Property and Casualty Insurance Practice Exam

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What is prejudgment interest?

Interest that accrues after payment is made
Interest that may accrue before a judgment is rendered
Interest that accrues on investment returns
Interest that has no bearing on legal proceedings

The correct answer is: Interest that may accrue before a judgment is rendered

Prejudgment interest refers to the interest that accrues on a legal claim before a court delivers a judgment. This type of interest is designed to compensate a plaintiff for the time value of money lost while awaiting a judgment, reflecting that a dollar now is worth more than a dollar in the future. This interest serves as an incentive for defendants to settle claims promptly and ensures that plaintiffs are made whole for the loss of use of their money during the legal proceedings. Options that describe interest accruing after the payment is made or relate to investment returns do not align with the definition of prejudgment interest. Similarly, suggesting that prejudgment interest has no relevance in legal contexts fails to recognize its purpose and application in facilitating fair compensation for plaintiffs awaiting judgment.