CPCU 551 Practice Exam 2

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1. Coverage for business income losses that continues after the period of restoration ends, and continues until business income returns to normal, or a maximum of 60 days, is provided with which of the following?

A. Business Income.

B. Extended Business Income.

C. Extended Period of Indemnity.

D. Business Income and Extra Expense.

2. Radical Hardware Store is insured by Deluxe Insurer under a Building and Personal Property Coverage Form (BPP). Radical purchased BPP Replacement Cost optional coverage for the building and business personal property. The store sustained fire damage, causing the following losses:
• Building - $40,000 replacement cost, $31,000 actual cash value.
• Business personal property - $20,000 replacement cost, $6,000 actual cash value.
Radical made no repairs to the damaged property and reported the claim 15 months after the fire. What is the amount that Deluxe will pay under the claim?

A. $37,000.

B. $46,000.

C. $51,000.

D. $60,000.

3. An insured has a Business Income (and Extra Expense) Coverage Form (BIC) with an Extended Period of Indemnity coverage option for 120 days. Following a covered loss, the period of restoration is 90 days. It takes an additional 75 days for revenue to return to normal. Ignoring waiting periods, for what period would the BIC cover the business income loss?

A. 75 days.

B. 120 days.

C. 150 days.

D. 165 days.

4. Which one of the following losses would be covered under the Building and Personal Property Coverage Form (BPP) with the Causes of Loss – Basic Form?

A. A building is closed due to radioactive contamination.

B. Electrical service to the insured premises is interrupted because of lightning damage to an overhead power line two miles away.

C. The weight of accumulated rain on the roof of a building causes the building to abruptly collapse.

D. An office building is vandalized with rocks and spray paint.

5. Which one of the following statements is correct regarding the Standard Property Policy (SPP)?

A. It is designed to cover buildings and personal property for standard risks.

B. It is a streamlined multiline policy used to expedite the underwriting process.

C. It reduces coverage for building losses by 15% when less than 31% of the building has been occupied for greater than 60 days.

D. It provides no coverage if a building is unoccupied, but not vacant, for more than 60 days.

6. Which one of the following statements is correct regarding layered property insurance?

A. Layered policies usually contain a coinsurance clause.

B. The combined premium of layered policies is usually higher than the premium an insurer would charge for a single policy subject to standard coinsurance rules because the insured will need to purchase insurance to value.

C. Minimum premium requirements for each layer may make the cost of layered coverage higher than the cost of a standard policy.

D. Deductibles are usually much lower than those used in most standard commercial property policies.

7. Which one of the following statements is correct regarding the analysis of loss exposures?

A. The frequency and severity of loss exposures tend to be directly related.

B. The Prouty Approach considers both timing and total dollar losses when considering whether to obtain insurance.

C. The timing dimension in the analysis of loss exposures is critical because funds must be available to pay for claim losses in full.

D. Data credibility may be affected by internal factors such as changes in the way an organization operates.

8. All of the following statements are correct regarding flood insurance, EXCEPT:

A. In the regular program, the maximum amount of insurance available for building coverage is $500,000.

B. In the regular program, the maximum amount of insurance available for personal property is $250,000.

C. In the emergency program, the maximum amount of insurance available for building coverage is $100,000.

D. In the emergency program, the maximum amount of insurance available for personal property is $100,000.

9. Moe’s Barber Shop is insured under a commercial package policy that includes the Business Income (and Extra Expense) Coverage Form. As a result of fire damage, Moe’s Barber Shop sustained an actual loss of business income at the described premises. Moe decided to rent a temporary location and rent substitute equipment while his shop was being repaired. However, while at the temporary location, Moe’s regular customers visited other barbers and Moe’s income was below normal levels. Once his barber shop was repaired and he was able to move back in, Moe’s business income returned to normal. Which one of the following insuring agreements would best apply to Moe’s claim under the Business Income (and Extra Expense) Coverage Form?

