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Personal Lines Insurance Practice Exam: Multiple Choice Questions and Answers, Exams of Accounting

Southwestern College Accounting

A series of multiple-choice questions and answers related to personal lines insurance. It covers various aspects of insurance, including coverage for family members, liability for bailees, flood insurance, and homeowners policies. Explanations for each answer, making it a valuable resource for studying personal lines insurance concepts.

Typology: Exams

2024/2025

Available from 03/06/2025

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Personal Lines Insurance Practice Exam

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1. Bobby, age 16, borrows his parents' car without their permission and gets

into an accident. Which of the following statements about coverage under the

parents' personal auto policy is CORRECT?

A) Bobby is covered by his parents' policy because he is included in the

definition of named insured.

B) Bobby is not covered for this accident because he used the car without

permission.

C) Bobby is not covered because it was not his car.

D) Bobby is covered by his parents' policy because he is a family member.: D)

Bobby is covered by his parents' policy because he is a family member.

Explanation: Bobby is a family member and thus automatically is covered under

the family's PAP policy. Even though Bobby is using the car without permission, the

exclusion pertaining to nonpermissive users does not apply to use of an owned auto

policy by resident family members.

Reference: 8.7.2 in License Exam Manual

2. A parking valet at a hotel uses a guest's car to do a personal errand and

damages the car in a collision. The guest has a personal auto policy (PAP).

The insurance company will pay the claim and ____.

A) relieve the parking valet of legal liability for the loss

B) subrogate against the named insured

C) subrogate against the parking valet

D) recover any additional loss from the lienholder: C) subrogate against the

parking valet

Explanation: Part-D coverage for Damage to Your Auto of the PAP contains a no

benefit to bailee provision. This provision states that a carrier or other bailee for hire,

such as a parking gar5age, service station, or moving company will not directly or

indirectly benefit from the PAP's insurance. A bailee is an individual or entity that

assumes possession of goods owned by another for the purpose of transporting,

servicing, or storing them. When temporary custody is assumed, the bailee becomes

legally liable for the goods.

Reference: 8.7.2 in the License Exam Manual

3. Who of the following are required to be members of the Arizona Property

and Casualty Insurance Guaranty Fund?

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Bobby, age 16, borrows his parents' car without their permission and gets into an accident. Which of the following statements about coverage under the parents' personal auto policy is CORRECT? A) Bobby is covered by his parents' policy because he is included in the definition of named insured. B) Bobby is not covered for this accident because he used the car without permission. C) Bobby is not covered because it was not his car. D) Bobby is covered by his parents' policy because he is a family member.: D) Bobby is covered by his parents' policy because he is a family member. Explanation: Bobby is a family member and thus automatically is covered under the family's PAP policy. Even though Bobby is using the car without permission, the exclusion pertaining to nonpermissive users does not apply to use of an owned auto policy by resident family members. Reference: 8.7.2 in License Exam Manual
A parking valet at a hotel uses a guest's car to do a personal errand and damages the car in a collision. The guest has a personal auto policy (PAP). The insurance company will pay the claim and ____. A) relieve the parking valet of legal liability for the loss B) subrogate against the named insured C) subrogate against the parking valet D) recover any additional loss from the lienholder: C) subrogate against the parking valet Explanation: Part-D coverage for Damage to Your Auto of the PAP contains a no benefit to bailee provision. This provision states that a carrier or other bailee for hire, such as a parking gar5age, service station, or moving company will not directly or indirectly benefit from the PAP's insurance. A bailee is an individual or entity that assumes possession of goods owned by another for the purpose of transporting, servicing, or storing them. When temporary custody is assumed, the bailee becomes legally liable for the goods. Reference: 8.7.2 in the License Exam Manual
Who of the following are required to be members of the Arizona Property and Casualty Insurance Guaranty Fund?

