Claims Handling and Adjuster Ethics Practice Test (Part 2 of 2)

Correct answer: B. $750

Model 902 Section 8D says subrogation recoveries are shared on a proportionate basis with the first-party claimant unless the deductible was otherwise recovered, with no expense deduction unless outside counsel was retained. Aisha bore $1,000 of the $8,000 loss (12.5%), so she receives 12.5% of $6,000, or $750, and the insurer keeps $5,250. Returning her full deductible would ignore the 25% shortfall.

Reference: NAIC Model 902, Section 8D

Correct answer: C. $12,700

The insurer pays actual cash value less the deductible: $16,000 - $500 = $15,500. Salvage is value recoverable after a loss, so the $2,800 sale proceeds reduce the insurer's net cost to $15,500 - $2,800 = $12,700. Subtracting salvage from the full $16,000 ($13,200) forgets that the insured, not the insurer, absorbed the $500 deductible.

Reference: ISO PP 00 01 09 18, Part D Limit Of Liability and Payment Of Loss; NAIC Glossary, Salvage

Correct answer: A. $30,000

The HO-3 Other Insurance condition pays only the proportion of the loss that this policy's limit bears to the total insurance covering the loss. Total insurance is $240,000 + $160,000 = $400,000, so Policy A pays 60% of $50,000, or $30,000. Splitting the loss equally ($25,000) is the equal shares method, which this form does not use.

Reference: ISO HO 00 03 05 11, Section I Conditions, G. Other Insurance And Service Agreement

Correct answer: D. $200,000

Under the CGL Method of Sharing, when all policies permit contribution by equal shares, each insurer pays equal amounts until it reaches its limit or the loss is fully paid. X and Y each pay $100,000; X is then exhausted, and Y pays the remaining $100,000, for $200,000 total. Contribution by limits ($500,000 / $600,000 of the loss) would have produced $250,000.

Reference: ISO CG 00 01 04 13, Section IV Conditions, 4.c Method Of Sharing

Correct answer: B. Payable jointly to Mei and Cedar Ridge Lending, as interests appear

The HO-3 Mortgage Clause says that if a mortgagee is named in the policy, any loss payable under Coverage A or B is paid to the mortgagee and the insured, as interests appear. Naming both on the draft protects the lender's security interest in the dwelling. If more than one mortgagee is named, payment follows the order of precedence of the mortgages.

Reference: ISO HO 00 03 05 11, Section I Conditions, L. Mortgage Clause

Correct answer: A. The denial does not defeat the mortgagee's valid claim if it meets the clause's conditions

The Mortgage Clause makes a denial of the insured's claim inapplicable to a valid mortgagee claim if the mortgagee reports known changes in ownership, occupancy, or substantial risk, pays premium on demand if the insured has not, and submits a signed, sworn statement of loss within 60 days after notice of the insured's failure to do so. If the insurer pays the mortgagee, it is subrogated to the mortgagee's rights.

Reference: ISO HO 00 03 05 11, Section I Conditions, L. Mortgage Clause, paragraphs 2 and 4

Correct answer: C. No remains of family photos or other keepsakes are found

NICB lists the absence of sentimental items, such as family photos and trophies, as an indicator that property may have been removed before a planned arson and then claimed as lost. Other NICB scene indicators include missing remains of expensive or non-combustible items and fire alarms or sprinklers that failed to work. Working alarms, long ownership, and a cooking fire do not point to fraud.

Reference: NICB, Scene Indicators for Law Enforcement, Structure Fires

Correct answer: D. Refer the file to the special investigation unit (SIU)

NICB stresses that indicators only suggest the potential for fraud and are not evidence; follow-up investigation is required. Referral to the SIU, the insurer's fraud investigators recognized as an antifraud initiative in Model 680 Section 11, is the right step. Denying without a reasonable investigation would violate Model 900 Section 4F, and paying while ignoring the indicators skips the insurer's duty to investigate.