D. Business Income, Extra Expense, and Extended Business Income insuring agreement.

A. Business Income and Extra Expense insuring agreements.

B. Business Income, Extra Expense, and Newly Acquired Locations insuring agreements.

C. Business Income, Extra Expense, and Civil Authority insuring agreements.

10. Which one of the following is a type of commercial crime insurance form that covers losses actually sustained during the policy period and discovered no later than one year after the expiration of the policy?

A. Loss sustained form.

B. Prospective form.

C. Discovery form.

D. Retroactive form.

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11. Which one of the following statements is correct regarding the Earthquake and Volcanic Eruption Endorsement to a commercial property policy?

A. The endorsement excludes coverage for underground pipes and foundations.

B. Any earthquake shock that occurs more than 72 hours after the original event is considered a separate event.

C. The Sublimit version of the endorsement contains a coinsurance condition.

D. The endorsement covers losses caused by tsunami attributable to an earthquake.

12. Which one of the following statements is correct regarding risk financing?

A. A disadvantage of risk transfer is that it requires the company to monitor, maintain, and report compliance practices.

B. Risk retention reduces an organization’s cash flow variability.

C. Retention generally reduces the level of liquidity needed by an organization more than risk transfer.

D. The primary benefit of risk retention is that it allows an organization to manage its cost of risk.

13. Alphie owns a retail shop that generates net income annually in the amount of $60,000. She is interested in purchasing Business Income Insurance to protect her income stream in the case of business interruption. Based on her estimates, her probable maximum loss is $40,000 in the case of business interruption. To be properly protected, Alphie should select, at a minimum, what coinsurance percentage?

A. 50%.

B. 60%.

C. 70%.

D. 100%.

14. Which one of the following statements is correct regarding inland marine and ocean cargo insurance policies?

A. A contractors equipment floater requires a detailed schedule of all insured equipment.

B. Instrumentalities of transportation and communication include bridges, docks, pipelines, and power lines.

C. An installation floater covers a contractor’s interest in building supplies only while those supplies are at the work site.

D. Carrier responsibility for a loss eliminates the owner’s loss exposure.

15. Bill’s Records and Tapes has a Building and Personal Property Coverage Form (BPP) that covers two buildings and their contents with a blanket limit of $5,000,000. A covered cause of loss destroys one of the buildings and its contents. The value of the destroyed building and its contents listed in the insured’s statement of values is $2,000,000, and the policy has an Agreed Value Option and a 20% margin clause. What is the most the insured could collect for this loss?

A. $2,000,000.

B. $2,400,000.

C. $3,600,000.

D. $5,000,000.

16. Randy’s Tire Shop (Randy’s) is covered by a businessowners policy (BOP) with a business personal property limit of $1,000,000 and an automatic seasonal increase provision. Randy’s sustained a business personal property loss of $1,300,000. In the 12 months prior to the loss, Randy’s owned business personal property with a monthly average value of $1,000,000. How much will Randy’s receive under the BOP for this loss?

A. $750,000.

B. $1,000,000.

C. $1,250,000.

D. $1,300,000.

17. PowerCo is insured under a Business Income (and Extra Expense) Coverage Form (BIC), with Monthly Limit of Indemnity optional coverage. PowerCo’s BIC contains a limit of insurance of $400,000 and a ¼ Monthly Limit of Indemnity fraction. During the policy period, PowerCo experienced the following business income losses as a result of a covered cause of loss:
• April – $100,000
• May – $120,000
• June – $60,000
How much of the business income losses will the BIC cover?

A. $70,000.

B. $200,000.

C. $260,000.

D. $280,000.

18. Bergen Steel Company owns several very large items of equipment, including cranes and bulldozers. It uses this equipment in its steel operations. Which one of the following inland marine coverage forms would be the most appropriate to provide coverage for this equipment?

A. Difference in conditions.

B. Contractors equipment.

C. Builders risk.

D. Motor truck cargo liability.

19. Which one of the following explosions would most likely be covered by equipment breakdown insurance but excluded from coverage under commercial property insurance?

