the
Commissioner is guilty of a misdemeanor and punishable by a fine up to $1000 and/or 1 year
imprisonment.

State Insurance Guarantee Associations

California has two guarantee associations. The purpose of these associations is to be unpaid claims or
contractual obligations of insolvent members. California law mandates that all admitted insurers belong
to the appropriate association as a condition to be admitted. Under no circumstances can an insurer or
agent imply/use that they are a member of the association in advertising or sales presentations, to induce
a client to purchase (violation of Unfair Practices).

• California Insurance Guarantee Association (CIGA) – pertains to most property and casualty
insurers. It pays claims of insolvent members with a cap of $500,000. CIGA is managed by a
nine member Board of Governors appointed by the Commissioner. The Commissioner must
choose 5 of the 9 from domestic insurers.

• California Life & Health Insurance Guarantee Association (CLHIGA) –pays contractual

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 obligations of insolvent members involving life, annuity, and health contracts. Limit of liability is
 Life and Annuities – 80% of contractual obligation limited to $100,000 cash per contract, and
$250,000 limit on death benefit per one insured life.
Health – limited to amount of claim not to exceed $200,000
Not all life and health contracts are guaranteed by the association. No self-insured plans.

Unfair Trade Practices

Unfair Practices is divided into two categories: Unfair Methods of Competition and Unfair Trade
Practices.
• Unfair Methods of Competition – Leading a client to expect dividends; stating an insurer is a
member of the Guarantee Association in sales or advertisement; boycott, coercion, or
intimidation which is restraint of trade; making or refusing to make an entry to deceive anyone
looking at the records
• Unfair Claims Practices – Settling for less than what a reasonable person would expect by
referring to printed or advertising material; telling the client not to obtain the services of an
attorney; misleading the claimant as to the applicable statute of limitations; delaying an
investigation by requiring a preliminary report then a formal report requiring the same
information
• Penalties for violating unfair practices - $5000 if not willful per violation, and $10,000 if willful
per violation.
3 mistakes on a single policy done unintentional is 3 violations = $15,000

Hearings on Misconduct – Cease and Desist Orders – The commissioner may examine and
investigate the affairs of anyone engaged in the insurance business in California in order to determine
whether such person has been or is engaged in any unfair method of competition or in any unfair or
deceptive practice. (CIC 790.04)

If the commissioner believes a violation might have occurred he must serve upon that person an order to
show cause containing a statement of the charges, a statement of person’s potential liability, date, time
and place which is not to be less than 30 days after the notice. The purpose of the hearing is to
determine whether the commissioner should issue an order to that person to pay the penalty and issue
and order to cease and desist the activity.

If the person violates the cease and desist the person can be ordered to pay up to $5000 or if willful up to
$55,000. Subsequent violations can result in suspension or revocation of license.

General Principles - Section 6 Insurance Regulations

Subsection 2
Answer Without Looking and Underline Key Words

1. It is considered an unfair method of competition for an agent to advertise that the insurer the agent is
appointed with is a _______________________________________________.
member of the guaranteed association

2. Insurers must submit an accredited financial statement annually to both the state and to the
_____________________.
NAIC (national association of insurance commissioners)
3. Most classes of insurance the rates require what before usage? ___________________________
prior approval

4. Insurer examinations and the insurance regulatory information system are the two major sources that
insurance regulators use to monitor insurer solvency. T/F

5. If an insurer has enough financial resources only to provide for all its liabilities and for all its
reinsurance of outstanding risks it is considered to be __________________.
insolvent

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6. If an insurer is not able to meet financial obligations when due is considered _________________
insolvent

7. If an individual fails to send the documents when the Commissioner issues a Notice of Seizure the
penalty is: ____________________________________
$1,000 or 1 yr jail

8. Besides having enough assets to provide for its liabilities and reinsurance; in order to remain solvent,
the insurer must also meet minimum requirements equal to what amount required by the California
insurance code? ______________________________
paid in capital

9. Directly advising a claimant to obtain the services of an attorney is a violation of unfair claim
practices. T/F

10. The purpose of the California Life and Health Guarantee Association is to protect life policy holders
and/or insured’s when any insurer becomes insolvent. T/F

11. Penalty for engaging in unfair practices is no more than $5000 if not willful, and no more than $10,000
if willful. T/F
misdemeanor
12. If an agent refused to submit their books and records they would be guilty of a(n) ______________.

13. If the Commissioner revokes an insurer’s Certificate of Authority that can take possession of
transaction records, confiscate the office premises, or liquidate the business. T/F

14. Commissioner as conservator can use the guarantee funds to pay salaries to keep the insurer going.
T/F
marketing and sales
15. The function of identifying and selling to potential customers would be: _______________________

16. Process to decide which customers to insure and for what coverage is _________________.
underwritting dep

17. In the State of California a rate will not remain in effect if it is considered to be excessive, unfairly
discriminatory, or inadequate. T/F

18. The Commissioner considers an insurer’s _____________

income _____________ when determining if the
rates are adequate or excessive, not whether or not the insurer is competitive.

19. Advising clients that an insurer is protected from insolvency by the California Insurance Guarantee
Association, or advising clients not to place business with an insurer that deals directly with the
public, or not to obtain the services of an attorney are all violations of unfair
_____________________
practices/ unfair methods of
______________. competition

20. The state law that regulates insurer practices regarding underwriting, sales, rate-making, and claims
handling are called: _______________________________________________
market conduct regulations

21. CIGA does not handle claims of insolvent members in the classes of:________________________
life and health/disability

22. CLHIGA stands for: _______________________________________________________________

CA life and health insurance guarantee association

23. CLHIGA would provide protection for insolvency for employer self-funded plans. T/F

24. CLHIGA would provide protection for direct group life insurance. T/F

25. CLHIGA would provide protection for Group stop loss plans. T/F
Copyright © PreLicenseTraining.com 27
General Principles - Section 6 Insurance Regulation
Subsection 3

Licensing and Maintaining a License

QUALFIED RESIDENT PRODUCER LICENSING

Insurance Agent – appointed/represents insurer

Sells all lines other than (except) Life, Disability or Health
Can represent/unlimited appointment

Property Broker – Not appointed/transacts on behalf of another (insured)/fees

broker/agent Sells all lines other than (except) Life, Disability or Health
and/or Can be a broker or agent with several insurers at the same time

Casualty Insurance Solicitor – appointed/employed by agent or broker

broker/agent Sells all lines other than (except) Life, Disability or Health – same lines as
Agent or broker who appointed/employed them.
Customer service representative. Must be a natural person.
Can be appointed only by one agent or broker and a time

Insurance Agent – appointed/represents insurer

Can represent/unlimited appointment

Personal Lines Broker – Not appointed/transacts on behalf of another (insured)/fees

broker-agent Can be a broker or agent with several insurers at the same time

Insurance Solicitor – appointed/employed by agent or broker

Sells same lines as a personal lines agent/broker
Customer service representative. Must be a natural person.
Can be appointed only by one agent or broker and a time

Note: Can only sell personal lines of insurance (non-commercial) - auto, residential, inland marine,
umbrella, watercraft, recreational vehicles, earthquake, flood (government programs). No commercial,
disability, bonds or worker’s compensation.

*** Limited Lines Automobile Insurance Agent - authorized to transact auto insurance only for non-
commercial vehicles with load capacity of 1,500 or less. Must be appointed by insurer or a business
entity. No Brokers

Brokers - Must post a $10,000 broker bond. It is illegal to charge fees in addition to the policy premium
for services which are not extra. Additional charges may not be made for services for which a producer

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would normally be expected to perform. It is also illegal to place consumer with a company solely to
charge a broker fee. Broker fees may be charged if there is a broker agreement agreed upon in
advance. Cannot charge broker fees to any government program.

Life Agent - Appointed to represent Insurer. Sells Life and Annuities Only. No Life Brokers. No Life
Solicitors.

A&H Agent - Appointed to represent Insurer. Sells accident, health and disability income. No A&H
Brokers or Solicitors.

Other Producers/licensees

Limited Life License - Limited to Funeral and Burial - Cannot sell life or annuity contracts over
$15,000

Life Settlement Brokers (new license as of 2010) - are life agents who help policyowners who assist in
negotiating a life settlement. A life settlement is an existing life insurance policy sold to a third party for
more than its cash surrender value but less than its net death benefit. A Life Settlement Broker helps
policyowners find a suitable buyer for their policies.
• Life Agents licensed one year or more apply for the license and pay a fee
• Life Agents licensed less than one year or not licensed as a Life Agent must complete 15 hours of
education on life settlement transactions in addition to applying and paying a fee.
• Those holding a viatical settlement broker or provider license have met the qualifications and at
renewal license will be changed to a Life Settlement Broker License
• Attorney’s, CPA’s, accredited financial planner do not need a Life Settlement Broker license

Life and Disability Analyst - Provide advice concerning Life, Disability, and Health products and charge
a fee.

License Denial - 4 Reasons

• Without a hearing, the Commissioner has the right to suspend or revoke an existing license deny
an application if the licensee or applicant has:

1) Committed/convicted of a felony (not charged)

2) Committed/convicted of a misdemeanor of the Insurance Code
3) Previous application denied for cause within the last five years.
4) License revoked or suspended for cause within the last five years.

• Anything else would require a hearing, and require a 30 day advance notice of the hearing
(ex: lacking integrity, misrepresentation on application for license, NOT for being a nonresident agent)
• Nolo contendere means convicted
• Note: As a disciplinary measure when a violation of the Code would justify suspension,
revocation or denial of the license the Commissioner may issue and restricted license. The
restrictions are determined by the Commissioner and the license may be suspended or revoked
with hearing or cause.

 Suspension – Commissioner may not suspend a license for a period exceeding three years
 Revocation - if a license is revoked, the Commissioner may not reissue for one year.

Grounds for Suspension/Revocation of License (examples)

• Issuing a binder from an insurer for whom the agent is not authorized to bind coverage.
• Knowingly violating the law against twisting or misrepresentation (up to three years)

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 • Subsequent violation of a cease and desist order, court order, or order to pay penalty (up to one
year)
• For any of the same grounds for which a license application may be denied
• Willful violation of rules against offering free insurance as an inducement to purchase real or
personal property services (up to one year)
• Violation of voluntary selection (free choice) of insurer or agent
• Inducing a client to co-sign for a loan (Senior)

Names Under Which Business is Transacted

• Must file with Commissioner both true and fictitious names. Commissioner can disapprove of any
name except bona fide natural name (name on birth certificate). Can only have 2 fictitious names.
• The name selected by the licensee shall not imply that the licensee is an insurer, underwriter, or is
entitled to engage in insurance activities not permitted under their licenses. Similar to one in use
if it interferes with their business
• Last word in the agency name cannot end with insurance, underwriter, or company. Nothing is
automatically approved. Agents may use designations that they have earned in the industry.
• Discontinuance or name change must be reported to the commissioner.
• Use of a name on stationary or advertisement the relationship with other organizations must be
clear. Cannot use the word underwriter in stating relationship

Maintaining a License
• Office Location - Resident insurance PC producers must maintain a principal office in California.
This address must be specified on all applications for license and renewal applications.

• Display of License - Every Producer who obtains a broker-agent license whether P&C or
Personal Lines must prominently display the license in the office.

• Appointments - All agents transacting must be properly licensed and appointed to transact
insurance (valid). The agents first appointment serves as a notice that the appointing insurer has
deemed this person to be of good reputation and worthy of the sought. It is commonly referred to
as an implied declaration. The appointment for a licensee is effective the moment it is signed.
Life agents can be appointed within 14 days of application. Appointments remain in effect until
terminated by the insurer or agent, license expiration, fees paid late, or death.

• Termination of License - A licensee may surrender his/her license by delivering the document to
the Commissioner or by providing written notice of intent. This also applies if the license is in the
possession of another. Individuals license terminate upon death. Termination/dissolution of entity
their organization license terminates unless someone from the old license stays with new entity,
new app. and fees are filed with Commissioner (DOI) within 30 days. This also applies to any
changes in co-partnerships and the application is signed by the general partner.
Note: Agents and brokers can transact under an organizational license or his/her license.

• License Renewal - Licenses must be renewed every two years from the original date of issue.
Renewal must be on or before the last day of the period for which the license was issued.
Given notice within 60 days of renewal. The license expires last day however the applicant can
continue to transact up to 60 days after expiration or until the DOI notifies the applicant of a
license deficiency.

• Inactive License - Means no appointment in effect and all fees and continuing education
requirements are current. An inactive license can be reactivated at any time simply by filing a
new appointment. An expired license means that fees and/or education are not current. The
licensee has up to one year from the date of expiration to bring fees and education current without

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 having to retest.

• Printing Licensing Number on Documents - Every licensee shall prominently print his/her
license number on quotes, advertisements, and business cards. The number must be printed in
the same size and type as any indicated telephone number, address, or fax number. Those
licensees that are operating in the capacity of a solicitor or employees of motor clubs,
organizations the organizational license number may be used. Penalty for violating is a fine of
$200 for the first offense, $500 for the second offense, and $1,000 thereafter.

• Fees and Premium Financing - Brokers must have a written agreement called a Broker
agreement that states services to be provided and fee charged. This agreement is to be signed
prior to taking an application. Agents do cannot charge fees insurers may charge fees and it must
be included in all premium quotations. An agent or broker who arranges premium financing for an
insured requires that the premium financier must disclose in writing any compensation paid to the
agent or broker. The agent or broker must keep records of this compensation for 3 years.

• Agent As A Fiduciary - Agents act in a fiduciary capacity when they accept premiums on behalf
of the insurer or offer advice that affects people’s financial security. Premiums collected by an
agent belong to the insurer and must be forward immediately. All fiduciary funds are to be kept in
a trust fund and agents are never to co-mingle clients funds with his/her own personal or business
funds. Note agents by co-mingle his/her funds with fiduciary funds to advance premiums and
establish reserves. Misappropriation or diverting clients funds is theft.

• Change in Address/or Organization - Agent and brokers must notify the Commissioner change
of business, residential, mailing address or email address immediately by electronic means
approved by the Commissioners. Changes in officers and directors, or changes of stockholders
of 10% or more require the Commissioner be notified.

• Licensees Recordkeeping Responsibilities - The CIC gives the commissioner the right to
specify the kinds of records that agents, brokers and solicitors must keep. This includes how and
where they must be kept. An example of the type of records agent and brokers must keep for
every insurance transaction are:

• Name of insured, insurer, policy number, effective date, termination date, gross premium, net
premium, commission, names of those who received or where promised commission, amount and
date of premium received and deposited, date of any return of premium

How Long? What must be kept?

Property & Casualty

18 months Information records about transactions conducted under the agent/broker

license

3 years Compensation received from premium financier

5 years Detailed bank records (account statements, deposit records cancelled

checks and withdrawal records), to be kept at principal office in California
(once a policy has expired and been cancelled can be stored off premises

5 years Surplus Lines Warning Disclosure

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Life and A&H

5 years Agent records and Insurers records

3 years Analyst Records

3 years Life/Annuity Replacement records

3 years 3 years LTC advertising

• Effective Date of Coverage - At the time of application or receipt of premium producers shall
provide all insureds the effective date of coverage, if known, or the circumstances under which
coverage will be effective if conditions precedent to coverage exist. This applies only to personal
lines.

CONTINUING EDUCATION REQUIREMENTS

To ensure agents are kept up-to-date and are qualified to complete their jobs, the State of California
passed a law in 1992 requiring them to continue their education.

License Type CE Requirements - Hours

24 hours per license term (License terms are 2
Life Only years.)
Accident and Health 24 hours per license term (2 years)
Life Agent Combo (Life Only and Accident and Health) 24 hours per license term (2 years)
Personal Lines 24 hours per renewal
Limited Lines Automobile 20 hours per license term (2 years)
Property broker-agent and/or Casualty broker-agent 24 hours per renewal
Continuing Education hours apply per person not per license. Holding more than one license means you are
concurrently licensed but does not increase the amount of CE hours

CE Course Subject Requirements

Supplemental CE Requirements (part of CEs,
License Type not in addition) Subject Requirements
Life Agent Combo, Property and/or Casualty, Life Only, 4 hours of Ethics training each license term
Accident & Health (Terms are 2 years.)
2 hours of Ethics training each license term (2
Personal Lines and Limited Line Automobile years)
Licensee soliciting Long-term Care (Licensed LESS
than 4 years) 8 hours of LTC training every year
Licensee soliciting Long-term Care (Licensed MORE 8 hours of LTC training each license term (2
than 4 years) years)
Licensee soliciting California Partnership LTC (PR)
(Licensed LESS than 4 years) 4 hours of LTC training every year.
Licensee soliciting California Partnership LTC (PR) 8 hours of LTC training each license term (2
(Licensed MORE than 4 years) years)
Licensee soliciting Annuity Products. 8 hours of Annuities to start, then 4 hours every

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 license term.

General Principles - Section 6 Insurance Regulations

Subsection 3
Answer Without Looking and Underline Key Words

1. In regards to an organizational license when a corporation is entirely dissolved, the license is

continued if an original partner remains with the new corporation. T/F

2. When an agent holds both a life and property & casualty license they are considered to be
____________
concurrently licensed.

3. When an agent holds both a life and property & casualty license their continuing education hours are
25 per year for either license. T/F

4. An insurer do who accepts an application from an agent not specifically appointed by that insurer and
then issues a policy form that application must forward to the insurance commissioner (DOI) a notice
of appointment within _________
14 days.

5. The California LTC continuing education requirements do not apply to non-resident agents if their
state requires CE hours, exception is LTC and annuity requirements. T/F

6. In order to be qualified to sell LTC insurance in the state of Ca. agents are required to pass a LTC
exam every 10 years. T/F

7. If an agent’s license is inactive they cannot transact any insurance business for which a license is
required to transact they would need to file an _______________.
appointment

8. An agent or broker who receives compensation for arranging or directing sales in connection with
premium financing must disclose all their commissions to the insured. T/F

9. An agent’s appointment is terminated if another insurer submits an appointment. T/F

10. Appointments are terminated by either the agent or insurer at termination of employment, license
expiration, or death of agent. T/F

11. Life agent’s records must include outline of coverage, all policies sold by the agent, and all
correspondence between agent and policyholder. T/F

12. Life agents must maintain records regarding policies sold in this state for how many years?
_________________
5 years

13. If an agent submits a renewal application with applicable fee on or before the expiration date they will
be able to transact/operate for up to ________
60 days after the specified expiration date.

14. An application for a license can be denied without a hearing if the applicant has had a previous
application denied for cause within the last ____________
5 years.

15. An application for a license can be denied if the applicant has been charged with a felony. T/F

16. A new licensee has the authority to transact when the insurer signs the notice of appointment. T/F

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17. A P & C broker/agent needs to complete 25 hours the first 4 twelve month periods following the date
of the original license was issued. T/F

18. An agent or broker must keep records of compensation from a premium financier for 3 years. T/F

19. A license is considered inactive if the fees are not current. T/F would be considerd expired

20. A partnership change requires a new app, more money, within 30 days, new name approved, and
you can transact under your own license, as well as incorporating. T/F a partnership doesn't have to be a corp

21. When fees and education are current but there is no appointment a license is considered to be?
__________________________________
inactive

agency name
22. What always requires approval before usage is? ________________________________________
underwriter, company, insurance
23. Name at least 3 words that an agency name cannot end with: _______________________________

24. The DOI cannot disapprove the use of any true corporate name. T/F

25. A customer service representative who only solicits and services life insurance would need which
license? _______________________________________________________________________
Life Agent lic

26. Attempting to settle a claim for less than the claimant believes he/she is entitled by reference to
written or printed advertisement is considered an unfair and deceptive act. T/F

27. The font size that must be used for the licensee’s license number on all price quotes, business cards,
and printed material must be the same size as the licensees _________, phone ___________,
fax or
__________
address

28. Insurance records must be made available at all times for the Commissioner for inspection. T/F

29. If the applicant has had any professional, vocational, or occupational license denied for any cause by
any licensing authority within five years the Commissioner would most likely deny their application
without a hearing. T/F

30. An agency that represents an insurer can leave the name of the insurer in their advertising,
letterhead, etc. as long as it clearly states the relationship between the two. What is not an
acceptable word in stating the relationship? _______________________________________
underwriter

31. An organization will cease to exist as an entity eligible to hold a license for termination of a key
employee. T/F

32. At the dissolution of an entity their insurance license can transfer to the new entity if someone from
the old license stays with the new company and a new application and fees are filed within 30 days.
T/F

33. According to the Code a judgment against an applicant who entered a plea of “nolo contendere” is
considered to be convicted. T/F
theft
34. A person who diverts or misappropriates fiduciary funds is guilty of _____________

35. A co-partnership whose membership has changed must return the old license with signatures of the
original partners to the Commissioner with an explanation. T/F

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36. Signature of the general partner on the application for registration is required if there has been a
change in membership in the co-partnership. T/F

37. Change in partnership would require at least one person who will exercise the agency powers of the
partnership remain with the new co-partnership for the license to continue. T/F

38. Penalty for engaging in unfair practices is no more than $5000 if not willful, and no more than $10,000
if willful. T/F

39. A licensee can return a license to the Commissioner. T/F

40. If in the possession of an employer a written notice ____ ____________ must be given to the
of intent
Commissioner.

41. An insurer who unintentionally makes an error is underwriting, issuing and renewing a single policy
would incur how many violations under Unfair Practices? _________________________________
3, fine 15,000

a life agent lic

42. License needed to sell annuities:___________________________________

43. A life broker represents the insured. T/F

A&H
44. License needed to sell health insurance:__________________________

45. The California Insurance Code defines a life agent as a Life Agent only. T/F
analyst
46. License issued to those who transact life and disability for a fee is called an _____________.

47. A natural person that is employed by an agent or broker to assist in all lines of insurance other than
life insurance (and now disability) is known as an __________________
insurance solicitor __________________.
fiduciary
48. When an agent handles money in a trust capacity they are said to be acting as a _____________

49. A solicitor is employed by an agent who sells auto, worker’s comp. homeowners, and life. They can
sell all lines as the agent who employs them. T/F

50. A natural person who solicits and services life insurance for the Agent who employees them would be
licensed as a ______________________________.
life agent

51. A licensee who on behalf of an owner, and for a fee, offers/attempts to negotiate the sale of the
insured’s policy to a provider is a _______________ ___________________.
insurer/seller
52. A life settlement broker represents only the _____________ also known as the seller and has a
fiduciary duty to act in their best interest.

53. A life agent who has been licensed for over one year would need to do what to obtain a Life
Settlement Broker’s license? ____________________________________________________
pay the fees

54. Who is not required to obtain a life settlement brokers licenses even though they may be representing
the policyowner (seller) in a life settlement transaction? ____________________________________
CPA, accountant, financial planner, attorney
_________________________________________________________.

55. Those who licensed to act as a viatical settlement broker have or have not met the requirements for
the new life settlement broker license.

