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CA Property & Casualty practice questions

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Question 1Insurance Principles and Concepts

Purchasing an insurance policy is best classified as which method of handling risk?

  1. Risk retention
  2. Risk transfer Correct answer.
  3. Risk avoidance
  4. Risk reduction

Explanation

Insurance shifts the financial consequence of a loss from the insured to the insurer in exchange for a premium. The insured keeps only the deductible and any uninsured portion.

Question 2Insurance Principles and Concepts

In property insurance, when must the insured have insurable interest?

  1. When the policy is first renewed
  2. When the application is submitted
  3. When the premium is quoted
  4. At the time of the loss Correct answer.

Explanation

Property coverage is tied to the principle of indemnity, so the insured must have an insurable interest when the loss occurs. A later-acquired interest can support a claim, while an interest that ended before the loss cannot.

Question 3Insurance Principles and Concepts

The principle of indemnity is intended to do which of the following?

  1. Punish the party that caused the loss
  2. Let the insured profit from a loss
  3. Restore the insured's pre-loss position Correct answer.
  4. Guarantee full replacement of all property

Explanation

Indemnity places the insured back in roughly the same financial position held before the loss, no better and no worse. It prevents recovery that exceeds the actual loss.

Question 4Insurance Principles and Concepts

An insurance contract is aleatory because:

  1. Payments depend on an uncertain event Correct answer.
  2. Both parties exchange equal values at inception
  3. The insured must perform first before coverage begins
  4. The insurer may cancel at any time without notice

Explanation

In an aleatory contract, the amounts exchanged are unequal and depend on chance. A small premium may produce a large claim payment, or no payment at all.

Question 5Insurance Principles and Concepts

A false statement of fact made by an applicant on an insurance application is called a:

  1. Concealment
  2. Misrepresentation Correct answer.
  3. Waiver
  4. Warranty

Explanation

A misrepresentation is an untrue statement of a material fact on the application. If it is material and relied upon, the insurer may have grounds to rescind the policy.

Question 6Insurance Principles and Concepts

Dishonesty or intentional behavior by an insured that increases the chance of loss is known as:

  1. Moral hazard Correct answer.
  2. Morale hazard
  3. Physical hazard
  4. Legal hazard

Explanation

Moral hazard arises from dishonest intent, such as filing a fraudulent claim or intentionally causing a loss. It is distinguished from carelessness, which is a morale hazard.

Question 7Insurance Principles and Concepts

Which risk involves the chance of gain as well as loss and is therefore generally uninsurable?

  1. Pure risk
  2. Particular risk
  3. Static risk
  4. Speculative risk Correct answer.

Explanation

Speculative risk involves the possibility of gain or loss, such as investing in a business venture. Insurers generally cover only pure risks, which present chance of loss or no loss.

Question 8Insurance Principles and Concepts

The law of large numbers helps insurers predict losses by:

  1. Excluding catastrophic perils from every policy
  2. Writing every policy for a one-year term
  3. Raising premiums after each reported loss
  4. Grouping many similar exposure units Correct answer.

Explanation

As the number of similar exposure units increases, actual loss experience tends to approach the expected loss level. This makes rates and reserves more reliable.

Question 9Insurance Principles and Concepts

A property policy has an 80% coinsurance clause on a building with a replacement cost of $500,000. The insured carries $300,000 of coverage and suffers a $100,000 covered loss. Ignoring any deductible, what amount does the insured collect?

  1. $75,000 Correct answer.
  2. $80,000
  3. $60,000
  4. $100,000

Explanation

The required limit is 80% of $500,000, or $400,000. The insured carried $300,000, so the recovery is ($300,000 / $400,000) x $100,000 = $75,000.

Question 10Insurance Principles and Concepts

After paying a covered loss caused by a negligent third party, an insurer may recover from that party under the right of:

  1. Contribution
  2. Subrogation Correct answer.
  3. Salvage
  4. Assignment

Explanation

Subrogation lets the insurer stand in the insured's shoes and pursue the responsible party after paying the claim. It helps hold the wrongdoer accountable and control costs.

Question 11Insurance Principles and Concepts

A deductible in a property policy primarily serves to:

  1. Eliminate small claims and share loss Correct answer.
  2. Provide coverage for excluded perils
  3. Extend coverage to additional insureds
  4. Increase the policy limit after a loss

Explanation

The insured absorbs the first part of each loss, which removes small claims and gives the insured a stake in loss prevention. It also reduces premium.

