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IN Property & Casualty practice questions

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Question 1Insurance Principles and Concepts

Insurance is best described as which of the following?

  1. A method of transferring the financial consequences of loss Correct answer.
  2. A guarantee that the insured will never suffer a loss of any kind
  3. A savings account that the insurer holds on the insured's behalf
  4. A speculative investment the insured makes to earn a profit

Explanation

Insurance transfers the financial consequences of an uncertain loss from an individual to a larger group, which spreads the cost across many policyholders. It does not prevent the loss from happening, nor does it function as a savings account or an investment.

Question 2Insurance Principles and Concepts

Which type of risk is insurable?

  1. Investment risk, because returns can be measured
  2. Speculative risk, because it offers a chance of gain
  3. Pure risk, because it involves only loss or no loss Correct answer.
  4. Gambling risk, because the outcome is uncertain

Explanation

Only pure risk - a situation offering the chance of loss or no loss but no chance of gain - is insurable. Speculative risk is not insurable because the prospect of profit would encourage people to seek the loss.

Question 3Insurance Principles and Concepts

In property insurance, insurable interest must exist at which point?

  1. It must exist at the time of application, but not at the time of loss.
  2. It must exist only if the loss exceeds the policy deductible.
  3. It need not exist at any time if the named insured is a corporation.
  4. It must exist at the time of the loss. Correct answer.

Explanation

In property insurance, insurable interest must exist at the time of the loss, because that is when the insured actually suffers financial harm. In life insurance, by contrast, the interest is measured at the time of application.

Question 4Insurance Principles and Concepts

A building with an actual cash value of $200,000 is insured for $200,000. After a $50,000 fire loss, the insured collects $50,000. Which principle is illustrated?

  1. Utmost good faith
  2. Indemnity Correct answer.
  3. Subrogation
  4. Coinsurance

Explanation

The principle of indemnity restores the insured to approximately the same financial position as before the loss, no better and no worse. Paying the full $50,000 loss on a $200,000 building puts the insured back where it was.

Question 5Insurance Principles and Concepts

Actual cash value is generally calculated as which of the following?

  1. market value plus the deductible
  2. original purchase price plus interest
  3. replacement cost plus depreciation
  4. replacement cost minus depreciation Correct answer.

Explanation

Actual cash value is replacement cost new minus depreciation, reflecting the value of the property in its current condition at the time of loss. Some policies instead use fair market value, but ACV is the standard formula.

Question 6Insurance Principles and Concepts

A roof that would cost $20,000 to replace has depreciated 40 percent. Under replacement cost coverage, the insurer pays which of the following?

  1. $12,000, which is the actual cash value
  2. $8,000, which reflects the depreciated value
  3. $20,000, before any applicable deductible Correct answer.
  4. $20,000 less 40 percent for depreciation

Explanation

Replacement cost coverage pays what it costs to repair or replace with new materials of like kind and quality without deducting for depreciation; the policy deductible then applies. The 40 percent depreciation would reduce an actual cash value payment to $12,000, but replacement cost coverage ignores it.

Question 7Insurance Principles and Concepts

The law of large numbers allows an insurer to do which of the following?

  1. charge every policyholder exactly the same premium
  2. eliminate all uncertainty from its underwriting results
  3. predict losses more accurately as exposure units grow Correct answer.
  4. operate without maintaining any policyholder surplus

Explanation

The law of large numbers holds that as the number of similar, independent exposure units increases, actual loss experience tends to approach the expected loss. That predictability allows insurers to set rates and hold adequate reserves.

Question 8Insurance Principles and Concepts

Adverse selection is best described as the situation in which which of the following occurs?

  1. high-risk applicants are the most likely to buy coverage Correct answer.
  2. a policyholder cancels coverage in the middle of a policy term
  3. an insurer deliberately selects only the most favorable risks
  4. a producer places coverage with an unauthorized insurer

Explanation

Adverse selection is the tendency of persons with greater-than-average loss potential to seek and buy insurance while better-than-average risks decline it. Insurers counter it through underwriting, which classifies and prices risks.

Question 9Insurance Principles and Concepts

Which of the following is a physical hazard?

