Property Policy Provisions and Contract Law — practice questions

8% of the exam ≈13 real questions 14 free questions here

Mortgagee clauses, appraisal, Valued Policy Law, duties after loss, and Florida's claim-handling clock — about 13 of the 160 scored questions. This is where the 2022 rewrite bites hardest, so any number you learned from a pre-2023 manual is suspect.

Where people lose points

• Paying actual cash value on a total loss. Florida's Valued Policy Law, s. 627.702(1)(a), F.S., makes the insurer liable for the amount the building was insured for and a premium was paid on — the adjuster's ACV figure is irrelevant. The qualifier that decides the hard version: where a covered and a non-covered peril combine, the insurer owes only the covered portion, unless the covered peril acting alone would have totaled the building.
• Confusing the notice bar date with the suit deadline. Section 627.70132, F.S. bars an initial or reopened claim unless notice is given within 1 year of the date of loss, and a supplemental claim unless notice is given within 18 months — timely notice of the initial claim does not extend the supplemental window. Section 95.11(2)(e), F.S. separately allows 5 years to sue for breach, and that clock also runs from the date of loss, not from the denial.
• Reciting the pre-2023 claim-handling clock. Section 627.70131, F.S. now runs 7 calendar days to acknowledge a claim communication, 7 days to begin the investigation and 30 days for any physical inspection after proof-of-loss statements, a copy of the adjuster's detailed estimate within 7 days of it being generated, and 60 days to pay or deny. The old 14, 45 and 90-day figures are the planted wrong answers.
• Assuming law and ordinance coverage has to be purchased. Under s. 627.7011(2), F.S. the policy is deemed to include it at 25% of the dwelling limit unless the insurer obtains the policyholder's written refusal; 50% is the upgrade the policyholder must affirmatively select.
• Thinking appraisal decides coverage. It resolves the amount of loss only — coverage, breach of conditions and liability stay with the courts. Under s. 627.70151, F.S. a party may challenge the umpire's impartiality, including where the umpire was an employer or employee of a party within the preceding 5 years.

Questions and answers, explained

All 8 questions above, with the correct answer and why it is correct. Everything here is on property policy provisions and contract law.

1. A fire destroys an insured Jacksonville dwelling. The insurer's investigation establishes that the named insured deliberately set the fire, and it denies his claim for arson. First Coast Bank is named as mortgagee in the declarations under the standard mortgage clause and is owed $210,000. What is the insurer's obligation to the bank?

   • ANone — a mortgagee named in the declarations takes exactly the rights of the named insured, so a valid arson denial against the owner extinguishes the bank's claim under the same policy.
   • BThe insurer must still pay the bank to the extent of its interest, because the mortgage clause is a separate contract.Correct
   • CThe bank must first complete foreclosure and take title, and only then may it present a claim as owner of the damaged property.
   • DThe bank may recover only the unearned premium on the voided policy, and must pursue the insured personally for the balance of the debt.

   Why: The standard mortgage clause — also called the union mortgage clause — creates a separate contract between the insurer and the mortgagee. The mortgagee's interest is protected even when the named insured's own claim fails because of arson, fraud, or a breach of a policy condition — provided the mortgagee itself meets the three duties the clause imposes on it — since the mortgagee did not commit those acts. Having paid the mortgagee, the insurer receives an assignment of the mortgage to the extent of payment or subrogates against the insured. Contrast the open mortgage clause (also called a loss payable clause), where the mortgagee's rights rise and fall with the insured's — that is what option A describes.

   Reference ISO HO-3 Section I Conditions — Mortgage Clause (standard/union mortgage clause)

2. An insured and her insurer invoke appraisal on a windstorm claim. The two appraisers select an umpire who, three years ago, was a salaried employee of the insurer. The insured objects. Under s. 627.70151, F.S., may she challenge the umpire's impartiality?

   • ANo — the statute lists only familial relationships within the third degree as grounds for challenging an umpire, and there is no family tie between this umpire and either party.
   • BNo — a past employment relationship is a valid ground only if it existed within the preceding 12 months.
   • CNo — once both appraisers have agreed on an umpire, the selection is final and neither party may object to it.
   • DYes — the umpire was an employee of a party within the preceding 5 years.Correct

   Why: Section 627.70151, F.S., lets a party challenge an umpire's impartiality on four grounds: a familial relationship within the third degree between the umpire and a party or a party's representative; the umpire having previously represented a party in a professional capacity in the same claim or regarding the same property; the umpire having previously represented another person against a party in relation to the claim, the same property, or an adjacent property; and the umpire having been an employer or employee of a party within the preceding 5 years. A three-year-old employment relationship falls inside that five-year window. Notice that the statute governs umpires specifically — the party-appointed appraisers are held to the policy's own requirement that they be competent and impartial.

