General Insurance Products and Coverage Design

Introduction

General insurance transfers financial consequences arising from uncertain events other than the long-term mortality and survival risks principally covered by life insurance. It encompasses property, motor, marine, aviation, liability, health, personal accident, engineering, agricultural and specialty risks.

A product name alone does not determine protection. Coverage depends on the insured subject matter, insured perils, exclusions, deductibles, limits, valuation provisions, policy period, territorial scope, conditions and endorsements. Effective coverage design therefore requires both product knowledge and an understanding of how policy provisions interact at the time of loss.

General insurance is usually based on indemnity: the insured should, subject to the contract, be restored to approximately the financial position occupied immediately before the loss—not profit from it. Exceptions include agreed-value policies, fixed-benefit accident covers and parametric insurance.

Learning Objectives

After studying this chapter, students should be able to:

1. distinguish the principal classes of general insurance;
2. analyse insured perils, exclusions, deductibles and limits;
3. calculate simplified claims involving deductibles, limits and coinsurance;
4. explain claim mechanics in marine, aviation, engineering and agricultural insurance;
5. identify gaps, overlaps and ambiguities in insurance programmes;
6. assess regulatory, ethical and technological issues in product design; and
7. recommend appropriate coverage structures for households and businesses.

1. The Architecture of Coverage

An insurance policy can be analysed through seven connected questions:

1. Who is insured? The named insured, additional insureds and other protected persons.
2. What is insured? Property, income, legal liability, health expenses or another interest.
3. Against what events? Named perils, accidental damage, legal liability or an index trigger.
4. Where and when? Territorial limits, policy period and applicable retroactive dates.
5. How is loss valued? Market value, replacement cost, agreed value, actual yield or fixed benefit.
6. How much is retained? Deductibles, excesses, waiting periods and coinsurance.
7. What is excluded or limited? Exclusions, sublimits, warranties and policy conditions.

Figure: Coverage design is an iterative process rather than a one-time product purchase.

2. Core Financial Provisions

2.1 Deductibles and policy limits

A deductible is the portion of an otherwise covered loss retained by the insured. It reduces small-claim administration and moral hazard. A policy limit is the maximum amount payable under the applicable coverage, subject to the wording.

For a simple covered loss where the deductible is applied before a payment limit, the insurer's payment is:

where:

• P = insurer payment in currency units;
• L = covered loss before the deductible;
• D = applicable deductible; and
• V = maximum payment limit available for that loss.

The formula assumes no coinsurance penalty, subrogation recovery, salvage, tax adjustment or other cost-sharing provision. Contract wording controls the sequence. A limit must not automatically be reduced by the deductible when the limit is defined as the maximum amount payable.

Worked example. A covered loss is $900,000, the deductible is $100,000 and the payment limit is $500,000:

The uninsured amount is $400,000: the $100,000 deductible plus $300,000 above the limit.

Deductibles may be expressed per event, per item, per vehicle or as a percentage. A time deductible, common in business interruption and machinery breakdown insurance, delays payment for a specified period. An aggregate deductible accumulates losses across a policy period.

2.2 Limits and sublimits

Common limit structures include:

• Per occurrence limit: maximum for one event or occurrence.
• Per person limit: maximum for each injured person.
• Aggregate limit: maximum for all covered claims during the period.
• Sublimit: lower cap for a specified peril, property type or expense.
• Reinstatement: restoration of an exhausted limit, automatically or for additional premium.

An apparently high overall limit can conceal inadequate sublimits for flood, debris removal, professional fees, valuables, cyber events or temporary accommodation.

2.3 Property coinsurance and average

Property policies may require insurance equal to a stated proportion of the value at risk. Underinsurance can proportionally reduce a partial-loss recovery.

Let:

• R = value of insured property at the time of loss;
• c = required insurance percentage, expressed as a decimal;
• S = amount of insurance carried;
• L = covered physical loss;
• D = deductible; and
• A = coinsurance factor.

A common simplified form is:

If the wording applies the deductible after the proportional adjustment, payment is:

The explicit cap at S prevents recovery from exceeding the amount insured. The formula assumes that S, rather than a separate lower sublimit, is the applicable payment cap. Some policies apply deductibles or valuation adjustments in another order.