A. Combustion explosion.

B. Explosion of a steam boiler.

C. Furnace explosion.

D. Explosion of an air tank.

20. The main difference between the two “Inside the Premises” insuring agreements included in the ISO Commercial Crime Coverage Form is that:

A. One provides coverage on a named-perils basis, while the other provides coverage on an open-perils basis.

B. One provides coverage for money and securities, while the other provides coverage for other property.

C. One provides coverage for property damage losses, and the other provides coverage for liability losses.

D. One provides coverage only for robbery, while the other provides coverage only for burglary.

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21. Which one of the following statements is correct regarding business income coverage?

A. Business income coverage is considered a “time element” because coverage is only provided for the number of days specified on the declarations page.

B. Business income insurance covers the reduction in an organization’s net income caused by accidental physical damage to property.

C. Extra expenses are expenses that will not continue during a business interruption.

D. The most likely starting point for estimating the maximum loss of business income are the noncontinuing expenses.

22. Which one of the following statements is correct regarding Difference in Conditions (DIC) policies?

A. They usually do not require coinsurance.

B. They must be filed in each state they are written.

C. They are used most frequently with smaller insureds.

D. The streamlined underwriting and standard policy conditions allow for faster and more convenient coverage.

23. Which one of the following would be covered under the ISO Commercial Crime Coverage form?

A. A thief breaks into a business by shattering a window and attempts to break into a safe using explosives. The attempt is unsuccessful; however, the explosives cause $5,000 damage to the safe.

B. A hacker gains remote access to a company’s computer system and steals $50,000 from the company’s accounts.

C. A company lost $100,000 in contracts after an employee sold the secret formula to their household cleaning solution to a competitor.

D. As a result of their quarterly internal audit, a business realizes $25,000 of inventory was stolen by an employee.

24. The Valuable Papers and Records coverage extension of the Building and Personal Property (BPP) Coverage Form:

A. Pays for labor costs to transcribe or copy duplicate information.

B. Provides limited coverage for inventory losses incurred due to accounting errors.

C. Includes coverage for electronic data losses.

D. Contains a 90% coinsurance requirement.

25. Which one of the following types of businesses would be excluded from coverage under a standard ISO businessowners policy (BOP)?

A. Credit union.

B. Retail outlet store.

C. Hardware store.

D. Flower shop.

26. Perry Industries purchased a Building and Personal Property Coverage Form (BPP), endorsed to include ISO’s Flood Coverage Endorsement. A flood occurred at their factory, which triggered an explosion. The BPP contains a $4,000 deductible and the flood endorsement contains a $6,000 deductible. With respect to coverage under the policy, what will be the amount of the deductible applied to this loss?

A. $4,000.

B. $5,000.

C. $6,000.

D. $10,000.

27. Which one of the following statements is correct regarding the Loss Conditions in the Business Income Coverage (BIC) Form?

A. The Loss Determination condition indicates that the amount of loss is based on net income that might have been earned from business increases resulting from the covered cause of loss.

B. The Loss Payment condition stipulates that the insurer agrees to pay for a covered loss within 120 days of the date of an agreed-upon amount of loss.

C. The Relevant Value condition is designed to encourage the insured to carry insurance to a stipulated percentage of the business income value at risk.

D. The Appraisal condition allows the insured or insurer to demand an appraisal of a loss if the two disagree on the amount of the loss.

28. Which one of the following types of water damage would be covered under the Building and Personal Property (BPP) Coverage Form with Causes of Loss - Broad Form coverage?

A. Sump pump backup.

B. Underground water seeping through the foundation.

C. Mudslide.

D. Sprinkler leakage.

29. Which one of the following types of marine insurance is meant to cover a particular shipment of goods specified in the policy, and is commonly used to cover valuable property being moved from its place of manufacture to its place of use?

A. Annual transit policy.

B. Trip transit policy.

C. Motor truck cargo policy.

D. Open cargo policy.

30. Power’s Flowers, a small chain of stores selling floral arrangements, has an extremely busy period during the two weeks before Valentine’s Day, requiring it to significantly increase its inventory during this period. To adequately cover its fluctuating inventory values and keep premiums to a minimum, Power’s Flowers should purchase a Building and Personal Property Coverage Form (BPP) with:

A. Spoilage Coverage endorsement.

B. Value Reporting Form.

C. An Agreed Value coverage extension.

D. The Peak Season Limit of Insurance endorsement.

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31. Sally’s Café has an ISO Commercial Crime Coverage Form, with a limit of $20,000. The Café suffered a covered money loss of $30,000. The insurance company paid Sally’s Café $20,000, the limit on the policy. Subsequently, the insurer recovered $13,000 of the stolen funds. How would the recovery be divided between the Sally’s Café and the insurer?

