Types of Property Policies — practice questions

14% of the exam ≈22 real questions 22 free questions here

Homeowners, dwelling, commercial property, BOP, inland and ocean marine, and NFIP flood — about 22 of the 160 scored questions, the second-largest of the six general-knowledge domains. Almost every item hands you a loss and asks which form pays, so learn each form by what it refuses to cover.

Where people lose points

• Reading the HO-3 as open perils throughout. Coverages A and B are open perils; Coverage C stays named perils. The HO-5 is the only standard form that writes all three on an open-perils basis, and adding a scheduled personal property endorsement to an HO-3 broadens only the scheduled items.
• Collapsing the two Florida ground-movement coverages. Catastrophic ground cover collapse is built into every policy an authorized insurer issues and requires all four elements — abrupt collapse, a depression visible to the naked eye, structural damage including the foundation, and the building condemned and ordered vacated. Sinkhole loss coverage is the broader optional product the insurer must make available for additional premium (s. 627.706, F.S.).
• Taking the greater of the two roof-deductible figures. Section 627.701(10), F.S. caps a separate roof deductible at the LESSER of 2% of the Coverage A limit or 50% of the cost to replace the roof — and it may not be applied at all to a roof loss from a hurricane, a valued-policy total loss, a tree fall that punctures the roof deck, or a repair of less than 50% of the roof.
• Quoting $500,000/$500,000 as the NFIP limits for a house. Those are the non-residential maximums. A one-to-four-family dwelling gets $250,000 building and $100,000 contents, contents are always settled at actual cash value, and a new policy carries a 30-day waiting period — so a client cannot buy flood coverage once a storm is in the cone.
• Assuming a DP-3 protects the landlord against a tenant's injury. The whole ISO dwelling program is property-only, with no Coverage E and no Coverage F; "special form" describes the perils on the dwelling, not the scope of the policy. Liability must be endorsed on or written separately.

Questions and answers, explained

All 10 questions above, with the correct answer and why it is correct. Everything here is on types of property policies.

1. An investor insures a non-owner-occupied rental house in Ocala on an unendorsed ISO DP-1 basic form written with the extended coverage perils. Which statement about that policy is correct?

   • ADwelling losses are settled on a replacement cost basis, and theft is a covered peril.
   • BDwelling losses are settled on an actual cash value basis, that is replacement cost less depreciation, and theft is not a covered peril.Correct
   • CThe DP-1 automatically includes personal liability coverage protecting the investor against tenant injury claims.
   • DThe DP-1 insures the dwelling on an open-perils basis, subject only to the listed exclusions.

   Why: The DP-1 is the narrowest form in the dwelling program. It is a named-perils form whose base perils are fire, lightning and internal explosion, with the extended coverage group — windstorm, hail, explosion, riot or civil commotion, aircraft, vehicles, smoke and volcanic eruption — added for additional premium, and vandalism or malicious mischief available on top of that. Theft is not part of the DP-1 peril structure. Loss settlement under the DP-1 is on an actual cash value basis, meaning replacement cost less depreciation, which is the single most important difference from the DP-2 and DP-3. Options C and D fail because the dwelling program is a property-only program with no built-in liability, and because open perils on the dwelling is the DP-3, not the DP-1.

   Reference ISO DP 00 01 (Dwelling Property 1 — Basic Form)

2. A Jacksonville warehouse operator insures his building under the ISO Building and Personal Property Coverage Form of the commercial property program. In addition to his own racking, forklifts and office equipment, he regularly stores customers' goods on consignment in his care, custody and control. What must appear on the declarations for those consigned goods to be insured?

   • AA limit for Your Business Personal Property, which by definition includes property of others
   • BA separate limit of insurance for Personal Property of Others in the insured's care, custody or controlCorrect
   • CAn increased Building limit, since consigned goods follow the building limit
   • DNothing additional; the Newly Acquired or Constructed Property coverage extends to consigned goods

   Why: The ISO Building and Personal Property Coverage Form sets out three distinct coverages, each of which is activated only by showing a limit of insurance for it on the declarations: Building; Your Business Personal Property, which is property the insured owns and used in the business, plus the insured's use interest in tenant improvements and betterments; and Personal Property of Others that is in the insured's care, custody or control. Consigned customer goods fall squarely into the third category, and a warehouse operator who buys only the first two leaves that bailee exposure uninsured. Option D misdescribes the Newly Acquired or Constructed Property additional coverage, which provides temporary limits on newly acquired buildings and business personal property at newly acquired premises, not on bailed goods.

