Insurance ExamStudy Topic
Property and Casualty Insurance Study Guide for the Licensing Exam
Study property and casualty insurance for your licensing exam. Covers homeowners policies, commercial property, liability, auto insurance, and workers' comp.
Topic Overview
Homeowners insurance policies (ISO forms HO-1 through HO-8) are a major exam topic. The most common residential policy is the HO-3 (Special Form), which provides open perils (all-risk) coverage on the dwelling and other structures and named perils coverage on personal property. The HO-4 (Renters) covers a tenant's personal property and liability but not the building itself. The HO-6 (Condo) covers the interior unit improvements and personal property for condominium owners. Policy sections include Coverage A (dwelling), Coverage B (other structures), Coverage C (personal property), Coverage D (loss of use), Coverage E (personal liability), and Coverage F (medical payments to others). Common exclusions include flood, earthquake, normal wear and tear, and intentional acts.
Commercial property insurance covers buildings, business personal property (BPP), and business income (BI). The Building and Personal Property Coverage Form (BPP) uses either replacement cost or actual cash value (ACV) as the valuation basis. Actual cash value (ACV) equals replacement cost minus depreciation; replacement cost pays to repair or replace with new materials without deduction for depreciation. The coinsurance clause requires the insured to carry insurance equal to a specified percentage of the property value (commonly 80 or 90 percent); failure to meet the coinsurance requirement results in a penalty at the time of loss, calculated as: (insurance carried / insurance required) x loss = recovery.
Liability insurance protects the insured against legal liability for bodily injury or property damage to third parties. Key concepts include: occurrence-based policies (cover claims arising from events that occurred during the policy period, regardless of when the claim is filed) vs. claims-made policies (cover claims made during the policy period, requiring a tail or extended reporting period to cover events that occurred before the policy expired but are reported after). General liability (CGL) covers premises and operations, products and completed operations, personal and advertising injury, and contractual liability. Coverage is subject to occurrence limits (per occurrence and aggregate).
Personal auto insurance (PAP) is divided into coverage parts: Part A (Liability) protects the insured against claims for bodily injury and property damage to others; Part B (Medical Payments) pays medical expenses for the insured and passengers regardless of fault; Part C (Uninsured/Underinsured Motorists) covers the insured's losses when hit by an uninsured or underinsured driver; Part D (Physical Damage) covers collision (damage from collision with another vehicle or object) and other than collision or comprehensive (theft, weather, fire, vandalism). Collision and comprehensive are subject to a deductible; liability coverage is not.
Workers' compensation provides no-fault coverage for employees who suffer work-related injuries or illnesses. Benefits include medical treatment, temporary total disability (TTD) income benefits (typically two-thirds of the worker's average weekly wage), temporary partial disability, permanent total disability, permanent partial disability (rated by degree of impairment), and death benefits. Employers purchase workers' comp through the private market or state fund; some states have monopolistic state funds. The exclusive remedy doctrine generally prevents employees from suing the employer in tort for work-related injuries, with limited exceptions for intentional acts.
- Confusing the HO-3 and HO-2 policy forms; the HO-3 provides open perils on the dwelling and named perils on personal property, while the HO-2 provides named perils on both. The HO-3 is broader and more commonly tested.
- Miscalculating the coinsurance penalty; the formula is (insurance carried / insurance required) x loss. If a building worth $200,000 is insured for $120,000 with an 80% coinsurance requirement ($160,000 required), a $40,000 loss would recover only $30,000 (120,000/160,000 x 40,000).
- Confusing occurrence-based and claims-made policies; an occurrence policy covers events that happen during the policy period regardless of when the claim is filed; a claims-made policy covers claims reported during the policy period, creating a coverage gap after the policy expires without a tail.
- Forgetting that medical payments (Coverage F in homeowners, Part B in PAP) are no-fault coverages -- they pay regardless of who caused the injury, unlike liability coverages that only pay when the insured is legally responsible.
- Treating ACV and replacement cost as interchangeable; ACV deducts depreciation while replacement cost pays for new materials. The difference is significant on older property and directly affects the amount recovered in a claim.
- Assuming workers' compensation covers all injuries; injuries resulting from employee intoxication, intentional self-infliction, violation of a specific safety rule, or injuries occurring outside the scope of employment are typically excluded or subject to reduced benefits.
Checkpoint Quiz
Test your understanding of Property and Casualty Insurance
These questions are for study practice only and are not official exam questions.
1. In a standard homeowners insurance policy, which of the following perils is typically EXCLUDED from coverage?
2. Auto insurance liability coverage pays for:
3. What is a deductible in a property insurance policy?
4. Comprehensive auto insurance coverage pays for vehicle damage caused by:
5. Which homeowners coverage section pays for the policyholder's legal liability if a guest is injured on their property?
6. The principle of subrogation in property insurance allows the insurer to:
7. An HO-3 homeowners policy covers the dwelling on which basis?
8. What does 'actual cash value' (ACV) mean when settling a property insurance claim?
9. Uninsured motorist (UM) coverage in an auto policy protects the insured when:
10. A commercial general liability (CGL) policy is designed primarily to protect a business from:
Frequently asked questions
What is the difference between HO-3 and HO-4 homeowners policies?
An HO-3 (Special Form) is designed for homeowners and provides open perils coverage on the dwelling and other structures, and named perils coverage on personal property. An HO-4 (Renters Insurance) is designed for tenants and covers only the tenant's personal property (named perils) and personal liability -- it does not cover the building, which is the landlord's responsibility.
What is actual cash value (ACV) in property insurance?
Actual cash value is the cost to repair or replace damaged property minus depreciation. For example, a five-year-old roof with a 20-year life expectancy has depreciated 25 percent; an ACV payment would be 75 percent of the replacement cost. Replacement cost coverage, by contrast, pays the full cost to repair or replace with like kind and quality without a depreciation deduction.
How does the coinsurance clause work?
A coinsurance clause requires the insured to carry coverage equal to a specified percentage (commonly 80%) of the insured property's value. If the insured carries less than the required amount, they are considered to be self-insuring the difference and will receive a reduced claim payment. The formula is: (insurance carried / insurance required) x loss amount = amount recoverable.
What does workers' compensation cover?
Workers' compensation covers employees for work-related injuries and illnesses regardless of fault. Benefits include medical treatment, temporary total disability income (typically two-thirds of average weekly wage), permanent disability ratings, and death benefits to dependents. The exclusive remedy doctrine generally bars employees from suing their employer in tort for covered work injuries.
What is the difference between collision and comprehensive auto coverage?
Collision coverage (Part D of the PAP) pays for damage to the insured's vehicle caused by a collision with another vehicle or object, regardless of fault. Comprehensive (other than collision) coverage pays for damage from non-collision causes: theft, fire, hail, flood, vandalism, hitting an animal, and similar perils. Both are subject to a deductible and are optional coverages; liability coverage is required by law in most states.
