Property Insurance Terms and Related Concepts — practice questions

9.5% of the exam ≈15 real questions 15 free questions here

Coinsurance, actual cash value, hurricane deductibles, business income, hazards and sublimits — about 15 of the 160 scored questions, and the most arithmetic-heavy domain on the exam. Expect three or four items you have to actually compute rather than recognize.

Where people lose points

• Dividing the limit carried by full replacement cost. The coinsurance formula is (limit carried ÷ limit required) × loss, then subtract the deductible, and the limit required is replacement cost × the coinsurance percentage. Dividing by replacement cost instead of by the required amount is the single most common error on this calculation.
• Applying the hurricane deductible storm by storm. Under s. 627.701(5)(a), F.S. it applies on a calendar-year basis across policies from the same insurer or insurer group. Once an earlier hurricane has eaten into it, the insurer may apply to the next hurricane the GREATER of what remains of the hurricane deductible or the all-other-perils deductible.
• Treating the $1,500 jewelry figure as a category cap. The Coverage C special limits are written peril by peril: $1,500 applies to loss by THEFT of jewelry, watches, furs and precious stones, and $2,500 to theft of firearms. Fire damage to the same bracelet is an ordinary Coverage C loss payable up to the full Coverage C limit.
• Measuring debris removal against the limit of insurance. The basic amount is 25% of the sum of the deductible plus what the insurer pays for the direct physical loss; when that is not enough, the current form adds up to $25,000 more per location per occurrence. The older $10,000 figure still appears in stale manuals.
• Attaching the 72-hour wait to the wrong coverage. The period of restoration begins 72 hours after the direct physical loss for business income, but immediately for extra expense — and it is not cut short by the expiration of the policy.

Questions and answers, explained

All 10 questions above, with the correct answer and why it is correct. Everything here is on property insurance terms and related concepts.

1. Maria sold her Hialeah home and closed on March 1, but forgot to cancel her HO-3 policy, which she had prepaid through December. On March 20 the house was destroyed by fire. Maria filed a claim under her still-active policy. How should the insurer respond?

   • ADeny the dwelling claim — Maria held no insurable interest in the property at the time of the loss, so there is nothing to indemnify.Correct
   • BPay the claim: the policy was in force and premiums were fully paid through December, which is all that coverage requires.
   • CPay the claim to the buyer, because an unendorsed property policy follows the building and transfers automatically at closing.
   • DPay Maria the full Coverage A limit and then subrogate against the buyer's own homeowners insurer, since the buyer became the party at risk on the March 1 closing date.

   Why: For property insurance, insurable interest must exist at the time of the loss. Maria's financial stake ended at closing on March 1, so the March 20 fire caused her no loss and there is nothing to indemnify. (Contrast life insurance, where insurable interest need only exist at inception.) A property policy is a personal contract that does not automatically transfer with the deed — assignment requires the insurer's written consent — so the buyer has no claim either and must rely on his own coverage. Maria would be entitled to a return of unearned premium, not a loss payment.

   Reference General P&C concept — insurable interest (property: required at time of loss)

2. The National Hurricane Center issues a hurricane warning for part of Florida at 6:00 a.m. Monday. The last hurricane watch or warning for any part of Florida is terminated at 8:00 a.m. Wednesday. At 6:00 a.m. Friday an oak loosened by the storm falls on an insured Sarasota home. The policy has a 2% hurricane deductible and a $1,000 all-other-perils deductible. Which deductible applies?

   • AThe hurricane deductible — the occurrence period runs until 72 hours past the last watch or warning for any part of Florida.Correct
   • BThe all-other-perils deductible — hurricane coverage ends the moment the warning for the insured's own county is lifted.
   • CThe all-other-perils deductible — the hurricane occurrence period continues for only 24 hours after the last warning is terminated.
   • DThe hurricane deductible, but only if the National Weather Service later classifies the storm as a major hurricane at the point of Florida landfall and the insured's county was under a mandatory evacuation order.

   Why: Section 627.4025, F.S., defines the hurricane occurrence as beginning when a hurricane warning is issued for any part of Florida and ending 72 hours after the last hurricane watch or hurricane warning for any part of Florida is terminated. Seventy-two hours after 8:00 a.m. Wednesday is 8:00 a.m. Saturday, so a Friday 6:00 a.m. loss is still within the hurricane window and the hurricane deductible applies. Two details trip candidates up. First, the clock is asymmetric: only a hurricane WARNING starts the period, but the period does not close until 72 hours after the last hurricane WATCH OR WARNING is terminated — so a lingering watch extends coverage even after every warning has been lifted. Second, both the trigger and the cutoff are keyed to a watch or warning for any part of Florida, not just the insured's county, and the storm's category is irrelevant to which deductible applies.

   Reference s. 627.4025(2)(c), F.S.

3. A contractor's welding sparks start a fire that damages an insured warehouse. Two weeks after the loss and before any claim payment, the building owner signs a release absolving the contractor of all liability, in exchange for the contractor finishing an unrelated job at no charge. What is the effect on the owner's fire claim?