   Reference ISO CP 00 10 (Building and Personal Property Coverage Form)

3. A homeowner in a Special Flood Hazard Area in Cape Coral buys an NFIP Standard Flood Insurance Policy, Dwelling Form, on her single-family home. What are the maximum building and contents limits available to her under the NFIP?

   • A$250,000 building and $100,000 contentsCorrect
   • B$350,000 building and $150,000 contents
   • C$500,000 building and $500,000 contents
   • D$250,000 building and $250,000 contents

   Why: Under the National Flood Insurance Program, the maximum amount of building coverage available for a one-to-four-family residential structure is $250,000, and the maximum contents coverage is $100,000. The $500,000 and $500,000 figures in option C are the non-residential building and contents maximums, which is the classic distractor. Two points an agent must convey in Florida: building and contents are purchased as separate coverages with separate deductibles, so buying building coverage alone leaves personal property uninsured; and contents under the Standard Flood Insurance Policy are settled on an actual cash value basis. Owners who need more than the NFIP maximums must buy excess flood coverage in the private market.

   Reference NFIP Standard Flood Insurance Policy, Dwelling Form (FEMA F-122)

4. An Orlando general contractor has two exposures. First, he is erecting a new medical office building from the ground up on a lot he controls. Second, under a separate subcontract he is transporting and installing rooftop HVAC units in an already-completed building across town. Which pairing correctly matches coverage to exposure?

   • ABuilders risk for the structure under construction; an installation floater for the HVAC units being transported and installed elsewhereCorrect
   • BAn installation floater for the structure under construction; builders risk for the HVAC units being installed elsewhere
   • CBuilders risk for both exposures, since both of them arise out of construction operations
   • DA commercial building and personal property form for both, since both involve work on real property

   Why: Builders risk covers a structure while it is under construction, including materials and supplies at the site intended to become part of it. It is commonly written on a completed-value basis, meaning the limit is set at the anticipated finished value of the project and the policy ends when construction is complete and the building is accepted or occupied. An installation floater is inland marine coverage on machinery, equipment, fixtures or materials that the insured is installing at someone else's location; it typically attaches while the property is in transit, while it is stored awaiting installation, and until the installation is completed, tested and accepted. Builders risk itself may be written either as a commercial property form or on an inland marine basis, depending on the program. A standard building and personal property form is the wrong tool for either exposure because it contemplates a completed, occupied building at a fixed described premises.

   Reference ISO CP 00 20 (Builders Risk Coverage Form); commercial inland marine installation floater

5. A Kissimmee homeowner insured on an unendorsed ISO HO-3 with $300,000 of Coverage A has two detached buildings on the residence premises: a storage shed she uses herself, and a small workshop she rents by the month to a neighbor who does not live in the dwelling. One fire destroys both. How does Coverage B respond?

   • ABoth buildings are covered, but total recovery for the two together cannot exceed $30,000, or 10 percent of Coverage A.
   • BBoth buildings are covered, and each one carries its own separate limit of 10 percent of the Coverage A limit.
   • CNeither building is covered, because Coverage B insures only structures physically attached to the insured dwelling.
   • DOnly the shed is covered; the workshop is rented to someone who is not a tenant and is not a private garage.Correct

   Why: Coverage B insures other structures on the residence premises set apart from the dwelling by clear space, and the limit is not more than 10 percent of the Coverage A limit — a single aggregate amount, not a limit per structure, and its use does not reduce the Coverage A limit. But the grant carries exclusions, and the operative one here is B.2.b.: other structures rented or held for rental to any person not a tenant of the dwelling. Read the trigger carefully — it is the rental to a non-tenant that pushes the workshop out, and the words “unless used solely as a private garage” are an exception written into that exclusion rather than the exclusion itself. Had the neighbor rented the building only to park a car, the garage clause would have pulled it back into coverage. Nothing turns on the building being detached or on its not being a garage standing alone: the shed in the same stem is detached, is not a garage, and is covered. Option A is the strongest distractor because it states the 10 percent aggregate rule correctly and most candidates stop there, but it never tests the rental exclusion. The form also excludes other structures from which a business is conducted and, with a narrow carve-back, structures used to store business property.

