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 is overinsurance?

Having more than one insurance policy
Insurance coverage exceeding the fair value of property
Insuring property under multiple types of policies
Coverage that fails to meet state requirements

The correct answer is: Insurance coverage exceeding the fair value of property

Overinsurance occurs when the amount of insurance coverage on a property exceeds its fair market value. This situation can lead to insurance being considered excessive because the insured amount is not reflective of the actual worth of the property. For instance, if a property valued at $200,000 has insurance covering it for $300,000, the policyholder is considered overinsured. This concept is significant because overinsurance can lead to issues such as moral hazard, where the insured might be less cautious with their property if they believe they are potentially receiving a financial windfall that exceeds their loss. Additionally, since premiums are based on the amount of coverage, being overinsured can lead to unnecessary costs that do not provide any additional benefit to the policyholder. Understanding overinsurance is essential for both consumers and insurers to ensure that coverage reflects actual value and avoids inflated premiums.