Reference: NICB, Scene Indicators for Law Enforcement (Property Fraud); NAIC Model 680, Section 11; NAIC Model 900, Section 4F

Correct answer: B. The insurance commissioner, as the commissioner prescribes

Model 680 Section 6A requires anyone engaged in the business of insurance who knows or reasonably believes a fraudulent insurance act is being, will be, or has been committed to provide the information to the commissioner as the commissioner prescribes. Section 7 grants civil immunity for such reports unless they are made with actual malice. The NAIC does not prosecute fraud cases.

Reference: NAIC Insurance Fraud Prevention Model Act (Model 680), Sections 6 and 7

Correct answer: A. The deadline is lifted, but a decision is due within a reasonable time

Model 902 Sections 7A and 7B normally require accepting or denying within 21 days after properly executed proofs of loss, or a written explanation and 45-day status letters. When specific information available for regulators' review gives a reasonable basis to suspect the claimant fraudulently caused or contributed to the loss, the insurer is relieved of those time limits but must still decide within a reasonable time for full investigation.

Reference: NAIC Model 902, Sections 7A and 7B

Correct answer: D. Flagrantly, or often enough to indicate a general business practice

Model 900 Section 3 makes an act listed in Section 4 an improper claims practice only if it is committed flagrantly and in conscious disregard of the Act, or with such frequency as to indicate a general business practice. A single honest mistake usually does not qualify. The Act is enforced by the commissioner through hearings and orders, not by a court's bad faith finding.

Reference: NAIC Unfair Claims Settlement Practices Act (Model 900), Section 3

Correct answer: C. It is enforced by the commissioner and creates no private cause of action

Section 1 of Model 900 states that nothing in the Act creates or implies a private cause of action; enforcement runs through the commissioner, who may issue cease and desist orders, penalties, and license actions. The Act's definition of insurer includes agents, brokers, adjusters, and third party administrators, so adjusters are covered. Workers compensation, fidelity, suretyship, and boiler and machinery claims are excluded.

Reference: NAIC Model 900, Sections 1, 2C and 6

Correct answer: B. Failing to fully disclose pertinent benefits and coverages to a first-party claimant

Model 902 Section 5A says no insurer shall fail to fully disclose to first-party claimants all pertinent benefits, coverages, or other provisions under which a claim is presented, and Section 5B bars agents from concealing them. Coverage D (Loss Of Use) is plainly pertinent when the home is unlivable. Model 900 Section 4A separately prohibits knowingly misrepresenting relevant facts or policy provisions.

Reference: NAIC Model 902, Sections 5A and 5B; NAIC Model 900, Section 4A

Correct answer: A. Refusing to pay claims without conducting a reasonable investigation

Model 900 Section 4F lists refusing to pay claims without conducting a reasonable investigation. A prior water claim says nothing about the cause or coverage of this loss; the adjuster must inspect and investigate before deciding. A pattern of such denials could also show a failure to adopt reasonable investigation standards under Section 4C. The other options describe listed practices that do not fit these facts.

Reference: NAIC Model 900, Sections 4C and 4F

Correct answer: D. Requesting a signed, sworn proof of loss when the policy requires one

Model 900 lists compelling insureds to sue through low offers (4E), failing to adopt reasonable standards (4C), and failing to affirm or deny within a reasonable time after investigation (4G). Requesting a signed, sworn proof of loss that the policy requires is a normal insurer right. Section 4K targets only unreasonable delay caused by requiring a proof of loss plus duplicative verification.

Reference: NAIC Model 900, Section 4

Correct answer: C. Final payment and full release of all claims

Model 902 Section 5E bars stating that a payment is final or a release unless the policy limit has been paid or a compromise on coverage and amount was agreed, and Section 5F bars partial-settlement drafts that purport to release total liability. Identifying the coverage under which payment is made is proper; Model 900 Section 4J lists failing to do so as an unfair practice.

Reference: NAIC Model 902, Sections 5E and 5F; NAIC Model 900, Section 4J

Correct answer: A. 60 days

Model 902 Section 7D bars continuing direct settlement negotiations with an unrepresented claimant whose rights may be affected by a statute of limitations unless written notice of the limitation is given: at least 60 days before expiration for third-party claimants and at least 30 days for first-party claimants. The 30-day figure is the tempting wrong answer because it applies to first-party claimants.