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56. A person not licensed as a life agent or licensed less than one year is required to complete how many
hours of education in life settlements before becoming eligible to apply for the life settlement broker’s
license? _____________________________________
15 hrs

57. Application for a license may be denied if the applicant has been convicted/committed
a_____________
felony or _______________
misdemeanor of the insurance Code. misdemeanor of insurance code

58. Aiding, assisting, or acting in behalf of a nonadmitted is not considered legal unless performed by a
surplus lines agent/broker. T/F

59. Status of license when fees are not paid current is _____________.
expired

last day
60. The renewal of a license must be filed on or before the _________ ____________ if the period for
which the license was issued.
email, residence, business/work, mailing address
61. What four addresses are required by the DOI? __________________________________________

62. Any change in any of these addresses the DOI must be notified when and how?
____________________________________________________________
electronic means/website

63. An agent must display his/her license number as well as the word “insurance” on all newspaper
advertisement and written insurance quotes. T/F

64. If the applicant has had any professional license denied for any cause by any licensing authority
within five years the Commissioner would most likely deny their application without a hearing. T/F

65. Agent records must include printed material in use which has been distributed by the insurer. T/F

66. A life agent can submit an application to an insurer they are not appointment with as long as they are
appointed within 14 days of the application date. T/F

General Principles - Section 6 Remaining Regulations and Ethics

Subsection 4
Free Insurance - It is illegal to offer free insurance or an annuity as an inducement to get someone to
purchase real or personal property. It cannot be offered as an inducement for completion of a sale.

Sales and Loans - Lenders cannot require, however can recommend in writing a particular agent or
insurer as a condition to get a loan or on a purchasing agreement (buying a car). This is known as
voluntary selection or free choice. Everyone has free choice irrespective of the loan or purchasing
agreement of agent or insurer.

No person making a loan of money on the security of real property shall make available to any person
information contained in a fire or casualty insurance policy if the borrower has filed with the lender a
statement that policy information shall not be used or made available. This means unless you sign a
statement saying “No” your lender can sell the information concerning your coverages.

Additional regulations have been passed to prevent fraud or mistakes in connection with insurance
covering motor vehicles where the premiums are included in the purchase price or amount loaned. At the
time of vehicle sale the licensed dealer must provide the purchaser with a written “Statement of
Insurance” signed by both. The statement must specify:

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 • The kind of insurance coverage (if none, a clear statement to that effect). If no insurance against
personal injury, death or property damage is included, it must state “Unless a charge is included
in this agreement for public liability or property damage insurance, payment for such coverage is
not provided by this agreement.”
• The amount of gross premium for each kind of insurance coverage, and the aggregate gross
premium
• The term of coverage
• A notice reading: Notice: No person is required as a condition precedent to financing the
purchase of an automobile that any insurance be negotiated or purchased through a particular
insurance agent or broker.
• Penalties - The Commissioner may suspend or revoke any license held by a person violating the
right to voluntary selection.
• After a hearing, the commissioner may issue a cease and desist order to any person if the
commissioner finds that person has, in more than one transaction, violated the California legal
provisions that prohibit sellers and lenders from requiring the purchase of insurance from a
particular insurance agent or broker. The violation of such a cease and desist order is a
misdemeanor. (CIC 773, 774)

Binders (CCR Section 2274) - Binders are temporary contracts between the insured and insurer that
requires a premium charge. A binder is deemed to include all the usual policy terms and endorsements.
Binders expire when the policy is issued.

Binders are good up to 90 days. Insurer can extend binder an additional 60 days with DOI permission
making the binder good up to 150 days total. Maximum binder $1,000,000. No Life, Health or Disability
Binders. The Commissioner can suspend license for issuing a binder without authority.

Certificates of Liability Insurance and Evidence of Property Insurance = Proof of insurance currently
in force.

Suspense/diary system - A suspense/diary system monitors and tracks client transactions and
communications for the agent and serves as a reminder to follow-up on policy changes. Account current
system tracks money.

Shall and May - As used in this code, the word "shall" indicates an action is mandatory (must) and the
word "may" (can) indicates an action is permissive, unless otherwise apparent from the context.

Person - "Person" means any individual or entity. Examples of entities are: associations, organizations,
partnerships, business trusts, limited liability companies, or corporations.

Requirements for Notice by Mail

Unless otherwise expressly provided, any notice required to be given to any person by a provision of the
code may be given by mailing the notice, postage prepaid and addressed to the person to be notified at
his or her residence or principal place of business in this State. The affidavit of the person who mails the
notice, stating the facts of such mailing, is evidence that the notice was mailed.

Referral of Auto Insureds to Repair Facilities

It is against the law for any agent, broker, or solicitor to accept any financial benefit from an auto repair
shop for referring clients to that company for vehicle repairs covered under their policy. (financial benefit"
means receiving any commission or gratuity, discount on repair costs, free repairs, or employment by a
repair facility).

Copyright © PreLicenseTraining.com 37
Additional Standards Application to Automobile Insurance - The California Code of Regulations (with
regards to adjustment and settlement of automobile insurance claims) states that no insurer shall:

The California Insurance Code (with regards to adjustment and settlement of automobile insurance
claims) states that no insurer shall:
1) Require that an automobile be repaired at a specific automotive repair dealer;
2) Suggest or recommend that an automobile be repaired at a specific automotive
repair dealer unless either of the following applies:
• A referral is expressly requested by the claimant;
• The claimant has been informed in writing of the right to select the automotive repair dealer.
• The insurer that elects to repair a vehicle or directs, suggests or recommends that a specific
repair shop be used, must cause the damaged vehicle to be restored to its condition prior to
the loss at no additional cost to the claimant other than as stated in the policy or as
otherwise allowed by these regulations . (CCR 2695.8(e)

If the recommendation of an automotive repair dealer is done orally, and if the oral recommendation is
accepted by the claimant, the insurer shall provide the information contained in a paragraph, as noted in
the statement below, to the claimant at the time the recommendation is made. The insurer shall send the
written notice required by law within five calendar days from the oral recommendation. This disclosure
statement of free choice must be at least 10 point font. After the claimant has chosen an automotive
repair dealer, the insurer may not suggest or recommend that the claimant select a different automotive
repair dealer.

Note: If the claimant elects to have the vehicle repaired at the shop of his/her choice, the insurer may not
limit or discount the reasonable repair costs based on charges that would have been incurred had the
vehicle been repaired by the insurer’s chosen shop.

FAIR CLAIMS PRACTICES

• Upon proof but no more than 40 calendar days the insurer must accept or deny a claim in whole
or part. 80 days if fraud is suspected. Notify status every 30 days.
• If insurer needs more time they must notify claimant additional time is needed
• Producer must immediately or within 21 calendar days respond to DOI request for claim
information, clients 15 days. Insurer 15 days
• No insurer can make a settlement offer than is unreasonably low
• Once in agreement the insurer has up to 30 calendar days to render claim payment
• Cannot deny a claim based upon race, religion, age, marital status, income however can
deny/discriminate based on risky behavior.

FALSE AND FRAUDULENT CLAIMS ARTICLE

The Insurance Code describes the basic responsibilities of the Insurance Commissioner, law
enforcement agencies, insurers, agents, brokers, and others confronting the problem of insurance fraud
in California. While insurers and their agents are investigating suspected fraudulent claims, they shall
have access to all relevant public records that are required to be open for inspection. (CIC 1871.1)
Areas of fraud are auto, health and worker’s compensation.

Any insurer that provides notice of claim forms must include on the form the following statement: “For
your protection California law requires the following to appear on this form: Any person who knowingly
presents false or fraudulent claims for the payment of a loss is guilty of a crime and may be subject to
fines and confinement in state prison.” (CIC 1871.2)

Before the settlement of a claim for insured vehicle theft, the insurer shall secure a claim form that
includes:

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 • A warning that false representation subject the insured to penalty of perjury
• A detailed description of the insured vehicle
• The purchase location of the insured vehicle
• Purchase date, and name of seller
• A detailed statement of the circumstances surrounding the theft
• The insured’s current driver’s license number

The insured must sign the claim form in the presence of the agent, broker, adjuster, or other claim
representative who must verify the insured’s driver’s license number, or submit a notarized claim form.
The insurer must retain for 3 years all settlement checks in settling an auto theft, the original claim form,
and a legible copy of the policy report. (CIC 1871.3)

For all types of insurance coverages it is unlawful to make false or fraudulent statements related to a
claim. It is specifically unlawful to knowingly:
• Make a false or fraudulent statement or material representation to obtain or deny compensation
• Present any false or fraudulent written or oral material statement supporting or opposing a claim
for compensation or for denying compensation
• Assist, abet, solicit, or conspire with a person engaging in an unlawful act under this section
• Make a false or fraudulent statement with regard to entitlement to benefits with the intent to
discourage an injured worker from claiming or pursuing a claim
• Violators may be subject to one or more of the following punishments:
• Imprisonment of up to 1 year in county jail, or as many as 5 years in state prison
• A fine of up to $150,000 or twice the amount of the fraud, whichever is greater
• Both imprisonment or fine.
• If state prosecutor takes the case an additional fine of up to $10,000 and up to 1 year in county
jail. An additional 2 years added to sentence for each prior conviction.

Fraud - Every insurer must maintain a fraud unit to investigate claims made by and against their
insureds.

What Kind of Premium Offsets are and are not Permissible

A broker/agent or surplus line broker may offset funds due an insured for return premiums on any policy
against amounts due him or her from the same insured for unpaid premiums on the same or any other
policy.

Insurer

25 days 25 days

Agent Insured
15 days

Unfair Discrimination
Insurers licensed in California may not refuse to accept an application, or issue a policy, or cancel
insurance due to an applicant’s marital status, sex, race, color, religion, national origin or ancestry. Nor
can they be used as a condition to charge a higher premium.

California does not prohibit charging a different rate for males and females based on sex-distinct morality
tables. Means Life, health and disability insurers may use age and sex (gender) to discriminate.

Identification - Can use birthplace to identify the applicant but not to discriminate.

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Sexual Orientation - No insurer in California may consider sexual orientation in its underwriting criteria
or use marital status, living arrangements, occupation, gender, beneficiary designation, zip codes, or
other territorial classifications within this state in order to establish sexual orientation or determine
whether to require a test for the presence of AIDS (CIC 10140)

Genetic Traits - No insurer can refuse to issue, sell or renew a life or disability policy based upon the fact
the person to be insured carries a gene which may, under some circumstances, be associated with a
disability in that person’s offspring, but which causes no adverse effect to the carrier (ie sickle cell, tay-
sachs)

Physical or Mental Impairment - No insurer can, under a life, annuity or disability policy, refuse to issue,
continue to insure or limit the amount, or the kind of coverage, or charge a different rate for the same
coverage to an individual solely because that individual has a physical or mental impairment, except
where the refusal or rate difference is based on sound actuarial principles or reasonably anticipated
experience.

Blindness - No insurer can, under a life, annuity or disability policy, refuse to issue, renew or limit
amount or kind of coverage, or charge a different rate for the same coverage to an individual solely
because that individual is blind or partially blind.

Ethics
It is important that you understand that even though the Code and Regulations identifies many unethical
and/or illegal practices, it is not a complete guide to ethical behavior. Ethics go beyond the letter of the
law and define not only what insurers and producers must do, but what they should do.

An agents or brokers interest should not be a factor in an insurance transaction. Agents and brokers
should remain at all times independent and objective in their judgment, valuations, and recommend
products that best serve the client’s needs. As licensed professionals you are charged with the ethical
responsibilities of full disclosure, confidentiality, timely submission of applications, prompt policy delivery,
and answering the client’s questions and concerns when presented.

The Code also states that agents must be sensitive and owe the highest degree of integrity and honesty
when dealing with Senior’s. Seniors are susceptibility to deceptive practices such as pretext interviews.
Pretext interviews are interviews that are conducted under false pretense.

Professional Image and Organizations

Professionalism means not only dedication to serving the client’s interest but also dedication to the
insurance industry, insurers and representatives. A professional aligns him or herself with colleagues
and competitors alike, knowing that all represent the same products and services, and all should share a
commitment to the purpose and goals of those products.

There are many choices when it comes to organizations that an agent or broker may join. Each has
goals to enhance the competence and professional standard of its members. Each has a Code of Ethics.
Though each Code may read differently the substance is the same.

a. Place the customer’s interest first

b. Know your job and continue to increase your level of competence
c. Identify customer’s needs and recommend products and services that meet those needs.
d. Use simply language that a layman can understand
e. Provide exemplary service
f. Keep informed and obey all insurance laws and regulations
g. Stay in touch with customers and conduct periodic coverage reviews
h. Accurately and truthfully represent products and services.
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 i. Protect your confidential relationship with your client
j. Avoid unfair or inaccurate remarks about the competition

General Principles - Section 6 Insurance Regulations

Subsection 4
Answer Without Looking and Underline Key Words

1. What action would the insurance Commissioner most likely take if the violation dealt with
loans on the security of real or personal property (Code 770). issue a cease and desist order
2. According to the code the word “may” is intended to be _________________.
permissive

3. The CCRs (regulations) governing claim settlement practices prohibits the following as acts of
unfair discrimination when denying claims: gender, income, reckless behavior, physical
handicap. T/F

4. What is it called when an insurer uses higher rates based solely on religion, race, or ethnic
group? _______________
unfair discrimination________________________

5. According to the Code every insurer must maintain a fraud unit to investigate fraudulent
claims from/or against their _______________________________
insurance

life
6. According to the Code, which class of insurance cannot issue a binder? ________________

7. The Commissioner has the right to suspend/revoke an insurance licenses for issuing a binder
without authority. T/F

8. Binders are good up to 1,000,000. T/F

misdemeanor
9. A person who diverts or misappropriates fiduciary funds is guilty of: ____________________

10. Committing an act of discrimination whether it be fair or unfair is always a violation of the
Code. T/F

11. If the insurer paid 25,000, 45,000 and 15,000 in a fraudulent claim the fine would be $85,000
times 2 = $170,000.

12. Oops wrote question 11 again

13. Acts for a license to be rescinded are: conviction of felony, displaying lack of integrity, holding
a nonresident license, misstating info on the license app. T/F

14. According to the code all areas of insurance are problematic for fraud: health, auto, worker’s
comp and personal liability. T/F

Congratulations you have completed General Principles!

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 PROPERTY
AND
LIABILITY
BASICS
The purpose of the Commercial Section is to provide an overview of facts. The facts are simply
to reinforce concepts. Please refer to your class material for more detailed information. This
information is strictly for review and only emphasizes areas that in the past and currently have
been consistently tested. Questions can appear on the test from any material published in your
classroom manual.

This review stresses key wording and phrasing that is associated with the concepts that are
tested and not a substitute for the actual class manual.

The retention questions are to familiarize the student with test wording. In the video the
presenter will explain how many of these questions may appear and additional questions that
could be asked.

Your course material will contain the information that is being reviewed.

Copyright © PreLicenseTraining.com 42
 POLICY STRUCTURES SUMMARY
BOTH PROPERTY & LIABILITY

Personalizes Promise / Agreement Rules, Duties, Obligations Omitted

DECLARATIONS INSURING CLAUSE CONDITIONS EXCLUSIONS
D I C E

RULES / DUTIES WHAT'S NOT

WHO COVERAGES
& PROCEDURES COVERED

Insured & Insurer Description Policy Period / Territory Restrict Insuring

Additional / Other Policy Voided Agreement
WHAT Optional Liberalization
Liability - BI, PD, PI, AI Extensions Cancellation
Property Ins Not Covered Transfer of Rights and Duties
Building / Contents Limitations Assignment
Real / Personal Sublimit / Caps Insurable Interest
WHERE Insured's Duties
DEFINITIONS Appraisal
Location Legal Action Against Us
Insured Other Insurance
WHEN Loss Payment
NAMED PERILS Abandonment
Inception / Expiration Mortgage Clause
Basic Form Perils No Benefit to Bailee
HOW MUCH Brood Form Perils Nuclear Hazard
Transfer Rights of Recovery
Limits INDEMNIFICATION Subrogation
Known as limit of liability
Premium How does it settle
Deductible (Property) R/C
Self - Insured Retention ACV
(Liability)

*Endorsement and Definitions can be added to any of these parts

Diagram by V. Wood
Copyright © PreLicenseTraining.com 43
 NAMED PERIL AND OPEN PERIL FORMS

COMMERCIAL LINES

Named Peril Policies Open Peril/All Risk

Only those perils stated in the Covers any peril unless
policy are covered excluded

Basic form Standard Form Broad form Special Form

Used on: CPP BOP CPP Both BOP & CPP

PERSONAL LINES

Named Peril Polices Special Form

(DP-3, HO-3)
Comprehensive
Basic Form Broad form (HO-5)
(DP-1 & HO-8) (DP-2, HO-2, HO-4, HO-6
PERSONAL LINES COMMERCIAL LINES

Special Open Peril/All Risk Special CPP/BOP

Broad
Broad has 6 Broad Named Peril Policies CPP
or 7 more Standard BOP
Basic Basic
perils than CPP

Note: The only perils you need to concentrate are perils not included in Basics.

REPLACEMENT COST ACTUAL CASH VALUE

Today’s Cost Today’s Cost

Value at the time no depreciation Value at the time minus depreciation
of loss of loss
Replacement cost Replacement cost

Note: Coverage A&B settle RC on Note: Coverage C (personal property), anything with an
Broad, Special, and HO-5, and BOP engine, all commercial property, personal lines Basics
Settle Coverage A, B and C ACV

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Diagram by Vicki Wood

Provisions/Conditions for Both Property and Liability

Normally tested

1. Accident - a sudden, unforeseen, unintended, and unplanned event. Fortuitous

2. Occurrence - An event that results in a loss. It includes an accident, however it is a broader definition
because it includes continuous or repeated exposure to harmful conditions that result in damage or
harm
3. Primary - Policy or policies that pay first up to its policy limits regardless of other policies in effect.
4. Excess - Policy or policies that pay only after the primary policy limits are exhausted.
5. Other Insurance
• Pro Rata Liability - Used when there is more than one policy that covers the loss. Each pays a
portion of the loss in proportion to its limit in relationship to all applicable insurance (total of all
policies). Determined by adding all the policies together to get the (denominator - bottom of the
fraction) then each policy limit is the numerator (the top of the fraction) which then determines the
percentage each insurer portion of the claim payment.
• Concurrent policies - Identical policies insuring the same risk.
• Nonconcurrent policies - Policies that do not provide the same coverages or do not insure against
the same perils. Nonconcurrency can result in coverage gaps or disputed payments. Some
policies will state they will settle pro-rata if the other policy/policies are concurrent and will only
settle as excess if the other policy/policies are noncurrent.
• Nonconcurrency in liability - Occurs when liability policies are layered (primary/excess) and the
effective dates or other provisions are different.
6. Liberalization - Coverage is broaden without an increase in premium.
7. Appraisal and Arbitration - Method used to handle claims when insured or insurer cannot agree on
the amount of indemnification. Dispute. Appraisal is used in property to settle dispute over value of
loss. Arbitration is used for everything else and in liability disputes.
8. Waiver or Change of Policy Provisions - changes can be made only by written endorsement issued
by the insurer and made part of the policy.
9. Premium - exchange of value, small certain loss, money, consideration
• Earned Premium - Insurer has provided coverage
• Unearned Premium - Insurer has yet to provide coverage
10. Cancellation - Termination (mid-term termination) by either the insured or insurer of the contract after
policy issuance prior to the expiration date.
• Named insured may cancel at any time by giving written notice to the insurer
• If policy is less than 60 days and not a renewal, the insurer may cancel for nonpayment or fraud
by giving 10 day notice, and 30 day notice for any other reason. Notice must be sent before the
59 day.
• If policy has been in effect for more than 60 days or is a renewal, the insurer may cancel for
nonpayment with 10 day notice and 30 day written notice for other allowable reasons:
 Nonpayment
 Material misrepresentation
 Substantial change in the risk
11. Type of Cancellations
• Pro-rata cancellation - Insurer cancels and premium must be returned proportionally. Insurer
keeps earned and must return unearned.
• Short rate cancellation - Insured cancels. Insurer will return unearned minus an additional
amount to cover expenses, or the insurer will keep earned premium plus an additional amount to
cover expenses.
• Flat cancellation - Insurer returns all premium
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 Test example:
12. Nonrenewal - not continuing a policy at the end of a policy period for an additional term of coverage.
13. Renewal - Continuance of a policy beyond its original term and into a new policy period.
14. Lapse - termination of the policy because of failure to pay the premium (nonpayment).
15. Assignment - Transfer of the insurance policy to another individual or entity. Requires insurer’s
written consent. Known as Transfer of Rights and Duties in some policies.
16. Subrogation - Known as Rights of Recovery in policy language. The legal process by which an
insurer seeks recovery of the amount paid to an insured from a responsible third party. Supports the
principle of indemnity: Prevents insured from collecting twice, helps insurer recover amount paid,
hold the negligent party responsible.
• Word in English language for subrogation is: ______________________
17. Death - Death of named insured rights of the policy transfer to the named insured legal
representative
18. Policy Period - Loss must occur during the policy period
19. Coverage Territory - Loss must occur within the covered territory. U.S. its territories and possession
(Guam/Virgin Islands), Puerto Rico and Canada
• Policies that are worldwide are: DP, HO, Marine, and Personal Umbrellas
20. Concealment, Misrepresentation or Fraud - Voids (Rescinds)
21. Proximate Cause - Unbroken/uninterrupted chain of events that ends in damage/loss. In property the
proximate cause must be an insured peril and in liability it must be negligence.
22. Certificate of Insurance - Proof of insurance
23. Business-Includes one's trade, profession, or occupation.

PROPERTY BASICS ONLY

Property pays to the insured. Liability pays to others/another

1. Real Property - structures (buildings) and the land attached to it. Note we do not insured the land
2. Personal Property - all property other than buildings/structures
3. Fire - Combustion that is enough to produce a spark, flame or glow.
• Friendly fire - Fire intentionally set and stays within its intended place.
• Hostile fire - Fire that has escaped its intended area.
4. Recovery is limited to: Insurable Interest (ownership), policy limit or sublimit,
and indemnification provision (how it settles). Ex: Personal property settles
ACV, but not more than the insureds percentage of ownership, and not in excess of either the policy
limit or a sublimit if it applies. Loss Settlement/Claim Settlement- Specifies the valuation method(s)
used to pay losses. Loss valuation will be discussed shortly.
5. Our Option - gives the insurer the right to repair or replace damaged property equivalent property.
6. Deductible clause - stated in the declarations. A deductible is a specified dollar amount of each
covered property loss that an insured must bear and that the insurer will only pay the amount of loss
in excess of the deductible subject (up to) policy limits
7. Inherent vice or defect - A condition or defect that exists within property itself that causes the property
to spoil, break, become defective, or destroy itself. Insurance policies typically exclude inherent vice.
EX: The quality of materials used in a painting allows the painting to fade or lose luster with time_
8. Pair or Set condition - states that in the case of a loss to an item that is part of a pair or set it is not a
total loss. The insurer can either repair or replace part of the set or pay the difference between the
value of the property and after the loss.
9. No benefit to bailee — specifies that the insurer will not recognize any assignment or grant any
coverage that benefits a person or organization repairing, storing, or moving the insured property for
a fee. (Need to purchase Inland Marine to cover customer’s property as their liability excludes care,
custody and control). Ex: dry cleaner, shoe repair, auto repair

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10. Unoccupancy- A property that contains personal property or contents has no occupants.
11. Vacancy - A property that has neither occupants nor personal property is described as vacant.
12. Standard Mortgage- (aka Mortgage Clause) — Specifies and protects the mortgagee's (lender)
financial interests in property insured by the policy. The mortgagee must perform certain duties to
protect its interests, which include:
• Paying any premium due under the policy on demand, if the insured fails to do so.
• Notify the insurer of any change in ownership, occupancy, or substantial change in risk of
which the mortgagee is aware.
• Submitting a signed, sworn statement of loss within 60 days after receiving notice from the
insurer of the insured's failure to do so.
Note #1: if the insurer denies a claim because the insured has failed to comply with the terms of the
policy, the mortgagee will still have the right to loss payment if the mortgagee complies with the
above duties.
Note #2: If the insurer cancels the policy for non-payment of premium, the insurer must give the
mortgagee at least 10 days written notice before the effective date of cancellation. If the insurer
decides not to renew the policy, the insurer' must give the mortgagee written notice at least 10 days
before the nonrenewal takes effect.
13. Right of Salvage - The right of the insurer to take possession of damaged property after the loss to the
property has been paid. The salvage belongs to the insurer.
14. Abandonment of Property - The term “abandonment” means to transfer title of the damaged property
to the insurance company and then claim a total loss. Only the insurer has the right to declare the
property a total loss, pay the insured the value and keep whatever salvage value might be gained
from the damaged property.
15. Control of Property - The acts/negligence of another outside your control will not affect your
insurance.
16. Coinsurance - used to encourage insureds to “insure- to-value”. It establishes the basis for payment
if the insured fails to maintain a specified percentage of that value. The higher coinsurance
percentage results in reduction in premium. Coinsurance only applies to partial losses. In a total
loss the policy must pay as a Valued policy. Discussed in HO
17. Burglary - requires evidence of forcible entry or exit, insured is not present.
18. Robbery - taking of property by threat. Insured is present
19. Theft - any act of stealing with or without force. Includes both burglary and robbery.