A. Sally’s Café - $0; Insurer - $13,000.

B. Sally’s Café - $6,500; Insurer - $6,500.

C. Sally’s Café - $10,000; Insurer - $3,000.

D. Sally’s Café - $13,000; Insurer - $0.

32. Which one of the following statements is correct regarding conditions contained in the Commercial Property Conditions Form?

A. The Control of Property condition states that a violation of a policy condition at one location will suspend coverage at all locations.

B. The Two or More Coverages condition describes how to apportion a loss among multiple policies.

C. The Legal Action Against Us condition requires the insured to bring legal action against the insurer within 60 days after the insurer denies coverage for a loss.

D. The No Benefit to Bailee condition reinforces the insurer’s right of subrogation against the bailee.

33. Which one of the following statements is correct regarding the various types of Inland Marine and Ocean Cargo insurance policies?

A. The open cargo policy is an inland marine insurance contract that covers overland shipments by vessel or aircraft.

B. A trip transit policy is usually purchased by frequent shippers.

C. Contractors equipment is the largest class of commercial inland marine insurance.

D. A motor truck cargo policy “carrier’s form” provides transit coverage for organizations that use their own trucks to transport their own goods.

34. At a milk processing plant, a spring broke on a valve in a milk processing machine. It caused raw milk to be mixed together with milk that had already been processed. This loss would be considered an example of which of the following?

A. Boilers and Pressure Vessels Breakdown.

B. Electrical Equipment Breakdown.

C. Mechanical Equipment Breakdown.

D. Air Conditioning and Refrigeration Equipment Breakdown.

35. Which one of the following statements is correct regarding surety bonds?

A. There are two parties to the contract: the surety and the obligee.

B. The coverage period is indefinite.

C. An attachment bond is a type of judicial bond typically provided by the defendant.

D. An appeal bond is a type of judicial bond guaranteeing that a defendant who appeals an adverse decision to a higher court will pay all court costs of the appeal.

36. Which one of the following endorsements is designed to help the insured avoid the costs of overinsuring or underinsuring business personal property, such as inventory?

A. Spoilage Coverage endorsement.

B. Brands and Labels endorsement.

C. Value Reporting Form endorsement.

D. Additional Covered Property endorsement.

37. Office Solutions (OS) is an office supply store. The store is insured under an ISO Commercial Crime Coverage Form with the following coverages:

Insuring Agreements Limit of Insurance Deductible Per Occurrence
Employee Theft $250,000 $10,000
Forgery or Alteration $250,000 $10,000
Inside the Premises – Theft of Money and Securities $50,000 $5,000
Money Orders/Counterfeit Money $25,000 $1,000

A burglar entered the store while it was closed, broke into the safe, and stole $47,000. It cost $6,000 to repair the damage to the safe. OS submitted a claim for $53,000. How much of the loss will be covered under OS’ crime policy?

A. $1,500.

B. $2,000.

C. $48,000.

D. $50,000.

38. Which one of the following statements is correct regarding the Businessowners Policy (BOP)?

A. By packaging several coverages together, it can result in both lower premiums and broader coverages.

B. By packaging several coverages together, it can help to increase the chances of adverse selection.

C. By conducting a thorough manual underwriting process for each individual policy, it can help to reduce the chances of adverse selection.

D. The additional burden of the more thorough underwriting process is balanced out by the convenience of having one policy that covers all or most of an insured’s needs.

39. If an employee accidentally drove a company-owned truck into an insured’s building, causing damage to the building, which Cause of Loss Form under the Building and Personal Property Coverage Form (BPP) would cover the loss?