Study online at https://quizlet.com/_b0fhw A) All insurers that write the types of insurance that are protected by the fund in Arizona B) Foreign property and casualty insurers only C) lien property and casualty insurers only D) All insurers that write insurance in Arizona, including life and health insur- ers: A) All insurers that write the types of insurance that are protected by the fund in Arizona Explanation: All insurers that write types of insurance that are protected by the fund are required to be member insurers of the fund. Reference: State Supplement in the License Exam Manual. Reference: 4.4.16.3 in the License Exam Manual

Which one of the following dwellings would a HO-3 Homeowners Form cover? A) Condominium B) Office building C) Single-family home D) Apartment building: C) Single-family home Explanation: HO-3 Homeowners Form covers owner-occupied single family dwellings. Condominiums are covered by the HO-6. Office and apartment buildings would be covered by a commercial policy. Reference: 7.4.1 in the License Exam Manual
Which on of the following would be classified as a general damage? A) Pain and suffering B) Lost wages C) Medical bills D) Damaged property: A) Pain and suffering Explanation: Compensatory damages compensate an injured party for injuries sus- tained- nothing more. Their purpose is to make a person whole again in the position that existed before the loss or harm. Compensatory damages are further categorized by: general damages (which necessarily result from the act or omission, such as emotional distress, inconvenience, and pain and suffering) and special damages

Study online at https://quizlet.com/_b0fhw B) Contractual liability C) Premises liability D) Vicarious liability: A) Absolute liability Explanation: The law imposes strict or absolute liability for specific situations or activities that pose threats to the safety of others. People who own dangerous animals are held to a higher standard of care. Absolute liability applies when a person is liable for a dangerous condition, regardless of the amount of care taken. Reference: 5.3.4 in the License Exam Manual

Which of the following terms is used to describe an empty building that is not being used? A) Vacated B) Absent C) Unoccupied D) Vacant: D) Vacant Explanation: A building that is not currently in use and does not have enough furnishings to function in its normal capacity is considered vacant. A building is unoccupied if no one is currently in it, but furnishings are present and the occupants intended to return, as is the case when the residents are out of town on vacation. Reference: 4.4.15 in the License Exam Manual
Which of the following statements about umbrella policies is NOT correct? A) They provide coverage above the limits of underlying policies. B) They are written only for commercial risks. C) Losses that are excluded by the underlying policy but covered by the umbrella are subject to the umbrella's retention limit. D) If the insured fails to keep the underlying coverage in force, the umbrella policy will not cover the amount of loss that would have been paid by the underlying policy.: B) They are written only for commercial risks. Explanation: Umbrella liability policies may be written for both personal and com- mercial risks. Reference: 9.9.1 in the License Exam Manual

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The agent has many responsibilities to the applicant. One involves a trust relationship between the agent and the insured regarding the insured's finances and confidentiality. In this case, the agent acts in what capacity? A) Fiduciary B) Consultant C) Attorney-in-fact D) Special agent: A) Fiduciary Explanation: Agents have the duty to act in a fiduciary capacity that requires a high degree of trust and confidence. This duty deals with the agent's dealings with both the insured and the insurer. The agent is expected to be trustworthy, act in good faith, and preserve confidential information. Reference: 1.9.2 in the License Exam Manual
Thomas had a forklift injury at work that caused his death. How much money will his surviving spouse receive for burial expenses? A) Up to $10, B) Up to $1, C) Up to $2, D) Up to $5,000: D) Up to $5, Explanation: Burial expenses, not to exceed $5,000, are in addition to the compen- sation. Reference: See State Supplement
With a few exceptions, most personal insurance policies exclude losses arising out of all of the following EXCEPT: A) business activities B) rendering of professional services C) personal activities conducted away from the insured premises D) work-related injuries: C) personal activities conducted away from the insured premises Explanation: Although there are limited exceptions, such as certain permitted in- cidental occupancies, personal lines policies typically exclude losses related to business activities, professional services, and work-related injuries.

Study online at https://quizlet.com/_b0fhw paid under the Coverage B-Other Structures? A) $ B) $10, C) $1, D) $6,000: A) $ Explanation: The attached garage is considered part of the dwelling, so the $10, is paid under Coverage A-Dwelling. Real property located on the described property and separated from the dwelling by clear space is covered by Coverage B-Other Structures. Reference: 6.4.3 in the License Exam Manual

Section II of the homeowners policy provides liability coverage for all of the following EXCEPT A) use of a 17-foot sailboat B) renting the garage to a jewelry maker C) actions of a domestic animal in the care of the insured D) actions of a residence employee: B) renting the garage to a jewelry maker Explanation: The homeowners policy excludes liability arising out of the rental of any part of the premises, except for the rental part of an insured location as a residence. Reference: 7.6.4 in the License Exam Manual
Which of the following is NOT an eligibility requirement for a homeowners policy? A) Named insured is the owner-occupant of dwelling B) Dwelling is a seasonal residence C) No more than 4 families occupy the home D) Named insured lives on a farm: D) Named insured lives on a farm Explanation: Farms are not covered under homeowners policies. They have their own specific farm policy. A homeowners policy requires that the named insured in the owner-occupant and there are no more than 4 families in the home. A seasonal residence may also be covered under a homeowners policy. Reference: 7.3.2 in the License Exam Manual