Question 12Insurance Principles and Concepts

Which policy section identifies the insured, the property, the policy period, and the limits?

  1. Insuring agreement
  2. Exclusions
  3. Conditions
  4. Declarations Correct answer.

Explanation

The declarations page provides the who, what, where, and when of the policy. It personalizes the standard policy form to the individual risk.

Question 13Insurance Principles and Concepts

Policy conditions generally describe:

  1. The named insured's business operations
  2. Duties of both the insured and insurer Correct answer.
  3. The perils that are not covered
  4. The amount of the premium refund

Explanation

Conditions are the rules of the contract, such as notice of loss, proof of loss, and cooperation. They also state the insurer's obligations, including the duty to defend.

Question 14Insurance Principles and Concepts

An exclusion in a property policy is designed to:

  1. Remove specified perils from coverage Correct answer.
  2. Set the policy's expiration date
  3. Define the insurer's duty to defend
  4. Add coverage for an additional premium

Explanation

Exclusions narrow the insuring agreement by listing perils, property, or situations that are not covered. They help define the scope of the risk the insurer intended to accept.

Question 15Insurance Principles and Concepts

A written change to a policy's terms, such as adding a location, is made by:

  1. An endorsement Correct answer.
  2. A warranty
  3. A certificate
  4. A binder

Explanation

An endorsement amends the policy and becomes part of the contract. It can add or remove coverage, change limits, or add insureds.

Question 16Insurance Principles and Concepts

A temporary agreement providing immediate coverage until the policy is issued is a:

  1. Declarations page
  2. Rider
  3. Binder Correct answer.
  4. Certificate of insurance

Explanation

A binder gives temporary evidence of coverage, usually effective when the application and premium are accepted. The permanent policy later replaces it.

Question 17Insurance Principles and Concepts

An insurer's adjuster tells an insured in writing that a late claim will be honored despite the policy's 60-day notice requirement. The insurer later denies the claim for late notice. Which doctrine most likely prevents the denial?

  1. Waiver Correct answer.
  2. Indemnity
  3. Subrogation
  4. Coinsurance

Explanation

A waiver is the voluntary surrender of a known right, such as the right to enforce a notice deadline. Once the insurer intentionally gives up that right, it generally cannot enforce the deadline against the insured.

Question 18Insurance Principles and Concepts

A producer acts beyond actual authority, but the insurer's past conduct leads a policyholder to reasonably believe the producer is authorized. The producer is exercising:

  1. Implied authority
  2. Apparent authority Correct answer.
  3. Express authority
  4. Statutory authority

Explanation

Apparent authority arises when the insurer's words or conduct lead a third party to reasonably believe the producer has authority. The insurer may be bound by the producer's acts even without actual authority.

Question 19Insurance Principles and Concepts

An insurance policy is a contract of adhesion because:

  1. The state legislature writes each policy
  2. The insurer drafts the terms unilaterally Correct answer.
  3. Both parties negotiate every term equally
  4. The insured drafts the policy wording

Explanation

The insurer prepares the standard form and the insured accepts or rejects it. Because the insured has no meaningful bargaining power over the wording, ambiguous language is construed against the drafter.

Question 20Insurance Principles and Concepts

When policy language is ambiguous, courts generally:

  1. Interpret the ambiguity against the insurer Correct answer.
  2. Void the entire policy
  3. Refer the dispute to the insurance commissioner
  4. Enforce the literal wording for the insurer

Explanation

Under the rule of contra proferentem, ambiguity in an adhesion contract is resolved against the party that drafted it. The insured's reasonable expectation of coverage is favored.

Question 21Insurance Principles and Concepts

A windstorm knocks down a power line, causing a fire that destroys a building. The fire is the immediate cause and the windstorm is the efficient cause. For coverage purposes, the proximate cause is:

  1. The fire
  2. The windstorm Correct answer.
  3. The building's age
  4. The power line failure

Explanation

Proximate cause is the dominant, efficient cause that sets the loss in motion, not necessarily the last event. If the policy covers windstorm, the resulting fire loss is generally covered.

Question 22Insurance Principles and Concepts

Actual cash value is generally calculated as:

  1. Original purchase price without deduction
  2. Replacement cost plus depreciation
  3. Market value plus the deductible
  4. Replacement cost minus depreciation Correct answer.

Explanation

Actual cash value reflects the property's value at the time of loss, commonly replacement cost less depreciation. It is intended to satisfy the indemnity principle.