TYPES OF PROPERTY LOSSES

1. Direct Loss - Damage to tangible property in which the proximate cause of the loss is an insured
peril.
EX: Fire damage to an insured residence, or water damage to the residence resulting from a ruptured
water pipe.

2. Indirect Loss (Consequential/Time Element) - A second financial loss occurring as the result of a
direct loss.
EX: Additional living expenses, extra expense, business income

LOSS VALUATION
A policy may pay the insured for a covered loss on the basis of the following:
1. Actual Cash Value (ACV) - The policy pays for the cost to repair or replace the damaged property at
the time of loss, less depreciation. Stated another way, the policy pays current replacement cost less
depreciation.
EX: A building has a roof with a 20-year life expectancy destroyed by hail five years after its
installation, and the cost to replace the roof at the time of the loss is $10,000, less depreciation of
$2,500 (25%), equals the actual cash value of $7,500.
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2. Replacement Cost - The policy pays the full cost to replace or repair the damaged property (not
exceeding policy limits) at the time of the loss without an adjustment for depreciation.
EX: Under the same scenario above (ACV example), the full $10,000 would be paid.
Note #1: The Replacement Cost method of loss valuation requires that the coverage amount at the
time of the loss be at least equal to 80% of the cost of replacement.
Note #2: The Replacement Cost method of loss valuation requires repair or replacement to the
damaged property with like kind and quality of material.
3. Functional Replacement Cost — a property policy provision that changes the valuation method
otherwise applicable (Actual Cash Value or Replacement Cost) to valuation that allows replacement
with less costly property that is functionally equivalent.
EX: The replacement of damaged property with identical property is impossible due to some
technological or environmental change.
4. Market Value —Settles for amount to which the damage property could be sold
5. Agreed Value - used to suspend coinsurance clause by establishing an agreement between the
insured and insurer as to the value of the property and the amount of insurance necessary to full
cover the risk.
6. Stated Amount - establishes the maximum value for insured property which is still subject to
adjustment and valuation at the time of loss.
7. Valued Policy - A policy which expresses on its face an agreement that that the object insured will be
valued at a specified sum without adjustments. Many states have passed legislation known as a
Valued Policy Law that requires an insurer to pay the full amount of insurance on an insured structure
in the event of a total loss.

LIABILITY BASICS

TORTS
A tort is a legal or civil wrong for which legal action may be taken. A person can face a claim for legal
liability for intentional torts, negligence, absolute or strict liability. Torts
establish legal liability (who is responsible and therefore is obligated to pay) for
harm done to others. Torts are categorized as:

a) Intentional torts - An intentional tort is a deliberate act (other than breach

of contract) that causes harm to another person, regardless of whether the
harm is intended or not. Examples of intentional torts would be assault,
battery, libel, slander, invasion of privacy, malicious prosecution and wrongful eviction just to name a
few. Some intentional torts can be covered by insurance, however many cannot. The ones that can
be covered fall into the category known as “personal injury”, which are considered to be injury to
one’s mental state or reputation and not bodily injury. Personal injury and advertising claims are
referred to as offenses.
b) Unintentional torts (negligence) - Negligence is the failure to do what a reasonable person would be
expected to do in a given circumstance. The greatest number of liability cases arises from
negligence. Tort law gives the injured party the right to seek compensation if they can prove or
demonstrate that someone else’s negligence led to their injuries or damage (bodily injury and
property damage).
• Four elements to establish negligence
 Legal Duty Owed
 Duty Breached
 Proximate Cause
 Actual Loss or Damage
c) Absolute Liability - Many times absolute and strict liability is used interchangeably, however the
state exam separates the two. Both absolute and strict liability imposes liability without regard to fault
or negligence. Absolute liability will arise from inherently dangerous activities.

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 • A doctrine that applies only in particular circumstances. It is imposed on those activities that
present an extreme likelihood of harm to others when mishaps occur. (Dangerous/Hazardous)
 Employers - imposed by statute - worker’s compensation
 Wild animals - pet rattle snake
 Contractors - blasting
d) Strict liability - will be associated with defectively manufactured products. The main difference
between the two is that in absolute liability the claimant does not have to prove anything, whereas
strict liability requires the claimant to prove that a defect in the product caused the injury or damage.

Defenses/Doctrines/Strategies/System.
• Common Law (judicial or court decisions)
 Contributory Negligence - Prevents recovery for damages caused by a negligent party if the
claimant was also negligent. Cannot collect.
 Last Clear Chance - Having a chance to avoid a loss and not taking it. It is used to counter
contributory negligence.
 Assumption of Risk- The plaintiff who consciously exposes himself to danger assumes some
risk of possible injury. Example: A river rapid excursion participant.
 Intervening Cause- A disrupted chain of events, thus freeing the defendant from liability.
Example: Children provoking or teasing a dog, causing it to bite or defend itself

• Statutory Law (enactment of legislatures)

 Comparative Negligence- Damages are reduced in proportion to the degree of negligence.
A degree of fault is assigned to both parties. There are different types of comparative
negligence that may be used in determining the degree of negligence, and statues vary by
state. In these test questions everyone gets something for their damages.

 Statute of Limitations- The length of time in which a person may file suit. Statutes of
Limitations can vary by the line or type of liability insurance, and from one state to another.

• Contributory versus Comparative

X’s claim is $10,000 and X is 75% at fault. Y’s claim is $5000 and is 25% at fault
Under Contributory Negligence - X collects: Nothing and Y collects Nothing

Under Comparative Negligence

X collects what percentage of his claim 25% = $2500 (Claim reduced by 75%)
Y collects what percentage of his claim 75% = $3750 (Claim reduced by 25%)

Other types of Negligence and Liability

1. Vicarious Liability- The imposition of liability on one person for the actionable conduct of another,
based solely on a relationship between the two persons. Employer is responsible for acts of
employees such as car accidents when the employee is running errands for the employer. Vicarious
liability is covered under all liability policies.
2. Gross Negligence- A willful, wanton, or reckless disregard of the consequences affecting the life or
property of another. Example: Operating a vehicle at a high rate of speed in a school zone with
children present.
3. Bodily Injury Liability- Legal liability arising from physical injury to a person, including sickness,
disease, and death caused by the negligent or purposeful acts or omissions of an insured. Damages
might include medical expenses, lost wages, mental anguish, disfigurement, etc.
4. Property Damage Liability- Legal liability arising from damage to tangible property, including loss of
that property caused by the insured's negligence. Damages might include the actual repair or
replacement of the damaged property, as well as loss of rents, income, or revenues sustained
Copyright © PreLicenseTraining.com 49
 because of the damage to the property.
5. Medical Payments Coverage- Provides payment of necessary medical, surgical, x- ray, dental,
ambulances, hospital, professional nursing, and funeral expenses incurred by invites and licensees
on the insured's premises. These payments are made regardless of fault or negligence, and payment
is not an admission of fault.
6. Personal Injury Liability- Legal liability arising from the wrongful conduct of the insured resulting in
injury other than bodily injury. Example: Libel, slander, false arrest, invasion of privacy, defamation
of character, etc.
7. Advertising Injury Liability- Legal liability arising from the misappropriation of advertising ideas or
style of doing business; infringement of copyright, title or slogan; and oral or written material that
violates a person's right of privacy.
8. Attractive Nuisance- An important exception to the usual liability for injuries to trespassers is in case
of injuries to children. Courts have held that some properties, such as artificial or uncommon objects,
attract and are a threat to children because they do not realize the possible danger, yet the court
does not expect a child to be able to resist these objects. Example: Swimming pools, ladders,
refrigerators with doors left on, trampolines, and other kinds of property around a business or home.

Types of Damages
1. Loss of Consortium- Compensation to a husband or wife for the loss of companionship of a spouse.
2. Specific Damages (a.k.a. Special)- Compensation to an injured party for actual or known expenses
such as bills, loss of earnings, or costs of repairing or replacing damages property. Specific damages
do not include pain and suffering. Specific/Special damages have economic benefit.
3. General Damages- Compensation to an injured party for pain, suffering, mental anguish,
disfigurement, and similar types of losses. There is no correlation between special and general
damages awarded.
4. Compensatory Damages - Special and general combined.
5. Punitive Damages - Damages assessed in addition to specific and general damages as a
punishment for extreme, objectionable conduct by a negligent party (wrongdoer), as in the case of
gross negligence. They are excluded from the insurance policy and serve as a warning to others not
to do similar acts.

Other Liability Terms and Concepts

1. Pure No-Fault Law - In the past, some states adopted a no-fault insurance law that provided payment
of loss from an insured’s own carrier for their damages, regardless of who was at fault. There are no
Pure No-Fault laws in any states today. No negligence is established.
2. Modified no-fault - Modified No-Fault laws which restrict the right to sue but do not completely
eliminate it. The unique element of a modified plan is called a threshold. A threshold is defined as a
boundary that must be crossed before an injured person can make a tort liability claim. This
threshold could be when medical bills exceed a specific amount or if death or disfigurement occurs.
PIP - Personal Injury Protection is added for this situation.
3. Severability - Separation of Insureds - each insured is treated as if they were the only insured in the
event of loss, except as to the limit of liability
4. Duty to Defend - Insurer promises to defend any suit for damages caused by an occurrence to which
coverage applies, whether or not any damages are paid up to policy limits.

Limits of Liability
The restriction a Liability policy places on the dollar amount of coverage is called the Limit of Liability.
Liability policies specify this limit in the following ways:

1. Per Occurrence Limit- The most the coverage will pay for a loss arising out of any one occurrence,
regardless of overall policy limits.
2. Per Person Limit- The maximum amount that the coverage will pay for loss to any one person
regardless of overall policy limits.
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3. Aggregate Limits- The maximum amount payable for loss (per location and/or per person) from all
occurrences within a policy period regardless of the number of separate accidents. Payment under
the policy reduces the amount of insurance available to pay additional claims during that policy year.
4. Split Limit- The amount of coverage is divided between bodily injury and property damage.
5. Combined Single Limit- The limit of the policy may be applied to either bodily injury or property
damage, wherever needed, or in any combination.

Property and Liability Basics

Without looking up - Answer the following and indicate key words. Then return to video for
answers.

1. Torts are any wrongdoing. T/F do not include breach of contract/criminal

2. Fred cancels his policy and receives the entire unearned premium minus administrative expenses.
This is what type of cancellation? short rate

3. Open peril or all risk is known as what policy form? special

4. This device is used by insurers to encourage insureds to insure to value and results in a better
coinsurance
premium best describe ________________________________.

5. What type of policy protects against loss from any peril except those that are excluded? special/open peril/ all
risk
6. Policy provision that allows the mortgagee to still be paid even though claim was denied is called?
_________________________________________
Morgage clause
both premium and
7. Lowering the deductible would cause and increase in ______________ claims
_________________.

8. Furniture purchased 10 years ago cost 10,000 new. The adjustor depreciated the damaged furniture
$5,000. The value at the time of loss was $15,000. The actual cash value of the furniture is?
___________________
$10,000. Original price is not a factor. replacement price-depriataed factor

9. Named perils can be located in what part of the policy? under the insurant Claus/agreement

10. Main purpose of tort law is to determine who is responsible for damages. T/F

11. An indirect loss first requires an insured direct loss. T/F

12. System in which damages are diminished (reduced) in proportion to the person’s degree of
negligence is ______________________________.
comparative negligence

rain
13. Concurrent causation excludes perils not covered such as: ______________________
9 months
14. Insured pays an annual premium and the insurer cancels after 3 months the refund will be ______
months or ______%.
75

15. When insurer cancels premium is refunded: ____________________________

prorata

16. Punitive damages punish the _________

wrong doer __________, meant to deter others from committing,
________ __________and are ___________from coverage under insurance policies.
similar acts insurance

Copyright © PreLicenseTraining.com 51
 transfer rights and duties
17. The contractual phrase for assignment is: _______________________________

18. Special damages have economic value such as lost wages and _______ ___ _______ expense.
out of pocket

19. Replacement cost replaces the damaged property without deduction for depreciation. T/F

20. Insurer rescinds the policy and has NOT been exposed to loss the insured would receive a refund
equal to the ______________
all premiums paid_________________.

21. Corporations can be subject to a claim for legal liability on the basis of absolute liability. T/F

22. General damages do not have economic value. T/F

23. There is no correlation between special and general damages. T/F

24. Indemnity contracts are required to pay the full amount necessary to restore an insured who has
suffered a covered loss. T/F

25. Indemnity contracts contain a specific limit for a single claim and contain a provision to prevent
insured from receiving full payment from two separate policies covering the same loss. T/F

26. Insurer can rescind (void) a policy if there is a change in the company’s underwriting policy that
would preclude the insured from coverage. T/F

27. The terms “you” and “your” in Personal lines policies refers to ______________________
named insurered and
_____________________.
resident spouse

28. An insurer may void the policy because the insured omitted facts on their application they
reasonability did not know about. T/F

29. The cost to repair a structure damage by wind is an example of a consequential loss. T/F

30. What cause of loss form covers risk of direct physical loss subject to exclusions? Open peril/all risk. Special
form
31. Legal liability cases may involve punitive, special, general and proximate. T/F

32. A policyholder pays an annual premium. Six months into the policy the policy is cancelled and the
pro rata
insurer returns 50% of the premium. This is called what type of cancellation? __________________

33. When coverage is automatically broadened without additional premium this is known as what policy
condition? liberalization
replacement price - deprecation =actual cash value
34. The formula for actual cash value is: _____________________________________

35. Property policies are considered to be first party contracts since they are between the insured and
the insurer. T/F
condition and exposion
36. Part of the policy where you will find the rules for both the insured and the insurer? ______________
section
_____________________
insurance clause
37. Part of the policy where you will find coverages described? ________________________________

Copyright © PreLicenseTraining.com 52
38. A ________________
binder is temporary contract between the insured and the insurer policy that provides
protection only for the perils stated describes what type of policy?

39. A _____________
valued policy pays a stated amount regardless of the loss or ACV.

40. Replacement cost is also called value at the time of loss which simply means today’s price. T/F

41. Property policies pay to the ____________________.

insured

42. To be held responsible for acts of another is what type of liability? vicarious liability

43. An aggregate limit is the most a policy will pay per occurrence? false
44. Split limits means that the policy has different limits for bodily injury and property damage. T/F

45. Bodily injury is actual harm to the body including sickness, disease, and resulting death. T/F

46. Personal injury in insurance terms includes bodily injury. T/F

47. Which part of a policy personalizes it? declaration page

48. A second financial loss resulting from an insured direct loss describes? indirect loss/ consequential loss
others/another
49. Liability policies pay for bodily injury and property damage to __________________.
flat
50. Insurer returned all premium is called what type of cancellation? ________________________

51. Replacement cost includes market value. T/F

52. Nonconcurrent in property insurance is when there is more than one primary insurer and the policies
are insuring for the same perils. T/F

53. Opps - No question

54. Liability policies never pay for bodily injury or property damage of an ____________________
insured

gross negligence
55. Willful, wanton, total disregard for the property or life of another describes? ___________________

56. Duty owed, breach of that duty, negligence is the proximate cause, and resulting in bodily injury or
property are the elements used to establish ________________________.
negligence

57. Amount paid for damaged property which is equal to the price for which it could have been sold is
called_____________________
market value _________________.

58. Oops - No question

59. What clause is commonly used to require insured to purchase insurance close to the value of the
property? ___________________________________
coinsurance

60. An apartment house is worth $500,000. The owner insures it for $300,000; the policy has an 80%
coinsurance clause. If there is a $200,000 loss the insurer will pay? ______________________
$150,000

61. The taking of property from a person by someone who has caused or who has threatened to cause
that person bodily harm is known as? ____________________________
robbery

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62. A written provision that modifies the provisions of the original contract is known as an
_________________.
endorsement/amendment

the insured/defendant
63. Who is considered the first party to an insurance contract? ______________________

64. A pet rattle snake is an example of an intentional tort T/F en example of absolute liability

65. One of the differences between the peril of robbery and a burglary peril is that burglary peril requires
______________
evidence of forcible entry or exit.
insurer
66. Who’s written consent is need to transfer a policy to another? _____________________
assignment/ transfer of rights and duties to others
67. Transferring a policy from one person to another is called: ________________________________

68. A wrongful act other than a crime or breach of contract is a ______________.

tort

69. An estimate of the amount that the insurer will pay on a claim is called __________ _____________.
loss reserve/estame/obligate

70. Negligence is considered to be an unintentional tort. T/F

71. The amount to replace property with like property of the same quality and construction is the:
__________________________________________.
replacement cost

72. The words “we” and “us” and “out” refers to whom in an insurance contract? the named insured

73. A physician is being sued by a patient for misdiagnoses. What type of professional liability insurance
would protect against this type of mistake? ___________________________________
malpractice (type of insurance-professional liability)

74. A reduction in the value of the property that results immediately from damage to the property is
known as a _____________________________________
direct loss

75. A trade conducted in the home is considered what in policy language? _____________________
a business

76. Taking of property with or without force is considered: burglary, extortion, robbery, theft. (Underline
best answer).

77. Which part of the insurance contract summarizes the major promises of the insurer?
______________________________________
insuring clause

78. Slander, libel, assault, malicious prosecution is considered intentional torts. T/F

79. The mortgage holder is entitled to receive 100% of their loss even if the insured has been charged
with arson for burning down their own home. T/F

80. Tort law gives an injured party the right to seek compensation if it is proven that another person’s
negligence contributed to the injury. T/F

81. Compensation for time away from work is considered special damages. T/F

82. The term subrogation refers to the insurer’s right to recover payment from a responsible 3rd party.
T/F

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83. Arbitration and/or appraisal are used to resolve a disputed claim. T/F

84. Notice by mail to an insured by an insurer requires the notice to be sent with return receipt. T/F

85. A person can base their claim for legal liability on the basis of breach of contract. T/F

86. Breach of contract allows the injured party to collect damages, costs, and attorney fees. T/F
Cancelation
87. ____________________ is sometimes called mid-term termination.

88. Damage to your property by an insured peril is called a __________

direct loss ___________.

89. Property policies insure direct loss, indirect loss, intangible loss, and tangible loss. T/F

90. To be covered the insured peril must be the proximate cause of the loss. T/F

91. Who can cancel an insurance policy?___________________________________

named insured or insurer

92. Unauthorized release of confidential information is considered an intentional tort. T/F

93. There is usually no direct correlation between the amount of general and special damages awarded
to the victim. T/F

94. Tort law consists of intentional torts, unintentional torts, absolute and strict liability. T/F

95. Duty, Breach, Proximate, Damage mean: _________________________________________

negligence

96. What is the per accident difference between 15/30/5 and the single limit $35,000?
_______________________________________
there is no difference

$350,000
97. What is the single limit equivalent of 100/300/50: _____________________________

98. A field agent has no duty to an insurer. T/F

99. The component of an insurance policy that indicates who and what is insured is called?
_______________________________________
declaratin page

100. If injuries or damages resulting from the behavior of an individual are so hazardous that public policy
require those causing either are to be held legally responsible, and therefore imposes responsibility
it falls under which type of liability? _____________________________
absolute

101. Contributory negligence is a legal doctrine that reduces damages in direct proportion to the amount
of negligence the injured party is responsible for. T/F

102. Keeping of exotic animals would subject the owner to which type of liability? ________________

103. Imposing legal liability upon one person as the result of the actions of another person is known as
___________________liability.
vicarious

104. If the proper amount of coinsurance is not maintained, the formula that will be used to calculate the
amount paid n the event of loss would be insurance amount ___________
have ÷ insurance amount
_______________
required time’s amount of the loss minus the deductible.

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105. Oops - No question

106. Doctrine that bars the insured from recovery if they have contributed to the loss?
__________________________________

107. An unbroken chain of events that begins with an insured peril in property insurance, begins with
negligence in liability insurance, and leads to injury or damages is known as ________________
proximate
cause.

108. An interrupted chain of events that can release someone from negligence is known as
_______________
intervening cause.

109. Liability insurance protects the third party. T/F

110. Who is tortfeasor? ________________________

the person who has caused the harm. insured

111. DICE stands for? _________________________________________________________________

Declaration Insuring Clause Condition and Explosions

112. Insured pays an annual premium of $1200 and in the 9 month the insurer cancels. The refund
would be: $300

End of this Section - Keep Going

Copyright © PreLicenseTraining.com 56
 DWELLING POLICIES
AND
HOMEOWNER POLICIES
The purpose of the Commercial Section is to provide an overview of facts. The facts are simply
to reinforce concepts. Please refer to your class material for more detailed information. This
information is strictly for review and only emphasizes areas that in the past and currently have
been consistently tested. Questions can appear on the test from any material published in your
classroom manual.

This review stresses key wording and phrasing that is associated with the concepts that are
tested and not a substitute for the actual class manual.

The retention questions are to familiarize the student with test wording. In the video the
presenter will explain how many of these questions may appear and additional questions that
could be asked.

Your course material will contain the information that is being reviewed.

Copyright © PreLicenseTraining.com 57
 DWELLING AND HOMEOWNER POLICIES
Standard Fire Policy - SFP (monoline/property only)
(limited perils, heavily endorsed, used for both personal and commercial)
Standard Fire had a165 lines of text. California Form Fire had 158 lines of text
Perils - Fire, lightning and removal
• By endorsement can add extended coverage endorsement (EC) and vandalism and malicious
mischief (V&MM). EC perils are: WHARVES
Windstorm, Hail, Aircraft, Riot, Vehicles, Explosion, Smoke
(including volcanic eruption consisting of airborne shockwaves, lava, ash, dust).

DP and HO cover single family homes to 4-plexs

(greater than 4-plex is commercial)
Dwelling Policies = DP = dwelling forms
DP – Structures that are tenant occupied up to 4-plex
DP – Owner-occupied homes that don’t qualify for HO
3 Forms
• DP-1=Basic, DP-2=Broad form, DP-3 = Special. DP- 3/Special form is the
broadest of the 3 forms

Perils
DP-1/Basic only covers 3 perils – fire, lightning and internal explosion. Extra premium is required to
activate the optional coverage’s: Extended Coverage which includes volcanic eruption, and V&MM.
(unless question states minimum coverages of DP-1/Basic assume EC and V&MM have been
added).
DP-1/Basic DOES NOT Cover - (Tested Area)
• The perils of falling objects, damage by burglars, weight of ice, snow or sleet; water; freezing;
electric surges.
• Does not cover these “other coverages” - glass; tree shrubs and plants, collapse. These are
covered by DP-2/Broad and DP/3 Special.
• Coverage E - Additional Living Expense must be endorsed on a DP-1/Basic. It is included in
DP-2/Broad and DP-3/Special
Note: DP-2/Broadform and DP-3 Special form cover the above

DP-2/Broadform provides broadform perils for Cov. A/Dwelling, - Cov. B/Other Structure and
Cov. C/Personal Property.