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The provisions of the Terrorism Risk Insurance Act of 2002 apply to which of the following lines of insurance? A) Homeowners B) Commercial property C) Automobile D) Dwelling: B) Commercial property Explanation: The Terrorism Risk Insurance Act of 2002 established a federal pro- gram to provide compensation for insured losses resulting from terrorism acts. Most commercial property and casualty policies are required to offer coverage for certified acts of terrorism. The program does not apply to personal lines coverage. Reference: 3.8.2 in the License Exam Manual
Trees, shrubs, and other plants are covered as additional coverages for Coverages A-The coverage is limited to certain perils, however. All of the following perils are covered when causing damage to a tree or shrub EXCEPT A) riot B) explosion C) theft D) wind: D) wind Explanation: The insurer will cover trees, shrubs, plants or lawns at the residence premises for loss caused by fire, lightning, explosion, riot, civil commotion, aircraft, nonowned vehicles, vandalism and malicious mischief, and theft. Wind, a common peril causing damages to trees, is not covered. Reference: 7.5.3 in the License Exam Manual
Which one of the following is an example of a peril? A) Gasoline stores on the premises B) Earthquake C) Indifference D) Illness: B) Earthquake Explanation: A peril is the actual cause of a loss. Examples of perils are fire, wind, hail, and collision. For example, if there is a house fire that destroys an entire house, the fire is the peril.

Study online at https://quizlet.com/_b0fhw D) Apartment building: A) Rare painting Explanation: Some items of property are very difficult to value after a loss has occurred. In this situation, the insured and insurer will agree on a value before the policy is issued. Antique furniture or fine arts will most likely have agreed values. If a loss occurs, the agreed value will be the amount the insured is guaranteed to receive. Reference: 4.4.10 in the License Exam Manual

Jim and his family are considering a move to the West Coast but are very concerned about earthquakes. Jim called an insurance agent for advice. What is the best advice the agent could give Jim about adequately covering his new home for possible earthquake damage? A) A separate earthquake policy should be purchased to provide full coverage for earth movement. B) Adding the earthquake endorsement will provide the coverage needed. C) The homeowners policy automatically provides earthquake coverage. D) A state insurance fund will cover any damage that occurs.: B) Adding the earthquake endorsement will provide the coverage needed. Explanation: The basic homeowners policy specifically excludes earthquakes, in- cluding the land shock waves or earth movement caused by a volcanic eruption; landslide; mine subsidence; mudflow; and earth sinking, rising, or shifting. The earthquake endorsement must be added to the homeowners policy to provide coverage for damage caused by earth movement. Reference: 7.5.7 in the License Exam Manual
In legal terms, voluntary relinquishment of a known right is called a A) Waiver B) Concealment C) Warranty D) Withdrawal: A) Waiver Explanation: A waiver is a voluntary relinquishment of a known right. If an insurer wives a legal right under an insurance policy, it cannot deny a future claim on the basis of a violation of that right. This is known as estoppel, because the insurer is estopped from denying the claim.

Study online at https://quizlet.com/_b0fhw Reference: 2.3.2.11 in the License Exam Manual

Effective June 30, 2020, the minimum requirements in Arizona for unin- sured motorists coverage for bodily injuries are A) $20,000 per person in all cases B) $50,000 per accident regardless of the number of persons involved C) $50,000 per person and $100,000 per accident D) $25,000 per person and $50,000 per accident: D) $25,000 per person and $50,000 per accident Explanation: An insured must purchase uninsured motorists coverage with bodily injury limits of at least $25,000 per person and $50,000 per accident. Reference: See State Supplement
The insured rear-ends another vehicle that is stopped at a red light. The driver of the car struck by the insured is badly injured. The insured, his daughter and her friend were in the car and were also injured. Part B of the insured's personal auto policy will pay medical expenses for all of the following EXCEPT: A) the insured. B) the occupant of the car struck by the insured. C) the insured's daughter's friend. D) the insured's daughter.: B) the occupant of the car struck by the insured. Explanation: Part B of the personal automobile policy (PAP) provides coverage for medical payments incurred in an auto accident without regard to fault. Covered persons include the insured, family members, and any passengers in the insured's vehicle. It does not provide liability coverage for injuries sustained by passengers in another auto involved in an incident with the insured. Reference: 8.8.1 in the License Exam Manual
Part A of the personal auto policy would apply in which of the following situations? A) Driver who intentionally causes an accident. B) Garage mechanic while test-driving the insured's auto. C) Insured's 13-year-old son who, while playing with the car, starts it and lets