Question 23Insurance Principles and Concepts

Replacement cost coverage differs from actual cash value coverage because it:

  1. Pays without deducting depreciation Correct answer.
  2. Pays only the outstanding mortgage balance
  3. Never requires the property to be repaired
  4. Applies only to commercial property

Explanation

Replacement cost pays what it costs to replace the damaged property with new property of like kind and quality. Actual cash value subtracts depreciation.

Question 24Insurance Principles and Concepts

A new insurer advertises low rates to all applicants, and the highest-risk buyers respond in large numbers. This is an example of:

  1. Subrogation
  2. Coinsurance
  3. Depreciation
  4. Adverse selection Correct answer.

Explanation

Adverse selection occurs when applicants with greater-than-average risk are more likely to seek or keep coverage. Underwriting and rating help insurers avoid concentrating on poor risks.

Question 25Insurance Principles and Concepts

Reinsurance is best described as:

  1. A policy sold directly to the public by a broker
  2. Coverage an insurer buys for part of its risk Correct answer.
  3. A government program for uninsurable risks
  4. A method of avoiding all catastrophic losses

Explanation

Reinsurance is insurance for insurers, transferring part of their exposure to another insurer. It increases capacity and protects against large or catastrophic losses.

Question 26Insurance Principles and Concepts

Which term describes a condition that increases the chance or severity of a loss?

  1. Exposure
  2. Risk
  3. Hazard Correct answer.
  4. Peril

Explanation

A hazard is a condition that increases the chance or severity of a loss, such as oily rags stored in a workshop. A peril is the actual cause of loss, while risk is uncertainty about loss and exposure is the state of being subject to a peril.

Question 27Insurance Principles and Concepts

A risk that involves only the possibility of loss or no loss, with no chance of gain, is called:

  1. Particular risk
  2. Pure risk Correct answer.
  3. Speculative risk
  4. Fundamental risk

Explanation

Pure risk involves only loss or no loss and is the category private insurance is designed to handle. Speculative risk includes the possibility of gain and is generally uninsurable.

Question 28Insurance Principles and Concepts

Insurable interest in a property insurance claim must exist:

  1. At the time the application is signed
  2. Continuously from application through the date of loss
  3. At the time the policy is delivered
  4. At the time of the loss Correct answer.

Explanation

Property insurance requires insurable interest at the time of loss so that the claimant suffers actual financial harm. A person who sold the building before the loss has nothing to insure, even if coverage existed at application.

Question 29Insurance Principles and Concepts

The principle of indemnity is intended to:

  1. Restore the insured to approximately the pre-loss financial position Correct answer.
  2. Allow the insured to profit when a covered loss occurs
  3. Guarantee full replacement of all damaged property regardless of cost
  4. Punish the party who caused the loss

Explanation

Indemnity restores the insured, as nearly as possible, to the financial position held before the loss, without profit. This is why policy limits and valuation methods such as actual cash value apply.

Question 30Insurance Principles and Concepts

An insurance contract is described as aleatory because:

  1. The premium is always paid in advance of the coverage period
  2. The values exchanged may be unequal and depend on chance Correct answer.
  3. Only the insurer makes a legally enforceable promise under the contract
  4. The insured must accept the policy as written without negotiation

Explanation

Aleatory means the dollar amounts exchanged can be quite unequal and depend on whether an insured event occurs, so a small premium may buy a large claim payment. Adhesion and unilateral promises are separate contract characteristics.

Question 31Insurance Principles and Concepts

An insurance policy is a unilateral contract because:

  1. It is prepared by the insurer and accepted by the insured
  2. Only the insurer makes a legally enforceable promise to pay Correct answer.
  3. It requires both parties to exchange promises of equal value and performance
  4. It takes effect only after the first premium is paid

Explanation

Only the insurer gives a legally enforceable promise; the insured's payment of premium is a condition, and the insured cannot be sued for failing to pay future premiums. This distinguishes insurance from a bilateral contract.

Question 32Insurance Principles and Concepts

A manufacturer stops using a hazardous chemical in its production process so that a related loss can never occur. Which risk management technique is this?

  1. Risk retention
  2. Risk transfer
  3. Loss reduction
  4. Risk avoidance Correct answer.

Explanation

Avoidance eliminates the exposure entirely, so no loss arising from that chemical can occur. Retention keeps the risk, reduction lessens its severity, and transfer shifts the financial consequences to an insurer.

