Chapter 5 Self-Check Quiz

Twenty questions. Answer before opening the key at the bottom. The multiple-choice questions test recall and recognition; the short-answer questions test whether you can use the ideas — that is, whether you can read a contract, not just describe one.

Multiple choice

  1. The four building blocks of any insurance policy, captured by the DICE mnemonic, are: a. Damages, Indemnity, Coverage, Endorsement b. Declarations, Insuring agreement, Conditions, Exclusions c. Deductible, Insured, Claim, Exposure d. Definitions, Indemnity, Conditions, Exceptions

  2. The part of the policy that states the specifics of the individual contract — named insured, limits, deductibles, policy period, and the schedule of forms — is the: a. Insuring agreement b. Declarations page c. Conditions d. Exclusions

  3. Reading a policy "within its four corners" means: a. Reading only the declarations page b. Reading the whole contract, every clause given effect, not just the one that supports your answer c. Reading only the four most important pages d. Reading only the insuring agreement and exclusions

  4. Under a named-perils property form, on a loss whose cause cannot be determined: a. The insurer must prove an exclusion applies, or the claim is paid b. The insured must prove the loss was caused by a listed peril, or the claim fails c. Coverage applies automatically d. The claim is split 50/50

  5. Under an open-perils ("all-risk") form, coverage applies to: a. Only the perils specifically listed b. Any cause of loss except those specifically excluded c. Only catastrophic perils d. Nothing until an endorsement adds a peril

  6. The insuring agreement is generally read broadly (in favor of coverage), while exclusions are read: a. Just as broadly b. Narrowly, against the insurer that drafted them c. Only by the insured d. Not at all once a claim is filed

  7. In a liability policy, the "duty to defend" is: a. Narrower than the duty to indemnify b. Broader than the duty to indemnify — the insurer must defend suits that potentially fall within coverage c. Identical to the duty to indemnify d. Owed only after a judgment

  8. Which of the following is a condition (rather than an exclusion or a grant)? a. A carve-out for war and nuclear hazard b. The requirement that the insured give prompt notice of a loss and cooperate in the investigation c. The promise to pay for direct physical loss d. The list of covered perils

  9. Exclusions exist for several sound reasons. Which is not one of the three given in the chapter? a. To exclude uninsurable or catastrophic risk b. To exclude risk that belongs in a different policy c. To make the policy longer and harder to read d. To exclude losses the insured should control or expect

  10. An exclusion that reads "We do not cover X; but this exclusion does not apply to Y" illustrates: a. A definition b. An exception that restores coverage for part of what the exclusion removed c. A condition d. A manuscript form

  11. When an endorsement conflicts with the base policy form it amends: a. The base form controls b. The endorsement generally controls (specific and later beats general and earlier) c. Neither applies d. The insured chooses which applies

  12. "Silent cyber" refers to: a. A cyber policy with a low limit b. Standard property/liability forms that neither clearly cover nor clearly exclude cyber-triggered losses, creating unpriced exposure c. An endorsement that excludes cyber d. A manuscript cyber form

  13. Bureau (ISO) forms differ from manuscript forms chiefly in that bureau forms are: a. Always broader in coverage b. Standardized, filed, and court-tested, with relatively settled meanings c. Drafted fresh for each insured d. Only used in surplus lines

  14. A genuinely novel or hard-to-fit risk often migrates to the surplus-lines market in part because: a. Surplus-lines carriers cannot use ISO forms b. Surplus-lines carriers have greater freedom of rate and form, so manuscript wording is easier to use c. Surplus lines is cheaper d. Admitted carriers are prohibited from writing manufacturing risks

  15. From an underwriting standpoint, the most important reason to read every endorsement on a policy is that: a. Endorsements are required by law to be read aloud b. Coverage is the net of the base form plus every endorsement, and the account-specific underwriting (and price) lives in the endorsements c. Endorsements never change coverage d. The declarations page already summarizes them completely

Short answer

  1. Explain why "reading the policy" is genuinely difficult, naming the three reasons the chapter gives (non-linear, layers of precedence, defined terms). (§5.1)

  2. A warehouse suffers an unexplained loss. State the coverage outcome under a named-perils form and under an open-perils form, and explain why the difference comes down to who bears the burden of proof. (§5.3)

  3. Give one example of an exclusion that exists because the peril is uninsurable/catastrophic, and one that exists because the loss is expected or within the insured's control. (§5.5)

  4. You delete a coverage-restricting exclusion by endorsement to win an account, but your pricing model priced the clean base form and never saw the endorsement. Explain, in terms of the combined ratio, why "the model approved the price" is not a defense. (§5.6, Ch. 3)

  5. Using the Harbor Steel Underwriting File, explain why writing the property coverage on an open-perils form means the exclusions (not a list of covered perils) define how the catastrophe exposure is handled. (The Underwriting File, §5.3, §5.5)

Answer key (try all twenty first) **Multiple choice:** 1. **b** · 2. **b** · 3. **b** · 4. **b** · 5. **b** · 6. **b** · 7. **b** · 8. **b** · 9. **c** · 10. **b** · 11. **b** · 12. **b** · 13. **b** · 14. **b** · 15. **b** **Short answer:** 16. A policy is **non-linear** (the answer to a coverage question is assembled from pieces scattered across declarations, insuring agreement, exclusions, definitions, and endorsements — never stated in one place); it is written in **layers of precedence** (specific beats general, endorsement beats base form, later beats earlier, so not all sentences carry equal weight); and it relies on **defined terms** that do not mean what they mean in ordinary speech (you must read the Definitions section before you can trust your reading of anything else). 17. Under a **named-perils** form, the insured must prove the loss was caused by a *listed* peril; if the cause cannot be pinned to a listed peril, the claim **fails**. Under an **open-perils** form, the insurer must prove an *exclusion* applies; if it cannot, the claim is **paid** even though no one can say what happened. The whole difference is which party carries the burden of proof, which the architecture of the insuring agreement assigns in opposite directions. 18. *Uninsurable/catastrophic*: flood, earthquake, war, or nuclear hazard — correlated or vast perils that hit many insureds at once and break the pool (failing the "not catastrophic to the insurer" criterion). *Expected or within the insured's control*: ordinary wear and tear, gradual deterioration, faulty maintenance, or intentional acts — losses that are not fortuitous and would create moral/morale hazard if covered (failing the "fortuitous loss" criterion). (Specific examples will vary.) 19. Deleting the exclusion **grants additional coverage**, which raises expected losses and therefore raises the *adequate* premium above what the model produced for the clean base form. If you charge the base-form price for broadened coverage, you are **under-pricing the risk**, and the extra losses will surface in a higher loss ratio and a worse combined ratio two or three years later. "The model approved the price" is no defense because the model priced a *different contract* than the one you actually wrote — it never saw the endorsement, so its approval was for coverage you didn't sell. Pricing follows risk, and you changed the risk after the model spoke. 20. Harbor Steel's property is written on an **open-perils (special) cause-of-loss form**, which covers *any* cause of loss *except* those excluded — so coverage is defined by what the **exclusions** carve out, not by a list of covered perils. The standard **flood** and **earth-movement** exclusions are exactly why the coastal/storm-surge catastrophe exposure must be handled separately (specialty coverage, a separate policy, or a program like the NFIP), and the **wear-and-tear** exclusion is why the thirty-year-old roof's gradual deterioration is the insured's problem, not the policy's. On an open-perils form, reading the exclusions *is* reading the catastrophe treatment.