   Reference s. 627.70151(4), F.S.

3. A hurricane tears an opening in the roof of an insured Port Charlotte home. Tarps and board-up crews are available in the area, but the insured leaves the roof open for three weeks. Rain during that period ruins drywall and cabinets that were undamaged by the storm itself. How is the additional damage likely to be handled?

   • AThe insurer must pay the additional drywall and cabinet damage in full, because mitigating a loss becomes the adjuster's responsibility as soon as the claim is reported to the company.
   • BThe insurer must pay in full, because ensuing rain damage is automatically covered once windstorm creates an opening, no matter what the insured does afterward.
   • CThe insurer may decline the additional damage caused by the insured's failure to make reasonable emergency repairs.Correct
   • DThe entire claim, including the original wind damage to the roof, is void because the insured breached a policy condition.

   Why: The Your Duties After Loss condition requires the insured to give prompt notice, protect the property from further damage, make reasonable and necessary repairs to protect it, keep a record of repair expenses, cooperate in the investigation, and submit a proof of loss when required. The policy pays the reasonable cost of those temporary protective repairs, so mitigation costs the insured nothing in the end. Damage that flows from a failure to mitigate is generally not covered. The breach does not void the untouched portion of the claim, however — the insurer still owes the original windstorm damage to the roof, which is why option D overstates the remedy.

   Reference ISO HO-3 Section I Conditions — Your Duties After Loss

4. An insured stops paying premium halfway through the term of a commercial property policy. The insurer cancels for nonpayment but has no right to sue the insured to force him to keep the policy in force. Which characteristic of the insurance contract best explains that result?

   • AAleatory — the values the two parties exchange are unequal and depend on whether a loss occurs.
   • BPersonal — the contract insures the owner rather than the building, so it cannot be assigned freely.
   • CUnilateral — only the insurer gives a legally enforceable promise; the insured never promises to pay.Correct
   • DConditional — the insurer's obligations depend on the insured first complying with the policy conditions.

   Why: Insurance is a unilateral contract: after the first premium, only one party — the insurer — has made a legally enforceable promise. Paying future premium is a condition the insured may simply choose to stop satisfying; it is not a promise the insurer can enforce, so the insurer's only remedy is to cancel and retain the earned premium. D is the near-miss: premium payment really is a condition, but 'conditional' describes what must happen before the insurer pays a claim, while 'unilateral' identifies which party is actually bound by a promise.

   Reference General P&C concept — characteristics of insurance contracts (unilateral)

5. An applicant answers “no” to a question about prior water losses. In fact she had a $900 supply-line claim four years earlier; she had forgotten it, and the insurer does not allege fraud. The insurer's own underwriting guidelines would have accepted the risk at the same premium and the same limit had it known. A fire later destroys the home. May the insurer rescind the policy?

   • AYes — any incorrect answer on an application is grounds for rescission, because the signed application is made part of the policy.
   • BNo — the misstatement was neither fraudulent nor material, because the true facts would not have changed the underwriting decision.Correct
   • CNo — a Florida property insurer may never rescind a policy once it has been in force for more than 90 days from issue.
   • DYes — but only in part, so the insurer may reduce the fire payment by the $900 of the undisclosed prior water claim.

   Why: Under s. 627.409(1), F.S., a misrepresentation, omission, concealment of fact, or incorrect statement prevents recovery only if it is fraudulent or material to the acceptance of the risk or to the hazard assumed, or if, had the true facts been known, the insurer in good faith would not have issued the policy, would not have issued it at the same premium rate, would not have issued it in as large an amount, or would not have provided coverage for the hazard resulting in the loss. The insurer here concedes none of those is true, so the answer is not material and the policy stands. A is the tempting distractor: attaching the application to the policy makes it part of the contract, but it does not eliminate the statutory materiality test. C garbles a real provision: s. 627.409(3), F.S., bars denying a residential property claim on the basis of credit information available in public records once the policy has been in force more than 90 days. It is a narrow credit-information rule, not a general 90-day cutoff on rescission.

   Reference s. 627.409(1) and (3), F.S.