Question 33Insurance Principles and Concepts

Leaving a car unlocked with the keys inside because the owner knows insurance will pay for a theft is an example of:

  1. Morale hazard Correct answer.
  2. Moral hazard
  3. Speculative risk
  4. Physical hazard

Explanation

Morale hazard is carelessness or indifference created by the knowledge that insurance will respond. Moral hazard instead involves deliberate dishonesty, such as intentionally causing or exaggerating a loss.

Question 34Insurance Principles and Concepts

Which characteristic is required for a loss exposure to be considered insurable?

  1. The loss must be certain to occur for each policyholder
  2. The loss must affect a large share of the population all at once
  3. The loss must be accidental and definite as to time, place, and amount Correct answer.
  4. The exposure must offer a realistic chance of financial gain

Explanation

Insurable losses must be accidental, definite, and measurable, and must occur across a large enough pool of similar exposures to be predictable. Catastrophic or certain losses defeat the pooling mechanism.

Question 35Insurance Principles and Concepts

The insuring agreement of a policy primarily:

  1. Describes the insured's duties after a loss occurs
  2. Identifies the insured, the covered property, and the policy limits
  3. Removes specified perils from the coverage provided
  4. States the insurer's promise to pay for covered losses Correct answer.

Explanation

The insuring agreement contains the insurer's core promise to pay for covered losses. Identifying details appear in the declarations, duties appear in the conditions, and removed perils are listed in exclusions.

Question 36Insurance Principles and Concepts

In an insurance contract, the insured's consideration is best described as:

  1. Payment of the premium or the promise to pay it Correct answer.
  2. The application submitted by the producer on behalf of the insured
  3. The insurer's promise to pay covered claims
  4. The insurable interest held at the time of loss

Explanation

The insured's consideration is the premium paid or promised, which supports the insurer's promise to pay claims. The insurer's consideration is its own promise of coverage.

Question 37Insurance Principles and Concepts

An insured carries two property policies on the same building with identical terms: Policy A with a $200,000 limit and Policy B with a $300,000 limit. Neither policy contains a provision changing the pro rata method. A $50,000 covered loss occurs. Under pro rata liability, Policy A pays:

  1. $20,000 Correct answer.
  2. $30,000
  3. $50,000
  4. $25,000

Explanation

The combined limits total $500,000, so Policy A bears 200,000 divided by 500,000, or 40 percent, of the loss. Forty percent of $50,000 is $20,000, and Policy B pays the remaining $30,000.

Question 38Insurance Principles and Concepts

After paying a total loss on a covered building, the insurer's right to take possession of the damaged property and sell it for its remaining value is known as:

  1. The right of abandonment
  2. The right of contribution
  3. The appraisal right
  4. The salvage right Correct answer.

Explanation

Salvage rights allow an insurer that has paid a total loss to take the damaged property and dispose of it, recovering some value and reducing the net cost of the claim. Contribution and appraisal serve entirely different purposes.

Question 39Insurance Principles and Concepts

The insurer and insured agree that a loss is covered but disagree sharply on the amount of damage. The policy provision normally used to resolve that disagreement is:

  1. Arbitration
  2. Salvage
  3. Appraisal Correct answer.
  4. Subrogation

Explanation

Appraisal is the provision under which each party selects a competent appraiser, and an umpire resolves differences if the appraisers disagree. It addresses the amount of loss once coverage is established.

Question 40Insurance Principles and Concepts

A signed statement from the insured that documents the date, cause, and amount of a loss is called a:

  1. Release
  2. Certificate of insurance
  3. Proof of loss Correct answer.
  4. Notice of loss

Explanation

Most property policies require the insured to submit a proof of loss documenting the time, cause, and amount of the claim. The earlier notice of loss is simply the prompt report of the claim.

Question 41Insurance Principles and Concepts

An insured relies on a producer's written statement that a newly purchased location is covered, buys no other insurance, and then suffers a loss there. The insurer is most likely barred from denying coverage under the doctrine of:

  1. Utmost good faith
  2. Subrogation
  3. Estoppel Correct answer.
  4. Waiver

Explanation

Estoppel prevents a party from denying a fact when another party reasonably relied on that fact and was harmed by the reliance. Waiver is the voluntary giving up of a known right and does not itself require reliance.

Question 42Insurance Principles and Concepts

Authority that is not expressly granted but is reasonably necessary for a producer to carry out the duties the insurer has expressly given is called:

  1. Apparent authority
  2. Express authority
  3. Implied authority Correct answer.
  4. Delegated underwriting authority

Explanation

Implied authority arises from the duties the insurer expressly assigns, such as collecting premium for a policy the producer is authorized to sell. Express authority is spelled out, and apparent authority arises from the insurer's conduct toward third parties.