  1. A frayed electrical cord Correct answer.
  2. Carelessness with a cigarette
  3. A dishonest employee
  4. Indifference toward loss prevention

Explanation

A physical hazard is a tangible condition that increases the chance or severity of loss, such as a frayed cord, icy steps, or faulty wiring. Dishonesty and carelessness are moral and morale hazards rather than physical ones.

Question 10Insurance Principles and Concepts

A moral hazard is best described as which of the following?

  1. carelessness that increases the chance of loss
  2. a dishonest tendency that increases the chance of loss Correct answer.
  3. a physical condition that increases the chance of loss
  4. a natural event that causes a loss

Explanation

A moral hazard arises from dishonesty or the intent to profit from a loss, such as arson or a false claim. Insurers control it through underwriting, claims investigation, and policy conditions.

Question 11Insurance Principles and Concepts

An insured who leaves a store unlocked at night because insurance will pay for any theft is demonstrating which of the following?

  1. a morale hazard Correct answer.
  2. a moral hazard
  3. a speculative risk
  4. a physical hazard

Explanation

A morale hazard is carelessness or indifference toward loss that arises because insurance is available to pay for it. Moral hazard, by contrast, requires dishonesty such as intentionally causing or exaggerating a loss.

Question 12Insurance Principles and Concepts

In insurance terminology, which of the following is a peril?

  1. A faulty electrical system
  2. An icy sidewalk
  3. A careless smoker
  4. Lightning Correct answer.

Explanation

A peril is an event that causes a loss, such as fire, lightning, windstorm, or theft. A hazard is a condition that increases the chance or severity of a loss.

Question 13Insurance Principles and Concepts

A representation in an insurance application is best described as which of the following?

  1. a guarantee that a stated fact is absolutely correct
  2. an intentional failure to disclose a material fact
  3. a statement the applicant believes to be true Correct answer.
  4. a promise to perform a future act

Explanation

A representation is a statement of fact on the application that the applicant believes to be true to the best of his or her knowledge. A materially false representation may allow the insurer to rescind the policy.

Question 14Insurance Principles and Concepts

In insurance, a warranty is best described as which of the following?

  1. an intentional concealment of material information
  2. an oral statement made during the sales presentation
  3. the insurer's promise to renew the policy
  4. a policy provision that is a promise by the insured Correct answer.

Explanation

A warranty is a policy provision in which the insured promises that certain facts are true or that certain conditions will be maintained. A material breach of a warranty can give the insurer grounds to deny a claim.

Question 15Insurance Principles and Concepts

Concealment occurs when an applicant does which of the following?

  1. exaggerates the value of the property being insured
  2. promises to install a sprinkler system next year
  3. intentionally fails to disclose a material fact Correct answer.
  4. states a fact that is untrue by mistake

Explanation

Concealment is the intentional withholding of information that is material to the insurer's decision to accept or rate the risk. Material concealment can make a policy voidable.

Question 16Insurance Principles and Concepts

An insurer's agent knows that a required sprinkler system has not been installed but issues the policy anyway. When a fire claim is later denied for that reason, which doctrine most likely defeats the denial?

  1. Aleatory contract
  2. Subrogation
  3. Indemnity
  4. Estoppel Correct answer.

Explanation

When an insurer knows of a condition that would allow it to deny coverage yet issues the policy anyway, it waives that requirement. Estoppel then prevents the insurer from later asserting the known ground to deny a claim.

Question 17Insurance Principles and Concepts

An insurance policy is a contract of adhesion, which means which of the following?

  1. the insurer drafts the terms and the insured accepts or rejects them Correct answer.
  2. the courts rewrite the policy wording whenever a claim is filed
  3. only the insured is legally bound by the terms of the agreement
  4. the two parties negotiate the wording as equals before issue

Explanation

A contract of adhesion is prepared by one party, the insurer, and offered to the other on a take-it-or-leave-it basis with no ability to negotiate terms. Because of this, ambiguities in the policy are generally construed against the drafter.

Question 18Insurance Principles and Concepts

An insurance contract is aleatory because of which of the following?

  1. only one party makes a legally enforceable promise
  2. it is offered on a take-it-or-leave-it basis
  3. the insured must comply with duties before collecting
  4. the amounts exchanged may be unequal Correct answer.

