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NC Property and Casualty State Exam
Questions and Answers 100% Pass
Insurance ✔✔- a plan of spreading the risk of possible loss over a large number of people (Law of
Large Numbers)
- protects against the risk (uncertainty) of when a financial loss might occur
Speculative Risk ✔✔- when there is a chance of gain as well as a chance of loss (ex: buying a
stock, gambling)
- insurance IS NOT intended to protect against this
Pure Risk ✔✔- when there is a chance of loss only
- not all pure risks are insurable
Insurable Risk ✔✔- a risk the insurance company is willing to accept
- characteristics of an insurable risk
- Low probability of a loss occurring
- Less than catastrophic results
- The loss must be measurable
- The loss must be significant
- The loss must be accidental and unintended
Law of Large Numbers ✔✔- makes it possible to predict future losses based upon prior experience
- law states that as a large # of events are included, the difference between actual and expected results become smaller
Spread of Risk ✔✔- involves spreading the company's policies over a broad geographical area in
order to avoid large losses in the event of a catastrophic event
Adverse Selection ✔✔- occurs when insureds with a high risk of loss attempt to purchase insurance
and are successful in doing so
- insurers attempt to PREVENT THIS (bad risk)
- prevented by:
- refusal to write
- rating up
- insurability standards *** deductibles do not prevent this
Retention ✔✔- when liability for a loss is maintained by an individual by NOT PURCHASING
INSURANCE
- deductible is an example of retention
Transfer ✔✔To shift the responsibility for a loss to an insurance company through the purchase
of insurance
Control/Reduction ✔✔- an attempt to prevent a loss or to reduce the amount of the loss
- Losing Money
- Incurred Additional Expenses
Capital Stock Companies ✔✔- in business to make a profit for stockholders
- owned by stockholders; elect a board of directors
- profit is fully taxable to stockholder
Mutual Insurance Companies ✔✔- owned by policyholders; each policyholder "owns" a part of
the company proportionate to their share
- elects a board of directors who appoint officers
- surplus returned to policyholders in the form of non-taxable policy dividend
Reciprocal (Assessment) Companies ✔✔- policyholders are insured by other policyholders
- managed by Attorney-In-Fact who can assess the policyholders for additional premiums
Classifications of Insurance Companies ✔✔1. Domestic: organized in state
- Foreign: organized in a different state
- Alien: organized in another country
Non-Admitted Companies ✔✔Property, casualty, and personal lines insurance agents are not
permitted to represent or place insurance coverage with non-admitted companies because the NC Department of Insurance cannot regulate them
Independent Agency System ✔✔- agent can represent more than one insurance company
- owns the business and retains all rights to the accounts
Direct Writers (captive/exclusive) ✔✔- can only represent one insurance company
- insurance company retains ownership rights, not the agent
Agents ✔✔- representatives of the insurance company
- requires a contract and appointment (something stating they can sell insurance)
- given binding authority (binder = temporary evidence insurance is in effect); must be written or oral (says you ARE covered); cannot cancel binder - only the policyholder or company can
Broker ✔✔- representatives of the insured
- shop the market for their customers and obtain coverage through an agent
- must have $15,000 bond
- CANNOT bind coverage
When Agents are PERSONALLY Liable ✔✔1. The agent breached their authority
- The agent represents an incompetent principal or a non-admitted insurance company
Agents Duties to the Insurance Company ✔✔1. Loyalty
- Obedience
- Use of Reasonable Care
- Exclusions
- Endorsements
- Definitions
Declarations Page ✔✔Personalized part of the policy that includes:
- the parties to the contract
- the policy term
- the amount of insurance purchased
- the amount of premium
- the object or person insured
Insuring Agreements ✔✔- the "heart" of the insurance contract that states the perils that are insured
against
- establishes the insurer's responsibility to pay claims in the event a covered peril occurs
Conditions ✔✔- Provisions and stipulations of the policy; rules of conduct for both the insured
and the insurer
- behavior (how the insured and insurer should behave)
Exclusions ✔✔- lists what perils are NOT covered
- things considered uninsurable
Endorsements ✔✔- Modify (add/take away rights) the basic contract
- No independent existence; become part of the insurance contract