Study online at https://quizlet.com/_b0fhw insurance. Reference: See State Supplement

If a vehicle collides with a boulder that came tumbling down the side of a mountain, what coverage would pay for the damage? A) Collision B) Uninsured motorist C) Other than Collision D) Supplemental payments: C) Other than Collision Explanation: Other than collision coverage pays for direct and accidental losses to a vehicle including colliding with falling objects such as a boulder. Reference: 8.12.1 in the License Exam Manual
If death results from a compensable injury, the maximum amount of cov- erage paid under workers compensation for burial expenses is: A) $1, B) $4, C) $5, D) $2,000: C) $5, Explanation: If death results from a compensable injury, the maximum amount of coverage paid under workers' compensation for burial expenses is $5,000. Reference: See State Supplement
Jeffrey bought a car yesterday for his daughter to drive to school and her job. Under Jeffrey's automobile policy, this car is considered A) a nonowned automobile B) an uninsured automobile C) a temporary substitute automobile D) an owned automobile: D) an owned automobile Explanation: A newly acquired automobile is an owned automobile that must be an eligible vehicle. For any coverage except Coverage for Damage to Your Auto, this car will have the broadest coverage provided for any of the cars listed on the declarations until it is added to the policy. It must be insured within 14 days after the insured

Study online at https://quizlet.com/_b0fhw becomes the owner. Reference: 8.4 in the License Exam Manual

A contract in which one insurer cedes all or part of a risk to another insurer is known as: A) assuming insurance B) retro insurance C) reinsurance D) a participating policy: C) reinsurance Explanation: In a reinsurance contract, an insurer protects itself from loss or liability arising from an original contract of insurance by insuring itself through another insurer. Reinsurance is the spreading or sharing of a risk too large for one insurer by ceding part of the risk to another company or reinsurer. Reference: 1.5.4 in the License Exam Manual
A dwelling policy can be used to insure all of the following EXCEPT A) an apartment building with 6 units B) rental homes C) lake cabins D) duplexes: A) an apartment building with 6 units Explanation: A dwelling policy may be used to insure a building with up to 4 units. Reference: 6.3.2 in the License Exam Manual
Medical Payments Coverage is Part B in the personal automobile policy. All of the following statements about medical payments coverage are correct EXCEPT A) coverage is provided for the named insured if hit by a car while walking a road B) Part B covers reasonable expenses for services incurred within 5 years of the date of injury C) no coverage is available if the vehicle is being used as a residence D) coverage is available if an injury occurs while getting into or out of a vehicle: B) Part B covers reasonable expenses for services incurred within 5 years of the date of injury

Study online at https://quizlet.com/_b0fhw D) Flat: A) Pro rate Explanation: When the insurer cancels a policy, the premium refund is determined on a pro rata basis. Under this method, the premium refund equals the premium paid for the unexpired term of the policy. A short-rate method is used when the insured cancels the policy. A policy terminated by either the insured or insurer on its effective date results in a flat cancellation. The entire premium is returned to the policy holder. There is no premature method of determining how much premium is due. Reference: 3.4.3 in the License Exam Manual

The following perils may be insured against under a basic dwelling policy EXCEPT: A) lightning. B) vandalism and malicious mischief. C) flood. D) fire.: C) flood. Explanation: Water damage, including flooding, is not a covered peril under a dwelling policy. Fire and lightning are covered perils on the Basic Form, and van- dalism and malicious mischief is available for an additional premium. Reference: 6.4.1.1 in the License Exam Manual
Which of the following types of property is NOT covered by a dwelling policy? A) 3 apartment dwellings B) Row houses C) Farm dwellings D) Mobile homes on permanent foundations: C) Farm dwellings Explanation: Properties eligible for dwelling policies include mobile homes on per- manent foundations, townhouses, row houses, and dwellings containing up to 4 apartments. Farm dwellings are not covered by dwelling or homeowners policies. They must be insured under the farm program policy. Reference: 6.3.2 in the License Exam Manual
All of the following are excluded under collision or Other than Collision coverages EXCEPT