Worked example. A building has a replacement value of $10 million and an 80% insurance requirement. It is insured for $6 million. A covered partial loss is $2 million and the deductible is $50,000.

The insured retains $550,000. This illustrates why regular valuation is central to coverage design.

3. Property Insurance

Property insurance protects buildings, machinery, stock, contents and sometimes consequential financial loss. Coverage may be written on a named-perils basis, which covers only listed events, or an all-risks basis, which covers accidental physical loss unless excluded. “All risks” does not mean every conceivable loss.

Common insured perils include fire, lightning, explosion, storm, theft and impact. Typical exclusions include wear and tear, gradual deterioration, inherent vice, faulty design, unexplained disappearance, war, nuclear risks and intentional acts. Flood, earthquake, terrorism and cyber-triggered physical damage may require extensions.

Valuation bases include:

• Replacement cost: cost of replacing property with a modern equivalent, usually without depreciation, subject to conditions.
• Actual cash value: replacement cost less applicable depreciation.
• Market value: exchange value immediately before the loss.
• Agreed value: value fixed in advance by contract.

Business interruption insurance complements physical-damage cover. It may cover lost gross profit, continuing fixed costs and increased cost of working during an indemnity period. A serious gap arises when the physical asset is insured but income loss, utility interruption or supplier dependency is not.

4. Motor Insurance

Motor insurance commonly combines:

1. Third-party liability, covering legally enforceable liability for injury or property damage;
2. Own-damage coverage, covering accidental damage, theft and specified perils affecting the insured vehicle; and
3. Ancillary benefits, such as towing, medical expenses, roadside assistance and loss of use.

Third-party liability is compulsory in many jurisdictions, although required limits differ. Comprehensive insurance normally combines liability and own-damage protection but remains subject to exclusions.

Important underwriting factors include driver age and history, vehicle value, repair cost, use, annual distance, location and anti-theft technology. Commercial use, ride-hailing, racing, unlicensed driving, intoxication and unauthorised drivers may be excluded or restricted.

At claim stage, the insurer examines accident circumstances, police reports where required, repair estimates, pre-existing damage and potential recovery from responsible parties. A total loss may be declared where repair is impossible or uneconomic. Settlement depends on the valuation wording, not merely the vehicle's original purchase price.

Electric vehicles introduce battery damage, charging-equipment liability, thermal runaway and specialist repair concerns. Advanced driver-assistance systems can reduce accident frequency while increasing sensor calibration and repair costs.

5. Marine Insurance

Marine insurance covers risks connected with maritime transport. Principal forms are cargo, hull and machinery, freight, and protection and indemnity liability. Cargo clauses range from restricted named-peril forms to broad accidental-loss forms, always subject to exclusions.

5.1 Coverage issues

Marine contracts require careful attention to voyage, location, packing, seaworthiness, delay, inherent vice, temperature variation, war and strikes. Warehouse-to-warehouse cargo protection does not necessarily eliminate gaps caused by delay, improper packing or termination provisions.

A valued policy predetermines insured value, often incorporating invoice value, freight and an agreed uplift. An unvalued policy requires value to be established under applicable law and wording.

5.2 Claim mechanics

Marine claims typically involve the following sequence:

1. Immediate notice: notify insurers, carriers and potentially liable third parties within required periods.
2. Loss mitigation: protect cargo, arrange drying, segregation, reconditioning or emergency repairs where reasonable.
3. Survey: appoint a marine surveyor to inspect damage, packaging, stowage, causation and salvage value.
4. Documentation: collect the policy or certificate, bill of lading, commercial invoice, packing list, survey report, delivery receipts and correspondence with carriers.
5. Classification: determine whether the loss is a partial loss, actual total loss, constructive total loss or general-average contribution.
6. Adjustment and recovery: value covered damage, deduct salvage and applicable deductible, settle the claim and pursue subrogation where appropriate.