DP-3/Special
• provides open peril/all-risk on Cov A/Dwelling and Cov. B/Other Structures aka real property.
• Provide broadform perils for personal property Coverage C None of the residential policies
(DP or HO) cover sinkhole collapse. This peril is covered in commercial policies.

Water damage must come from plumbing, heating, air conditioning or appliance. Excludes: damage if
window is left open.

Difference between DP-2/Broad and DP-3/Special is plumbing leakage on the test. The special form will
cover damage to insured’s property from the neighbors plumbing. Another difference is Coverage A and
B perils.

Exclusions - similar to HO. However DP excludes boats with engines, money, and cancellation of lease
or unpaid rent. (Review HO exclusions)

Copyright © PreLicenseTraining.com 58
Indemnification (How policies settle)
DP-1/Basic settles everything (Cov. A, B, and C) actual cash value (ACV)
DP-2/Broad and DP-3/Special settle buildings Cov. A and B (real property) replacement cost if the 80%
co-insurance is met (Coverage A and B)
All DP and HO settle Coverage C (personal property) actual cash value. Replacement cost would have
to be endorsed.

Vehicles
DP-1/Basic does not provide coverage for any vehicle unless WHARVES has been activated. It excludes
any damage by the insured or tenants vehicle.
DP-2 only excludes vehicle damage by the insured or tenant to driveways, walks and fences.
DP-3 covers vehicle damage whether done by others or the insured or tenant

Collapse (Same on DP, HO, Commercial and BOP)

Collapse is covered if caused by a broad form peril, hidden decay, hidden insect or vermin damage,
weight of contents, weight on roof, or during construction, remodeling or renovating from defective
methods or materials. No Basic policy (DP-1 or HO-8) covers collapse. Ensuing fire, explosion or glass
breakage is covered.

Homeowner Policy = HO’s = Package/Multline Policy

HO requires the home to be owner-occupied, except HO-4.

California uses 6 HO forms. 4 forms: HO-8, HO-2, HO-3 and HO-5 are used to insure single to 4-plexs
(difference is perils). HO-4 renters. HO-6 condo unit owners. Perils are:

California HO-8 HO-2 HO-3 HO-5 HO-4 HO-6

HO Modified Broad Special Comprehensive Tenant Condo Unit
Forms Form Form Form Form Form Owner Form
Coverage A
Open peril Open Peril Broadform
Dwelling Basic Broadform Not
or or Perils*
(Real Perils Perils Applicable
All Risk All Risk (Limited)
property)
Coverage B
Other Broadform Open peril Open Peril
Basic Not Not
Structures Perils or or
Perils Applicable Applicable
(Real All Risk All Risk
property)
Coverage C Open Peril Broadform
Basic Broadform Broadform Broadform
Personal Or Perils*
Perils Perils Perils Perils*
Property All Risk

Note: Asterisk (*) next to Broadform perils means that the HO-4 and HO-6 can be endorsed with the Special
Personal Property endorsement to change the perils to Open Peril/All Risk. HO-8 is the least comprehensive of the
four forms used to insurance single family homes and HO-5 is the most comprehensive.

1. Use to Insure single family homes up to a 4 plex? HO - 8, 2, 3, 5

2. Difference between HO-2 and HO-4? HO-4 has no Cov A/Dwelling or Cov. B/Other Structures. No
real property

3. Same between HO-2, HO-3, HO-4 and HO-6? Coverage C Perils (Broad form)

4. Same between HO-3 and HO-5? Cov A/Dwelling and Cov.B/Other Structures perils. Real property
perils

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5. Difference between HO-3 and HO-5? Cov. C/Personal Property perils

6. HO-2, HO-4, HO-6 (and DP-2) are what form? Broad form (Even numbers, are Broadform - except
HO-8))

7. DP-3, HO-3 and HO-5 (except DP-1) are what form? Open Peril/All-risk. (Odd numbers, except DP-
1 are Open/all risk)

8. What form covers personal property broad form perils and no real property coverage? HO-4

9. Which form does not require the premise be owner-occupied? HO-4

10. Which form covers condominiums? HO-6

HO-3 - Coverage C - Personal Property are Broadform Perils

(Perils 10 - 15 are not covered on HO-8/Basic)
Broad Form Perils (16 Perils) Standard Exclusions on
HO-2, HO-4, HO-6 All HO forms
HO-3 Coverage C Perils
1. Fire or Lightning Ordinance or law
2. Windstorm or Hail Earth Movement subidence
3. Aircraft Water Damage (including flood)
4. Riot or Civil Commotion Power Failure
5. Vehicles Neglect
6. Explosion War
7. Smoke Nuclear Hazard
8. Vandalism or Malicious Mischief Intentional Loss
9. Theft Government Action
10. Falling Objects
11. Weight of Ice, Snow, or Sleet
12. Accidental Discharge of Water or Steam
13. Sudden and Accidental Tearing Apart, etc
14. Freezing
15. Sudden/Damage Artificial Electrical
Currents
16. Volcanic Eruption

Section I - Property
• HO – Coverage A includes paint to be used on the interior. Construction materials on
premises are insured under Coverage A. Also settles built-in appliances ACV
• HO policies exclude damage by domestic animals owned or kept by an insured
• HO-3 would cover damage to property insured under Cov A or B done by a deer, but not
damage to personal property (Cov C). HO-5 would cover all the damage
• All HO Policies settle Coverage C personal property ACV.
• Coverage D - Loss of Use/Additional Living Expense includes Fair Rental Value
• Jewelry, furs, watches, silverware and guns have a sublimit only for the peril of theft. If
$20,000 of gold jewelry melted in a hotel fire in Europe there would be no limitation.
• Bank notes are covered as money. Passports are covered under securities both are subject
to sublimits.
• Additional Coverages on current test:
o Trees, shrubs, and plants is an additional coverage on HO
o Reasonable expenses to do necessary repairs to prevent further damage
o HO policies provide 10% ordinance or law as an additional coverage
o Removal – aka as preservation of property or removal from endangerment provides coverage

Copyright © PreLicenseTraining.com 60
 for any cause which the test will state as All Perils.
o Landlord furnishings – covered up to $2,500. Excludes the peril of theft.
o Grave Markers – up to $5000

Exclusions:
Persons excluded - Non-resident spouses, students away at college after age 24, grandparents in
nursing facilities, and property of roomers or boarders.
Earth movement is excluded – Damage from ensuing fire, explosion, or glass breakage is covered.
Earth movement includes subsidence, landslide, mudslides, cracking, settling are also considered earth
movement. Sinkhole Collapse is NOT earth movement and is a commercial peril only.
Farms
Animals - excluded as property however covered under liability
Hovercraft
Water damage exclusion – excludes flood, surface water, water below surface, sewer backup and
sump pumps. Does not exclude plumbing leakage!
Ordinance or law exclusion – creates a gap because it does not cover the insured expense for
construction code upgrades that are now required. Even if the home burns to the ground, the insured is
still responsible for the cost of the code upgrades required.

California Residential Property Disclosure – is not part of the policy. Only contains general
description of coverage used for dwellings and indicates what description is being used in the insured’s
policy.

Duties
Insured’s duties do not require submitting to an examination under oath, unless it is requested. It does
require the insured make reasonable repairs to protect from further damage

SECTION II - LIABILITY
Aka PERSONAL LIABILITY = COMPREHENSIVE PERSONAL LIABILITY = CPL

Section II = Cov. E - Personal Liability and Cov. F - Medical Payments to Others

• Is identical on all forms.
• Covers host liquor
• Covers premise and personal activities both on and off premises (worldwide). Example hitting
someone with a golf ball.
• Covers the following vehicles: golf carts on the golf course, vehicles in dead storage, non-
registered vehicles owned by the insured on their property, non-registered vehicles not owned by
the insured anywhere in the covered territory, however they are all excluded as property
• Motorized vehicles used to assist the handicap, and motorized equipment used to service the
premise and gardening are covered under Section I (property) and Section II (liability)
• Note: Section II excludes liability for business, professional, auto for rental property.
Excludes liability for jetski’s, motorcycles, and intentional acts,
and those covered by worker’s compensation.

Endorsements:
Mobilehome – Amends definition of home to include mobilehome. Must be at
least 10 x 40 ft
Inflation Guard - prevents underinsurance in uncertain economic times.
Watercraft – Extends Cov. E (liability) and Cov F (medical payments) to
watercraft schedule/listed on the declaration page (up to 50 hp or sailboat 30 ft). Excludes watercraft
racing however covers sailboat racing. Also excludes watercraft rented to others or used to carry people

Copyright © PreLicenseTraining.com 61
or property for a fee.
Personal Injury – HO require this endorsement to provide coverage for malicious prosecution, false
arrest, libel, slander, wrongful eviction or entry, invasion of privacy, etc.
Additional Residence Rented to Others – extends liability only to rental property

*Both DP and HO provide worldwide coverage. Both allow incidental business occupancies of the
service type such as beauty parlors, photography, tutoring, private school, accounting, insurance. No
more than 2 people working. No retail sales.

Major Coverage Differences between DPs and HOs

Areas of Differences Dwelling Policies (DP) Homeowner Policies (HO)

Structure of Policy Monoline- contains property Package – contains both property
coverage only. Liability and and liability/medical payments
medical payments requires
endorsement
Occupancy Either – tenant or owner-occupied Must be owner-occupied
Flexibility All units do not have to be for All units must be for used for
residential purposes only residential purposes only
Insuring Agreements (Coverages) All are optional All are automatic
Personal Property – Coverage C Optional – The insured sets the Included – Automatically 50% of
limit amount Coverage A
Personal Property – Coverage C 10% of Coverage C worldwide 100% of Coverage C worldwide
worldwide coverage (off premises) Policy limit applies both on and off
premise
Personal Property – Coverage C Theft of personal property must be Theft of personal property included
theft coverage endorsed in all HO policies.
Additional Living Expense and Fair Coverage D-Fair Rental = 10% of Coverage D includes both on
Rental Value A Coverage E-Additional Living Homeowner 1991 Edition = 20% of
Expense = 10% of A A. HO-2000 Edition = 30% of A

Insurance to Value - If an insured has an HO -3 the minimum percentage amount the insured must
carry to ensure that they maintain replacement cost coverage for a partial loss to either the dwelling or
other structures is 80%. Insurance to value is also called coinsurance which only applies to partial
losses. By maintaining the proper amount of insurance the insured will receive 100% (full amount) of the
partial loss, subject to policy limits.

Computing the loss settlement: The formula that is applied in the event of a partial loss is as follows:
• Step1 - Multiple the “value at the time of loss” by 80% - If it equals or is greater than the policy
limit then stop and pay the full amount of the partial loss. If it is less then go to Step 2.

• Step 2 - Insert information into formula to determine what percentage the insurer will pay.

Carried/Had = Policy limit (Had)

Required/Should Have = Value of the property at the time of loss times coinsurance % (80%)

AMOUNT OF INSURANCE CARRIED AMOUNT AMOUNT

----------------------------------------------------- x OF (Minus deductible ) = INSURER
AMOUNT OF INSURANCE REQUIRED LOSS PAYS

Copyright © PreLicenseTraining.com 62
Dwelling and Homeowner
Pause the Video and Answer the following. Indicate what words were key to the
question.
excluded
1. Flood, power failure and earth movement are ________________ on DP and HO’s.

2. Fire department service charge, reasonable repairs, debris removal are considered what on an HO
policy? __________________________________________
additional covrages

coverage D
3. In an HO coverage for fair rental value is included in:______________________________

4. HO medical payments coverage F does not apply to:_______________, _____________, and

jet-sky motorcycle
________________________.
hitting someone in anger

5. Landslide, mine subsidence and earth tremors caused by a volcanic eruption are considered:
___________________ ______________________.
earth movement

6. This peril is not covered by personal lines and is also NOT considered earth movement:
_____________________
sink hole collapse _____________________.

7. Difference between DP2 and DP3 are perils insured under Coverage ___________________.
E&F

8. HO watercraft endorsement extends coverage for listed/schedule watercraft for:

___________________________________ and _______________________________.

9. Ordinance and law affects a claim by excluding the part of a loss that results from enforcement of
________________ordinance
building or loss (Construction codes, building upgrades, and zoning).

10. Money, bank notes, passports and watercraft are covered personal property on an HO subject to
policy: ______________________.
sublimit
hover craft
11. What type of craft is NOT covered by an HO policy? _______________________________

12. Endorsement designed to prevent underinsurance caused by economic conditions:

________________________
inflation guard __________________________.
coverage E personal and coverage F medical payments
13. Section II of an HO provides what two major coverages __________ ___________ and
____________ ____________.

14. Section II of HO covers host liquor. T/F

15. Personal injury endorsement covers malicious prosecution. T/F

16. Power failure, ordinance or law and government action are considered what under Coverage C of a
exclusion
HO policy? ___________________________________________________

17. Volcanic eruption is a covered peril under Coverage C of an HO policy. T/F

18. To provide open peril coverage for items listed on the schedule would be the purpose of a
_________________ ______________ _________________endorsement.
scheduled personal property

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19. Recovery of personal property on an HO policy is subject to ACV, policy limits or sublimits, and
insured’s interest in the policy. T/F

20. What insuring agreements are provided in all DP policies? ___________________________.

DP 123 choosing coverage abcd

21. What insuring agreement is NOT provided in all DP policies and must be endorsed in a DP-1/Basic?
___________________________________________________
coverage E additional living expensase

22. What perils are included in a standard fire policy? _________________________________

fire light removal

23. Subsidence is excluded under: ____________ ____________________

24. California Standard Fire policy has 158 lines versus 165 lines and is standardized by law. T/F
DP3
25. Which of the dwelling forms provides the broadest coverage? ______________________

26. Under the dwelling forms, property covered away from premises is insured for?
_______________________
10%
DP1 *basic
27. Damage by burglars is excluded from what dwelling form? __________________________

28. A reason the Insured would prefer a dwelling policy over homeowners is broader coverage. T/F
HO 4
29. The homeowner’s form normally referred to as the renters or tenants form is? ___________

30. Which forms would be used to insure a single family detached home or private residence?
_________________________________________________________________________
HO8-basic HO2-broad HO3-special HO5-comprehensive form

condos
31. H0-6 is used to insure what? ______________

32. The scheduled personal property endorsement is designed to provide all risk coverage for jewelry,
furs, and other valuables for a specified amount. T/F

33. Under Coverage C of a HO policy, lower sublimits apply to jewelry, watches, and furs regardless of
the cause of loss. T/F

34. The gap caused by ordinance or law exclusion in an HO policy would cover if there was an ordinance
requiring dogs to be on a leash and the insured’s dog bites someone while walking the dog. T/F.

35. Section II covers both _________________

premises and __________________
personal activities anywhere in the
world.

36. The two coverages that are the same in H0-2 and H0-3 are personal liability and medical payments.
T/F

37. Homeowner’s policies offer broader coverage and ______________

higher premium than dwelling policies.

38. Coverage C of a Homeowners policy does not apply to jewelry, watches, or furs. T/F

39. Which endorsement would cover silverware for open perils without limitation for theft?
________________ ________________
schedule personal ________________.
property endorsement

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40. Animals, vehicles, and credit cards are considered what under Section I of HO?
_______________________________
exclusions

41. Which of the following are subject to a sublimit under the HO: ceramics, art, guns, or moveable
property? (Circle correct answer) theft only

42. Loss of Use is also known as ___________________ ____________________ ________________.

additional living expanses

43. The standard H0-3 policy will pay for damage to furniture or property removed that occurs as a result
of removal from premises due to a house fire. T/F

44. Section II includes bodily injury to the insured’s resident family. T/F

45. A named insured and a non-resident spouse are covered under a HO. T/F

46. Power failure is an insured peril under the H0-3. T/F

47. Section II will provide a defense even if the claim is groundless, false, or fraudulent. T/F

48. Section II of HO is also known as CPL. T/F compression P liablilty

49. Section II of HO will cover personal injury liability from false arrest, libel, malicious prosecution, or
slander. T/F

50. The additional residence rented to others endorsement provides coverage when an insured is
concerned that a renter might hold him liable for injuries that occur in connection with the rental unit.
T/F

51. Section II of HO would cover a neighbor slipping on the ice and spraining their ankle at the house
your insured rents to his sister. T/F

52. Which of the following would be considered an insured under the HO policies: A grandparent living in
an adult care facility or a 25 year old son away at college?
____________________________________________
neither, only up to 24 if in collage

53. Which of the following does DP2 have compared to DP1 – debris removal, personal liability,
improvements and betterments, additional living expenses, or are the same.

54. Home is damaged minutes after an earthquake, first by fire, and then by bursting of fuel pipes
causing an explosion. What if anything will the HO policy pay?
the damage bue the fire and explosion only
___________________________________________________________________________
$25000
55. Landlord furnishings are covered for what amount? __________________________

56. Landlord furnishings exclude which peril?_______________

theft

57. Which peril is included in DP2 and not available in DP1? Explosion, falling objects volcanic eruption,
sinkhole collapse? (Circle correct answer)

58. Which type of property is excluded under Section I but covered under Section II?
_________________________________________________
pets

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59. Co-insurance clause makes carrying insurance of a percentage of the dwelling advisable to avoid
possible penalty. T/F

60. Water damage exclusion in the cause of loss special form applies to all of the following except: tidal
waves, flood, sewer backup, plumbing leakage. (Circle correct answer)

61. Which if any of the DP policies exclude collapse? _______________________________

basics DP1

62. Which of the following. if any, would be considered an additional coverage provided by an HO-3:
Money and securities, trees, shrubs and plants, defective planning, or government action. (Circle the
correct answer)

63. Which of the following collapse losses would be covered under an HO-3? Defective workmanship
completed 2 years ago, known insect damage, weight of contents, or earth movement? (Circle
correct answer)

64. Appliances built in are part of the dwelling therefore the Broad and Special forms settle them
replacement cost. T/F

65. Paint that is to be applied to the interior is considered personal property and insured under which
dwelling
Coverage and an HO3? _______________________________

66. Though ordinance and law is excluded, under additional coverage how much coverage is provided in
the HO policies? ____________________________________
10%

67. HO has replacement cost coverage on the insured structures. The cost of replacement on the
dwelling is $100,000 and the other structure (garage) is $20,000. To be certain of replacement cost
coverage on a partial loss to either structure would require the insured carry a minimum of how much
coverage? _______________________________
80%, 16000 on garage

68. Limit of liability on a structure is $75,000, and the structure is worth $125,000. How much would be
paid on a $50,000 loss with an 80% co-insurance requirement? _______________
75%

69. Under Section II a car in dead storage would be covered. T/F

70. Under Section II a golf cart would have coverage when: _____________________________

71. Under Section II non-registered vehicles on your property would be covered. T/F

72. Water damage to insured’s personal property resulting from rain entering the home through a window
left open would be covered. T/F

73. Grave markers are covered for what amount under Section I?
$5,000

Copyright © PreLicenseTraining.com 66
Copyright © PreLicenseTraining.com 67
 LIMITED AND PERSONAL
LINES AUTO
The purpose of the Commercial Section is to provide an overview of facts. The facts are simply
to reinforce concepts. Please refer to your class material for more detailed information. This
information is strictly for review and only emphasizes areas that in the past and currently have
been consistently tested. Questions can appear on the test from any material published in your
classroom manual.

This review stresses key wording and phrasing that is associated with the concepts that are
tested and not a substitute for the actual class manual.

The retention questions are to familiarize the student with test wording. In the video the
presenter will explain how many of these questions may appear and additional questions that
could be asked.

Your course material will contain the information that is being reviewed.

LIMITED AND PERSONAL LINES AUTO

This is not in the EO however shows up on the test from time to time. California
repealed the law that required auto inspections for additional vehicles insuring for
Copyright © PreLicenseTraining.com 68
OTC and collision. Each Insurer determines if they want additional vehicles to be inspected.

Financial Responsibility means the proof of the ability to pay. Proof - insurance identification card,
bond, cash deposit, proof as a self-insurer, government vehicle.

• Owners of vehicles and drivers must be able to prove financial responsibility of 15/30/5 or
$35,000 - Property damage of $750 or more, any bodily injury, failure to pay previous judgment,
conviction of a serious violation or several minor. Regardless of fault. Not exchanging
information - $250 fine

Eligible Persons - individuals, married, and families. Vehicles registered an entity ineligible. Exception:
farm or ranch partnership or corporation is allowable.

Eligible Vehicles include:

• Cars, trucks, vans with gross vehicle weight of l0,000 pounds or less.
• Pickup and vans under 10,000 pounds and cannot be used to transport or deliver goods and
materials. EXCEPTION: pickups and vans used for farming/ranching or the insured is in the
business of installing, maintaining, or repairing furnishings or equipment and the deliver is
incidental (related) to their business (allowable).
• Temporary substitutes when insured’s vehicle is out of service due to breakdown, servicing,
destruction or repair.

Ineligible vehicles include:

• Vehicles rented to others, or used to carry people or property for a fee (livery conveyance)
o Livery conveyance for test purposes: is a vehicle that transports people for a fee.
o Share the expense carpool ARE covered
• No Commercial Vehicles - Hauling people or property for profit
• Vehicles available for “regular use” such as company or roommates car are ineligible -
Covered by using the “extended non-owner endorsement”.

Coverage territory is the US, including its territories (Virgin Islands) and possessions (Guam),
Puerto Rico and Canada. NO Coverage in Mexico.

Who is an insured depends the type of coverage. For test purposes: Who is an insured – “any
person”.
• Part A Liability - Named insured includes spouse if a resident of the same household & up to
90 days after leaving the household (ex. divorce).
• Both Part B-Medical Payments and Part C – Uninsured Motorist Bodily – insures the Named
insured and spouse if resident of the same household, family members in any auto and while
as pedestrians. (A pedestrian could mean riding your bike, skate boarding, etc). Other
persons (passengers) are covered only if occupying the covered auto. Test sometimes refers
to passengers as permissive occupants.

Covered vehicles (4 wheels)

• Those listed on the declaration page that are owned or leased (leased 6 months or more is
considered owned), newly acquired vehicles (replacement or additional on the day become
owner) any trailer (this will be a sailboat while being towed on your test), and temporary substitute
vehicles.
o The broadest coverage that applies to any covered vehicle the insured owns will be the
vehicle coverage that applies to a rental car and newly acquired vehicles or all the
coverages on the Dec Page.
 Newly acquired vehicles – whether additional or replacement are automatically insured for

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 the broadest coverage of any vehicle in the declaration. If physical damage already
applies to other covered vehicles the insured has 14 days to notify insurer. If no physical
damage applies to any vehicle and the insured has liability only then the insured has 4
days to notify the insurer. Damage to the new vehicle occurring before insured notifies
the insurer within the 4 days period is subject to a $500 deductible.
 If newly acquired vehicle is an additional vehicle, the insured must notify the insurer within
14 days of the vehicles acquisition to continue coverage on the vehicle. No such
notification is necessary for replacement vehicles except for physical damage coverage.

• Motorcycles are not covered because they have 2 wheels. RV because 6 wheels (CIC states
6 wheel are private passenger vehicles). ATV & Dune Buggies are not covered because they
are not registered. Golf Carts and Snowmobiles not covered. All can be covered by using
the “Miscellaneous Type Vehicle Endorsement or a separate policy. The Miscellaneous
Type Vehicle Endorsements offers Part A = Liability, Part B- Medical Payments, Part C -
Uninsured Motorist and Part D - Physical Damage. (True only for the test).