   • ANone — subrogation is a right created by Florida statute and cannot be impaired by any agreement between the insured and a third party.
   • BNone — the insurer must pay the claim in full and may still sue the contractor, because a release signed by the insured does not bind the insurer.
   • CThe owner has impaired the insurer's subrogation rights, and the insurer may reduce or deny the claim to the extent of that impairment.Correct
   • DThe release is valid and the insurer must pay in full, because an insured is always free to waive recovery rights against a contractor.

   Why: Subrogation lets the insurer step into the insured's shoes and recover from the party legally responsible for the loss, which supports indemnity by keeping the insured from collecting twice. The policy's subrogation condition obligates the insured to do nothing after a loss to prejudice those rights. Signing a post-loss release destroys the insurer's recovery against the contractor, so the insurer may reduce or deny payment to the extent it was harmed. Timing is the key distinction: many policies expressly permit a waiver of subrogation signed in writing before a loss occurs, which is standard practice in construction and lease contracts.

   Reference ISO HO-3 / commercial property Subrogation (Transfer of Rights of Recovery) condition

4. A one-story retail building in Doral has exterior walls of 8-inch concrete block, a metal deck roof carried on unprotected steel joists, and a concrete slab floor. Under the ISO construction classifications used to rate commercial property, this building is:

   • AJoisted masonry, since masonry walls here support a combustible roof deck
   • BNoncombustible, since the unprotected steel joists rule out a masonry class
   • CMasonry noncombustible, since masonry walls carry a noncombustible roofCorrect
   • DModified fire resistive, since the block walls carry a one-hour fire rating

   Why: Masonry noncombustible (ISO Class 4) is the class for a building whose exterior walls are built of masonry materials — adobe, brick, concrete, gypsum block, hollow concrete block, stone or tile — and whose floors and roof are of metal or other noncombustible material. The class definition turns on the materials used, not on any minimum wall thickness. Joisted masonry is the tempting wrong answer because the walls really are masonry, but that class (Class 2) requires combustible floors or roof — classically wood joists — and this roof deck is steel. The plain Noncombustible class (Class 3) is reserved for buildings whose walls are noncombustible but not masonry; masonry walls move the risk up a class. Modified fire resistive needs masonry or fire-resistive walls, floors and roof rated one hour or more but less than two hours, which an unprotected steel deck cannot meet.

   Reference ISO Commercial Lines Manual — building construction classifications, Class 1 Frame through Class 6 Fire Resistive; Class 2 Joisted Masonry and Class 4 Masonry Non-Combustible are defined by wall, floor and roof materials, with no stated minimum wall thickness

5. While its fire-damaged plant is rebuilt, a print shop rents a nearby storefront and leases temporary presses so it can keep filling customer orders. Those outlays are paid under:

   • AExtra expense coverage, which funds costs that avoid or shorten a shutdownCorrect
   • BBusiness income coverage, since the rentals stand in for lost net profit
   • CDebris removal coverage, as an expense arising out of the covered fire loss
   • DExtended business income, which starts once operations are fully resumed

   Why: Extra Expense pays the necessary expenses the insured incurs during the period of restoration which it would not have incurred but for the loss, specifically to avoid or minimize the suspension and continue operations. Business income is the tempting distractor, but it indemnifies the net income actually lost plus normal operating expenses that continue during the suspension — it does not reimburse rent on substitute premises. Extended Business Income is a separate additional coverage at A.5.c. that begins only after operations are resumed and runs 60 consecutive days in the 10 12 edition. Debris removal pays to clear debris of covered property, not to relocate a business. Note the structure of the form: Extra Expense is a primary insuring agreement at A.2., not an additional coverage, and it is provided at a premises only if the declarations show that Business Income coverage applies there.

   Reference ISO CP 00 30 10 12 (Business Income (And Extra Expense) Coverage Form) — A.2. Extra Expense; A.5.c. Extended Business Income

6. An ocean marine cargo policy provides that the insurer pays nothing until the loss reaches $5,000, and that once the loss reaches that figure the insurer pays it in full with nothing subtracted. This is:

   • AA straight deductible, subtracted from every loss the policy pays
   • BA percentage deductible measured against the limit, not a flat figure
   • CA self-insured retention the insured funds before the insurer responds
   • DA franchise deductible, which drops out once the threshold is reachedCorrect

   Why: A franchise deductible sets a threshold rather than a subtraction: below the figure the insurer pays nothing, and at or above it the insurer pays the loss in full. It survives mainly in ocean marine and some crop forms. A is the near-miss — a straight or flat deductible is subtracted from every covered loss, so a $6,000 loss would net $1,000 rather than $6,000. A percentage deductible is stated as a percentage of the limit or of the insured value, as Florida's hurricane deductible is, not as a payment trigger. A self-insured retention differs again: the insured pays and typically administers losses inside the retention, and the insurer's limit sits above it.

   Reference General P&C concept — franchise deductible versus straight (flat) and percentage deductibles; ocean marine practice

7. The Section I exclusions of the ISO HO-3 open with the words "regardless of any other cause or event contributing concurrently or in any sequence to the loss." What does that lead-in accomplish?