An actual total loss occurs when the insured property is destroyed, irretrievably lost or no longer exists as the insured thing. A constructive total loss may arise where recovery or repair would exceed the relevant value threshold under the governing law and wording; abandonment requirements can apply.

General average is a maritime loss-sharing principle. When an extraordinary and reasonable sacrifice or expenditure is intentionally made for the common safety, participating interests may contribute proportionately. In a simplified allocation:

where C_i is interest i's contribution, CV_i is its contributory value, ΣCV is total contributory value and GA is the allowable general-average amount. Actual adjustment depends on the contract, applicable law and any incorporated York-Antwerp Rules.

6. Aviation Insurance

Aviation insurance includes aircraft hull, passenger liability, third-party liability, crew personal accident, airport liability and product liability. Hull coverage is often based on an agreed aircraft value. Liability exposures can be severe because one event may involve passengers, cargo, ground property and multiple jurisdictions.

Major exclusions or restrictions may concern war, hijacking, hostile cyber acts, noise and pollution, confiscation, unauthorised use, excluded territories, unapproved pilots and failure to maintain airworthiness. War-risk insurance is frequently arranged separately.

Aviation claim mechanics

Following an accident, life safety and compliance with aviation authorities take priority. The insured should promptly notify the insurer while preserving wreckage and records unless movement is necessary for safety or authorised purposes. Evidence may include:

• flight plans and operational records;
• pilot licences, ratings and duty-time records;
• maintenance and airworthiness documentation;
• weather, air-traffic and airport records;
• passenger and cargo manifests; and
• official accident-investigation findings.

The safety investigation normally determines causes and prevention measures; it is not automatically a legal determination of liability. Insurers separately assess policy coverage, proximate cause, airworthiness conditions, repairability and third-party liability.

For partial hull damage, approved repair costs are assessed under the agreed wording, including transport, specialist labour and betterment. For total loss, the agreed hull value usually governs, subject to salvage and policy terms. Liability handling may require defence coordination across jurisdictions and consideration of international conventions. Subrogation may be pursued against maintenance organisations, airports, component manufacturers or other responsible parties.

Grounding of an entire aircraft fleet after an incident may produce substantial economic loss without physical damage to every aircraft. Such loss is often outside standard hull coverage unless specifically insured.

7. Liability Insurance

Liability insurance pays covered damages and defence costs when the insured becomes legally liable to another party. Major forms include public liability, product liability, employers' liability, professional indemnity, directors' and officers' liability, and environmental liability.

Two coverage triggers are particularly important:

• Occurrence basis: responds according to when injury or damage occurred, even if the claim is reported later, subject to terms.
• Claims-made basis: generally requires the claim to be made during the policy period and after any retroactive date; timely reporting may also be required.

Claims-made coverage creates gaps if the retroactive date is advanced or renewal is discontinued without extended reporting protection. Liability policies may pay defence costs inside the limit, thereby reducing funds available for judgments or settlements, or outside the limit.

Typical exclusions include intentional injury, contractual liability beyond ordinary law, known circumstances, fines and penalties, pollution, cyber incidents and professional services unless endorsed. An additional-insured endorsement does not necessarily cover every liability assumed in a commercial contract.

8. Health and Personal Accident Insurance

Health insurance reimburses or directly settles eligible medical expenses. Coverage may include hospitalisation, surgery, outpatient treatment, medicines and specified preventive care. Managed-care arrangements can restrict provider choice or require pre-authorisation.

Under a simplified single-claim design, where the insured pays deductible d and coinsurance proportion q, insurer payment before other provisions is:

where E is the allowed eligible expense and B is the remaining benefit limit. This assumes no copayment, exclusions, provider penalty or out-of-pocket maximum; actual sequencing depends on the policy.

Health exclusions and restrictions may concern waiting periods, pre-existing conditions, experimental treatment, non-medically necessary services and treatment outside a network or territory. Regulation may prohibit or limit some exclusions.

Personal accident insurance pays fixed benefits or specified reimbursements following accidental injury. Benefits may include accidental death, permanent disability, temporary disability and medical expenses. Disability schedules assign percentages to defined losses, while occupational disability wording may depend on inability to perform one's own or any suitable occupation. Illness alone is not covered unless expressly included.