Explanation

An insurance contract is aleatory because the values exchanged by the parties are unequal and depend on chance; a small premium may produce a large claim payment, or no payment at all.

Question 19Insurance Principles and Concepts

An insurance policy is a unilateral contract because of which of the following?

  1. it is void unless countersigned by the insured
  2. both parties exchange promises of equal value
  3. it requires the insured to negotiate the terms
  4. only the insurer makes an enforceable promise Correct answer.

Explanation

Only the insurer makes a legally enforceable promise, which is to pay covered claims. The insured's payment of premium and compliance with conditions are not promises the insurer can sue to enforce.

Question 20Insurance Principles and Concepts

An insured who fails to submit a sworn proof of loss within the required time may have the claim denied. This best illustrates that an insurance policy is which of the following?

  1. an aleatory contract
  2. a conditional contract Correct answer.
  3. a contract of adhesion
  4. a unilateral contract

Explanation

Insurance is a conditional contract because the insured's right to collect depends on compliance with the policy's conditions, such as submitting a timely proof of loss.

Question 21Insurance Principles and Concepts

Which of the following is required for an insurance contract to be legally enforceable?

  1. Approval of the policy form by the insured's attorney
  2. A minimum of two named insureds
  3. A signed application and a physical examination
  4. Offer, acceptance, consideration, and legal purpose Correct answer.

Explanation

To be legally enforceable, a contract must have an offer and acceptance, consideration, a legal purpose, and parties with legal capacity. A physical exam or attorney review may be requested by the insurer but is not an element of a valid contract.

Question 22Insurance Principles and Concepts

A producer who has never been given written authority tells an applicant that a policy is in force, and the applicant relies on that statement. The insurer is most likely bound because of which of the following?

  1. apparent authority from the producer's position Correct answer.
  2. the insured's insurable interest
  3. express authority granted in a written agency agreement
  4. the principle of subrogation

Explanation

Apparent authority arises when the insurer's words or actions lead a third party to reasonably believe the producer has authority, and the insurer is bound by that appearance. Express authority would require an actual grant of power in the agency agreement.

Question 23Insurance Principles and Concepts

A stock insurance company is owned by which of the following?

  1. the state department of insurance
  2. its policyholders
  3. its reinsurers
  4. its shareholders Correct answer.

Explanation

A stock insurer is owned by its shareholders and operated for profit, while policyholders are customers rather than owners. Mutual insurers, by contrast, are owned by their policyholders.

Question 24Insurance Principles and Concepts

In a reciprocal insurance exchange, the members do which of the following?

  1. buy shares of stock and receive dividends
  2. insure each other through an attorney-in-fact Correct answer.
  3. purchase coverage from a government pool
  4. are assessed for losses only after a claim is paid

Explanation

A reciprocal exchange is an unincorporated group of individuals or businesses that insure one another, using an attorney-in-fact to manage the operations of the exchange. The members are known as subscribers.

Question 25Insurance Principles and Concepts

After paying a covered fire loss caused by a contractor's negligence, an insurer sues the contractor to recover the amount it paid. The insurer is exercising which right?

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

Explanation

Subrogation allows an insurer that has paid a claim to stand in the insured's shoes and recover the paid amount from the negligent third party responsible for the loss. It supports the indemnity principle by preventing the insured from collecting twice.

Question 26Insurance Principles and Concepts

For property insurance, insurable interest must exist at which point?

  1. Only when the application is signed
  2. At the time the claim is reported
  3. At the time of the loss Correct answer.
  4. Only when the policy is delivered

Explanation

Insurable interest is the legal right to insure property because the insured would suffer a financial loss from its damage. In property insurance, that interest must exist when the loss occurs, not merely when the application is signed or the policy is delivered.

Question 27Insurance Principles and Concepts

Which situation is an example of a pure risk?

  1. Owning a home exposed to fire Correct answer.
  2. Buying stock in the hope its value rises
  3. Betting on a sporting event
  4. Opening a restaurant to earn a profit

Explanation

A pure risk involves only the chance of loss or no loss and offers no possibility of gain. Fire damage to a home is a pure risk because the owner can only lose or remain the same, not profit from the fire.