Study online at https://quizlet.com/_b0fhw A) damages to awnings, cabanas, or other equipment B) damage due to wear and tear C) road damages to tires D) flood damage: D) flood damage Explanation: Flood damage to a vehicle is not excluded under the Other than Collisions coverage. Reference: 8.12.1 in the License Exam Manual

Under an auto policy, Other than Collision coverage would apply to which of the following situations? A) All of the car's tires are stolen. B) An insured has her car parked at an airport, and a suitcase is stolen from the car. C) The car rolls over after hitting a patch of ice. D) An insured breaks a window to gain access because the keys were left inside.: A) All of the car's tires are stolen. Explanation: Other than Collision coverage protects against all accidental damage not due to collision, upset, and other specified exclusions. Therefore, the car rolling over on the icy road would not be covered, nor would the loss of personal property, such as a suitcase. Breakage of glass would be covered only if the breakage were due to a collision and not intentionally caused by the insured. Reference: 8.12.1 in the License Exam Manual
Section II of a homeowners policy covers all of the following EXCEPT A) bodily injury to one of the insured's resident family members B) property damage of another caused by the insured C) bodily injury to others D) liability for loss of use of another's property: A) bodily injury to one of the insured's resident family members Explanation: Section II coverages are the same in all 6 forms. They cover personal liability of the insured and medical expenses of a person injured on the insured's premises (with permission), injured as a result of the activities of the insured, or during the course of employment for the insured or by an animal owned by

Study online at https://quizlet.com/_b0fhw results from any cause or loss Explanation: All homeowners forms cover losses caused by the escape of pollutants only if a result of a broad form named-peril cause of loss, not ANY cause of loss. Reference: 7.5.2.3 in the License Exam Manual

In homeowners policies, what does Coverage A insure? A) Dwelling B) Personal property C) Other structures D) Extra expenses: A) Dwelling Explanation: Coverage A provides dwelling coverage, Coverage B covers other structures, Coverage C insurers personal property, and Coverage D covers loss of use. Reference: 7.5.1 in the License Exam Manual
For an insurance contract to be legally binding, both parties to the contract must be considered competent. Which of the following would NOT be used to determine competency? A) Individual is not under the influence of drugs or alcohol B) Individual is over age 80 C) Individual is of legal age D) Individual is mentally competent: B) Individual is over age 80 Explanation: For a contract to be legally binding, both parties must have the legal capacity to make a contract. The insured must be of legal age (usually 18) and be mentally competent (sane and sober) to make an insurance contract. The fact that an individual is over age 65 would not make that person mentally incompetent. Reference: 2.3.1.4 on the License Exam Manual
Both parties rely on statements made to each other when writing a con- tract. This is known as a A) unilateral contract B) speculative contract C) contract of utmost good faith

Study online at https://quizlet.com/_b0fhw D) conditional contract: C) contract of utmost good faith Explanation: The principle of utmost good faith imposes a higher degree of honesty on parties to an insurance contract. The insurer relies on the truthfulness on the application, and the insured relies on the company's promise and ability to provide coverage and pay claims. Both parties must know all material facts and relevant information, neither may attempt to conceal facts or deceive the other party. A unilateral contract is one in which only one party makes a legally enforceable promise. In a conditional contract, the insurer's consideration is a promise to pay only if a certain condition is met. If the condition is not met, the insurer does not have to pay. Reference: 2.3.2.3 on the License Exam Manual

Jonathan and Mary have 2 sons. Steve lives at home and the other son, Stan, lives in an apartment across town. Jonathan wants to buy a car for Stan so he can get a job after his college classes. Jonathan titles the car in both his name and Stan's name and wants to add the car to his automobile policy. Which endorsement will provide this coverage? A) Extended, nonowned coverage for named individual B) Drive other car C) Miscellaneous type vehicle D) Joint ownership coverage: D) Joint ownership coverage Explanation: This endorsement provides coverage for the interests of each owner of a covered auto, including a son living out of the household. Reference: 8.13 on the License Exam Manual
If a producer moves, he must report his new address to the director within how many days after moving? A) 90 B) 120 C) 60 D) 30: D) 30 Explanation: If a producer changes his address (business or residential) or name, the producer must notify the director within 30 days of the date of the change.

Personal Lines Insurance Practice Exam: Multiple Choice Questions and Answers, Exams of Accounting

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