Definitions ✔✔Explains the meaning of important terms found in the contract
Legal Characteristics of the Insurance Contract ✔✔1. Unilateral
- Adhesion
- Waiver
- Estoppel
- Representations
- Warranties
- Misrepresentations
- Concealment
Unilateral ✔✔- characteristic of an insurance contact that states the contract can only be enforced by one party
- the insurer cannot enforce payment of premiums in court, but the insured can enforce the contract if all conditions of the contract have been satisfied
- only the insurance company makes a legally enforceable promise
Adhesion ✔✔- contract is purchased as it is worded and the insured is "stuck" with that wording
- courts will interpret any ambiguity in favor of the insured (the party who did not write the contract)
Purpose of Statutes and Regulations ✔✔To promote and protect the public welfare
Commissioner of Insurance ✔✔- chief regulatory body for the oversight of the insurance industry
- VOTERS ELECT THE COMMISIONER of insurance to a four-year term as a member of the council of state
Commissioner's General Responsibilities ✔✔- assures that insurance laws are adhered to by all
parties; may institute civil actions or criminal prosecutions through the Attorney General
- monitor financial stability of admitted companies through the review of their annual financial statement
- APPROVES rates and policies for insurance (DOES NOT SET)
- any examination and/or hearing conducted by the commissioner must be preceded by at least 10 DAYS PRIOR WRITTEN NOTICE to all parties (may suspend a license prior to a hearing, but may only revoke after)
Deviation ✔✔- company is charging less than normal rates
Regulations Regarding Insurance Transactions ✔✔- all records must be maintained for at least 5
years
- any deductible or cost-sharing amount between the named insured and insurer must be expressed in the contract
- unlawful for an insurer to discriminate based in rates based on age/sex
- company must supply a proof of loss form within 15 days of receiving notification of the claim
- illegal for an agent to charge excess of premium for policy fees or services unless a sign is posted, written consent is given, and a receipt
- agents shall be held personally liable for unlawfully executed contracts
- all payment receipts issued by an agent should be dated, contain name and address of agent and name of insurance company, and should be signed by the person accepting payment
Twisting ✔✔- misrepresentation of a policy's terms and values to induce the lapse of replacement of an existing contract of insurance
- lying about what a policy covers so someone will get insurance with you
Rebate ✔✔- any valuable consideration which is offered as an inducement to purchase insurance
Commingling ✔✔- accounting records of agents shall be SEPARATE and apart from any other business records, and funds due to insurers/policyholders must be available at all times
- must keep separate personal and business accounts
Licensing Law ✔✔- must meet CE requirements each biennium (every 2 years)
- applicant must be at least 18, not violated any insurance laws, completed 20 hours of pre-licensing education
- agents must have a current appointment date and NOTIFY THE COMISSIONER WITHIN 30 DAYS of the effective date
- outlines procedures used to protect the confidential nature of the information processed in the insurance industry
- only deals with non-public/confidential information (credit history, need-to-know), not public information (driving record, etc.)
Adverse Underwriting Decision ✔✔- when an application for insurance has been rejected, an
existing policy has been terminated, or coverage has been placed with a residual market mechanism
- failure to place coverage with a company requested by the applicant and the charging of a higher rate based on information that differs from that supplied by the insured ***charging higher premium due to an increase in hazard is NOT considered an adverse underwriting decision
Residual Market Mechanisms ✔✔- used as a last resort when no one else will insure you
- Beach Plan
- Fair Plan
- NC Motor Vehicle Reinsurance Facility (the Facility)
Pretext Interviews ✔✔Conducted when an individual poses as someone else in order to obtain information, or does not reveal their identity
Requirements of the Privacy Act ✔✔- requires the execution of/delivery of 2 documents prior to
the collection of and use of confidential information (non-public) information
- Notice of Information Practices
- Disclosure Authorization Form
Notice of Information Practices ✔✔- summarizes the applicant's rights under the act including the
right to know what information was gathered and from whom; also, the ability to dispute inaccurate information
