CPSA CPIA 3 — Questions and Answers
Question 1: Which term describes the maximum amount an insurer will pay for all covered losses during the policy period, regardless of the number of occurrences?
- Per-occurrence limit
- Aggregate limit (Correct answer)
- Combined single limit
- Split limit
Correct answer: Aggregate limit
The aggregate limit caps the insurer's total payout for all claims combined within the policy period.
Question 2: A client's homeowners policy excludes flood damage. The agent fails to recommend a separate flood policy and the client suffers a flood loss. The agent may face liability for:
- Errors and omissions (E&O) (Correct answer)
- Bodily injury liability
- Workers compensation fraud
- Products liability
Correct answer: Errors and omissions (E&O)
Failing to advise a client about coverage gaps or recommend appropriate coverage exposes an agent to errors and omissions (E&O) liability.
Question 3: The 'coinsurance clause' in commercial property insurance penalizes the insured when:
- The insured files more than one claim per year
- The property is insured for less than a specified percentage of its value (Correct answer)
- Two insurers share the same risk
- The insured fails to notify the insurer within 24 hours of a loss
Correct answer: The property is insured for less than a specified percentage of its value
The coinsurance clause requires the insured to carry coverage equal to a stated percentage (commonly 80%) of the property's value or face a penalty at claims time.
Question 4: Which valuation method pays the cost to replace damaged property with new property of like kind and quality, without deducting depreciation?
- Actual cash value (ACV)
- Market value
- Replacement cost value (RCV) (Correct answer)
- Functional replacement cost
Correct answer: Replacement cost value (RCV)
Replacement cost value pays the full cost to replace damaged property with new, equivalent property without applying a depreciation deduction.
Question 5: Under a claims-made liability policy, what is a 'retroactive date'?
- The date the policy automatically renews
- The earliest date from which a covered incident can arise for the claim to be covered (Correct answer)
- The deadline for reporting a claim after policy expiration
- The date the insurer can rescind the policy
Correct answer: The earliest date from which a covered incident can arise for the claim to be covered
The retroactive date sets the earliest point in time from which an occurrence must originate for the resulting claim to be eligible for coverage under the claims-made policy.
Question 6: Which of the following is NOT a common method used to calculate premium for personal auto insurance?
- Driver age and gender
- Vehicle use and annual mileage
- Zip code or territory
- Insured's marital status (Correct answer)
Correct answer: Insured's marital status
While age, vehicle use, and territory are standard rating factors, marital status alone is not a universal underwriting factor and is prohibited in some states.
Question 7: What is the primary purpose of an 'insurance binder'?
- To permanently bind the insurer to coverage for the policy term
- To provide temporary proof of insurance until the formal policy is issued (Correct answer)
- To obligate the insured to pay premium in advance
- To transfer risk to a reinsurer
Correct answer: To provide temporary proof of insurance until the formal policy is issued
A binder is a temporary agreement that provides evidence of insurance coverage while the formal policy is being processed and issued.
CPSA CPIA 3
Which term describes the maximum amount an insurer will pay for all covered losses during the policy period, regardless of the number of occurrences?