TEXAS PROPERTY AND CASUALTY EXAM 2026 | 200 Practice
Questions with Detailed Rationales | Insurance Licensing | Pass
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Section 1: Insurance Basics and Principles (Questions 1-25)
Q1: Which of the following best describes the principle of indemnity in insurance?
A. The insured should profit from a loss
B. The insured is restored to the same financial position after a loss as before, without
profit [CORRECT]
C. The insurer pays double the amount of the loss
D. The insured receives payment regardless of actual loss amount
Correct Answer: B
Rationale: The principle of indemnity ensures that insurance restores the insured to their
pre-loss financial position, preventing profit from losses. This prevents moral hazard
and aligns with the fundamental purpose of insurance as risk transfer, not investment.
Option A is incorrect because profiting from losses violates indemnity. Option C
describes a valued policy situation, not standard indemnity. Option D describes a
different concept entirely (open peril without valuation).
Q2: In Texas, an insurance contract is considered a contract of adhesion because:
A. Both parties negotiate all terms equally
B. The insurer drafts the policy and the insured must accept or reject it as written
[CORRECT]
C. It requires a court to interpret all disputes
D. It is only valid if signed by an attorney
Correct Answer: B
,Correct Answer: B
Rationale: Insurance contracts are contracts of adhesion because the insurer prepares
the policy language (take-it-or-leave-it basis), and the insured has no power to negotiate
terms. Under Texas law, ambiguities in adhesion contracts are construed against the
drafter (the insurer). Option A describes a negotiated contract, not adhesion. Options C
and D are incorrect statements regarding contract formation.
Q3: What is the primary purpose of the Texas Property and Casualty Insurance Guaranty
Association?
A. To regulate insurance rates in Texas
B. To provide coverage for high-risk insureds who cannot obtain insurance elsewhere
C. To protect policyholders and claimants against losses due to insurer insolvency
[CORRECT]
D. To license insurance agents in Texas
Correct Answer: C
Rationale: The Texas Property and Casualty Insurance Guaranty Association (TPCIGA)
is established under Chapter 462 of the Texas Insurance Code to pay covered claims
when a member insurer becomes insolvent. It does not regulate rates (that's TDI's role),
provide coverage to high-risk individuals (that's TAIPA for auto or FAIR plans), or license
agents. The Association is funded by assessments on member insurers.
Q4: Which element is NOT required for a valid insurance contract in Texas?
A. Offer and acceptance
B. Consideration
C. Legal purpose
D. Written documentation in all cases [CORRECT]
Correct Answer: D
,Rationale: While most insurance contracts are written, Texas law does not universally
require all insurance contracts to be in writing to be valid (though specific types may
have statutory writing requirements). The essential elements of any valid
contract—offer/acceptance, consideration, competent parties, and legal purpose—are
required. Many oral insurance agreements can be binding, though proving them is
difficult.
Q5: The doctrine of reasonable expectations in Texas insurance law means:
A. The insured's reasonable expectations of coverage are honored even if policy
language contradicts them [CORRECT]
B. The insurer can deny any claim not explicitly listed in the policy
C. Policy language always overrides the insured's understanding
D. Only written endorsements create coverage expectations
Correct Answer: A
Rationale: Texas courts have adopted the reasonable expectations doctrine, which
holds that objectively reasonable expectations of coverage are honored even if policy
language appears to exclude coverage. This protects insureds from technical denials
that contradict their reasonable understanding. Option B describes strict construction
against the insured, which Texas law rejects. Option C contradicts the doctrine itself.
Option D is incorrect because reasonable expectations can be created through various
means including marketing materials and agent representations.
Q6: In property insurance, actual cash value (ACV) is typically calculated as:
A. Replacement cost plus depreciation
B. Replacement cost minus depreciation [CORRECT]
C. Market value plus land value
D. Original purchase price minus inflation
Correct Answer: B
, Rationale: Actual Cash Value = Replacement Cost - Depreciation (or Broad Evidence of
Value in some jurisdictions). This represents the damaged property's value at the time
of loss, accounting for wear and tear. Texas courts generally accept replacement cost
less depreciation as the standard ACV calculation. Option A would inflate value
incorrectly. Option C incorrectly includes land (typically uninsurable under standard
property policies). Option D ignores depreciation and current replacement costs.
Q7: Which of the following is an example of a morale hazard in insurance?