9. Engineering Insurance

Engineering insurance addresses risks arising from construction, installation, operation and breakdown of machinery. Major products include:

• contractors' all risks (CAR);
• erection all risks (EAR);
• machinery breakdown;
• boiler and pressure-vessel insurance;
• electronic equipment insurance; and
• delay in start-up or advance loss of profits (DSU/ALOP).

9.1 Coverage design

CAR and EAR policies commonly combine material-damage and third-party liability sections. The policy period must align with site possession, construction, testing, commissioning and maintenance obligations. Testing and commissioning often represent higher-risk phases and may carry special deductibles or conditions.

Defect exclusions require close analysis. Some wordings exclude only the defective component; others exclude broader damage arising from defective design, material or workmanship. The distinction between the cost of correcting a defect and resulting accidental damage can materially affect recovery.

Machinery breakdown generally covers sudden and unforeseen internal damage, such as mechanical failure or electrical short circuit. Wear, corrosion and gradual deterioration are ordinarily excluded because they are maintenance rather than fortuitous risks.

9.2 Claim mechanics

After an engineering loss, the insured should isolate unsafe equipment, prevent further damage and obtain consent before destructive repair where practicable. Loss investigation commonly requires:

1. operating logs, alarms and control-system data;
2. maintenance and inspection records;
3. drawings, specifications and commissioning records;
4. metallurgical, electrical or vibration analysis;
5. repair-versus-replacement estimates; and
6. production and financial records for interruption claims.

The adjuster distinguishes accidental damage from wear, defective design and inadequate maintenance. Settlement may include dismantling, transport, repair, re-erection and testing, subject to the valuation clause. Betterment—such as increased capacity or extended life beyond the pre-loss condition—may be charged to the insured unless replacement with modern technology is unavoidable and the wording provides otherwise.

For DSU/ALOP claims, physical damage under the underlying policy is usually required. The adjuster develops a delay timeline, separating insured delay from concurrent uninsured causes such as ordinary project slippage, financing problems or redesign. The waiting period and indemnity period can substantially constrain payment.

10. Agricultural Insurance

Agricultural insurance covers crops, livestock, aquaculture, forestry and farm assets. Production is exposed to correlated weather, disease, pests and market-access risks, making accumulation control and reliable data essential.

10.1 Indemnity-based crop insurance

Individual-yield insurance compares actual yield with a guaranteed yield. A simplified indemnity is:

where:

• I = indemnity in currency units;
• A_f = insured farm area in hectares;
• p = insured price per unit of crop;
• y_g = guaranteed yield per hectare; and
• y_a = verified actual yield per hectare.

If guaranteed yield is a percentage k of historical yield y_h, then y_g = ky_h. The formula assumes no deductible, payment factor or policy cap beyond the yield guarantee.

Example. A 100-hectare farm has a historical yield of 4 tonnes per hectare and selects 75% coverage. The guaranteed yield is 3 tonnes per hectare. Actual yield is 2.2 tonnes and the insured price is $300 per tonne:

10.2 Index and parametric products

Weather-index insurance pays according to an objective measure such as rainfall, temperature or wind speed. Satellite vegetation indices and area-yield measures are also used. Claims can be paid rapidly without inspecting every farm, but basis risk arises when the index payout differs from the farmer's actual loss.

10.3 Agricultural claim mechanics

For indemnity-based crop claims, farmers must normally give prompt notice, preserve representative plots, maintain planting and input records, and obtain consent before destroying or replanting damaged crops. Adjusters verify acreage, crop variety, cause of loss, production records, harvest samples and salvage value. Failure to follow recognised farming practices may affect coverage where such practices are policy conditions.

Livestock claims may require veterinary certification, identification records, proof of vaccination, post-mortem evidence and confirmation that death resulted from an insured cause. Disease exclusions, epidemic accumulation limits and government compensation must be coordinated.

Index insurance follows a different process: the insurer validates data from the contractually specified station, satellite or model and applies the predetermined payout schedule. Actual farm loss is not normally adjusted. Data quality, station failure and transparent trigger governance are therefore central design issues.