Question 28Insurance Principles and Concepts

What is the primary effect of a deductible in a property insurance policy?

  1. It increases the policy limit by the deductible amount
  2. It eliminates the insurer's duty to investigate a claim
  3. It transfers all loss above the deductible to the insured
  4. It leaves a small part of each loss with the insured Correct answer.

Explanation

A deductible is the amount the insured absorbs before the insurer pays on a covered loss. It reduces small claims and administrative costs, which helps lower the premium.

Question 29Insurance Principles and Concepts

A producer issues a binder to an applicant. What does the binder do?

  1. Gives temporary coverage pending policy issuance Correct answer.
  2. Cancels any coverage that existed before the application
  3. Permanently sets the final premium for the policy
  4. Replaces the need for a written policy at renewal

Explanation

A binder is temporary evidence that insurance is in effect while the insurer completes underwriting and issues the policy. It does not establish the final premium or replace the policy itself.

Question 30Insurance Principles and Concepts

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

  1. Punish the party that caused the loss
  2. Restore the insured's prior financial position Correct answer.
  3. Pay a fixed amount regardless of the actual loss
  4. Allow the insured to profit from a covered loss

Explanation

Indemnity means the insured should be restored financially to approximately the position held before the loss, no better and no worse. It prevents an insured from collecting more than the actual amount of the loss.

Question 31Insurance Principles and Concepts

A property policy contains an 80% coinsurance clause. What is the purpose of this clause?

  1. To increase the policy limit after a covered loss
  2. To encourage insurance close to property value Correct answer.
  3. To divide a loss equally between insurer and insured
  4. To waive the deductible when the insured is underinsured

Explanation

A coinsurance clause requires the insured to carry a limit equal to a stated percentage of the property's value, commonly 80%. It encourages insurance to value and reduces a claim proportionally if the insured carries less than the required amount.

Question 32Insurance Principles and Concepts

An insured and insurer agree a loss is covered but disagree on the amount of damage. Which policy provision is designed to resolve this dispute?

  1. The appraisal provision Correct answer.
  2. The assignment provision
  3. The cancellation provision
  4. The subrogation provision

Explanation

An appraisal provision allows the insured and insurer to select independent appraisers to determine the amount of a loss when coverage is not disputed. If the appraisers disagree, an umpire helps resolve the difference.

Question 33Insurance Principles and Concepts

A windstorm blows down a wall, and the falling wall starts a fire that damages a building. The policy covers windstorm and excludes fire, and no anti-concurrent causation clause applies. Under the doctrine of proximate cause, what is the result?

  1. The fire, because it caused the most visible damage
  2. The excluded fire, because exclusions always control
  3. The windstorm, which began the chain of events Correct answer.
  4. Neither event, because two causes are involved

Explanation

Proximate cause is the efficient cause that sets an unbroken chain of events in motion leading to the loss. If the covered windstorm is the proximate cause and no anti-concurrent causation clause applies, the resulting damage is treated as windstorm loss.

Question 34Insurance Principles and Concepts

An insured has two property policies covering the same loss. Policy A has a $60,000 limit and Policy B has a $40,000 limit, and both contain a pro rata other insurance clause. If the covered loss is $20,000, how much does Policy A pay?

  1. $8,000
  2. $20,000
  3. $12,000 Correct answer.
  4. $10,000

Explanation

Under a pro rata other insurance clause, each policy pays its share of the loss based on its limit relative to the total limits. Policy A's share is $60,000 divided by $100,000, or 60%, of the $20,000 loss, which equals $12,000.

Question 35Property Insurance Basics

In property insurance, insurable interest must exist at which point for a claim to be paid?

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

Explanation

Property coverage is a contract of indemnity, so the claimant must have a financial stake in the property at the moment damage occurs; otherwise no true loss is suffered. Interest at application supports underwriting but is not the payment test. An owner who sells the building before the fire has nothing to indemnify.

Question 36Property Insurance Basics

Which statement best describes the principle of indemnity in property insurance?