- shall be provided to the applicant NO LATER than at the time of the delivery of the policy when personal information is being collected
Disclosure Authorization Form ✔✔- grants public permission for the company to collect non-
public information
Privacy Act: When Adverse Underwriting Decision Has Been Made ✔✔- responsibilities of agents
and companies when an adverse underwriting decision has been made:
- Company must provide reason for adverse underwriting decision per the applicants written request; REQUEST MUST BE MADE WITHIN 90 DAYS, company has 21 days to respond
- Applicant has the right to dispute any information felt to be inaccurate that prompted the decision, and company must respond to disputed info WITHIN 30 BUSINESS DAYS
- Insurer must specify questions designed to obtain information solely for marketing purposes
Open Peril ✔✔- will insure against all perils unless they are specifically excluded from the
coverage
- burden of proof lies with the insurer to demonstrate that the loss was caused by an excluded peril **special coverage = open peril coverage
Insurable Interest (Financial Interest) ✔✔- an individual must have insurable interest in the
property to benefit from a property insurance policy
- to establish insurable interest, the applicant must: have the insurable interest at the time of the loss, but not necessarily at the time of the policy purchase
Standard Fire Policy ✔✔- origin of modern property coverage
- 165 lines
- adopted in 1943
- 165 line New York Standard Fire Policy of 1943
Standard Fire Policy Attributes ✔✔- named peril policy insuring against Direct Losses
- Fire
- Lightning
- Removal of property (to protect it from further damage); once removed, coverage became open peril and was provided for 5 DAYS
- in addition, coverage was extended to direct damage caused by an unnamed peril with the PROXIMATE CAUSE (CONCURRENT CAUSATION) of the damage was a covered peril (ex: water damage caused by putting out a fire)
SFP Provisions ✔✔1. Friendly/Hostile Fire
- Cancellations of Policies
- Mortgagee Rights
- Pro-Rata Liability
- Concealment & Fraud
- Legal Action (cannot happen after 3 years)
- Subrogation
- Abandonment Clause (cannot abandon property in order to claim total loss)
- Inception & Expiration (12:01 AM)
SFP: Cancellation ✔✔- if NAMED INSURED canceled, unearned premium was refunded on a SHORT-RATE basis
- if INSURER canceled with written notice to named insured within 5 days, premium was refunded on a PRO-RATE basis **insurance company can cancel whenever they want WITH WRITTEN NOTICE
Pro-Rata Liability ✔✔- more than one policy covering the same property
- pro-rate (proportional) share of the loss, regardless of whether the insurance was collectible or concurrent (covering the same property against the same peril)
- Any increase in hazard may have restricted coverage
- When vacant/unoccupied, coverage was suspended 60 DAYS LATER; coverage restored when condition ceased
SFP: Extended Coverage Endorsement (EC) ✔✔- a named peril endorsement to the SFP providing
direct loss coverage for the perils of: W - wind H - hail A - aircraft R - riot V - vehicles (not owned by household) E - explosion S - smoke
SFP: Vandalism & Malicious Mischief (VMM) ✔✔- covered the willful and malicious damage to or destruction of property (not damage to glass, theft, burglary, or larceny)
- ex: spray paint on house
- could only be added if EC was included in coverage
- VMM coverage suspended if property was vacant for 30 consecutive days (60 unoccupied) VACANT/UNOCCUPIED ALWAYS 60 DAYS EXCEPT VACANT VMM = 30 DAYS
SFP: Sprinkler Leakage ✔✔- covered accidental leakage or discharge of a sprinkler system
- loss must be due to improper operation or malfunction of the system
Purpose of ISO and the Rate Bureau ✔✔- to develop and standardize insurance coverage forms
Dwelling Policies ✔✔- replaced the SFP
- written on private residential premises that don't qualify for coverage under the Homeowner's Program
- some dwellings may not qualify for HO because of age, location, upkeep, value, or because they're rental property
Basic Form (DP-1) ✔✔- a named peril policy
- covers WHARVES, fire, lightning, VMM, volcanic eruption (air-born) **not vehicles owned by named insured/household
Broad Form (DP-2) ✔✔- property and contents
- named peril policy covering all DP-1's perils. plus damage done by burglars, fallen objects, weight of ice, sleet, and snow, overflow of water from plumbing/appliances, damage from power surges, freezing, tearing apart of hot water systems
Special Form (DP-3) ✔✔- open peril coverage on the dwelling and other structure (named peril
on contents)
- covers same perils as DP-
Coverage Parts of the Dwelling Policies ✔✔1. Coverage A = Dwelling. Available on all forms.
