Chapter 19 Quiz

Twenty questions to check your grasp of commercial property underwriting. The answer key is in the collapsed block at the bottom — work all twenty before you open it. All dollar figures are constructed teaching examples.

Multiple choice

1. The ISO Causes of Loss form that covers "risk of direct physical loss from any cause except those specifically excluded" is the:

  • A. Basic form
  • B. Broad form
  • C. Special form
  • D. Agreed-value form

2. Business income coverage primarily pays:

  • A. The cost to rebuild the damaged building
  • B. The net income the business would have earned plus continuing expenses during the shutdown
  • C. The market value of the destroyed inventory
  • D. The legal liability arising from the loss

3. The period of indemnity for a single-plant manufacturer is most often driven by:

  • A. The time to rebuild the generic building structure
  • B. The policy term (12 months)
  • C. The longest critical-path element of the recovery, such as a long-lead specialized machine
  • D. The insured's choice of when to reopen

4. A building has a full insurable value of \$20M. Under an 80% coinsurance clause, the minimum limit the insured must carry to avoid a penalty is:

  • A. \$12M
  • B. \$16M
  • C. \$18M
  • D. \$20M

5. An insured carries \$12M on a \$20M-value building under 80% coinsurance and suffers a \$4M partial loss. Before any deductible, the policy pays approximately:

  • A. \$4.0M
  • B. \$3.2M
  • C. \$3.0M
  • D. \$2.4M

6. The chief advantage of writing a building on an agreed-value basis is that it:

  • A. Lowers the building's replacement cost
  • B. Suspends the coinsurance clause, so a partial loss pays in full with no coinsurance penalty
  • C. Eliminates the deductible
  • D. Converts the policy to actual cash value

7. Actual cash value (ACV) is best described as:

  • A. The original purchase price of the property
  • B. Replacement cost minus depreciation
  • C. The agreed value plus a catastrophe load
  • D. The market resale value of the land and building

8. Harbor Steel's building — a 1994 joisted-masonry/metal-frame plant with its original sprinkler system, a welding occupancy, and fire protection class 4 — is best classified as:

  • A. A highly protected risk (HPR)
  • B. A non-HPR (ordinary) commercial risk
  • C. An uninsurable risk
  • D. A frame-construction dwelling

9. Which loss is excluded by the commercial property Special form but covered by equipment breakdown?

  • A. A fire that spreads from an adjacent building
  • B. Wind damage to the roof in a storm
  • C. A boiler or transformer that fails from internal mechanical or electrical forces
  • D. Theft of inventory

10. Inland marine coverage exists chiefly to insure:

  • A. Ocean-going cargo only
  • B. Property that moves, is in transit, or is hard to fix to one location
  • C. The building structure at the described premises
  • D. Liability for products sold

11. In a layered property program structured as \$10M primary / \$15M xs \$10M / \$25M xs \$25M, a \$4M fire loss is paid by:

  • A. All three layers proportionally
  • B. The primary layer only
  • C. The top (\$25M xs \$25M) layer only
  • D. The reinsurer directly

12. Per dollar of limit, primary property capacity is priced higher than high-excess catastrophe capacity because:

  • A. Regulators require it
  • B. The primary layer sees the most frequent (attritional) losses, while the excess layers are reached only by rare catastrophes
  • C. Excess insurers are more generous
  • D. The primary layer carries the catastrophe peril

13. The most common and expensive valuation error in commercial property is:

  • A. Insuring to a value that is too high
  • B. Insuring to a value that is too low, often through a stale, un-updated number
  • C. Using replacement cost instead of ACV
  • D. Adding equipment breakdown coverage

14. A statement of values (SOV) is:

  • A. The insured's annual financial statement
  • B. A location-by-location schedule of insured properties and their values, used to build premium, limits, and catastrophe accumulation
  • C. The declarations page of the policy
  • D. The reinsurer's treaty summary

15. The reason commercial property concentrates catastrophe (accumulation) risk in a way liability does not is that property is:

  • A. First-party coverage, so one hurricane damages many of the insurer's own insureds simultaneously
  • B. Always written on a claims-made basis
  • C. Cheaper than liability
  • D. Exempt from reinsurance

Short answer

16. Explain why business income is described as "the coverage that saves businesses," and why its limit must be derived rather than copied from the building value.