Question 43Insurance Principles and Concepts

An applicant deliberately fails to disclose a prior fire loss when the application asks about loss history. This is best described as:

  1. A warranty
  2. A representation
  3. A waiver
  4. Concealment Correct answer.

Explanation

Concealment is the intentional withholding of a material fact the insurer needs to evaluate the risk, and it can allow the insurer to void the policy. A representation is an affirmative statement, and a warranty is a promise that a fact is true.

Question 44Insurance Principles and Concepts

Which statement about a policy warranty is correct?

  1. It is a promise by the insurer to renew the policy at each anniversary
  2. It is a statement the applicant believes true to the best of their knowledge
  3. It automatically voids the policy for any inaccuracy, however trivial
  4. It is a promise that a fact is true; a material breach may defeat coverage Correct answer.

Explanation

A warranty is a statement the insured promises is true, and under modern rules a breach that is material to the risk can support denial or rescission. Innocent or trivial inaccuracies generally do not automatically void coverage.

Question 45Insurance Principles and Concepts

To recover damages in a negligence action, a claimant must prove:

  1. Duty, breach, proximate cause, and damages Correct answer.
  2. Intent to harm, causation, and injury
  3. A written contract, a material breach, and damages
  4. A statutory duty and strict liability

Explanation

Negligence requires a duty owed to the claimant, a breach of that duty, proximate cause linking the breach to the injury, and actual damages. Intent to harm is not an element and would point instead to an intentional tort.

Question 46Insurance Principles and Concepts

Which statement correctly distinguishes facultative from treaty reinsurance?

  1. Facultative is written only by state guaranty funds
  2. Facultative is negotiated per risk; treaty applies automatically Correct answer.
  3. Treaty reinsurance transfers all risk permanently to the reinsurer
  4. Facultative applies automatically to all risks; treaty is negotiated case by case

Explanation

Facultative reinsurance is arranged individually for each risk the ceding insurer chooses to submit, and either side may decline. Treaty reinsurance is a standing agreement under which the reinsurer automatically accepts risks within a defined class.

Question 47Insurance Principles and Concepts

Which statement about a liability insurer's duty to defend is correct?

  1. It applies only after the insured has paid a judgment
  2. It is identical in scope to the duty to indemnify
  3. It is broader than the duty to indemnify Correct answer.
  4. It ends as soon as the insured reports the claim

Explanation

The duty to defend is broader than the duty to indemnify, so the insurer must defend suits that are potentially covered even if the allegations are groundless or ultimately fall outside coverage. The duty to indemnify arises only when the insured is legally obligated for a covered loss.

Question 48Insurance Principles and Concepts

A standard mortgage clause in a property policy provides that:

  1. The mortgagee becomes the named insured on the policy
  2. The mortgagee's rights end if the insured's policy is cancelled
  3. The mortgagee must pay the premium for the named insured
  4. The mortgagee is protected despite the insured's acts Correct answer.

Explanation

A standard mortgage clause protects the lender's interest even when the insured's own acts, such as misrepresentation or failure to comply with conditions, impair coverage for the insured. The mortgagee is also entitled to notice of cancellation and may pay premium to protect its interest.

Question 49Insurance Principles and Concepts

A property policy's abandonment clause means that:

  1. The insurer may abandon any property it has already paid for
  2. The insured may abandon the premises after a total loss without notifying the insurer
  3. The insured cannot force the insurer to take title to damaged property Correct answer.
  4. The insured may leave damaged property for the insurer to repair

Explanation

The abandonment clause prevents the insured from forcing the insurer to accept title to damaged property in exchange for the policy limit. An insurer may take the property only when it exercises its salvage rights after paying a loss.

Question 50Insurance Principles and Concepts

An applicant truthfully but incorrectly states the age of a building, and the insurer would have charged a higher premium had it known the true age. The insurer may most likely:

  1. Deny only the portion of the loss attributable to the wrong age
  2. Void the policy only if the building is later destroyed by fire
  3. Rescind the policy because the misstatement was material Correct answer.
  4. Take no action because the applicant did not intend to deceive

Explanation

A misrepresentation need not be intentional; if it is material, meaning the insurer would have acted differently, the insurer may rescind or reform the policy. The applicant's innocent intent does not cure the materiality of the false statement.