  1. The insurer must pay the full policy limit whenever a covered peril occurs
  2. The insured may recover more than the property was worth if premiums were paid in full
  3. The insured should be restored to roughly the same financial position held before the loss Correct answer.
  4. The insurer must replace every damaged item with a brand-new item of like kind

Explanation

Indemnity means the settlement places the insured approximately where they stood before the loss, no better and no worse. That is why actual cash value, limits, and deductibles all reduce the payment below full new-for-old value. Allowing a profit from loss would create a moral hazard.

Question 37Property Insurance Basics

Actual cash value (ACV) is most commonly calculated as:

  1. The appraised market value of the insured's entire estate
  2. Replacement cost plus accumulated depreciation
  3. The price the insured originally paid for the property
  4. Replacement cost minus depreciation Correct answer.

Explanation

ACV starts with what it would cost today to replace the damaged item and then subtracts depreciation for age and condition. The result reflects the used value of the property at the time of loss. Purchase price and estate value are not part of the standard formula.

Question 38Property Insurance Basics

Which items are found on the declarations page of a property policy?

  1. The named insured, property description, policy limits, and deductible Correct answer.
  2. The insured's duties after a loss, including protecting the property from further damage
  3. The appraisal, arbitration, and suit-limitation provisions of the policy form
  4. The list of excluded perils together with the reason each exclusion applies

Explanation

The declarations personalize the policy by naming the insured, describing the covered property and location, and stating the term, limits, and deductible. The remaining parts of the form supply the promises, conditions, and exclusions. Reading the declarations first shows what was actually bought.

Question 39Property Insurance Basics

What is the function of the insuring agreement in a property policy?

  1. It states the insurer's promise to pay for covered losses Correct answer.
  2. It lists the duties the insured must perform after a loss occurs
  3. It describes the property and the amount of insurance purchased
  4. It explains the circumstances under which coverage does not apply

Explanation

The insuring agreement is the core promise: the insurer will pay for direct physical loss from covered perils to covered property during the policy period. Everything else in the form supports, limits, or conditions that promise. Duties, descriptions, and exclusions appear in other sections.

Question 40Property Insurance Basics

A property insurance binder is best described as:

  1. A sworn statement by the insured describing the damaged property
  2. A written agreement by the applicant to purchase the policy at a future date
  3. Temporary evidence of coverage until the policy is issued or the binder expires Correct answer.
  4. An endorsement attached to the policy that broadens its coverage

Explanation

A binder provides immediate, temporary protection while the application is underwritten and the policy is prepared. It is subject to the terms of the policy to be issued and terminates when that policy is delivered or the binder's stated period ends. Oral binders are valid in many states.

Question 41Property Insurance Basics

In a property policy, the deductible is:

  1. A premium credit given for accepting a higher retention limit
  2. The amount the insured absorbs before the insurer pays on a loss Correct answer.
  3. The amount the insurer pays before the insured's share begins
  4. The most the insurer will pay for any one loss

Explanation

The deductible is the insured's retained share of each loss, subtracted before the insurer's payment is calculated. It eliminates small claims and reduces premium. Larger deductibles lower cost but increase the insured's exposure.

Question 42Property Insurance Basics

What role do exclusions play in a property policy?

  1. They set out the insurer's promise to pay for covered losses
  2. They describe the perils and losses the policy will not cover Correct answer.
  3. They list the insured's duties after a loss has occurred
  4. They identify the insured property and the applicable limits

Explanation

Exclusions remove or narrow coverage by naming perils, property, or situations the insurer will not pay for, such as earth movement or intentional loss. They define the boundary of the insuring agreement and help keep premium affordable. Some excluded perils can be bought back by endorsement.

Question 43Property Insurance Basics

A commercial building policy contains an 80% coinsurance clause. What does that clause require of the insured?

  1. Pay 80% of each covered loss out of pocket before the insurer responds
  2. Carry insurance of at least 80% of the property's value at the time of loss Correct answer.
  3. Accept an 80% reduction in the policy limit in return for a lower premium
  4. Keep the policy in force for at least 80% of the stated policy period

Explanation

A coinsurance clause sets a minimum amount of insurance as a percentage of the property's value, measured when the loss occurs. Meeting the requirement means losses are paid in full up to the limit; falling short triggers a proportional penalty. The clause exists to discourage underinsurance.

