Property and Casualty Insurance Practice Exam

Why are certain properties excluded from a policy if they are covered under other policies?

1. To reduce overall administrative costs

2. To avoid duplicative coverage

3. To encourage bundled insurance options

4. To simplify the claims process

The correct answer is: To avoid duplicative coverage

Certain properties are excluded from a policy if they are covered under other policies primarily to avoid duplicative coverage. This principle maintains the integrity of insurance agreements by ensuring that a policyholder does not receive payments for the same loss from multiple sources. By excluding properties that are already insured elsewhere, the insurer helps to prevent the risk of overinsurance, which can lead to moral hazard where the insured may not take necessary precautions against loss knowing they are fully compensated from multiple policies. This approach not only streamlines the claims process by clarifying coverage but also contributes to the overall stability of the insurance market by reducing the complexities and potential for excessive claims. This rationale does not particularly serve to reduce administrative costs, promote bundled insurance options, or simplify the claims process, although those might be incidental benefits. The primary focus is on ensuring that coverage is both equitable and effective without overlap.