17. State the coinsurance formula in words, and explain why the penalty bites on partial losses, which surprises insureds the most.

18. Run COPE on Harbor Steel in one sentence per factor, and name the single COPE factor an underwriter can most readily improve through a subjectivity.

19. A bakery's compressor fails internally, spoiling stock and closing the shop for a week. Identify which coverage (property Special form vs. equipment breakdown) responds to (a) the compressor damage, (b) the spoiled inventory, and (c) the lost income.

20. Why does the chapter end the property analysis by handing the \$20M coastal line to Part V (reinsurance and catastrophe modeling) rather than closing it out here? What is the unanswered question?

Answer key (try all twenty first) **Multiple choice** 1. **C** — Special form is "all-risk": everything not specifically excluded is covered, flipping the burden. 2. **B** — BI pays net income that would have been earned plus continuing expenses during the interruption. 3. **C** — The longest critical-path element (e.g., a long-lead specialized machine) governs, not the building rebuild or the policy term. 4. **B** — 80% × \$20M = \$16M required limit. 5. **C** — Coinsurance ratio = \$12M / \$16M = 0.75; 0.75 × \$4M = \$3.0M (before deductible). 6. **B** — Agreed value suspends the coinsurance clause; a partial loss pays in full with no coinsurance penalty (in exchange for a verified value up front). 7. **B** — ACV = replacement cost minus depreciation. 8. **B** — Non-HPR: ordinary, solid commercial construction and protection — not the elite HPR standard. 9. **C** — Internal mechanical/electrical failure (boiler, transformer) is the property form's exclusion and equipment breakdown's purpose. 10. **B** — Inland marine covers property that moves, is in transit, or is hard to fix to one location. 11. **B** — A \$4M loss never exhausts the \$10M primary, so only the primary pays. 12. **B** — The primary sees frequent attritional losses; excess layers are touched only by rare catastrophes, so they cost less per dollar of limit. 13. **B** — Under-insurance, usually from a stale value, both under-prices the account and triggers a coinsurance penalty at claim time. 14. **B** — The SOV is the location-by-location values schedule underpinning premium, limits, and cat accumulation. 15. **A** — Property is first-party; one event damages many of the insurer's own insureds at once (the failure of the independence assumption from Chapter 1). **Short answer** 16. BI replaces the income lost (and continuing expenses paid) while the business cannot operate; without it, a company that can rebuild its building still goes under for lack of revenue across the months-long recovery. The limit must be derived from the financials (gross earnings) and the period of indemnity because BI has no fixed ratio to the building value — a cheap building can carry a huge income exposure and vice versa. 17. The policy pays the same *fraction* of the loss as the fraction of the required value the insured actually insured: payment = loss × (limit carried / limit required) − deductible. Because the ratio applies to *every* loss, not just total ones, an insured with a partial loss far below their limit still takes a penalty — which they never expect, since the limit was "more than enough" to cover the loss. 18. **Construction** — 1994 joisted-masonry/metal frame, adequate but not superior. **Occupancy** — welding/cutting/fabrication, a hot-work occupancy with ignition sources built into the workflow. **Protection** — original wet-pipe sprinklers and public fire protection class 4 (ordinary, not superior). **Exposure** — coastal, named-windstorm zone, with storm-surge nearby. The factor most readily improved by a subjectivity is **Protection** (e.g., requiring sprinkler certification, a hot-work permit program, an infrared electrical scan). 19. (a) The **compressor** damage from internal failure → **equipment breakdown** (the property Special form excludes it). (b) The **spoiled inventory** resulting from the breakdown → **equipment breakdown** (consequential damage). (c) The **lost income** during the week closed → **equipment breakdown's** business-income element (or BI if triggered by a covered property peril, but here the cause is internal breakdown, so equipment breakdown responds). 20. Because the \$20M coastal property line is real catastrophe exposure that must be *ceded* (how much to keep net vs. reinsure — Chapter 27) and *accumulated* (how it loads the Port Hadley zone and what the named-storm return-period loss is — Chapter 30). The unanswered question is **not** "is the building valued right?" (settled here) but "how much of this correlated catastrophe exposure can our balance sheet safely hold?" — which valuation feeds but does not answer.