Good Driver Discount (Proposition 103) Minimum 20%

• Qualifications for Good Driver Discount: Driving a minimum of 3 years with 18 of the
preceding months in the US or Canada, not more than one violation point, no at-fault bodily
injury (even minor). Absence of prior insurance is not a factor. Minimum discount 20% (80%
of standard rate)

Principal Rating Factors required by Prop 103/Good Driver in decreasing order of importance are:
Safe driving record, annual miles driven, years of driving experience.

Allowable reasons for cancellation or nonrenewal (on the test): Nonpayment of premium,
fraud/material misrepresentation, substantial increase in hazard, suspension or revocation of driver’s
license.
• Notification of Cancellation: 10 days nonpayment, 20 days for allowable reasons
• Notification of Renewal – 20 days prior to expiration
• Notification of Nonrenewal – 30 days prior to expiration
• Cannot nonrenew an auto policy on the basis of age.

LIMITS OF LIABILITY
• Part A – Liability is the per accident limit shown on the declaration page regardless of the number
of insureds, claims made, covered vehicles, or number of vehicles involved in the accident. Part A
pays if the insured causes bodily injury or property damage to others (hitting a neighbors fence).
Pre-judgment interest is within policy limit and not in addition to it.
• Part B – Medical Payments is per person, per accident.
• Part C – Uninsured Motorist Bodily Injury is the per accident limit shown on the declaration
page regardless of the number of insureds, claims made, covered vehicles, or number of
vehicles involved in the accident. There is no stacking.

Part A - Liability
• Liability is Mandatory Coverage. Pays defense costs and damages if the insured is found to be
legally liable (negligent). Duty to defend ends when the policy limit is exhausted.
• Defense costs are part of Part A coverage and NOT a supplementary payment.
• Supplementary Payments – are paid in addition to policy limits and includes $250 for a
bail bond, premium on all other of bonds (no limitation), post-judgment interest, loss of
earnings up to $200 per day, expense incurred by the insured and insurer’s request, and all
defense costs.

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Out of State Coverage – If the insured is traveling in another state with a higher financial responsibility
limit than California their policy will amend to the higher limits without any additional premium. If the
insured is in a modified-no-fault state the policy will add PIP (personal injury protection) without any
additional premium.

Split limit – Has a sublimit per person for bodily injury and a different per accident limit for bodily injury
verses property damage. 15/30/5 = $15,000 total one person can collect for BI, $30,000 is the most the
insurer will pay for ALL BI in per accident, and $5000 is the most the insurer will pay for ALL PD
(property damage) per accident.

Single limit – Has one overall per accident limit that can be used for either bodily injury or property
damage, or any combination.
• Split limit of 15/30/5 and a single limit of $35,000. The total per accident limit is the same. The
split limit pays $30,000 per accident for bodily injury and $5000 per accident for property damage
which equals the single per accident limit of $35,000.
• You will be required to determine how much an insurer will pay. Ex: 3 people are injured in
an auto accident in the amounts of $15,000, $35,000, and $8,000. The policy limits are
25/50/10. Insurer would pay $48,000. Remember no one person can be paid more than
$25,000.

Part B – Medical Payments

• Pays expenses that occur within 3 years, pays without regard to fault, and will pay medical
expenses caused by a hit and run driver who cannot be identified.

Part C - Uninsured Motorist (UMBI)

Uninsured Motorist – Means the other person is responsible and not insured. Underinsured Motorist
– Means the responsible party has liability insurance but the claim is higher than the policy limits.
• It is mandatory that the insurer offer uninsured motorist, however the insured can reject this
coverage in writing.
• Minimum limits offered 15/30. No insurer required to offer more than 30/60

Uninsured Vehicles: Vehicles without policy or bond, vehicles with insurance but the insurer denies or
refuses to admit coverage, vehicles insured by an insurer that is insolvent, stolen vehicles, and hit and
run vehicles that can’t be identified (for bodily injury) if vehicle shows evidence of another vehicle and
reported within 24 hrs.
• Vehicles that can never be declared uninsured vehicles – Government vehicles, vehicles while
being used as a residence, vehicles available for regular use.

Uninsured Vehicles - Property Damage

• Uninsured Motorist Property Damage – Must be offered when insured does not purchase collision
coverage. Covers the insured’s vehicle for ACV up to maximum $3500. Does not cover hit and
run.
• Collision Deductible Waivers – Must be offered when the insured purchases collision to waive the
deductible if the vehicle is damaged by an identified uninsured motorist. Does not cover hit and
run.

Part D – Coverage for Damage to Your Auto – Physical Damage is made up of 2 coverages.
• Collision and ‘other than collision’. Sold separately. Separate deductibles
Both collision and “other than collision” (OTC) are considered property insurance because they
pay for damage to the INSURED’s vehicle. Pays regardless of fault.
• Collision is named peril coverage. Covers upset (rolling vehicle over) of the vehicle, impact

Copyright © PreLicenseTraining.com 71
 or colliding with another vehicle or object. Excludes colliding with an animal or bird as that is
considered to be covered under “other than collision”, (OTC).
• Other Than Collision (OTC) – Is open peril coverage much like inland marine it covers all
natural disasters. (Previously known as comprehensive)
 Examples of OTC coverages on the test are: vandalism, theft, fire, earthquake, flood, riot,
breakage of glass, missiles (objects flying through the air), contact with a bird or animal,
explosion, just to name a few.
 A brick that falls off the back of the truck and has NOT yet hit the ground is OTC.
 Colliding with a tree after the car has been stolen is OTC
 Theft of a car and car parts, including tires is OTC
 Upset of the vehicle during a riot is OTC
 Mounted radios are covered for theft under OTC as well as theft of a spare tire or hood
ornament.

o “Other Than Collision” (OTC) exclusions:

 Mechanical and Electrical Breakdown (engine failure)
 Road damage to tires (unless stolen). Hitting a pothole and bursting a tire is not covered
(its road damage to tires). Hitting a pothole and busting a rim is collision. Running over
something is a collision.
 Breaking the window because you locked your keys in your car is not covered, it is an
intentional act.
 Radar equipment
 Excludes sound reproducing equipment (CD player) if NOT permanently mounted
 Excludes equipment that transmits and reproduces such as a CB even if permanently
mount. This would require endorsement

IMPORTANT - Transportation Expense - applies to all collision or OTC losses covered by Part D. It is
included as part of the physical damage coverage and is not an endorsement. It provides $20 per day
up to $600 total. The money can be used to rent a vehicle, purchase a bus pass, or taxi fares. Begins
24 hours, unless vehicle is stolen which is 48 hours.

Part D - Settlement
• Part D – Basis for valuation of the auto - the limit of liability is the actual cash value of the
damaged or stolen property or the amount required to repair or replace it, whichever is less.
PAP can settle physical damage ACV or replacement cost of another car of like kind and quality.
• Part D – Payment of loss clause states it is the insurer’s option to repair, replace or pay the loss
in money. It is the insurer’s option to return recovered property or keep it.
• Both Collision and Other than Collision are considered property insurance because this coverage
covers the insured’s car.
• Duties after a loss – The duties currently showing up on the test are: notify the insurer or agent,
allow the insurer to appraise the damage before getting it repaired, notify the police when the loss
is due to theft or hit and run. You do not have to notify the police of any accident - just hit and run
accidents.

EXCLUSIONS THAT APPLY

Part A - Liability - property owned or being transported.
Part A and Part D - PAP does not provide coverage for any personal effects in the vehicle. For test
purposes loss to personal effects should be filed under the insured’s HO policy
Part A – Liability, Part B – Medical Payments, and Part C – Uninsured Motorist – All exclude using
the vehicle without reasonable belief of being entitled to do so (stolen), using the vehicle as a taxi,
worker’s compensation, commercial use, intentional, racing in a facility, vehicles fewer than 4 wheels,
and vehicles available for regular use. All exclude any owned vehicle that is not a covered vehicle.

Copyright © PreLicenseTraining.com 72
Some of these can be covered by endorsement.
• Family members taking the vehicle without permission are NOT excluded.

Part B – Medical Payments and Part C –Uninsured excludes using the vehicle as a residence.

ENDORSEMENTS
• Miscellaneous Vehicle Endorsement – Used to amend the definition of an auto so that
motorcycles, dune buggies, ATV, golf carts, and even 6 wheel motor homes can be insured
on a PAP. All coverages are available.
• RV endorsed on the PAP has coverage for cabanas, awnings and refrigeration, but not
luggage.
• California considers even 6 wheel RV’s to be personal autos.
• The Limited Mexico Endorsement – Is excess liability for trips 10 days or less, within 25 miles
of the border for accidents with another American driver while in Mexico.
• Towing and Labor – Covers labor at the site of disablement or towing to the nearest garage.
• Joint Ownership Endorsement – Used when two people own a vehicle who are not married.
• Auto Loan/Lease Coverage – Is Gap insurance. Pays the difference between the actual cash
value of the totaled vehicle and the loan balance, subject to restrictions.
• With endorsement tapes, discs, CD’s can be insured for $200 total.

ENDORSEMENTS THAT APPLY TO “NON-OWNED VEHICLES”

• Named nonowner Coverage – Used by an insured who does not own a vehicle, but rents,
borrows, or needs a SR-22 to prove financial responsibility. Can purchase liability, medical
payments, and uninsured motorist. Is excess over the vehicle policy. No physical damage.
• Extended Nonowned Coverage for Named Individual – Extends coverage for nonowned vehicles
such as a company car or any vehicle available for regular use. Can purchase liability and
medical payments coverage.

Named Operator Only policy – All coverages are available.

CAARP = California Automobile Assigned Risk Plan – high risk drivers unable to obtain coverage in
the normal/standard/voluntary market. Only issues the limits required for financial responsibility. For the
personal lines auto is 15/30/5. Coverage provided for personal and commercial risks. Producer must be
licensed and certified. All admitted insurers offering auto insurance must belong.

California Low Cost Program – Program for good drivers with low income. Minimum age is 19 years
old and driving for 3 years. Unmarried males 19-24 in household there is a surcharge. Policy limit is
10/20/3. Qualifications are the same as required for good driver as well as having an income less than
250% of property level. Vehicle cannot be worth more than $20,000. Provides liability coverage,
medical payments and uninsured motorist are optional coverages. No physical damage coverage.

ISO PERSONAL AUTO

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 Scheduled Policy - 8 Parts

Parts A, B, C

Pays to a
1. Declarations: Personalizes
3rd Party 2. Definitions: Auto's defined in various parts of the contract
3. Part A: Liability Coverage - may be written alone or along with
other coverage parts. Mandatory. Pays for bodily injury and property
damage done by the insured to others. Insured must be legally liable.
Pays per/each accident.
4. Part B: Medical Payments Coverage -Optional, may be written
Parts B and C only if policy includes liability coverage. Pays regardless of fault.
Pays medical expenses for hit and run. Pays per person, per
Both pay to accident.
Insured, Family 5. Part C: Uninsured Motorist Coverage - may be written only along
& Passenger. with liability: it must be offered-insured allowed to reject the coverage
Both follow in writing. Covers insured’s, family and passengers bodily injury if
I d & F il other party is uninsured and at fault (insured is legally entitled). Will
pay bodily injury for hit and runs. Pays per/each accident.
{Physical Damage}
6. Part D: Coverage for damage to you auto - may be written alone
or with liability coverage. Pay regardless of fault. 2 Optional
Coverages - Collision and “Other Than Collision (OTC). Covers the
insureds car. Both Collision and OTC claims include Transportation
Expenses
7. Part E: Duties after an accident or loss - describes insured's
duties in event of a loss.
Limited Lines and 8. Part F: General Provisions - establishes condition for the Personal
Auto (PAP) coverage.
Pause the video and answer
the following questions. Indicate key words in each question.

1. The 3 principal rating factors for personal auto

________________________________________________________________________________
safe driving record, anual miles driven, years of driving experience

2. Personal auto policy medical payments limits are:

_________________________________________
per-person per accident

per-accident or each accident

3. Personal auto liability and uninsured motorist limits are: ____________________________________

4. Personal auto covers earthquake under:

__________________________________________________
other than collision/OTC

liability
5. Extensive damage to a claimant’s automobile would be paid by the insured’s auto:_______________
ACV=actual cash value
6. Gap endorsement on a personal auto policy pays the difference between ______________ and the
_________.
value of outstanding loan

7. Uninsured motorist coverage includes a spouse making a claim for loss of consortium, insured child
who lives at home and is 26, the neighbor occupying the covered auto. T/F

8. Uninsured motorist coverages include a pedestrian struck by the covered auto. T/F

Copyright © PreLicenseTraining.com 74
9. A sailboat while being towed is considered covered under the PAP. T/F

10. Part B under the PAP limits per accident. T/F

11. Puerto Rico and Canada are part of the covered territory of a PAP. T/F

12. Vandalism is covered under physical damage. T/F

excess
13. Part A, B, C,D, follow a non owner driver into other vehicles and pays on an ________________
basis.

14. A PAP covers car rental expenses when the insured collides with a tree. T/F

15. A motorcycle is automatically covered under a personal auto as long as its registered. T/F
reason why a Motocycle is not cover is because it has two wheels
16. Insured has a $500 collision deductible and a $50 Other than Collision deductible. They ran over
some branches from a tree that was struck by lightning doing $2000 in damage. The PAP will pay?
_________________________________________________.
$1,500

17. A person who does not own a car would need to purchase a personal auto policy with which
endorsement if they occasionally rent or borrows a vehicle. T/F

18. The insurer has the right to settle for the lesser of the amount necessary to repair or replace the
property or ACV. T/F

19. Under Part B of a personal auto policy the medical payment coverage would apply to an insured’s
son that is struck by a car while riding his bike to school. T/F

20. John borrows a neighbors car which has liability only. John has liability and collision. John is
involved in an accident. John’s liability coverage is excess and his collision will pay on a temporary
basis. T/F

21. Which endorsement is needed to cover a car available for regular use?
__________________________
extended non owner endorsement

22. Other than collision will pay for damages to the vehicle when it collides with a tree after being stolen.
T/F
towing and labor
23. Name of the endorsement that covers labor at the site of disablement is: ______________________

24. A vehicle destroyed by fire would need which coverage in order to be covered?
__________________
OTC all natural disasters, EXEPT :freezing, wear and tear, damage to tired or rader

25. Radar detectors are covered under the PAP. T/F

26. The personal auto policy will pay for the cost of defense, premium on appeal bonds, reasonable
expenses incurred by the Insured and insurers request without counting against policy limits. T/F
supplementary pay
27. Claim related expenses are called _____________________ ________________________.

28. CAARP requires that agent/brokers be state licensed and at least 2 year experience. T/F
29. CAARP provides auto liability coverage for high risk drivers in personal lines only. T/F
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30. CAARP insurers risks for what limits? ______________________________________________.
minimum pero auto /15/30/5

proof of ability to pay______ ______________ to pay.

31. Financial responsibility is _________________

32. A personal auto policy with liability limits of 25/50/10 has to pay for injuries to three different people.
The injuries are in amounts of $10,000, 35000, and 18,000. The policy will pay a total of:
___________________________________________.
$50,000 no one person gets more than 25k

33. A personal auto policy with liability limits of 30/60/25 has to pay to three different people for bodily
injury. Their injuries amount to $ 5,000, 35000, 20,000. The policy will pay a total of:
________________________________________.
$55,000

34. A block falls off a truck and has yet to hit the ground causing damage to your auto. This would be
insured under what type of coverage on your PAP? ______________________________________
OTC

35. The insurer may either pay money for the loss or replace the damaged or stolen vehicle is known as
the Payment of Loss clause. T/F

36. Two types of vehicles not considered to be uninsured vehicles are government vehicles and vehicles
while being used as a ____________________________.
residence

upset
37. Collision is best described as an ___________________, or colliding with another object or vehicle.

38. Any items in the vehicle that are not permanently attached are not covered by the auto policy.
Claims for these items should be filed under which policy?
_______________________________________
homeowner

39. Rating factors for auto in decreasing order of importance are: safe driving record, annual miles
driven, and age of the insured. T/F

40. Additional vehicles require inspection before insuring for physical damage according to the Code. T/F

41. All natural disaster are covered by which physical damage coverage?
________________________________________________________________________________
OTC
_
42. OTC is considered to be auto coverage as well as _________________
property insurance since it pays to an
insured.

43. Once an auto policy has been in force for more than 60 days we cannot cancel for suspension of
driver’s license. T/F

44. The Mexico endorsement is __________________

excess liability, covering vehicles on trips of
____________
10 days or less and within ___________________
25 miles of the border.

45. The limit of liability applies per accident, regardless of the number of insureds, claims made, vehicles
involved or premiums shown in the Dec. or vehicles involved in the accident. T/F

46. An insured carrying minimum auto liability limits is involved in an accident in another state that has
higher minimum limits. The PAP will amend to the higher limits for an additional premium. T/F

47. Collision coverage would cover a vehicle that is upset during a riot. T/F
48. A private passenger auto owned by a partnership can be insured on a PAP. T/F
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49. A pickup or van with a gross vehicle weight of less than 9500 lbs. may be eligible for a personal auto
policy if it is used in farming and ranching. T/F

50. You have a personal auto with a $250 collision deductible and a $100 OTC deductible. You run a
stop sign and hit another car. Damage is $4000. How much would your insurer pay for the
damages to your vehicle? ____________________________________________.
1750

51. Only the named insured, resident relatives, and other entities responsible for the use of the auto are
considered insured’s on a PAP. T/F

52. Under the financial responsibility law requirements in California, what is the minimum limit for several
people injured in one accident? ___________________________________________.
30,000 per accident for all bodely injury

53. A hit and run vehicle whose owner or operator cannot be identified is not an uninsured vehicle. T/F
54. All-terrain (ATV) vehicles, motorcycles, golf carts, dune buggies, need what endorsement to be
insured under the personal auto policy?
_______________________________________________________________________________.

55. Under the liability portion of an unendorsed personal auto policy, what coverage is available if the
named insured is operating a company car? ___________________________________________
extended name non owner

56. Which one of these is not in addition to policy limits but out of policy limits: Pre-judgment interest,
post-judgment interest. (Circle the correct answer).

57. If an insured rents a vehicle while on vacation, what coverage is provided under the PAP?
________________________________________________________________________________

58. If an insured under a personal auto policy leaves a covered auto at an auto dealer for repairs, and
the auto is involved in an accident while being test driven by an employee of the dealer, how will the
the car will be excess
personal auto policy respond to liability claims? _________________________________________.

59. The personal auto coverage for damage to your own automobile states that the limit of liability is the
lesser of the amount necessary to repair or replace the property or the ___________________
ACV of the
stolen or damaged property.
vehicle
60. Livery conveyance is best described as a ____________ for hire that transports _____________
People *Taxi/limo

61. Under a personal auto policy, if a newly acquired auto is to replace the covered auto with liability
only, how long does the insured have to request collision coverage?
________________________________.
4 days

62. Having an at-fault accident involving minor bodily injury would disqualify an individual from receiving
a good driver discount. T/F

63. Auto policies like other property policies do not insure cars for flood or earthquake. T/F

64. It is an insurer’s option when making a loss settlement with the insured under a PAP whether or not
to return the stolen property to the address shown in the policy. T/F

65. What are the 3 main rating factors for Prop 103 (Good driver discount):
__________________________________________________________________________.
safe driving record, miles driven, years of experiance

Copyright © PreLicenseTraining.com 77
66. What coverage is available under the named non-owner coverage endorsement?
___________________________________________________________________________
part A-liability part B-medical part C-uninsured motors

67. Under an unendorsed personal auto policy, what coverage is available for personal effects?
_____________________________________________________.
none

68. An RV policy will cover cabanas, awnings, and refrigeration. T/F

69. Under an unendorsed personal auto policy, transportation expenses coverage applies to what type of
losses?
___________________________________________________________________________
all collision and all OTC losses

70. What coverages are available under the Misc Type Vehicle Endorsement?
________________________________________________________________________________
part a-part b-part c-part d
_
71. After a collision loss, the PAP requires the insured to submit a written notice of the loss to the
company. T/F

72. When does a personal auto policy require the insured to notify the police?
________________________________________________________________________________
hit and runs and theft
_
73. What is the minimum per accident limit for bodily injury on a low cost insurance program?
________________________________________
10 per person/20 all bodily injury /30

74. The limit of liability on a PAP is based on the number of vehicles insured, claims made, or vehicles
involved in the accident. T/F

75. Uninsured motorist would pay to replace a child’s car seat. T/F

76. If an insured is hurt by a hit and run driver their medical expenses would be covered under?
_______________________________________________.
part B medical payments

$200
77. With endorsement tapes, records, and discs would be covered for what amount? ______________.

78. If an insured trades in or acquires a new vehicle what coverages do they have?
________________________________________________________________________________.
all the coverages on deck page

79. If the vehicle being replaced have liability, OTC, and collision. The insured has how many days to
notify the insurer to maintain the OTC and collision coverage? _____________________________
14 days

80. Under the collision coverage of a personal auto policy the rental car expenses incurred by an insured
after a covered accident are not covered unless the policy has been endorsed for this expense. T/F

81. Physical damage losses covered by a personal auto policy can be settled by replacing the damaged
vehicle with a vehicle of like kind and quality. T/F

82. An auto insurer must provide 10 day notice for non-payment, 20 day notice for cancellation for
allowable causes, 20 day notice prior to the offer to renew, and 30 day notice for non-renewal. T/F

83. Auto provides coverage for damage due to earthquake under:

____________________________________________________________________.
OTC

Copyright © PreLicenseTraining.com 78
 Personal Inland Marine
Boats, Yachts
and
Government Programs
The purpose of the Commercial Section is to provide an overview of facts. The facts are simply
to reinforce concepts. Please refer to your class material for more detailed information. This
information is strictly for review and only emphasizes areas that in the past and currently have
been consistently tested. Questions can appear on the test from any material published in your
classroom manual.

This review stresses key wording and phrasing that is associated with the concepts that are
tested and not a substitute for the actual class manual.

The retention questions are to familiarize the student with test wording. In the video the
presenter will explain how many of these questions may appear and additional questions that
could be asked.

Your course material will contain the information that is being reviewed.

Copyright © PreLicenseTraining.com 79
 Personal Inland Marine, Boats, Yachts and Government Programs
Inland Marine General Concepts
Inland marine policies apply to both Personal Lines and Commercial Lines. The general information
stated below applies whether it is a personal or commercial risk. Commercial Inland Marine will be
discussed later in our studies.

Filed and Nonfiled Forms

Inland marine insurance can be categorized as either nonfiled or filed. Insurance companies are
responsible for making the filings, and many insurers use the services of ISO that make the filings on
their behalf.
Filed forms are regulated inland marine policies sometimes referred to on the test as “controlled”.
They usually apply to property that can be class-rated, Personal lines have many filed forms such as
those covering jewelry, furs, cameras, and fine arts to name a few. Commercial has only a few.

Non-filed forms are those that are not regulated in form or rates, generally because of their unique
exposures and uses. Test refers to them as uncontrolled. The insurer is relying heavily on the
underwriter’s judgment in assigning an appropriate rate, and in some cases writing the policy to
provide the coverage. A few non-filed forms in personal lines would be “wedding present floater” or
“live animal floater”. Majority of commercial inland marine forms are nonfiled.