Question 44Property Insurance Basics

An insurer pays a covered fire loss that was caused by a negligent contractor. Under its subrogation rights, the insurer may:

  1. Require the insured to repay the claim before any recovery is made
  2. Deny the claim because a third party caused the damage
  3. Pursue the contractor to recover the amount it paid the insured Correct answer.
  4. Cancel the policy without returning any unearned premium

Explanation

Subrogation lets the insurer stand in the insured's shoes after paying a claim and pursue the party legally responsible. It keeps the cost of negligence with the wrongdoer and helps hold down premiums. The insured must not impair these rights, for example by releasing the contractor in advance.

Question 45Property Insurance Basics

An insured holds two property policies that cover the same building and the same loss, each with an equal limit. How is the loss most commonly settled?

  1. The policy written first pays in full and the second policy pays nothing
  2. Each insurer pays its pro rata share of the loss Correct answer.
  3. The insured collects the full amount from each policy
  4. The insured selects one policy and the other insurer pays nothing

Explanation

Other insurance conditions usually require each policy to share the loss proportionally so the insured is indemnified once, not twice. Contribution among insurers prevents overpayment and spreads the cost. Collecting twice would violate the indemnity principle.

Question 46Property Insurance Basics

How does a standard mortgage clause protect a lender named in a property policy?

  1. It extends the policy's coverage to the lender's other real estate holdings
  2. It pays the lender up to its interest even if the insured's acts void coverage Correct answer.
  3. It transfers title to the mortgaged property to the lender when a loss occurs
  4. It requires the lender to reimburse the insurer for any claim paid to the insured

Explanation

Under a standard (or union) mortgage clause the lender receives loss payment to the extent of its interest, and its protection is not defeated by the acts of the borrower. The lender is also entitled to notice of cancellation or nonrenewal. The lender's recovery is limited to its financial interest.

Question 47Property Insurance Basics

After a covered loss, the sworn proof of loss serves to:

  1. State the details and amount of the insured's claim Correct answer.
  2. Suspend the policy until the damaged property is repaired
  3. Establish the replacement cost of the entire property
  4. Transfer the insured's rights against a third party to the insurer

Explanation

A proof of loss is a formal, often notarized statement giving the insurer the date, cause, and amount of the claim together with supporting documentation. It is a condition precedent to payment in many forms. Filing it does not waive the insurer's right to investigate.

Question 48Property Insurance Basics

If the insurer and the insured cannot agree on the amount of a covered loss, the appraisal provision allows them to:

  1. Each select a competent appraiser, with an umpire deciding if the appraisers disagree Correct answer.
  2. Ask the state insurance department to issue a binding decision
  3. Submit the dispute to a court before any payment is made
  4. Cancel the policy and return the unearned premium

Explanation

Appraisal is a dispute-resolution mechanism limited to the amount of loss, not to questions of coverage. Each side names an appraiser; if the appraisers cannot agree, an umpire chosen by them resolves the difference. The process is generally binding as to value.

Question 49Property Insurance Basics

A covered building has stood vacant for 70 days when a loss occurs. Under most property forms the effect is that:

  1. Coverage for many perils is suspended or sharply restricted Correct answer.
  2. Coverage continues unchanged because vacancy is not a policy condition
  3. Only theft losses are excluded while every other peril remains covered
  4. The policy automatically converts to a tenant-occupied policy form

Explanation

Vacancy increases the chance of undetected damage, vandalism, and theft, so forms commonly suspend or limit coverage after a stated period such as 60 days. The insured usually must buy a vacancy permit to restore protection. Unoccupancy, where contents remain, is treated less harshly than vacancy.

Question 50Property Insurance Basics

An endorsement attached to a property policy:

  1. Modifies the policy's coverage and takes precedence over the original form Correct answer.
  2. Is automatically void if it conflicts with the printed form
  3. Has no effect on coverage until the next renewal date
  4. Replaces the policy's declarations page in all circumstances

Explanation

Endorsements amend the base form to add, delete, or alter coverage and are effective as of the date shown. Because they are written for the specific account, they control when their wording conflicts with the preprinted form. Amendments may or may not change premium.