Reference: NAIC Model 902, Section 7D

Correct answer: B. Improper, because her own insurer may not wait for another party to pay

Model 902 Section 7C says insurers shall not fail to settle first-party claims on the basis that responsibility for payment should be assumed by others, except as the policy provides. Rosa's own policy covers the loss, so her insurer should pay her and then pursue the neighbor through subrogation if warranted. Sending 45-day status letters does not cure an improper basis for delay.

Reference: NAIC Model 902, Section 7C

Correct answer: D. An insurer refuses a reasonable demand within its insured's liability limits

Third-party bad faith arises under liability coverage, when an insurer handling a claim made against its insured unreasonably fails to settle within limits and the insured is hit with a judgment above the limits. California's CACI 2334, for example, lets the insured recover the entire judgment. The other choices are first-party bad faith: mistreating the insured's own claim for the insured's own loss.

Reference: Judicial Council of California, CACI No. 2334, Bad Faith (Third Party), Refusal to Accept Reasonable Settlement

Correct answer: C. Promptly evaluate the demand and recommend accepting it

Model 900 Section 4D requires good faith efforts at prompt, fair settlement once liability is reasonably clear. Here liability is clear and damages far exceed the $50,000 limit, so a demand within limits should be promptly evaluated and normally accepted. Unreasonably rejecting it can expose the insurer to the entire excess judgment in a third-party bad faith claim, and the insured should be kept informed.

Reference: NAIC Model 900, Section 4D; CACI No. 2334

Correct answer: A. Say she may consult an attorney of her choice, without giving legal advice about her case

Adjuster codes of ethics, such as Fla. Admin. Code 69B-220.201(3)(h) and La. R.S. 22:1674.1(A)(16), forbid advising a claimant to refrain from seeking legal advice or against retaining counsel. Evaluating the strength of a lawsuit is legal advice, which an adjuster who is not an attorney should not give because it risks the unauthorized practice of law. The right answer respects her freedom to consult a lawyer.

Reference: Fla. Admin. Code 69B-220.201(3)(h); La. R.S. 22:1674.1(A)(16)

Correct answer: B. Not negotiate or settle directly with the claimant unless the attorney consents

State codes such as Fla. Admin. Code 69B-220.201(3)(g) and La. R.S. 22:1674.1(A)(14) bar adjusters from negotiating or effecting settlement directly with a third-party claimant known to be represented by an attorney, unless the attorney consents. It does not matter who started the call. The adjuster can ask the claimant to have the attorney make contact. Urging the claimant to drop counsel is also improper.

Reference: Fla. Admin. Code 69B-220.201(3)(g); La. R.S. 22:1674.1(A)(14)

Correct answer: D. Decline, because paid referrals to contractors are prohibited

Standards such as La. R.S. 22:1674.1 bar adjusters from having a financial interest in a claim beyond their agreed pay, from soliciting work for contractors, and from accepting compensation from contractors engaged by insureds. Florida's code likewise bars steering claimants to anyone who will compensate the adjuster for the referral. Reasonable prices or disclosure on request do not cure the conflict of interest.

Reference: La. R.S. 22:1674.1(A)(1), (3) and (4); Fla. Admin. Code 69B-220.201(3)(a)

Correct answer: C. Pretext interview, generally prohibited unless a narrow claim exception for suspected fraud applies

Model 670 defines a pretext interview as one in which a person pretends to be someone else, misrepresents the interview's purpose, or refuses to identify himself or herself on request. Section 3 prohibits pretext interviews, with a narrow claim exception where specific information gives a reasonable basis to suspect criminal activity, fraud, or material misrepresentation. Adjusters should normally identify themselves and whom they represent.

Reference: NAIC Insurance Information and Privacy Protection Model Act (Model 670), Sections 2V and 3

Correct answer: B. Decline without the individual's written authorization or an exception

Model 670 Section 13 bars insurers, agents, and insurance support organizations from disclosing personal or privileged information collected in connection with an insurance transaction unless the individual gives written authorization or a listed exception applies, such as disclosures needed to perform an insurance function or to detect fraud. Claim-related details are privileged information. A reporter's request fits no exception, and payment of the claim changes nothing.

Reference: NAIC Model 670, Sections 2W and 13