Property and Casualty Insurance Practice Exam

How is the premium for the Home Day Care Coverage Endorsement determined?

1. Based on the number of rooms in the home

2. Based on the number of children in care

3. A flat fee per month

4. Calculated as a percentage of total home value

The correct answer is: Based on the number of children in care

The premium for the Home Day Care Coverage Endorsement is determined based on the number of children in care. This approach is used because the number of children directly affects the risk exposure for the insurance company. More children can lead to a higher likelihood of incidents or claims, which necessitates a premium structure that accounts for this increased risk. When calculating insurance premiums, insurers consider factors that influence the potential frequency and severity of claims. In the context of home day care, the number of children actively cared for represents one of the most critical indicators of risk. By basing the premium on the number of children, insurers can tailor the coverage to the specific situation of the insured, ensuring that it reflects the actual risk profile associated with operating a day care in a residential setting. Other factors such as the overall size of the home or its value may play roles in other insurance calculations, but they do not directly correlate to the day care operation's risk level as effectively as the number of children in care does.