INLAND MARINE POLICIES

Needed because:
• the care, custody and control exclusion found in liability policies
• the restrictions on insured locations and insured perils
Major classes of property insured under inland marine forms:
• Property with high value
• Property subject to mobility or transit
• Property subject to unique perils
• Property in the care, custody and control of others (bailee)

Inland Marine policies are generally written on an open-peril basis. All losses are covered except the
ones that are excluded. Broader than the open perils insured on a property policy and have less
exclusions than an open peril property policy.

Most property policies exclude catastrophic losses such as earthquake and flood. Flood and earthquake
are not excluded from most personal inland marine forms. The common exclusions found in marine
policies are few and listed below:
• War, Nuclear, Government Act or Civil Authority:
• Intentional Loss – A woman in anger throws her diamond wedding ring into a lake. Though
insured, the insurer will not pay.
• Wear & Tear, inherent vice, deterioration: Example, fabrics fade over time when exposed to
sunlight.
• Damage caused by insects and vermin
• Dishonest acts committed by the insured
• Mechanical or electrical breakdown

There are special valuation provisions for inland marine policies that state an amount of insurance for
each item, but the value of scheduled items is not determined until the time of loss. Then, when a loss
occurs, the insurer will pay one of the following amounts, whichever is the smallest:
• The item’s actual cash value at the time of loss
Copyright © PreLicenseTraining.com 80
 • The reasonable cost of repairing the item to its pre-loss condition
• The reasonable cost of replacing the item with another that is essentially the same.
• The amount of the insurance.

Transit Policy
Transit insurance, also called transportation insurance, covers owners of property against damage to
their property while in the course of transit by land, air or water carriers. Shippers use this coverage
because their property may be damaged in circumstances under which a carrier has no legal obligation
to pay.
• Two basic types of transit insurance are available.
 The trip transit is a policy that covers a particular shipment of goods specified in the policy.
This policy is purchased by those who ship occasionally. It can be used to cover a family’s
property being shipped because they are relocating to another state.
 The annual transit policy is known as an open policy in that it covers the shipments
continuously made and received by the insured throughout a one year policy period. Both
types of transit policies are non-filed. This means they can be written either named peril or
open peril.

Personal Inland Marine

Personal Articles Policy/Floater - The Personal Articles Floater is a separate inland marine policy used
to insure the same 9 classes of personal property that a Scheduled Personal Property endorsement (HO
04 61) does on a homeowner form. Both PAF and SPP cover earth movement and flood. Coverage is
worldwide except fine arts. Used to lift the limitation for theft on HO’s and to provide open perils.
• Stamp Collections - must be shipped by registered mail
• Fine Arts - not worldwide. Settles on a valued basis only. Requires appraisal.
• Cameras - Camera must be schedule. Can have blanket coverage (unscheduled) on incidental
items.
• Musical Instruments - Instrument schedule. Can have blank coverage (unscheduled) on
incidental items such as reeds, guitar strings, etc. Can endorse for remuneration (for hire).

Newly acquired property is covered for a specified period of time and applies to jewelry, furs, cameras,
musical instruments, and fine arts. This period of time is usually 30 days, except fine arts, which allows
90 days to report a new item. With the exception of fine arts, newly acquired items are insured for 25%
of policy limit, but not more than $10,000. Fine Art provides 25% of policy limit for newly acquired items,
not subject to sublimit.

Personal Effects Policy/Floater - used by tourists and students studying abroad. No coverage when
the insured was domicile (at home).

Personal Property Policy/Floater - Unscheduled. Insures 13 classes of property. Similar to Coverage

C however offering open perils with very few exclusions

WATERCRAFT

Boatowner Coverage
Boatowner policies are inland marine package policies used to insure recreational watercraft of various
types. Needed due to the limited coverage provided by DP and HO’s. These policies are
designed/structured like Homeowners in the fact that they consist of both property and liability
coverages.. Boatowner policies are designed for watercraft that can normally be towed by a vehicle and
do not have living quarters.

Coverage provided is similar to a personal auto policy, in that the policy offers physical

Copyright © PreLicenseTraining.com 81
damage coverage for the watercraft itself, watercraft liability, medical payments, and uninsured boater
coverage can be purchased
• Section I - provides open peril coverage for the hull, motors, equipment accessories used to
operate and maintain and trailer on an open peril basis. Called physical damage on the test.

• Section II - Provides watercraft liability, medical payments and uninsured boater.

 Liability includes operator, passenger, vicarious and flotilla liability. Flotilla liability refers to an
extended liability for a boatowner who operates the vessel of another. Liability assumed
under contract is excluded.
Medical payments - Pays regardless of fault and pays for: insured,
family and passengers (permissive occupants)

Note: Water skiers are not covered without endorsement

YACHT POLICY
Yacht policies are a specialized and non-standardized type of ocean marine insurance for the larger
classes of personal watercraft. Normally this type of watercraft cannot be towed by a vehicle, ranges
from 22 to 100 feet, and may have living quarters. Some smaller watercraft is insured on a yacht policy,
which is why it provides trailer coverage. (Expensive speed boats)

Since this is an ocean marine policy, even when used to insure a houseboat on a lake, it will use ocean
marine terms, such as hull coverage (physical damage) and protection and indemnity coverage (liability).
The yacht policy provides open peril coverage and most insurers insure yachts on an agreed value basis.

The following coverages are provided under the Yacht policy:

• Trailer – The value of the trailer used to transport the vessel to a particular body of water. There
is usually a separate limit on a Yacht policy because of the vessel’s increased value.
• Hull – Physical damage coverage for the vessel, motor, accessories, extra fuel tanks. Usually
provides coverage on an open peril basis. Can be insured for named perils.
• Protection and Indemnity (P&I) – Ocean marine liability is called protection and indemnity (P&I).
It covers bodily injury sustained by others, including persons on other watercraft involved in a
collision with the insured’s vessel, passenger liability, damage to other watercraft, wharves,
docks, and other property of others. Liability generally includes a provision that deals with the
removal or destruction of a wrecked or sunken watercraft. Protection and Indemnity also
includes provisions for:
 Medical payments - covers anyone who is injured while on, boarding or leaving the insured
yacht. Coverage also applies to the insured and family members. It is similar to auto medical
payments. No additional premium is charged for this coverage.
 Longshoreman and Harbor Workers – This is worker’s compensation for dock workers and
those who do repairs. It protects the insured against liability for injury to casual workers,
except the master and crew members of the vessel.
o P & I (Protection and Indemnity) can be endorsed to provide worker’s compensation
coverage for injured crew members. A large yacht owner might have a paid captain and
crew. Coverage for liability assessed under the Jones Act of 1920 can be added by
endorsement.

Boatowner and Yacht insurance policies are subject to warranties or promises relating to certain
conditions concerning the use of covered watercraft. These warranties include:

Copyright © PreLicenseTraining.com 82
 • Pleasure Use Only
• Lay-Up: The insured declares a period of time when the watercraft will not be in use. Requires
insurer to be notified if used during this time frame
• Navigational limits: Limits the use of the vessel to a described geographical area. Example: a
small boat might be limited to inland waterways and coastal use only

UMBRELLAS

Umbrellas and Excess Liability Policies

Major function of these policies: Personal umbrella and excess liability are types of insurance that
provides individuals and families with excess liability protection over and above their primary liability
policies. This protection applies once the policy limits of the underlying policy are exhausted. The
minimum limit is $1,000,000 and is usually increased in increments of $1,000,000. Commercial
umbrellas provide excess liability over business liability policies.

Difference between an Umbrella and an Excess Policy: An umbrella policy is not only excess liability
limits over the primary policies but an umbrella can also be broader than the underlying policies. This
means the Umbrella may provide coverage excluded or not included in the underlying policy. This is
what is meant when they say an umbrella broadens and deepens the underlying policies. An excess
policy does not provide broader coverage. It provides the same type of liability coverage as the
underlying policy and can be written as excess over one line/class of coverage. Commercial policies
can be written as umbrellas, excess, or replacement.

Required underlying policies for personal lines: The personal umbrella policy is designed to be
excess over the following underlying policies:
• Primarily: Homeowners Liability (Personal Liability) and Personal Auto (two coverage required)
• Watercraft, Motor home, or RV if the insured owns.
• Owners, Landlords and Tenants liability (Liability on Rentals)
Note: In commercial lines commercial general liability is required.

An umbrella can provide coverage that the underlying policy does not. The homeowner policy does not
cover personal injury. Assuming a claim for defamation is brought against the insured that has an HO-3
and an Umbrella policy. The HO-3 would not provide protection but the Umbrella would. In this situation
the umbrella would drop down and become the primary policy, less a self-insured retention. A self-
insured retention is a type of deductible that the insured is required to pay when the umbrella pays as a
primary policy and not as a excess. The self-insured retention becomes active only for losses not
covered by any underlying insurance.

Although ISO recently introduced the first standardized personal umbrella policy, most insurers are
still using their own policies. This is because these forms are based on the insurers own loss
experience, have been tested in court and the insurers know how they will be interpreted.

Excess Liability

Auto Personal

Copyright © PreLicenseTraining.com 83
ALL GOVERNMENT PROGRAMS
• Any broker/agent licensee can write
• Insurer must belong to the appropriate program as well as the California Insurance Guarantee
Association as a condition to be admitted.
• Except Earthquake - Insured can go directly to the Government Agency Office to obtain insurance
• All have 800 numbers
• Producers do not have binding authority
• No broker fees can be added to a government program.

Note: Insurance Policies that cover flood and earthquake - Auto under the physical damage coverage
known as OTC (other than collision/comprehensive) and marine policies

Earthquake Coverage - State

Earthquake coverage can be purchased as a separate policy or can be

endorsed onto a Homeowners policy. (We’ll discuss the advantages and
disadvantages of both in a moment.) With earthquake insurance, instead of
using dollar amounts to state a deductible, deductibles are stated as a
percentage of the Coverage A-C limits of insurance (15%, 25%).

Statements Concerning Earthquake Coverage

It is mandatory in the state of California that insurer’s offer earthquake insurance to their clients when
writing coverage for a residential property (DP and HO). Must be offered within 60 days of the effective
date of the policy. The insured has 30 days to accept or decline coverage. All earthquake shocks that
occur within a 72 hour period of time are considered to be the result of a single earthquake. In
commercial policies the time frame is 168 hours.

The California Earthquake Authority (CEA) was created to help make earthquake coverage available for
residential property owners. It is administered under the authority of the Insurance Commissioner. The
CEA has no authority to transact any other type of insurance business. Insured must go through the
provider who markets and services their DP or HO policy. The CEA policy, offers the following
provisions/coverages:
• $1,500 additional living expense;
• No coverage on pools, fences, driveways, landscaping, or other structures;
• Dwelling coverage with a deductible equal to 15% of the dwelling limit;
• $5,000 personal property coverage;
• Optional coverage: $10,000 building code upgrade.

If you could get it - Advantages of using the Earthquake endorsement are:

1) The deductible may be lower;
2) Earthquake is an extra covered peril for each separate coverage (dwelling, contents, etc.);
3) Extended Replacement Cost, Personal Property Replacement Cost, and Ordinance and Law
endorsements would apply to earthquake claims also.
Disadvantages include:
1) The deductible, typically 15% of the limit, applies to each limit of coverage separately;
2) The coverage usually costs more than a separate policy.

NATIONAL FLOOD INSURANCE PROGRAM (NFIP) - Federal

The National Flood Insurance Program is a federal program which enables property owners to purchase
flood insurance. The peril of flood is excluded from property policies because of its catastrophic result.
The National Flood Insurance Program (NFIP) provides insurance against the peril of flood for

Copyright © PreLicenseTraining.com 84
commercial and personal properties. It is a single peril policy
Eligibility to Sell – Any insurance company may be authorized to become a “Write Your Own” (WYO)
flood insurance provider with the NFIP. Through this arrangement, companies issue policies and settle
flood claims under their own names. The federal government administers rules, rates, and regulations
for the program and reinsures the losses.

There is a 30-day waiting period before coverage begins, and the full annual premium must be remitted
with the application. All broker-agents can write government programs.
 As stated in Section 207 of the Flood Insurance Reform Act of 2004, in order for any producer
to place flood insurance through the NFIP the three-hour training must be completed before
submitting the policy.

Types of properties eligible – Almost any building which is walled, roofed, principally above ground and
is fixed to a permanent site, is eligible for coverage by a flood policy. This includes residential, personal,
farm, or commercial property. A policy may cover a building, or its contents, or both. The property
must be located in an officially designated flood zone, or a participating community. A participating
community is one that is willing to adopt flood control measures and land use regulations as well as
paying fees to join the NFIP.

Flood policies exclude coverage for many of the same types of property that are excluded by other
property policies such as:
• Accounts, bills, currency, deeds, evidence of debt, money, securities, bullion, manuscripts
• Lawns, trees, shrubs, plants, growing crops, livestock
• Aircraft, motor vehicles
• Fences, retaining walls, outdoor swimming pools, bulkheads, wharves, piers, bridges, docks,
and other open structures on or over water
• Underground structures and equipment
• Newly constructed buildings which are in, on, or over water
• Structures which are primarily containers such as gas or liquid storage tanks
• Indirect losses such as additional living expense, business income, extra expense.

Property removed by the insured to protect it from a flood is covered for up to 45 days when removed
to another location. Personal property must be in an enclosed structure or fastened to the structure to
be covered. The flood policy does not include any indirect loss coverage. Deductibles apply separately
to buildings and contents.

Flood is defined as a temporary, partial, or complete inundation of normally dry land areas by:
• An overflow of inland or tidal waters
• An unusual and rapid accumulation or runoff of surface waters
• Mudslides or mudflow on the surface of normally dry land areas
• Collapse of land along the shore of a body of water, if the collapse results from erosion
caused by waves or currents which exceed normal cycles and overflow of shoreline
• Also covers reasonable expenses to protect the property from flood waters

NFIP Limits

Emergency program limits

Non-residential $100,000 building $100,000 contents
Residential structures $100,000 building $10,000 contents
Single-family residence $35,000 building $10,000 contents

Regular Program limits

Copyright © PreLicenseTraining.com 85
 (Once the community has been surveyed and mapped)
Non-residential $500,000 building $500,000 contents
Small business $500,000 building $500,000 contents
Residential $250,000 building $100,000 contents
Single-family residence $250,000 building $100,000 contents

CALFORNIA FAIR ACCESS TO INSURANCE REQUIREMENTS (FAIR) - State

Fair Plan provides stability, availability and maximum use of the property insurance market. It provides

basic property coverage to risks the insurance company would prefer not to compete for or write. By law,
any insurer, that wishes to buy riot reinsurance must participate in a HUD-approved FAIR PLAN. (HUD
means Housing and Urban Development). FAIR plans are state programs and more than half of the
states have implemented them.

Market Place
The FAIR plan (Fair Access to Insurance Requirements), an industry placement facility and a joint
reinsurance association, is designed to provide fire and extended coverage (EC) insurance to individuals
who cannot get coverage through regular channels (voluntary market) because of increased hazards.
Each admitted insurer writing property insurance in California is required to belong as a condition to
receive their Certificate of Authority.

Original Requirements
Originally the two areas most commonly taken care of through this plan are 1) brush hazard areas and 2)
inner-city hazard areas. Other phrases used on the test for inner city areas are: urban, geographical,
environmental and civil unrest. Environment means a hazardous condition beyond the control of the
property owner that might give rise to loss under the insurance contract, such as the condition of the
neighborhood. .

Application and Coverage

Any person with an insurable interest in real or tangible personal property who, after diligent effort, has
been unable to obtain basic property insurance through normal channels from an admitted insurer or a
licensed surplus line broker, is entitled, upon application to the FAIR plan, to an inspection of the
property by representatives of the inspection bureau. The inability to obtain insurance after diligent effort
is demonstrated by a signed general statement to this effect on a form prescribed by the association.
• If the premiums are returned to the FAIR Plan within 15 days of the quote, coverage is effective
on the date the quote was issued. If received after 15 days, then coverage is effective on the
date the premium was received. No Broker fees can be applied to any government sponsored
program directly or indirectly.
• "Basic property insurance" refers to insurance against direct loss to real or tangible property at a
permanent location in those urban areas chosen by the Commissioner. Perils insured against
are those under the Standard Fire Policy (SFP), as well as Extended Coverage endorsement
and Vandalism and Malicious Mischief. No farm or automobile risks are acceptable. Note:
These properties must also be offered the CEA earthquake policy. Maximum limit $1,500,000.

Personal Inland Marine/Boats/Yachts and Government Programs

Pause the video. Answer the following. Indicate the key words in each question.
hall insurance
1. Yacht policies provide coverage for boat under _______ __________ and liability under
_____________ ________ _________________.
protection and indemnity

Copyright © PreLicenseTraining.com 86
 physical damage
2. Boatowner policies provide coverage for the boat (hull) under __________ for boat and liability
___________
coverages are ________________ _____________________
water craft, uninsured boaters, ______________________.

3. What coverage does yacht policies provide that boatowner’s does not: _______________________
long Shorman and harbor workers
________________________________________________________________________________.

4. An inland marine policy would consider war, insects and vermin and mechanical or electrical
breakdown or failure as: ______________________________
this are going to be exclusions

inland marien
5. Damage caused by flood or earthquake would be covered by ________________________ and
__________________________________________________________.
OTC other than collision

6. Fair Plan ensures ____________,

stability _____________
availability and maximum use of the insurance market.
competition
7. Fair plan does NOT encourage:_______________________
participating communities
8. Flood insurance can only be written in _____________ __________________.

9. California residents are eligible to be insured by the Calif. Fair plan when they are unable to afford
the high premium charged by insurers in the standard/normal market or when their insurer becomes
insolvent. T/F

10. The personal articles floater used in a homeowners policy, also referred to as a scheduled personal
property endorsement, covers personal possessions such as jewelry, cameras and furs on all-risk
basis in dollar amounts specified by the insured. T/F

11. Both excess liability and excess physical damage coverage is provided by a personal umbrella
policy. T/F
Homeowners because of section1 and 2
12. Which type of policy is similar in design to a boatowners policy? _________________________

13. Coverage provided by a personal umbrella policy falls into the category of providing coverage for
property losses not covered by the underlying policy on an excess basis. T/F

14. All property owners in the state of California are eligible to purchase flood insurance through the
National Flood Insurance Program. T/F

15. Earthquake insurance must be offered on all residential properties. T/F

16. The California Earthquake Authority (CEA) policy covers personal property for $5000 and the
deductibles are based upon percentages. T/F

17. The standard umbrella policy coverage is worldwide. T/F

18. The California Fair Plan provides property insurance for properties that are located in urban,
geographical, civil unrest, and brush areas. T/F

19. The National Flood Insurance program will cover expenses that are deemed reasonable in order to
protect Insured property from flood water. T/F

20. The watercraft endorsement provides what type of coverage to the watercraft listed/schedule on the
Declaration page? _______________ and _____________________.
coverage E-persona Coverage F-medical

Copyright © PreLicenseTraining.com 87
 Oops 21 is skipped over.

21. The watercraft endorsement excludes watercraft racing however this exclusion does not apply to
sailboats. T/F This is true. Watercraft racing is excluded (engine) - not sailboat racing

22. The watercraft endorsement may cover which of the following: Rental of the watercraft to others,
using the watercraft for a business outing, or carrying property for a fee. (Circle the correct answer)
deductible
23. A self-insured retention under an umbrella policy is a ____________ applicable to losses excluded
by the underlying coverage and covered by the umbrella.

24. Liability coverage on a boatowner policy excludes which of the following: passenger liability,
contractual liability, flotilla liability, operations liability, none are excluded. (Circle the correct answer)

25. Which inland marine floater is most similar to the scheduled personal property endorsement on a
homeowner’s policy? ____________
personal auto______________
floater policy/floater.

26. Earth movement is excluded on an inland marine policy. T/F

27. Under a yacht policy, protection and indemnity provides coverage for liability if the insured vessel
strikes a marina and injures a dock worker. T/F

28. What coverages are typically provided in a boat owner’s policy? ___________________________
physical damage all the accessories of boat

29. The CA Fair Plan will insure a home with faulty wiring. T/F
anyone with broker lic
30. Who can write policies with the Fair Plan and flood policies? ______________________________

31. What common exclusion is found in liability policies that creates the need for inland marine
coverage?

____________________________________________________.
custody and control

32. The primary difference between an umbrella and excess liability policies is umbrellas provide excess
liability over _________________
several underlying policies. Excess liability may cover only _________
one
line.
protection and indemnity
33. Liability on a yacht policy is called: __________________ _____ _____________________

34. Hull coverage on a boat or yacht policy covers:

___________________________________________
body of boat and accessories
________________________________________________________________________________
commercial umbrella,
35. What type of policy did not have a standard form until recently? ____________ permissive occupancy
_________________

Oops 36 wasn’t answered clearly

36. Under a personal umbrella what underlying coverages must an insured typically maintain?
Answer: In Personal Lines the answer is auto and personal liability. In Commercial Lines the answer
is Commercial General Liability.

37. Umbrellas are excess liability over several primary insurances. T/F True

Copyright © PreLicenseTraining.com 88
38. What type of coverage is provided by an inland marine policy? ______________
open peril Also transit
coverage.

39. Personal Articles policy covering stamps exclude shipping stamps except by registered mail. T/F

LETS KEEP GOING!

Copyright © PreLicenseTraining.com 89
 COMMERCIAL
LINES
The purpose of the Commercial Section is to provide an overview of facts. The facts are simply
to reinforce concepts. Please refer to your class material for more detailed information. This
information is strictly for review and only emphasizes areas that in the past and currently have
been consistently tested. Questions can appear on the test from any material published in your
classroom manual.

This review stresses key wording and phrasing that is associated with the concepts that are
tested and not a substitute for the actual class manual.

The retention questions are to familiarize the student with test wording. In the video the
presenter will explain how many of these questions may appear and additional questions that
could be asked.

Your course material will contain the information that is being reviewed.

Copyright © PreLicenseTraining.com 90
Section 1 - Introduction/Overview

CPP - OVERVIEW
CP CP CP CP
Packaged for convenience, eliminates

redundancy, provides flexibility and

Dec Coverage Conditions Cause of
fewer gaps. However, coverages and

CGL CGL

Coverage

Dec Forms

Crime Crime Crime

Dec Coverage General

These are interlines forms

(Information not repeated)
Boiler Boiler &
Machinery
Machinery
Common Common
CPP + + Dec Coverage
Dec Conditions

Modular
Inland Inland Inland

Marine Marine Marine

Commercial Package Policy

(CPP)

Aka Commercial Lines

Program Auto Auto

Common Declaration plus

Dec Coverage
Common Conditions plus

Farm Farm

Dec Coverage

*Property & Liability each have their own Declaration Page

Copyright © PreLicenseTraining.com 91
• CPP policies are considered to be modular policies also known as commercial lines program
• Coverage Part = Coverage Module
• Commercial Package Policy (CPP) must contain a Common Declaration, Common Conditions, and
at least 2 Coverage Parts/Modules. Any two Coverage Parts
• The 7 Coverage parts on the test are: Commercial Property, Commercial General Liability,
Commercial Inland Marine, Commercial Crime, Commercial Auto, Boiler and Machinery and Farm.
Each can be written alone or part of a package. Each contains their own declaration page and
conditions form.
• Each of the above coverage parts/modules can be written as part of a package or monoline
(standalone).
• Truckers, umbrella and employer’s liability are usually not part of the iso package policy.
• Main purpose of a package policy is convenience (fewer policies).
• Packaging also eliminates redundancy (use of interlines forms), provides flexibility and fewer gaps
(because the same insurer is providing all the coverages). However whether coverage is in a
package or written monoline (by itself) what is covered and what is excluded remains the same.
• Worker’s Comp is not part of the Commercial Package Policy - CPP
• Know the six common conditions: Cancellation, Changes, Right to Examine, Inspection and
Surveys, Premiums, Transfer of Rights and Duties.
• Common conditions do not include policy period and perils insured against
• Changes can only be done by endorsement issued by the insurer and made part of the contract
• Examination of Books and Records condition allows insurer to examine the books anytime during
policy period and up to 3 years after. This is done to make sure the insurer has collected the
appropriate premium.
• Inspection and Survey’s condition the insurer has the right but not obligated to inspect the property
and make recommendations. This is done for insurability and rating only. It does not warrant the
place is safe or in compliance.
• Either the First Named Insured or insurer may cancel a CPP
• Only the First Named Insured can request changes, cancel, and are responsible for the premium.
• “Your” in policy language refers to those whose name appears on the declaration page.
• The Commercial Property Conditions – “insurance under two or more coverages”, “other insurance”,
and “rights of recovery” all support the principal of indemnity.