   • AIt bars the loss only if the excluded peril was the last event to occur
   • BIt preserves coverage whenever a covered peril contributes to the damage
   • CIt bars the loss even when a covered peril also contributes to the damageCorrect
   • DIt makes the insured prove which peril caused the larger share of damage

   Why: This is the anti-concurrent causation lead-in. It contracts around the efficient proximate cause rule: if an excluded peril such as flood or earth movement contributes at all, the loss is excluded even though a covered peril such as wind contributed too. A is the near-miss — candidates read "concurrently" and stop, but the added words "or in any sequence" make the order of events irrelevant, so an excluded peril that came first or last still defeats the claim. Florida's concurrent cause doctrine, which favors the policyholder when independent perils converge, applies only where the policy contains no such clause.

   Reference ISO HO 00 03 (05 11) Section I – Exclusions, paragraph A lead-in; Sebo v. American Home Assurance Co., 208 So. 3d 694 (Fla. 2016)

8. A burglar takes a diamond tennis bracelet and a shotgun from an insured's home in Coral Gables. The policy is an unendorsed ISO HO-3, form HO 00 03 05 11, and nothing is scheduled. The special theft limits that apply are:

   • A$2,500 for the jewelry and $1,500 for the firearm and its equipment
   • B$1,500 for the jewelry and $2,500 for the firearm and its equipmentCorrect
   • C$1,500 for each item, because both fall in one theft sublimit group
   • DNo sublimit at all, because theft on the premises is a covered peril

   Why: The Special Limits Of Liability set $1,500 for loss by theft of jewelry, watches, furs and precious or semiprecious stones, and $2,500 for loss by theft of firearms and related equipment. A simply reverses the two figures, which is the single most common error on this item. These special limits are the total for each category in any one loss, they apply only to loss by theft — fire damage to the same bracelet is paid up to the full Coverage C limit — and they do not increase Coverage C. The stem names the form edition because ISO's 2022 revision (HO 00 03 03 22) raised these two figures to $2,000 and $3,000, while Florida study material still teaches the 2011 numbers. Scheduling the items on a personal articles floater removes the sublimit and usually the deductible.

   Reference ISO HO 00 03 05 11, Coverage C – Personal Property, 3. Special Limits Of Liability e. ($1,500 jewelry theft) and f. ($2,500 firearms theft)

9. A kitchen fire at a Tampa restaurant costs $180,000 to repair the building and equipment, and the owner also loses $60,000 of net income during the eleven weeks the restaurant is closed for those repairs. How are the two amounts classified?

   • AThe repair cost is a direct loss and the lost income is an indirect, or consequential, loss.Correct
   • BThe repair cost is an indirect loss and the lost income is the direct loss of the occurrence.
   • CBoth amounts are direct losses, because one covered peril is what produced each of them.
   • DBoth are indirect losses, because the fire and not the policy is what closed the restaurant.

   Why: A direct loss is the physical damage the peril itself does to covered property — here the $180,000 of fire damage to the building and equipment. An indirect or consequential loss is the financial loss that follows from that damage rather than from the peril touching the property; because it is measured over time it is also called a time element loss. The distinction controls which form pays: the Building and Personal Property Coverage Form insures direct physical loss only, and the $60,000 of lost net income is payable solely if a business income form or endorsement was added. Option C is the tempting error — one peril can produce both kinds of loss, and a shared cause does not make both losses direct.

   Reference General P&C concept — direct versus indirect (time element) loss; ISO CP 00 10 and ISO CP 00 30

10. An unendorsed ISO HO-3 insures a Port St. Lucie dwelling for $300,000. The full replacement cost of the dwelling immediately before the loss is $500,000. A covered loss damages part of the dwelling: the cost to repair that part is $80,000 and its actual cash value is $50,000. The deductible is $2,500 and the insured has completed the repairs and submitted the bills. What does the insurer pay?

    • A$77,500
    • B$47,500
    • C$45,500
    • D$57,500Correct

    Why: The HO-3 Loss Settlement condition pays buildings at replacement cost only if the amount of insurance is 80 percent or more of the full replacement cost immediately before the loss. Eighty percent of $500,000 is $400,000, and only $300,000 was carried, so the insurer pays the greater of (a) the actual cash value of the damaged part, $50,000, or (b) that proportion of the cost to repair which the amount of insurance bears to 80 percent of replacement cost: $300,000 / $400,000 x $80,000 = $60,000. The greater figure is $60,000, less the $2,500 deductible, or $57,500. Choice C is the trap: it divides by the full $500,000 replacement cost instead of by the 80 percent figure. Note also that until repairs are actually complete the insurer owes no more than actual cash value, unless the repair cost is both less than 5 percent of the amount of insurance and less than $2,500.

    Reference ISO HO-3 (HO 00 03 05 11) — Section I Conditions, C. Loss Settlement

Topics inside this domain

• Florida's hurricane deductible
• Florida's separate roof deductible
• Florida property claim deadlines
• Law and ordinance and replacement cost

Drill other domains

• Types of Property Policies (14%)
• 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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