Property and Casualty Insurance Practice Exam

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Study for the Property and Casualty Insurance Exam. Utilize flashcards and multiple-choice questions with thorough explanations. Prepare with confidence and excel in your exam!

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What happens if a policy has a limit of coverage?

The insurer pays all claims completely regardless of the amount
The insurer may exceed the limit in case of significant loss
The insurer is limited to pay up to a specified maximum amount
The insured is automatically penalized for exceeding the limit

The correct answer is: The insurer is limited to pay up to a specified maximum amount

A policy with a limit of coverage specifies the maximum amount that an insurer will pay in the event of a claim. This limit defines the insurer's liability and provides clarity to both the insurer and the insured about the extent of financial protection available. In the event of a loss, the insurer will not cover claims that exceed this predetermined limit, which ensures that the insured is aware of the financial boundaries of their coverage. Policies may vary in how they establish these limits, such as having a per-incident limit or an aggregate limit that applies over a specified period. It’s essential for policyholders to understand these limits when choosing coverage amounts to ensure they are adequately protected against potential losses.