Section 1 - Introduction Overview of Commercial Package Policy

Without looking up - Answer the following and indicate key words. Then return to video for
answers.
84. In addition to a common declaration and at least 2 coverage parts a commercial modular
package policy must also include common policy ______________________.
general rules

85. The terms “you” and “your” in Commercial policies refers to ____________________
the named insured only.

86. Major advantages of a commercial lines package program over purchasing the coverage on a
monoline basis is ___________________________________.
fewer policies/ convenance

87. Another name for Commercial Package Policy is: Comercial Lines Program
88. Commercial Package Policies have fewer exclusions and broader coverage than writing
coverage as monoline. T/F

89. The 6 Common Conditions for a commercial package policy are:

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(The video will give details about each of the six conditions)
i. ________________________________________________________
cancelation
ii. ________________________________________________________
changes
iii. ________________________________________________________
examination of books and records
iv. ________________________________________________________
inspection and surveys
v. ________________________________________________________
premiums
vi. ________________________________________________________
transfer of rights and duties

90. Fewer policies to buy and maintain is one major advantage of purchasing a modular
________________________________________________.
commercial lines program

comen declaration
91. All commercial package policies must include a _________________
____________________ and ________________________
comen condition
____________________________.

92. Changes in the commercial policy can be done only by endorsement issued by the
______________
insurer or "us" and made part of the policy.

93. Who can cancel and commercial policy? either first name insured or the insurer

94. The insurer is not obligated to tell the insured about any hazardous conditions on their property.
T/F

95. Insured perils are listed under the common policy conditions of the commercial lines policy
program. T/F

96. The insurer has the right to audit or examine insured’s books __________________
anytime during the
policy period and up to ________________
3 years after expiration.

97. Employees are insureds by class on a CPP. T/F

98. Which insured has the right to cancel, request changes, and is responsible for the premium on
a CPP? the first named insured, "you" and "your"

99. Red Pepper and/or Toots Sweet DBA Hot Candy are insured by We Insure Anyone. Who can
cancel the policy? Red Pepper or We Insure Anyone

100. Changes can be done by agent request. T/F

101. What type of policy is known as a modular policy? CPP/commercial line program

102. Packaging commercial lines coverages provide broader coverage and fewer exclusions.
T/F

103. Policy period is a common condition. T/F

104. An advantage of the commercial lines program is convenience allowing property owners
to have all their coverages in one policy. T/F

105. “Your” in policy language refers to whom? named insured

106. How many Common Conditions are there? 6

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 107. The Common Dec and Common Conditions are interlines forms which means this
information will not be ________________________
repeated and applies to either the entire contract or
at least 2 Coverage Parts.

108. How many Coverage parts must be included to make a CPP? at least 2-any

109. If the insurer cancels the CPP how is premium refunded? prorata

110. Who is responsible for the premium payments? first named insured

111. Who is defined as “Named Insured” under the CPP? those names appearing on the dec page

112. CPP are packaged so insured gets a discount? no is convenience

property and
113. What two coverage parts must be included in order for the CPP to be discounted? liability

114. Each of the 7 Coverage Parts have their own _____________________

declaration page and their
own __________________________
conditions which applies only to that Coverage Part.

115. Commercial Shipping is one of the seven coverage parts? commercial inland marine

116. Commercial Dwelling is one of the seven coverage parts? False, commercial property

117. The purpose of the inspection and surveys condition is to determine insurability and

_________________________________.
insurabilidty and premium to be charged

118. The purpose of the examination of books and records condition is to ensure that the
insured’s business is solvent. T/F

119. Another purpose of inspections and surveys condition is to make sure the insured is in
compliance with safety regulations. T/F

120. modules
Coverage parts are also known as coverage ___________________.

Section 2 - Commercial Property

COMMERCIAL PROPERTY
COVERAGE PART
(Forms currently being tested

Building and Glass Business Leasehold

Coverage
Personal Builder’s Risk Extra Expense Income Interest
Form

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 BPP

Coverage A Coverage B Coverage C

Building Business Personal Property

Coverage A, B or C

EACH need a cause of loss form attached

Building and Personal Property Form (BPP)

Building And Personal Property

Coverage A - Building Coverage B Business Coverage C

Personal Property Property of Others
• The Building Personal Property (BPP) form is used by everyone in business to cover their property.
It consist of 3 categories of property. Coverage A covers the buildings, Coverage B covers the
business personal property, and Coverage C covers property of others.
• Coverage A Building also includes completed additions, outdoor fixtures (lamp post), any
permanently attached fixtures or equipment, and any equipment used to service the premises.
Excludes patios, piers, wharves and docks.
• Coverage B – Business Personal Property includes business personal property, improvement and
betterments and stock/inventory. Improvements and betterments are insured under business
personal property - Coverage B
• Coverage C – Property of Others. Includes employees property, but excludes theft of employees
property.

Property must be at the described premises or within 100 ft. Inventory more
than 100 ft. is excluded and would need a Commercial Inland Marine to be
covered. Business property off premises is insured up to $10,000.
Excludes: property in a vehicle - or in the possession of a salesperson.
Property Not Covered
$, records of $, animals, crops, land, lakes, ponds, automobiles, aircraft,
watercraft, licensed vehicles, contraband, business personal property when
airborne or waterborne

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 Coverage Extensions – Newly acquired building are insured up to $250,000,
business personal property up to $100,000. Property off premise is insured up to
$10,000, but excludes while in vehicles or in the possession of a sales person.
Outdoor property is insured for $1000 total for the perils FLARE (fire, lightning,
aircraft, riot, and explosion). Valuable Papers $2500. Personal Effects and Property
of Others $2500. Coverage extensions require an 80% coinsurance or a value
reporting symbol be on the declaration page in order to apply
• Coinsurance is most often found in Commercial property policies
• Coinsurance is used to encourage an insured to insure to value
• Coinsurance results in a better premium (reduced rate). The higher the coinsurance percentage an
insured is willing to accept the lower the premium. 80% is normal. When an insured meets the
coinsurance requirement they are entitled to 100% of a partial loss. Coinsurance only applies to a
partial loss and is subject to the policy limit.
• Mortgage holder gets 10 day notice for non-renewal and cancellation due to nonpayment of premium.
• Mortgage holder is provided protection in the property conditions.
• A mortgage holder may still be entitled to a claim payment even if the claim is denied due to the
actions of the insured.
• Vacancy has a different definition for the tenant than it does for the building owner. Vacancy for a
tenant is when there is insufficient business property to conduct business. Vacancy for the building
owner is when the building is less than 31% occupied, which means 70% unoccupied.
• After meeting the definition of vacancy for 60 days 5 perils are suspended. Glass, water, theft,
vandalism and sprinkler. These designated perils can be bought back (means waived) by purchasing
a Vacancy Permit Endorsement which will waive the exclusion for a permit period but not
policy period. Two perils can be excluded off the vacancy permit, they are vandalism and sprinkler.
• A Commercial building vacant for more than 60 days and damaged by fire the claim would be
reduced 15%. Another way to say this is that they will only pay 85% of the claim.

Cause of Loss Forms

• 4 Cause of Loss Forms: Basic, Broad, Special, and Earthquake with Volcanic Eruption.
• Cause of loss forms identify the perils insured against and the exclusions.
• The majority of exclusions for commercial property are found in the cause of loss forms.
• Windstorm is a covered peril on all 3 forms: Basic, Broad and Special.
• The peril of explosion excludes machinery and steam boiler explosion.
• The peril of riot/civil commotion includes looting.
• The peril of theft is covered only on the Special form.

Covered Causes Basic Broad Special

of Loss Form Form Form
Fire   
Lightning   
Explosion   
Windstorm or Hail   
Smoke   
Aircraft or Vehicles   
Riot or Civil Commotion   
Vandalism   
Sprinkler Leakage   
Sinkhole Collapse   
Volcanic Action   

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 Breakage of Glass**  
Falling Objects  
Weight of Snow, Ice  
Water Damage  
Theft/Unspecified Perils Not

Excluded

Builders Risk
Builders Risk – Form used to cover buildings under
construction. Covers building, materials within 100
feet, however does not cover the contractors tools.
Requires the building be insured for 100% of the
completed value, in order to avoid penalty. Cause of
loss form must be attached.
• Property under construction excludes the peril of theft and cannot be declared vacant.
• Covered is foundation, if not covered elsewhere temporary structures built or assembled on the site
(scaffolding); material and supplies within 100 ft. of premises used for construction, fixtures,
machinery and equipment used to service, not build.
• What perils and exclusions apply depends on the cause of loss form attached.
• Property under construction excludes the peril of theft and cannot be declared vacant.
• Unless otherwise in writing coverage ceases 60 days after occupied, put to its intended use, or
otherwise 90 days after completion.
Business Income and Extra Expense (Indirect Coverage)
There is no coverage under Business Income coverage form unless there is first
an insured direct loss.
Business Income can be purchased with or without Extra Expense.
Business income covers losses that occur at the premises designated on the dec page.
• Business Income covers the loss of income when operations are suspended due to damage to the
property by an insured peril. It covers loss of income, rents, tuition, etc. that could have been earned.
It starts 72 hours after the loss
• Business income is the pre-tax net profit or loss, continuing expenses, including payroll.
• Net income is revenue minus expenses
• The peril that triggers business income depends on the cause of loss form listed on the declaration
page.
• Business income and extra expense are indirect coverage forms in the commercial property
coverage part.
• Extra expense is an indirect coverage that prevents suspension of business operations by paying the
extra expenses needed to stay open.
• Extended Business Income will continue coverage up to 30 days after reopening.
• Extended Period of Indemnity will extend business income beyond the 30 days after reopening-up to
the number of days stated on the declaration page.
• Business Income from Dependent Properties protects the insured in the event that a business they
do not own or control is damaged by an insured peril and affects the insured’s ability to earn money.
• Extra expense can include expediting expenses. Expediting expenses are expenses such as
overtime, overnight shipping, etc. These expenses are to speed up repairs.

Section 2 - Commercial Property

Without looking up - Answer the following and indicate key words. Then return to video for
answers.

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1. Business income covers losses that occur at the premises designated on the declaration page. T/F
2. Under a building and personal property coverage form a building has been vacant for more than 60
consecutive days what effect will this have in a fire? 15% reduction only pay 85% loss

3. Under the commercial property policy the definition of building includes patios, outdoor fixtures,
permanently installed equipment, and personal property used to maintain the premise. T/F

4. Name the Commercial Property Cause of Loss form or forms that cover windstorm? basic/broad/special

5. Name the Commercial Property Cause of Loss form or forms that cover glass breakage? broad, special

6. To get protection as a mortgage holder, the mortgage holder must purchase an endorsement called
the “mortgage holder protection.” T/F

7. A tenant in a leased building who makes improvements that are not legally removable should
purchase coverage for __________________________
betterments or covrage B and __________________________
improvements to
insure their investment in these improvements.

8. “Business Income” (does/does not) include payroll?

9. The value reporting form modifies how business personal property is insured on the Building and
Personal Property Coverage form. T/F

10. After a building has been vacant for 60 days the insurer will suspend which coverages and reduce
the others by what %? reduced by 15%, suspended-glass, water, theft, vandalism, leakage, sprinkler
11. In the property coverage form, the policy covers “your personal property.” The word “your” refers to
______________________________
named insured(s).

12. Extended Period of Indemnity extends business income beyond 30 days after reopening. T/F

13. Value reporting form is used when stock fluctuates allowing the insured to pay premiums based on
values actually at risk. T/F

14. Form used to insure buildings under construction describes which form? Builders Risk

Oops - On the video I skip to #19 then come back to #15.

15. There is no coverage under the Business Income policy unless there is first an insured direct loss.
T/F

16. Under property not covered on the commercial property form aircraft and vehicles that are registered
are excluded however they can be insured as inventory. T/F

17. The vehicles insured in the name of the business can be insured as business personal property on
the property form. T/F

18. What perils are covered on the Builder’s Risk form? depend on the form attached

19. Commercial property policies cover money up to $500. T/F

20. Commercial property policies cover explosion of machinery and steam boilers. T/F

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21. Which of the following, if any, would be covered on a building and personal property (BPP) form:
(Underline correct answer) - patio, lamp post, piers, none, or all.

22. If the insured is not the building owner improvements and betterments would be covered under what
coverage on a BPP? Covrage D

23. Under coverage extensions property off premises would be covered at a trade fair, in a delivery truck
and in the possession of a salesperson for up to $10,000. T/F

24. The vacancy permits when added to the BPP waives only the designated periods during the policy
period? T/F

25. Under the business income coverage form extra expense is _______________.
excluded

26. Plate glass form is needed because the Broad & Special cause of loss forms limit glass breakage to
$100 per plate - $500 total for vandalism and unspecified perils. T/F

27. On the plate glass form glass that is insured is scheduled or unscheduled? schedauled

28. When the insured is not the property owner then vacancy is when there is insufficient business
property to conduct business. T/F

29. Inventory/stock more than 100 feet from premise is not covered. What type of coverage do you need
to cover this exposure? commercial inland marine

30. An example of a loss covered by business income is a loss of profits due to a ______________
suspension of
business operations because of a insured direct loss to the premiums.

31. If a building is vacant for 75 days what perils if any would be suspended? glass, vandalism, water, sprinkler

Answer to Question #32 is lengthy as I share other questions they may ask on value reporting.
Extra space to take notes.

32. Under the value reporting form if no reports have been filed the most the insurer will pay on a loss is:
75% pay,

less than 31% occupied or

33. If the property owner is insured on a BPP the property considered vacant when?
70% unoccupied
34. Ordinance and law would cover the additional costs necessary to make a restroom ADA complaint.
T/F

35. What is revenue minus expenses? net income

36. Which commercial property form contains most the exclusions that apply to a commercial property
policy? cause of loss form

37. What are the two perils that can be excepted (excluded) from the vacancy permit? vandalism and sprinkler
leakage
38. Which indirect coverage form is used to prevent suspension of the business after an insured direct
loss? extra expense

39. Which indirect coverage form is used when the business operations are suspended after an insured
direct loss to cover continuing operation expense and loss of profit? business income

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40. Which indirect loss coverage is available immediately? extra expanse

41. Which indirect loss must the insured has a 72 hour waiting period? business income

42. Which form is used to prevent over and under insurance? reported form

43. For property to be covered it must be located at the -________________ ________________ and
described premises
within _____________.
44 feet

44. An unendorsed commercial property coverage form with no optional coverages will settle buildings
_____________________.
ACB

45. A Commercial building vacant for more than 60 days and damaged by fire the claim would be
reduced 15%. T/F Another way to say this is that they will only pay 85% of the claim.

46. Business income covers net income including continuing expenses. T/F

Section 3 - Commercial General Liability CGL

Commercial General Liability (CGL) consists of two

Premises & coverage forms: Occurrence and Claims-made.
Operations
*The major difference between an occurrence form and a
Completed Product claims-made form is the coverage trigger. Coverage trigger
Operations Liability
is what activates coverage. In an occurrence policy it is the
Commercial policy that was in force when the occurrence happened. In a
General
Liability claims-made policy what triggers coverage is when was the
Contingent Contractual
claim filed.
Liability Liability *The retroactive date of a claims made form is the earliest
Coverages date that an occurrence can occur (happen) and still be
BI PD PI AI
Med Pay
covered under the current policy.

• Reporting Periods on a claims made CGL

o An unendorsed CGL claims made contains a Basic Extended Reporting Period (BERP) which
is activated when the policy ends. Under BERP (midi tail) the insured has up to 60 days after
the policy expires to report an incident that happened before the policy expires and still have it
covered. A claim arising from a reported occurrence within the next 5 years will be paid by
the policy.
o A claims made CGL can be endorsed with a Supplemental Extended Reporting Period
(SERP) to extending the reporting period indefinitely (unlimited duration).
o Loss discovered 75 days after expiration would require the supplement extended reporting
period endorsement to be covered.
• CGL extends coverage to the following loss exposures: premises & operations; product, completed
operations, contractual, and contingent.
• The exposure for the insured’s location and activities is known as premises & operations.
• CGL excludes pollution liability. If the insured’s storage tank leaks pollution and damages adjacent
property the insured would need a pollution liability policy, not CGL to pay for the damage.
• The CGL has 6 limits. Section III of the contract addresses the limits.
• CGL declaration shows limits for medical expense limit, premises “rented to you” limit, personal &
advertising limit, no pollution limit.
• The CGL has 2 aggregate limits: General aggregate, and product & completed operations
aggregate. All claims are subtracted from the General aggregate, except product & completed

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 operations claims.
• CGL Section I pertains to: Coverage A=Bodily Injury and Property Damage. Coverage B=Personal
& Advertising Injury. Coverage C=Medical Payments. Supplementary payments are provided for
Coverage A&B and paid in addition to policy limits. Duty to defend ends when policy limits have
been exhausted.
• Coverage C – Medical payments pays all expenses incurred within 1 year only, not 3 years.
• Personal injury would cover unauthorized release of confidential information.
• Personal injury is not the same as bodily injury. However, should a bodily injury occur during a false
arrest or wrongful eviction it would be included in the “offense” and covered as a personal injury.
• CGL defines an automobile has licensed for public roads and does not extend coverage to
automobiles. Street sweepers and snowplows are autos
• CGL defines mobile equipment as not licensed for public roads. CGL provides liability for mobile
equipment. Forklifts and earth movers are mobile equipment.
• CGL covers host liquor. The exclusion for liquor only applies if the insured is in the alcoholic
beverage business.
• CGL excludes injuries to employees. Employees injuries are covered under workers compensation
• CGL covers injuries to customers/patrons.
• CGL excludes liability for pollution, unless caused by an insured peril, or comes from a part of mobile
equipment designed to hold it in the event of an accident.
• CGL excludes care, custody, and/or control which creates the need for commercial inland marine.

Commercial Liability and Professional Liability

• A doctor would need a professional liability policy because the doctor’s CGL would exclude this
exposure.
• Professional Liability = Errors & Omissions (non-medical professionals) and Malpractice (medical
professionals).
• Most CGL’s exclude Professional liability.
• CGL covers bodily injury, property damage, personal injury. Professional liability losses do not fall
within these definitions.
• Professional liability – covers claims for failure to render or not render professional services.
(Mistakes due to negligence).
• Professional athletes are the least likely professionals to purchase Professional liability insurance.
• Insurance producers purchase Errors & Omissions (E&O). Covers claims brought by insureds and
insurers for errors (mistakes). Example: failure to recommend, add, delete, forward, etc. Does not
cover BI, PD, PI or losses where the producer violated the law.
• Professional liability is normally written on a claims-made form.
• Professional liability provides the cost of defense and pays any damages the professional is found to
be legally liable for, that are covered by the policy.
• Employment practices liability – covers claims such as sexual harassment, discrimination, wrongful
termination, etc.

Section 3 - Commercial General Liability (CGL)

Without looking up - Answer the following and indicate key words. Then return to video for
answers.

1. If the insured’s storage tank leaks pollution and damages adjacent property the insured would need a
pollution liability policy, not CGL to pay for the damage. pollution liability policy

2. The manufacturer of a board game is being sued because a child choked on a piece of the game.
The manufacturer would find coverage for the defense costs __________________.
under commercial general liability

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 bodily injury and property damage
3. Coverage A in a CGL provides coverage for ___________________ and
_______________________

4. A CGL policy has how many aggregates? 2, per year

5. An aggregate is the maximum amount the policy will pay per occurrence. T/F

6. The CGL would provide liability arising out of ownership of an aircraft. T/F

7. Personal injury under the CGL covers bodily injury resulting from false arrest or wrongful eviction.
T/F

8. Medical payments are provided under what coverage in a CGL? coverage C

9. A date indicated on the Dec page that an occurrence can occur and still be covered on a CGL
claims-made form would be referred to as the _________________________________.
retro active date

10. The exposure that arises out of location or business activities would be referred to as which
exposure? premises and operations

11. The CGL would cover injuries sustained to a customer in a customer’s home by an employee. T/F

12. The general aggregate includes the exposure for product and completed operations. T/F

13. Serving liquor at a business function or company picnic would require endorsing the policy for liquor
liability as liquor is excluded on a CGL. T/F

14. Personal injury is synonymous with bodily injury. T/F

15. What is included in Coverage B of a CGL? personal injury and advertising injury (business damange)

16. The mini tail is referred to as the earliest point that a claims-made CGL would respond to an
occurrence. T/F

17. The CGL would exclude losses from contributing to or causing intoxication of a person or serving a
minor by a bartender. T/F

18. The CGL provides liability for any bodily injury or property damage caused by the Insured’s use of
their company vehicle. T/F

19. A Doctor would need to purchase professional liability policy because his CGL does not include
coverage for malpractice. T/F

20. Who would have Product exposure? Manufacturer ,whole seller , retailers

21. Who would have a liability exposure known as Premises and Operations? everyone in business

22. CGL policies provide limited coverage for care, custody, and control. T/F

23. An unendorsed CGL for test purposes means it does not provide coverage for any
________________
auto exposure.

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 24. If the insured does not have a Commercial Auto what endorsement can be added to cover their
exposure of having employees drive their own cars on company business? employees, non owners,

25. CGL provides a 10,000 aggregate coverage for pollution. T/F

26. Section I is coverage, Section III concerns ____________________.

limits

27. It could be said that the Supplemental Extended Reporting Period (SERP) freezes the claims made
period so that it will respond like an occurrence policy. T/F

28. Purpose of CGL is to protect the insured from claims made by their ______________________.
customers or patrios

29. Products & completed operations is included in the general aggregate. T/F

30. Rent to you limit, medical expense, personal & advertising limit are all listed on the Dec page. T/F

31. If an insured discovers an occurrence after 75 days after the claims-made policy has expired what
must the insured have in order to be covered? endorsement, SERP
32. Your insured is being sued for an ad this is alleged to be misleading. Which policy would you find
coverage for losses that could result from this lawsuit? Commercial General Liability

33. Coverage A and/or B would cover advertising injury. T/F

34. Both the occurrence form and the claims made form have the same declaration, and basically the
same exclusions and coverages. The key difference between the two is the coverage
trigger
________________.

35. There are how many limits on the CGL declarations page? 6

36. Which section would you find policy limits? section III

37. In an unendorsed claims-made policy the insured has how many days to report a claim which
occurred during policy period? 60days

38. In an unendorsed claims made policy what begins when the policy ends? basic extended reporting period
Meti Meini
39. _________tail gives the insured 5 years to file a claim. _________ tail gives an extra 60 days to
report.
policy period
40. The coverage trigger in an occurrence policy is it had to happen during _________ ___________.