   Reference ISO HO 00 03 05 11 (Homeowners 3 — Special Form), Section I Coverage B.1. and B.2.b.

6. A fire destroys the house next door in Ocala. County officials bar access to the entire block for a month, including an insured home that suffered no damage at all and is covered by an unendorsed ISO HO-3. The family must live in a hotel for that month. For how long does Coverage D respond to the civil authority order?

   • AFor up to 30 consecutive days, the same period the form allows for property removed to a safe place after a loss.
   • BNot at all, because Coverage D requires direct physical damage to the residence premises itself by a Peril Insured Against.
   • CFor no more than two weeks, even though the insured dwelling itself sustained no direct physical damage at all.Correct
   • DFor the shortest time required to repair the neighboring premises, with no fixed outer limit stated in the form.

   Why: Coverage D is made up of three grants. Additional Living Expense and Fair Rental Value both require that a loss covered under Section I make the residence premises unfit to live in. The third grant, Civil Authority Prohibits Use, is the exception: if a civil authority prohibits the insured from using the residence premises as a result of direct damage to neighboring premises by a Peril Insured Against, the form covers the loss as provided under Additional Living Expense and Fair Rental Value for no more than two weeks. No damage to the insured's own home is required, and the two-week cap is a hard outer limit even though the closure here lasts a month. Option B is the most tempting answer because it states the general rule that governs the other two Coverage D grants — which is precisely why Civil Authority exists as a separate provision. The 30 days in option A belongs to the Property Removed Additional Coverage, and the open-ended repair standard in option D is the measuring period for ordinary Additional Living Expense, not for a civil authority closure.

   Reference ISO HO 00 03 (Homeowners 3 — Special Form), Section I Coverage D.3.

7. A gas explosion levels a building across the street from an insured retail store in downtown Orlando. The store itself is undamaged, but the fire marshal closes the street and bars all access to the store for six weeks. The store is insured on an unendorsed ISO Business Income (and Extra Expense) Coverage Form. How does Civil Authority coverage respond to the lost business income?

   • AIt pays from the moment access is barred and continues for the full six weeks, because the store never reopened during the closure period.
   • BIt pays nothing, because Civil Authority coverage requires direct physical loss of or damage to the described premises by a Covered Cause of Loss.
   • CIt begins 72 hours after the first action of civil authority and then applies for up to four consecutive weeks from the date coverage began.Correct
   • DIt begins immediately and applies for up to 30 consecutive days, matching the extended business income period the same form provides.

   Why: Under the current ISO form, Civil Authority Coverage for Business Income begins 72 hours after the time of the first action of civil authority that prohibits access to the described premises, and applies for up to four consecutive weeks from the date such coverage began. Civil Authority Coverage for Extra Expense begins immediately after that first action and ends four consecutive weeks after the date of that action or when the Business Income civil authority coverage ends, whichever is later. So a six-week closure produces four weeks of paid business income at most. The grant also has conditions the facts must satisfy: the damaged property must be within a stated distance of the described premises, the damage must be caused by a Covered Cause of Loss, and the action must be taken in response to dangerous physical conditions resulting from the damage or to enable a civil authority to have unimpeded access to the damaged property. Option B is the most tempting because it correctly states the trigger for the main Business Income insuring agreement — and that is precisely why Civil Authority exists as a separate Additional Coverage: it answers when the damage is somewhere else. Extended Business Income, hinted at in option D, is a different additional coverage that runs up to 60 consecutive days after operations resume.

   Reference ISO CP 00 30 (Business Income (and Extra Expense) Coverage Form), Additional Coverages — Civil Authority

8. A Port Everglades shipowner asks his agent to arrange ocean marine insurance that will protect the vessel itself, the goods being carried aboard it, the transportation revenue he stands to lose if a voyage is not completed, and his legal liability to crew, passengers and other vessels. Which set of coverages is he describing?

   • AHull, cargo, freight, and protection and indemnity — the four traditional coverages of an ocean marine program.Correct
   • BHull, cargo, general average, and the running down clause — the four coverages the Nationwide Marine Definition requires.
   • CBuilding, business personal property, business income, and premises liability under a commercial package policy.
   • DTrip transit, motor truck cargo, warehouse legal liability, and bailee coverage, all written as inland marine.