11. Specialty Insurance

Specialty products address risks not adequately served by standard forms. Examples include cyber, political risk, trade credit, terrorism, kidnap and ransom, event cancellation, fine art, renewable energy and intellectual-property insurance.

Cyber insurance may cover incident response, data restoration, business interruption, cyber extortion and third-party privacy liability. Difficult design questions include systemic cloud outages, ransomware controls, war exclusions and events that produce both digital and physical damage.

Trade credit insurance protects sellers against customer insolvency or prolonged default, subject to credit limits and reporting conditions. Political-risk insurance may cover expropriation, currency inconvertibility, political violence and breach of contract by public entities.

Specialty insurance frequently uses manuscript wording. This improves tailoring but increases the need for legal review, scenario testing and consistency across policies.

12. Coverage Gaps, Overlaps and Programme Design

A coverage gap is an exposure that is uninsured or inadequately insured. Common causes include:

• understated asset values;
• missing perils or territories;
• restrictive definitions of insured persons or operations;
• low sublimits;
• short indemnity periods;
• non-aligned policy periods;
• exclusions that transfer risk between policies;
• claims-made retroactive-date problems; and
• dependency on suppliers, utilities or digital platforms.

Overlap is not always wasteful: multiple policies may intentionally respond in layers. However, “other insurance” clauses and contribution principles must be reviewed to avoid disputes.

A practical gap analysis uses scenario testing. For each severe but plausible event, the analyst maps physical damage, income loss, liability, people impacts and recovery costs to specific policy provisions. The residual uninsured amount is then retained, mitigated or transferred.

13. Illustrative Case: Orion Food Processing Ltd.

Background

Orion Food Processing Ltd., a fictional company, owns a $12 million factory, $3 million of stock, refrigerated vehicles and specialised production machinery. It exports goods by sea and relies on one electricity supplier. Its programme includes property, machinery breakdown, motor, marine cargo and public liability insurance.

Problem

A voltage disturbance damages the refrigeration compressor. Stock spoils, production stops for six weeks and delayed exports cause a customer to claim economic loss. The property policy excludes mechanical and electrical breakdown. Machinery insurance has a $2 million limit and a 48-hour time deductible for interruption, while cargo insurance begins only when goods leave the premises.

Analysis

The damaged compressor may fall under machinery breakdown rather than the property policy. Spoiled stock is covered only if the machinery wording includes deterioration of stock. Lost production requires machinery-business-interruption coverage and is reduced by the 48-hour waiting period. The unshipped exports have not entered marine transit. Public liability may exclude pure contractual economic loss. The utility disturbance does not guarantee recovery unless utility interruption is expressly covered.

The case reveals five potential gaps:

1. no deterioration-of-stock extension;
2. an inadequate machinery limit;
3. a time-deductible retention;
4. no utility-interruption extension; and
5. no cover for contractual penalties or pure delay loss.

Approach and solution

Orion commissions updated machinery and interruption valuations, raises the machinery limit, adds deterioration-of-stock and utility-interruption extensions, and negotiates a longer indemnity period. It also installs voltage protection, maintains temperature alarms and revises customer contracts to limit delay liability. Insurance and operational controls are combined rather than treating insurance as a substitute for maintenance.

Outcome

Future compressor damage would have a clearer coverage pathway, although deductibles, exclusions and policy limits would remain. Contractual penalties knowingly assumed by Orion may still be uninsured.

Learning points

Coverage analysis must follow the complete chain of loss. Property damage, spoilage, interruption, transit and liability can trigger different policies, and an insured initiating event does not make every consequence recoverable.

14. Governance, Regulation and Ethics

Insurance regulation varies by jurisdiction but commonly addresses licensing, solvency, compulsory insurance, product governance, policy disclosure, claims conduct, privacy and consumer protection. Designers should ensure that products serve an identifiable target market and provide reasonable value.

Ethical concerns arise where exclusions are obscure, premiums are discriminatory without sound risk justification, claims are delayed strategically, or automated systems cannot be explained or challenged. Insureds also have duties of honest disclosure and must not exaggerate losses.