41. The coverage trigger in a claims-made policy is when the _______

claim is ___________.
filed

42. Cover for pollution caused by the insured’s bulldozer turning over and damaging the adjacent
property would be covered under: _____________________________
Pollution

Section 4 - Commercial Inland Marine and Commercial Auto

Commercial Inland Marine (example)

Commercial
Inland Marine Commercial Commercial Accounts Physiician
Coverage Inland Receivable & Surgeons
Inland Marine . Equipment
Part Declaration Marine Form Form
Condition
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• Commercial Inland Marine: Filed forms=controlled=open peril. Non-filed forms=uncontrolled and
unregulated=named peril or open peril.
• Commercial inland marine is needed because commercial property policies excludes coverage for
stock/inventory once it is more than 100 feet from the premise.
• Commercial Inland Marine (CIM) Coverage Part uses only filed forms and all are open peril.
• CIM Coverage Forms (13) forms that can be included in a CPP or written monoline.
• CIM Coverage forms do not cover commercial buildings and automobiles.
• A bill of lading limits a carrier’s liability on a shipment.
• Annual transit is a non-filed form. It is usually written open peril, can be written named peril.
• A Motor Truck Cargo form can be written to cover the carrier’s liability (Trucker’s Form), cover the
shipper (owner) – known as the shippers form, or for those who haul their own goods known as the
“owners form”.
• Bailee’s coverage form pays whether the insured is legally liable or not, as long as the damage was
done by an insured peril.
• Equipment dealers form covers new & used stock (equipment), customer’s equipment, but not motor
vehicles.
• Sign’s coverage form covers neon and mechanical signs, no billboards.
• Valuable Papers covers deeds, maps and abstracts.
• EDP - Electronic Data Processing policy insurers computer hardware and software on a non-filed
form. This form provides broader coverage that the commercial property form: as computers are
subject to different risks that just those perils covering property.

Commercial Inland Marine

Without looking up - Answer the following and indicate key words. Then return to video for
answers.

1. What type of equipment does a contractor equipment floater cover? hand tools to bulldozers

2. Transportation insurance, goods in transit, mobile in nature are all phrases that could be used for
property insured under a Marine policy. T/F

3. Inland Marine refers to property moving over land. T/F

4. Inland Marine policies normally provide which type of peril coverage? open

5. Inland Marine policies cover many of the natural disasters and other situations normally excluded
under the property policies. T/F

6. The liability policy exclusion for care, custody and control creates the need for Marine policies. T/F

7. Buildings and vehicles kept in a commercial parking lot would or would not be property insured under
a Marine policy? would NOT

8. Neon signs, jewelry, accounts receivable, and valuable papers are a few of the items that can be
insured under a Commercial Inland Marine policy. T/F

9. Professional photographers and musicians would use which marine form? commercial articles

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10. Inland marine policies would cover earth movement. T/F

Oops I forgot #11 on the video.

11. Inland marine policies exclude insects or vermin, wear and tear, but cover mechanical breakdown.
T/F False - also excludes mechanical and electrical breakdown.

12. Which inland marine form is used to cover maps, deeds, and abstracts? valuable papers

13. Bailees coverage is a nonfiled form and would be used by a dry cleaners so that their customers
property would be covered regardless of fault if damaged by an insured peril. T/F

14. Equipment dealers form of a CPP would cover new and old stock, customers stock, and vehicles that
are registered. T/F

15. A bill of lading limits the carrier’s liability on shipments. T/F

16. What form is used by the centers/hubs that ship and receive goods of others on a regular basis.
anual transit
17. Annual transit is a non-filed marine form that can be written open peril or named peril. For the test
you answer its is which? usually written=open peril, can be=name peril

18. What form is used to insure a single shipment? trip transit

Commercial Auto

• CGL and Commercial auto define an “automobile” as licensed for public roads. Both define “mobile
equipment” as not licensed for public roads. By using the same definitions they prevent overlaps in
coverage.

Truckers Form - covers truckers that haul goods for others subject to
special trucking industry regulations. Works like Business auto however
has a trailer interchange agreement which would extend physical damage
to a non-owned trailer when attached.

Business Auto - Used by most businesses. Includes private carriers

(those who ship their own goods on their own trucks. Motor carrier form is
used by those who haul people or property for a fee.

Garage Form - For those who sell, service or store automobiles. Garage
liability is a combination of CGL and Business Auto. Garage liability covers
work done on customers care but not physical damage. Garagekeepers
covers physical damage to customers car.

Symbols
• Vehicles insured are identified by Symbols located on the Declaration page.
• Symbol #1 - Any Auto

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• Symbol #4 – Owned autos other than private passenger (trucks)
• Symbol #7 – Specifically Described (only those listed). Note: The word seven starts with an “s” and
so does “specifically described”. No automatic coverage for newly acquired vehicles under Symbol
#7.
Employer’s non-ownership liability is covered by using Symbol’s 8 & 9.
• Symbol #8 is for vehicles rented, leased or borrowed. (Non-owned)
• Symbol #9 covers the employer when the employees drive their own cars while conducting company
business.
Physical Damage
• The 3 physical damage coverages are: Comprehensive (open peril), Specified causes (named
comprehensive perils only), and Collision. When insuring a vehicle you cannot use both
comprehensive and specified causes on the same vehicle.
Endorsements
• Drive Other Car is the endorsement needed for a Business Auto policy to extend coverage to a rental
car to the named insured while on a personal vacation.
• Individual Named Insured is the endorsement used so that family members of a sole proprietor can
drive cars registered to the company.
• Medical payments and Uninsured Motorists are endorsements in Commercial Auto.

Commercial Auto
Without looking up - Answer the following and indicate key words. Then return to video for
answers.

1. What are the 3 Commercial Auto Forms? business auto, truckers, garage forms
2. Commercial auto is sometimes referred to as Business Auto T/F
CGL Bussines auto
3. Garage liability combines ________________ and ______________ _____________ together and is
used to insure those who sell, service, or store automobiles.

4. Employer non ownership liability coverage would protect the employer for the exposure that is
created when employees drive their own cars on company business. ture

5. Vehicles insured are identified by a __________________

symbol found on the Dec page.

6. Under the physical damage coverage of a Business Auto the insured can purchase Comprehensive,
Specified Cause, and Towing & Labor together. T/F

7. Under the physical damage coverage of a Business auto the insured can purchase Comprehensive,
Collision, and Towing & Labor together. T/F

8. Under the physical damage coverage of a Business auto the insured can purchase Specified Cause,
Collision, and Property Damage liability together. T/F

9. Owned Autos Other Than Private Passenger are insured under Symbol ___________.
4

10. If your Insured owned a public parking lot and wanted to protect the cars in their possession they
would need to purchase which coverage? garage keepers

11. Which part of the Garage Policy covers physical damage to customers car? Garage Keepers

12. Which part of the Garage Policy covers work done on the customers car? Garage liability
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13. To avoid gaps or overlaps between these two policies the definition of an “automobile” and “mobile
equipment” used in each policy is the same. T/F

14. What endorsement would be needed so that a Business Auto policy would cover a car rented while
on vacation? drive another car, extended non owner

15. Symbol 7 is for vehicles __________________

specifically listed _____________

Section 5 - Commercial Crime, Equipment Breakdown (Boiler & Machinery), Farm,

Business Owner Policy (BOP), Bonds, and Worker’s Compensation

Crime
• Crime Coverage can be written monoline or as part of a CPP.
• Crime Coverage can be written to provide coverage for money, securities,
and property other than money and securities (tangible property).
• Crime Coverage is needed because commercial policies exclude money
and theft by an employee.
• For test purposes the only time an employer has coverage if an employee steals, is if they have
Employee Theft or Dishonesty coverage.
• Employee Dishonesty covers theft of money, securities, and property other than money and
securities.
• Employee Dishonesty does not cover inventory shortages, employee being robbed, or employee
losing the bank deposit. The employee must be guilty of a crime.
• Burglary must show visible signs of forcible entry or exit. After hours/insured not present.
• Robbery – threat, or feeling threatened. Taking of property through force. Insured is present.
• Theft – is any act of stealing.
• Property Other Than Money and Securities – means tangible business property.
• Messenger is an insured off premise with company property.
• Custodian is an insured on premise with company property.
• The phrase “theft, disappearance, and destruction” means loss to money.
• Inside the Premises-Theft of Money & Securities covers damage (interior/exterior) premise stealing of
money, damage to vault, and the money or securities taken.
• Outside the Premises coverage covers money and securities or other property when in the custody of
a messenger or armored care company for theft or attempted theft. Not the premises, must be off
the premises.
• Crime policies are written on a loss sustained form or a discovery form.
Policy Forms
• Loss sustain form the loss must occur during policy period and can be discovered up to 1 year after
the policy expires.
• The one year to discover a loss and still get it paid on a loss sustained form is called a discovery
period.
• Discovery form covers loss that is discovered during policy period and can happen anytime, even
prior to policy period.

Crime
Without looking up - Answer the following and indicate key words. Then return to video for
answers.

1. Crime Coverages are needed since commercial property policies do not provide coverage for
_______
money or _________________________
employee theft.

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2. The employee dishonesty coverage form would cover the robbery of an employee. T/F

3. The crime coverages include inventory shortages. T/F

Burgrely
4. __________________ is evidenced by visible signs of forcible entry or exit.

5. A custodian is the janitor under crime coverages. T/F

Oops I skipped question 6 - 11 on video

6. Any act of stealing would be covered under what definition? theft

7. The CEO taking the bank deposit to the bank would be considered a messenger. T/F

8. An employee losing a bank deposit would be covered under Employee Dishonesty T/F

9. Robbery is any act of stealing. T/F

10. Other than money & securities means what in Crime Coverages? Tangible business property

11. Which form would cover losses that occurred during policy period and 1 year later? Loss sustain Form

12. Which form would cover losses that are discovered during policy period but happened prior?
the discovery form
13. What is it called when losses can be found up to one year after the policy expires? discovery period

Answers: 6 - Theft 7 - True 8 - False (must be the criminal) 9 - False 10 - Tangible business property
11 - Loss Sustain Form

Boiler and Machinery aka Equipment/Mechanical Breakdown

Boiler and Machinery is now known as Equipment Breakdown policy.

This policy covers equipment that operates under internal pressure, mechanical
equipment, communication devices, air compressors but NOT tools, computer media,
excavation equipment or equipment manufactured by insured.
Boiler and Machinery is needed because commercial property policies exclude steam
boiler and pressurized machinery explosion.
• B&M (Equipment Breakdown) covers accidental (sudden) breakdown of machinery. Will not cover a
bad pump.
• Covers the insured’s building and property of others in the insured’s care, custody, and/or control that
the insured is legally liable for.
• Does not cover aircraft.
• Mechanical breakdown includes steam boiler explosion, mechanical failure caused by centrifugal
force, electric breakdown.
• Excludes inherent defect, leakage of a value, loss while testing equipment, breakdown of foundation.
• Settles replacement cost
• Expediting expenses $25,000

Boiler and Machinery aka Equipment/Mechanical Breakdown

Without looking up - Answer the following and indicate key words. Then return to video for
answers.
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1. Equipment breakdown policy would cover equipment under internal pressure, mechanical equipment,
communication devices and tools. T/F

2. Under an equipment breakdown policy computer media, excavation equipment and equipment
manufactured by the insured would be covered. T/F

3. Boiler and machinery coverage is need because commercial property policies exclude explosion of
steam boilers and machinery under pressure. T/F

4. Mechanical failure caused by centrifugal force would be covered on this form. T/F

5. Electrical breakdown would be covered under this form. T/F

6. Inherent defect would be covered under this form. T/F

7. An equipment breakdown policy would cover electronic equipment used in the transmission of
energy, equipment operating under a vacuum, and aircraft. T/F

Commercial Farm
Without looking up - Answer the following and indicate key words. Then return to video for
answers.

1. The Farm policy combines both __________________

personal lines and ______________________lines.
commercial

2. The Farm property part consists of coverages A – G. T/F

3. It is said that coverages A-D are like a homeowners and coverages E – G are like commercial
property. T/F

4. What 2 property coverages cover farm personal property? E (scheduled items, expenses) &F (incidental stuff )

5. What is the difference between the two?

6. Farmowner policy normally contains both _________________

liability and _________________
property coverages.

7. Each horse, mule, or cow, under one year of age is called? half head

8. Liability coverages are H – J. T/F

9. Which liability coverage covers both farming and personal activies exposure? coverage H, bodily injury

10. Coverage I covers which liability coverage? personal and advertasing injury
11. Coverage I includes both farming and personal activities exposures? false

12. The four coverage forms under the Commercial Farm coverage part
are:________________________ __________________________
property, local ag, and equipment, livestock, liability _______________________
__________________________.

13. Under the crop insurance what two programs are all risk? multi-peril, sold by private insurer ,FCIC

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 farm structures
14. What is included in coverage G?

15. Medical payments would be Coverage ______________________.

J within 3 years

16. When might a person have a need for mobile agricultural machinery and equipment? if they are actually a
crop farmer
17. Does the livestock form cover an animal that might get hit if it wondered onto the roadway?
Ture as long it doesn't belong to you
18. Crop Hail is a named peril policy. T/F

Business Owner Policy (BOP)

Businessowner Policy (BOP) is a pre-packaged policy similar in design to

homeowners, for small to medium size low risk businesses.
BOP’s contain both property and liability.
BOP’s offer simplified rating, (not reading) that benefits the insured and insurer.
BOP’s provide the convenience of one policy that meets most needs at a reduced
premium. It includes several coverages that might have been overlooked.
• Insurers do not individually underwrite BOP’s, the computer does.
• Professional liability is not a mandatory coverage on a BOP it is an optional coverage.
• Unique feature of a BOP is it provides replacement cost coverage without any coinsurance penalty.
• BOP’s property coverage is written either Standard (one peril more than the Basic Cause of Loss
form used in Commercial Property), or Special (same as Special Cause of Loss Form in Commercial
Property).
• The additional peril offered by the BOP standard form is $1000 for transit.
• BOP’s include several optional coverages to choice from as well as endorsements.
• Office buildings cannot be more than 6 stories, 100,000 sq ft total, and no one space more than
25,000 sq ft.
• Used to insure small apartment and condo’s.
• Types of businesses that can be insured are office, service, processing, retail, some wholesale.
• BOP includes Business Income and Extra Expense which would have to be purchased separately in
a CPP. In a BOP the coverage is for 12 months.
• BOP’s contains many of the same coverages and exclusions as the CPP policy does.

Business Owner Policy (BOP)

Without looking up - Answer the following and indicate key words. Then return to video for
answers.

1. A dwelling policy is to a homeowners what commercial property is to businessowners. T/F

2. The mandatory coverages of a business owners policy (BOP) include business income coverage,
extra expense coverage, property coverage and professional liability coverage. T/F

3. Business owner’s policy (BOP) allow the insured to have full control of which coverages are included,
is designed for large businesses, and covers only business property of the insured. T/F

4. A Business owner’s policy (BOP) differs from a CPP in that it settles _____________
replacement without any
requirement for _________________.
coinsurance

5. A BOP could be used to insure which of the following: Place of amusement, motorcycle shop,
restaurant, a three story dwelling unit.

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6. A BOP can be used to insure small apartment and residential condos. The maximum height and
number of units would are? 6 stories, 60 units total

7. Types of business that would be eligible for a BOP? Low risk, retail, processing, office,

8. Office building insured on a BOP must meet eligibility requirements which are? max 6 stories, 100thousaend
sq feet, no one space being
dec,condition,property, liability, 25k
9. To be a complete contract a BOP must consist of?additional build in, income, extra
expense
10. It is said that a BOP, Boatowner Policy, and Mobilehome policy are designed like which policy?
HomeOwnders
11. BOP’s automatically include Business Income and Extra Expense. T/F

12. BOP’s extend coverage to automobiles registered to the company. T/F

13. BOP policies contain simpler reading which lowers handling costs for the insurer. T/F

14. BOPs provide the convenience of one policy that meets most of the insureds needs at a reduced
premium cost. T/F

15. BOP’s have the benefit of additional coverages that might otherwise be overlooked. T/F

16. A BOP could be used to insure and apartment complex with 5000 sq feet of merchantile. T/F

Oops - Forgot this

17. Are BOP’s individually underwritten. T/F
Answer: Underwriting for BOP’s with most insurers is automated (computer does it) which lowers
handling cost. Your companies still individually underwrite.

18. BOP policies provide the convenience of one policy that meets most of the needs at a reduced
premium cost, have the benefit of addition coverage that might be overlooked and lowers cost do to
simplifying reading. T/F
Answer: False - simplified rating not reading

Bonds
Bonds – are three party contracts. The parties are:
Principal (obligor), obligee (customer), and the surety
(guarantor) = POS
Surety is the insurer
Performance Bond – Guarantees the obligation will be
fulfilled.
In a Surety Bond the Principal (contractor) purchases the
bond and it is written for the benefit of the obligee
(customer).

• Difference between bond and insurance: Bonds are 3 party contracts, surety should not sustain a loss, coverage period can
be indefinite (in force until physically canceled).
• Surety is liable (responsible for payment) to the obligee.
• Surety bonds written for length of the contract
• Surety Bond guarantees performance of the principle
• Contract that expresses one party’s promise to answer for another party’s failure to do something as promised is a surety
bond.
• In a Fidelity Bond the Obligee (employer) purchases the bond and it is written for the benefit of the Obligee, and the
Principal is the employee.

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• Fidelity Bonds are written on a continuous basis and require cancellation, do not expire.
• Insurance Brokers purchase license permit bonds.

Bonds
Without looking up - Answer the following and indicate key words. Then return to video for
answers.

1. Name the three parties to a bond. principle, surety, obligation

2. In a bond it is said the surety is expected to lose. T/F

3. A characteristic of a surety bond is that the obligee is liable to the surety for losses paid by the surety.
T/F

4. Surety bonds differ from an insurance policy is that the coverage is indefinite/continuous, there are 3
parties to the contract and the surety should not sustain any loss. T/F

5. A written contract that expresses one party’s promise to answer for another party’s failure to do
something as promised would be a ______________________________
surety bond

6. The party to surety bond whose performance the bond guarantees is the _________________
principle

7. What type of bond does an insurance broker purchase? lic and permit

8. In a surety bond the _______________

contractor customer
is the principle and the ______________ is the obligee.

9. In a fidelity bond the _____________

employee is the principal and the ________________
employer is the oblige

Worker’s Compensation

*California is a compulsory state for workers compensation.

*Workers compensation pays without regard to fault or negligence
of either the insured or insurer (absolute liability).
*Employers are required to provide statutory benefits
*Covers bodily injury in the course of employment and injuries or
occupational disease that arises out of employment. Means it
doesn’t have to happen on the job, it has to be work related.

• Purpose of w/c is to avoid ligation between employer and employee, lessen claimant (employees out
of pocket expense), provide an efficient way of compensation injured workers.
• Workers give up the right to sue the employer in exchange for guaranteed benefits. This is known as
“exclusive remedy”.
• Volunteers are exempt, however can be covered by endorsement.
• It is a misdemeanor to advise an employer to purchase aggregate excess (stop-loss) coverage
unless they are self-insured.
• In California workers compensation can be obtained through private insurance companies, the State
Fund, or self-insurance.
• California has a Competitive State Fund because it competes with private insurers for workers
compensation business.
• Monopolistic state fund is when worker’s comp can only purchase from the state program and not
private insurance companies.

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• California State Insurance Fund is a direct writer. Employers can go direct or purchase from agents
or brokers.
• California is a competitive state since workers compensation can be purchased from private carriers.
• A monopolistic state is where workers compensation cannot be purchased from private carriers only
the State Fund.
• The Statutory benefits include 6 components: Medical, temporary disability, permanent disability
(both of these are for disability income), death/survivor benefits, vocational rehabilitation (for those
injured prior to 2004), and supplement job displacement benefit (for those injured after 2004).
• Worker’s compensation medical benefits are unlimited in all states. For claims after 2004
chiropractic and physical therapy are limited to 24 visits per injury. Employer can authorize more.
• Employers Liability – based on common law (means must prove negligence) is for claims brought by
employees not covered by workers compensation.
• Workers Compensation will provide benefits to employees temporarily in other states.
• 24 hr care coverage – Is a program/plan that combines workers compensation with the employers
health and/or disability coverage to provide both occupational and non-occupational coverage in a
single plan. Cannot include life insurance. Sold only by Fire & Casualty broker-agents, or A&H
agents. A&H agents are required to complete a 4hr course in WC&EL and pass a test.
• 24 hr coverage can be defined as a workers comp policy with a disability insurance policy and/or a
health plan. No life insurance
• Worker’s compensation only provides state mandated benefits. Excludes federal benefits. Federal
benefits such as Longshore & Harbor Worker’s, Defense Base, and Maritime (Jones Act of 1920) can
be added by endorsement.
• A Worker’s Compensation & Employers Liability Policy consists of Part I – State mandated benefits
(pays without regards to fault or negligence), Part II – Employers Liability (common law, must prove
negligence), Part III – Other States, Part IV – Duties, Part V – Premium, Part VI-Conditions.
• Factors that cause workers compensation premiums to increase are: fraudulent claims, employers
under-reporting payroll, employers who operate without workers compensation. Increase in
population does not increase workers compensation premiums

Worker’s Compensation
Without looking up - Answer the following and indicate key words. Then return to video for
answers.

1. Worker’s Compensation policies provide benefits for work related injuries regardless of fault or
___________________.
negligence
2. Worker’s comp basic purpose was to avoid litigation between employer and employee, lessen the
out-of-pocket expenses of the claimant and provide an efficient way of compensating injured workers.
T/F
3. Twenty four hour coverage can be defined as a worker’s comp policy with a ____________
disability insurance policy
insurance policy.
4. When a state program is a company’s only option available for purchasing of workers compensation
insurance the fund is called a __________________________________.
competitive
unlimited medical, loss wages,
5. The four state mandated benefits under Part I of worker’s compensation are?rehabilitation, death/survivor
benefits
6. In California under workers compensation medical benefits have a maximum limit. T/F

7. It is said that 24 hour coverage is seamless coverage as it covers both occupational and
nonoccuptional. T/F

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8. The second injury fund was set up to encourage employers to hire the previous injured or
handicapped. T/F

9. Part II of Worker’s Compensation is Employer Liability which is designed to fill the gaps concerning
claims brought by employees not covered under worker’s compensation. T/F

10. Worker’s comp pays for bodily injury and occupational disease that arises out of and in the course of
employment. T/F

11. A heart attack is an example of an occupational disease. T/F

12. Who is the insured under a Worker’s Comp policy? employer

13. Name the three methods used by employers to obtain Worker’s Comp: sell fund, purchase form state,
purchase form private insurer
14. There must be a formal agreement before worker’s compensation applies. T/F

15. Worker’s comp pays extra income benefits. T/F

16. Under loss of income worker’s comp pays 66 2/3 of any workers compensation. T/F

17. Worker’s comp covers pain and suffering. T/F

18. An employee while running errands for the boss was injured in a auto accident. The employee is
hospitalized 60 days. This hospital stay would be covered under: the health plan, auto policy,
general liability, worker’s comp. (underline the correct answer).

19. When the employer has the choice to purchase W/C from a private carrier the state fund/ or state is
called _____________________.
competitive
monopolistic
20. When the employer can only purchase W/C from the state fund this is called _________________.

21. Part 1 of W/C is the state mandated benefits. Part II is Employers Liability. Part III is other states.
What is Part IV? duties

22. The limits on employers liability are? 100thou or 1mil

23. Population growth has an effect on the rising cost of worker’s comp. T/F

We are so DONE!!!!!

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