A. Special Form.

B. Named Perils Form.

C. Basic Form.

D. Broad Form.

40. Which one of the following statements is correct regarding risk management?

A. Risk control measures generally take one of two approaches: the monetization approach and the human behavior approach.

B. Risk control measures are designed to address the links in the chain of events and the unrelated events that converge.

C. The two main classifications of risk management techniques are risk control or risk acceptance.

D. All loss exposures faced by organizations can be classified as liability, property, or personnel.

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41. Blanket insurance is often a better choice than specific insurance because:

A. Blanket insurance allows for a lower coinsurance clause.

B. The agreed value option can be used with blanket insurance, but it is not available with specific insurance.

C. Blanket insurance greatly reduces the risk of underinsurance.

D. Blanket insurance insures specific values of property at various locations.

42. Tanya’s detached garage at her home was damaged due to a fire. Tanya used her garage exclusively to park her car when she was at home. While the garage is being repaired, Tanya will park her car on the street in front of her home. The most likely financial consequence Tanya will experience from the fire damage is:

A. Cancellation of her homeowner’s insurance policy.

B. Extra expenses incurred.

C. Loss of business income.

D. Reduction in the value of the garage.

43. Which one of the following perils would be covered under the Outdoor Property coverage extension of the Business and Personal Property (BPP) coverage form?

A. Explosion.

B. Windstorm.

C. Vandalism.

D. Vehicles.

44. Which one of the following statements is correct regarding differences between the Extra Expense Coverage Form and the Business Income (and Extra Expense) Coverage Form?

A. The Extra Expense Coverage Form offers many more coinsurance options than the Business Income (and Extra Expense) Coverage Form.

B. The extra expense coverage in the Extra Expense Coverage Form is subject to more exclusions than the extra expense coverage form in the Business Income (and Extra Expense) Coverage Form.

C. The Extended Period of Indemnity optional coverage for the Extra Expense Coverage Form extends coverage for 30 days, while this optional coverage under the Business Income (and Extra Expense) Coverage Form extends coverage for 90 days.

D. The Business Income (and Extra Expense) Coverage Form does not include the Limits on Loss Payment condition of the Extra Expense Coverage Form.

45. The Legal Liability Coverage Form has no coinsurance condition because:

A. It is difficult for an insured to know the value of property of others in its care.

B. The rates are high enough that a coinsurance condition is unnecessary.

C. The insurer will not pay above the limit of insurance with or without a coinsurance condition.

D. The Form was developed before coinsurance became standard practice.

46. The ISO Barns, Outbuildings and Other Farm Structures Coverage Form would provide coverage for which of the following?

A. Silos.

B. Hay.

C. Private garages.

D. Crops.

47. Which one of the following statements is correct regarding blanket insurance?

A. The minimum coinsurance clause is 80%.

B. The rate is the same as for 90% coinsurance.

C. There is a 5% discount that may be applied for meeting higher coinsurance levels.

D. To meet coinsurance requirements, the insured with blanket insurance must buy more insurance than otherwise would be required.

48. John and Susan, a married couple, are on vacation in San Francisco. Susan brought some of her expensive jewelry on the vacation. Which one of the following types of insurable interest does their hotel have in Susan’s jewelry?

A. Exposure to legal liability.

B. Contractual obligation.

C. Factual expectancy.

D. Ownership interest in property.

49. Which one of the following provides coverage for residential buildings under the ISO Farm Program?

A. Coverage A - Dwellings.

B. Coverage C - Household Personal Property.

C. Coverage E - Scheduled Farm Personal Property.

D. Coverage G - Barns, Outbuildings, and Other Farm Structures.

50. Clarissa is an employee of The Smart Store, a store that sells smart products. She was working at the register one day, and she witnessed a customer steal a smart phone from the store. Is this theft covered by the store’s commercial crime policy?

A. No, because customer theft is never covered under a commercial crime policy.

B. Yes, provided the policy contains Inside the Premises – Robbery or Safe Burglary of Other Property coverage.

C. Yes, provided the policy contains Forgery or Alteration coverage.

D. Yes, provided the policy contains Inside the Premises – Theft of Money and Securities coverage.

CPCU 551 Practice Exam 2

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