Artificial intelligence is increasingly used in underwriting, fraud detection, image-based damage assessment and claims triage. It can improve speed and consistency but may reproduce biased historical patterns or generate false fraud indicators. Human review, data governance, validation and appeal mechanisms remain necessary.

Climate change is altering hazard frequency, severity and geographic distribution. Insurers are responding through risk-based pricing, updated catastrophe models, resilience conditions and parametric solutions. Affordability problems may require public-private arrangements, but subsidies should not obscure long-term risk signals or discourage mitigation.

15. Professional Best Practices

Sound coverage design requires professionals to:

• maintain current asset, revenue and exposure data;
• distinguish payment limits from asset values and loss estimates;
• review exclusions and endorsements, not only schedules;
• test severe but plausible claim scenarios;
• align policy periods, territories and definitions across policies;
• document reasons for accepting uninsured risks;
• preserve records required to support claims;
• reassess coverage after acquisitions, construction or operational changes; and
• integrate insurance with safety, continuity and contractual risk management.

Chapter Summary

General insurance products protect property, income, legal liability, health and specialised interests. Coverage depends on the interaction of insuring clauses, valuation methods, deductibles, limits, exclusions, conditions and endorsements. A deductible is generally applied to covered loss before the payment is capped where the limit represents the maximum payable; policy wording determines actual sequencing. Property coinsurance can reduce partial-loss recovery and should be subject to the insured amount or applicable limit.

Property, motor, marine, aviation, liability, health, accident, engineering and agricultural insurance have distinct triggers and claim processes. Marine claims depend heavily on survey evidence, transit documents, salvage and maritime loss classifications. Aviation claims combine technical investigations with multi-jurisdictional liability issues. Engineering claims require separation of accidental damage from defects, wear and maintenance failures. Agricultural claims differ fundamentally between indemnity adjustment and index-based payout methods.

Effective programme design identifies gaps through scenario analysis and coordinates insurance with valuation, maintenance, safety, continuity planning and contractual controls. Ethical product governance, transparent claims handling, technological oversight and adaptation to climate and systemic risks are increasingly important.

Key Terms

Actual total loss: Complete destruction, irretrievable loss or loss of identity of insured property.

Additional insured: A person or organisation protected under another party's policy by endorsement or policy definition.

Aggregate limit: Maximum payable for all covered claims during a specified period.

Basis risk: Risk that an index-based payout differs from the insured's actual loss.

Claims-made policy: Liability policy principally triggered by a claim made during the policy period, subject to its terms.

Coinsurance clause: Provision reducing recovery when the amount insured is below a required proportion of value.

Constructive total loss: Loss treated as total because recovery or repair exceeds a legally or contractually relevant threshold.

Deductible: Amount of an otherwise covered loss retained by the insured.

Endorsement: Document modifying the standard policy wording.

General average: Maritime principle requiring proportionate contribution to qualifying sacrifices or expenditures made for common safety.

Indemnity: Restoration of the insured's financial position, subject to policy terms, without allowing profit from loss.

Limit: Maximum amount payable under an applicable coverage.

Occurrence policy: Policy generally triggered by injury or damage occurring during the policy period.

Parametric insurance: Insurance paying according to a predefined measurable trigger rather than adjusted actual loss.

Proximate cause: Legally effective cause used to determine whether a loss falls within coverage.

Subrogation: Insurer's right, after payment, to pursue responsible third parties in the insured's place.

Sublimit: Lower limit applying to a specified peril, property or expense within broader coverage.

Underinsurance: Insurance amount insufficient relative to the value or exposure at risk.

Waiting period: Time-based retention before interruption or disability benefits become payable.

Review Questions

Short Answer Questions

1. Distinguish a deductible from a policy limit.
2. What is basis risk in agricultural index insurance?
3. Explain the difference between occurrence and claims-made liability policies.
4. What is general average in marine insurance?
5. Why may an “all-risks” property policy still leave significant gaps?

