Alabama Property and Casualty Practice Exam

In insurance terminology, the condition of being subject to a loss is referred to as what?

1. Liability

2. Indemnity

3. Exposure

4. Subrogation

The correct answer is: Exposure

In insurance terminology, the condition of being subject to a loss is referred to as exposure. Exposure signifies the risk or potential for loss that an insurance policyholder faces. This concept is crucial in underwriting and determining how much coverage a person needs, as well as in calculating premiums. When an insurer evaluates exposure, they assess various factors such as the nature of the insured property, its use, and any potential hazards that might lead to a loss. A higher level of exposure typically correlates with a higher risk of claims, influencing both underwriting decisions and insurance rates. The other terms in the choices have different meanings in the context of insurance. Liability refers to the legal responsibility to compensate for damage or injury, indemnity signifies the principle of compensation to make the insured whole after a loss, and subrogation allows an insurer to recover costs from a third party responsible for a loss. Understanding these distinctions helps grasp the comprehensive nature of risk within the insurance industry.