6. An agent orally binds commercial property coverage on a Tampa warehouse while underwriting is pending. The binder names the insurer, the property and the limit, but says nothing about deductibles, exclusions or conditions. Fire damages the building two days later. Which terms govern the loss?

   • AOnly the terms actually written into the binder; anything it omits is read in the insured's favor as full coverage.
   • BNo terms at all, because Florida requires every binder covering property insurance to be in writing and signed.
   • CThe terms of the signed application, which serves as the operative contract until the policy itself is issued.
   • DThe usual terms of the policy to which the binder was given, plus any endorsements the binder designates.Correct

   Why: Section 627.420, F.S., allows binders for property, marine, casualty or surety insurance to be made orally or in writing, and provides that a binder is deemed to include all the usual terms of the policy as to which the binder was given, together with such applicable endorsements as are designated in the binder, except as superseded by the clear and express terms of the binder. So the insurer's standard deductible, exclusions and conditions apply even though the oral binder was silent. A is the tempting answer, but silence in the binder pulls in the form's usual terms rather than creating unlimited coverage. B is simply wrong: oral binders are expressly permitted. Note also that no notice of cancellation or nonrenewal is required unless the binder's duration exceeds 60 days.

   Reference s. 627.420, F.S.

7. An insurer receives an insured's signed, sworn proof of loss on May 2 for hail damage to a metal roof. On June 20 the insurer notifies the insured in writing that instead of paying money it will replace the roof with material of like kind and quality. Is that election effective under the unendorsed HO-3?

   • ANo — the Our Option condition requires written notice within 30 days after the proof of loss, and 49 days passed.Correct
   • BNo — an insurer may repair or replace only when the insured consents in writing at the time of the election.
   • CYes — the insurer may elect to repair or replace at any time before it actually issues payment on the claim.
   • DYes — the election is timely because the insurer had 60 days from the proof of loss to make its loss payment.

   Why: The Our Option condition in the ISO homeowners form provides that if the insurer gives written notice within 30 days after it receives the insured's signed, sworn proof of loss, it may repair or replace any part of the damaged property with material or property of like kind and quality. May 2 plus 30 days is June 1, so a June 20 election is too late and the insurer must settle in money. D is the strongest distractor because the Loss Payment condition really does make loss payable 60 days after the insurer receives the proof of loss and reaches agreement, an appraisal award is filed, or a final judgment is entered — but that 60-day period governs when payment is due, not how long the insurer has to elect repair or replacement.

   Reference ISO HO-3 (HO 00 03), Section I — Conditions, Our Option

8. A windstorm that is not a named hurricane uproots a mature oak on an insured Florida residence premises. The tree is worth $4,000 and does not strike the house or any other structure. Coverage A is $300,000. Under the unendorsed HO-3, what does the policy pay for the tree itself?

   • A$4,000 — the full value of the tree, since it is below the 5 percent of Coverage A available for plants.
   • BNothing — windstorm is not one of the perils this additional coverage insures trees and shrubs against.Correct
   • C$500 — the per-tree cap applies, and windstorm is one of the perils covered for trees and shrubs.
   • D$15,000 — 5 percent of Coverage A is the amount available for any one tree under this coverage.

   Why: The Trees, Shrubs And Other Plants additional coverage in the ISO homeowners form is named-peril coverage, and the named perils are fire or lightning, explosion, riot or civil commotion, aircraft, vehicles not owned or operated by a resident of the residence premises, vandalism or malicious mischief, and theft. Windstorm and hail are conspicuously absent, so a wind-toppled tree that damages no covered structure produces no payment for the tree. C is the most tempting answer because the $500 per-tree cap and the aggregate of 5 percent of the Coverage A limit are both real figures — but a sublimit matters only once a covered peril applies. Debris removal of the fallen tree may still be payable under the separate debris removal provision when the tree damages covered property or blocks a driveway or a ramp designed for the handicapped.

   Reference ISO HO-3 (HO 00 03), Section I — Additional Coverages, Trees, Shrubs And Other Plants

Topics inside this domain

• Florida's hurricane deductible
• Catastrophic ground cover collapse vs sinkhole coverage
• Florida's Valued Policy Law
• Florida property claim deadlines
• Law and ordinance and replacement cost

Drill other domains

• Types of Property Policies (14%)
• Property Insurance Terms and Related Concepts (9.5%)
• Types of Casualty Policies, Bonds, and Related Terms (15%)
• Casualty Insurance Terms and Related Concepts (9.5%)
• Casualty Policy Provisions (8%)
• Florida Statutes, Rules and Regulations Common to All Lines (15%)

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