Long Answer Questions

1. Compare the coverage, exclusions and claim processes of property and engineering insurance.
2. Explain how limits, sublimits, deductibles and valuation clauses affect claim settlement.
3. Analyse the principal forms and claim mechanics of marine insurance.
4. Discuss aviation insurance with reference to hull valuation, liability and accident investigation.
5. Evaluate the regulatory and ethical implications of artificial intelligence in insurance underwriting and claims.

Analytical / Application Questions

1. A building worth $20 million is insured for $12 million under an 80% coinsurance requirement. A covered loss of $4 million occurs, subject to a $100,000 deductible. Calculate payment using the chapter's simplified formula and interpret the result.
2. Design an insurance programme for a manufacturer that imports machinery, exports products, operates delivery vehicles and stores customer data. Identify at least five potential gaps.
3. A drought-index policy makes no payment even though one farmer experiences severe crop loss. Analyse possible causes of this outcome and recommend design improvements.

Multiple Choice Questions with Answers

Question 1

A covered loss is $900,000, the deductible is $100,000 and the applicable payment limit is $500,000. Assuming the deductible applies before the limit and no other adjustments apply, what is the insurer's payment?

A. $400,000

B. $500,000

C. $800,000

D. $900,000

Correct Answer: B. $500,000

Question 2

Which formula correctly represents payment when V is the maximum amount payable, L is covered loss and D is a deductible applied before the limit?

A. P = max(0, min(L,V) − D)

B. P = min(V, max(0,L − D))

C. P = min(D, max(0,L − V))

D. P = max(V, L − D)

Correct Answer: B. P = min(V, max(0,L − D))

Question 3

A property worth $10 million has an 80% insurance requirement but is insured for $6 million. A covered loss is $2 million and the deductible is $50,000. Using the simplified coinsurance formula in the chapter, what is payable?

A. $1,450,000

B. $1,500,000

C. $1,550,000

D. $1,950,000

Correct Answer: A. $1,450,000

Question 4

Which marine insurance concept shares a qualifying sacrifice made for the common safety among maritime interests?

A. General average

B. Actual cash value

C. Retroactive coverage

D. Experience rating

Correct Answer: A. General average

Question 5

Why does an official aviation safety investigation not by itself settle an insurance liability claim?

A. Safety investigations never examine causation

B. Only aircraft manufacturers may determine liability

C. The investigation's safety purpose is distinct from legal and policy determinations

D. Aviation liability is always settled at agreed hull value

Correct Answer: C. The investigation's safety purpose is distinct from legal and policy determinations

Question 6

Which loss is most characteristically considered under machinery breakdown insurance?

A. Gradual corrosion over ten years

B. A sudden internal electrical short circuit damaging a machine

C. Ordinary reduction in resale value

D. Intentional destruction by the insured

Correct Answer: B. A sudden internal electrical short circuit damaging a machine

Question 7

What is basis risk in weather-index crop insurance?

A. The insurer fails to reinsure the policy

B. The farm's actual loss differs from the index-based payout

C. The farmer insures more than one crop

D. The insured price exceeds the market price at harvest

Correct Answer: B. The farm's actual loss differs from the index-based payout

Question 8

Which action is normally important when presenting an indemnity-based crop claim before harvest?

A. Destroy all damaged crops immediately without notice

B. Preserve representative plots and notify the insurer promptly

C. Replace production records with a weather forecast

D. Wait until the next policy year to report the loss

Correct Answer: B. Preserve representative plots and notify the insurer promptly

Question 9

Which coverage issue is especially associated with discontinuing a claims-made liability policy?

A. Loss of protection for later claims arising from earlier acts unless extended reporting protection applies

B. Automatic doubling of the aggregate limit

C. Conversion of all deductibles into franchise deductibles

D. Automatic coverage for known circumstances

Correct Answer: A. Loss of protection for later claims arising from earlier acts unless extended reporting protection applies

Question 10

A health policy has an eligible expense of $10,000, a $1,000 deductible, 20% insured coinsurance and sufficient benefit limit. Under the chapter's simplified formula, how much does the insurer pay?

A. $1,800

B. $7,200

C. $8,000

D. $9,000

Correct Answer: B. $7,200