   Why: Ocean marine insurance is traditionally written in four parts. Hull coverage insures the vessel itself. Cargo coverage insures the goods being transported. Freight coverage insures the transportation revenue the carrier loses if the voyage is not completed, since freight charges are commonly earned only on delivery. Protection and indemnity is the ocean marine liability coverage, protecting the shipowner against injury to crew and passengers and damage to other vessels and to property such as docks. Option B is the most tempting distractor precisely because it is built out of real ocean marine vocabulary: general average is a genuine principle under which every interest in a voyage contributes to a loss voluntarily incurred to save the venture, and a running down clause is a real collision liability provision inside a hull policy. Neither is one of the four coverage lines, and the Nationwide Marine Definition describes which risks may be written as marine insurance, not which coverages a policy must contain. Option D lists inland marine coverages, which is a different branch of the marine field.

   Reference General P&C concept — ocean marine coverages (hull, cargo, freight, protection and indemnity)

9. A Miami manufacturer's commercial property program is written on the special form, which excludes flood and earth movement. The risk manager wants one contract that adds those two perils and also carries a higher limit for them than the underlying property market will write. What is she describing?

   • AAn umbrella liability policy, which sits above the property program and drops down when an underlying limit is exhausted.
   • BA commercial package policy, which combines the property and casualty lines the insured needs into a single rated contract.
   • CA difference in conditions policy, an open-perils contract written to fill the gaps and limits left by the underlying program.Correct
   • DAn excess and surplus lines binder, which by definition can only duplicate the coverage already carried on the admitted program.

   Why: A difference in conditions policy is a separate open-perils first-party contract bought alongside a commercial property program. It is written to exclude the perils the underlying property policy already insures, so that what remains is precisely what the property form leaves out — most commonly flood and earthquake — and it can also be used to provide higher limits for those perils than the underlying program carries. Option A is the strongest distractor because the phrase sits above sounds like the same architecture, and an umbrella genuinely does drop down when an underlying limit is exhausted. But an umbrella is third-party liability insurance; it responds to claims made against the insured and does nothing at all for direct physical damage to the insured's own buildings and stock. A DIC is first-party property insurance. Option D also misstates the surplus lines market, which exists precisely to write coverage the admitted market will not, and a DIC is frequently placed there.

   Reference General P&C concept — difference in conditions (DIC) coverage

10. A Fort Myers Beach couple's single-family house is their principal residence and is insured under an NFIP Dwelling Form for $250,000, which is more than 80 percent of its full replacement cost. A flood destroys the house and everything in it. How will the NFIP value the building and the contents?

    • ABoth the building and the contents at replacement cost, because the building is insured to at least 80 percent of its replacement cost.
    • BThe building at replacement cost and the contents at actual cash value, because personal property under the policy is always valued at actual cash value.Correct
    • CBoth at actual cash value, because the NFIP settles every residential flood loss on a depreciated basis regardless of the amount carried.
    • DThe building at actual cash value and the contents at replacement cost, since the 80 percent test in the policy applies only to contents.

    Why: Under the SFIP Dwelling Form, replacement cost loss settlement on the building is available only where the insured building is a single-family dwelling, is the policyholder's principal residence, and is insured for at least 80 percent of its full replacement cost at the time of loss or for the maximum amount of insurance available under the NFIP. This house meets all three tests, so the building is settled at replacement cost. Contents follow a different and unconditional rule: personal property is always adjusted at actual cash value, and so are appurtenant structures, appliances and carpeting. Option A is the natural mistake, because the 80 percent test is real and this risk passes it — but passing that test buys replacement cost on the building only, never on the contents, and no amount of insurance changes that. For the principal residence test, the Dwelling Form looks at whether the insured or the insured's spouse lived in the dwelling for at least 80 percent of the 365 days immediately before the loss, or 80 percent of the period of ownership if the dwelling was owned less than a year.

    Reference NFIP Standard Flood Insurance Policy, Dwelling Form (FEMA F-122), loss settlement provisions

Topics inside this domain

• Florida's hurricane deductible
• Florida's separate roof deductible
• Catastrophic ground cover collapse vs sinkhole coverage
• HO forms compared: HO-2 through HO-8
• Citizens eligibility and the 20 percent rule
• Law and ordinance and replacement cost

Drill other domains

• Property Insurance Terms and Related Concepts (9.5%)
• Property Policy Provisions and Contract Law (8%)
• 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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