South Carolina Personal Lines Practice Exam

What does the Automatic Increase in Insurance Endorsement in a DP policy do?

1. Decreases coverage over time

2. Increases coverage based on market value fluctuations

3. Increases coverage by an annual percentage to offset inflation

4. Provides additional coverage for acts of God

The correct answer is: Increases coverage by an annual percentage to offset inflation

The Automatic Increase in Insurance Endorsement in a Dwelling Policy (DP policy) is designed specifically to address the issue of inflation and the rising costs associated with property replacement. By allowing for an annual percentage increase in coverage, this endorsement helps ensure that a policyholder's coverage remains adequate over time, reflecting growth in construction costs and overall price levels. As inflation occurs, the value of money decreases, which can impact the cost of rebuilding or repairing a dwelling. This endorsement helps mitigate the risk of underinsurance by automatically adjusting the insured amount upward, thereby providing a safeguard against potential losses due to insufficient coverage. It effectively ensures that the policy limits keep pace with the present value of the property rather than remaining static. The other options do not accurately represent the function of this endorsement; for instance, decreasing coverage would not serve a protective role for policyholders, nor would simply increasing based on market fluctuations ensure that the coverage is keeping up with inflation. Additionally, while acts of God may necessitate coverage, they are not specifically addressed by this endorsement, which is focused solely on periodic increases to account for inflation.