A. A person who intentionally burns their house for insurance money
B. A person who is careless about locking doors because they have insurance
[CORRECT]
C. A person with a pre-existing medical condition
D. A person who lives in a high-crime neighborhood
Correct Answer: B
Rationale: A morale hazard is a condition of carelessness or indifference to loss
because of the existence of insurance protection. It differs from moral hazard (Option A
- intentional dishonesty) and physical hazards (Options C and D - tangible conditions
increasing risk). Morale hazards increase loss frequency through negligence rather than
intentional acts.
Q8: Under Texas law, the maximum time period for filing a sworn proof of loss after
receiving a request from the insurer is typically:
A. 15 days
B. 30 days
C. 60 days [CORRECT]
D. 90 days
Correct Answer: C
Questions with Detailed Rationales | Insurance Licensing | Pass
Guaranteed - A+ Graded
Section 1: Insurance Basics and Principles (Questions 1-25)
Q1: Which of the following best describes the principle of indemnity in insurance?
A. The insured should profit from a loss
B. The insured is restored to the same financial position after a loss as before, without
profit [CORRECT]
C. The insurer pays double the amount of the loss
D. The insured receives payment regardless of actual loss amount
Correct Answer: B
Rationale: The principle of indemnity ensures that insurance restores the insured to their
pre-loss financial position, preventing profit from losses. This prevents moral hazard
and aligns with the fundamental purpose of insurance as risk transfer, not investment.
Option A is incorrect because profiting from losses violates indemnity. Option C
describes a valued policy situation, not standard indemnity. Option D describes a
different concept entirely (open peril without valuation).
Q2: In Texas, an insurance contract is considered a contract of adhesion because:
A. Both parties negotiate all terms equally
B. The insurer drafts the policy and the insured must accept or reject it as written
[CORRECT]
C. It requires a court to interpret all disputes
D. It is only valid if signed by an attorney
Correct Answer: B
,Correct Answer: B
Rationale: Insurance contracts are contracts of adhesion because the insurer prepares
the policy language (take-it-or-leave-it basis), and the insured has no power to negotiate
terms. Under Texas law, ambiguities in adhesion contracts are construed against the
drafter (the insurer). Option A describes a negotiated contract, not adhesion. Options C
and D are incorrect statements regarding contract formation.
Q3: What is the primary purpose of the Texas Property and Casualty Insurance Guaranty
Association?
A. To regulate insurance rates in Texas
B. To provide coverage for high-risk insureds who cannot obtain insurance elsewhere
C. To protect policyholders and claimants against losses due to insurer insolvency
[CORRECT]
D. To license insurance agents in Texas
Correct Answer: C
Rationale: The Texas Property and Casualty Insurance Guaranty Association (TPCIGA)
is established under Chapter 462 of the Texas Insurance Code to pay covered claims
when a member insurer becomes insolvent. It does not regulate rates (that's TDI's role),
provide coverage to high-risk individuals (that's TAIPA for auto or FAIR plans), or license
agents. The Association is funded by assessments on member insurers.
Q4: Which element is NOT required for a valid insurance contract in Texas?
A. Offer and acceptance
B. Consideration
C. Legal purpose
D. Written documentation in all cases [CORRECT]
Correct Answer: D
,Rationale: While most insurance contracts are written, Texas law does not universally
require all insurance contracts to be in writing to be valid (though specific types may
have statutory writing requirements). The essential elements of any valid
contract—offer/acceptance, consideration, competent parties, and legal purpose—are
required. Many oral insurance agreements can be binding, though proving them is
difficult.
Q5: The doctrine of reasonable expectations in Texas insurance law means:
A. The insured's reasonable expectations of coverage are honored even if policy
language contradicts them [CORRECT]
B. The insurer can deny any claim not explicitly listed in the policy
C. Policy language always overrides the insured's understanding
D. Only written endorsements create coverage expectations
Correct Answer: A
Rationale: Texas courts have adopted the reasonable expectations doctrine, which
holds that objectively reasonable expectations of coverage are honored even if policy
language appears to exclude coverage. This protects insureds from technical denials
that contradict their reasonable understanding. Option B describes strict construction
against the insured, which Texas law rejects. Option C contradicts the doctrine itself.
Option D is incorrect because reasonable expectations can be created through various
means including marketing materials and agent representations.
Q6: In property insurance, actual cash value (ACV) is typically calculated as:
A. Replacement cost plus depreciation
B. Replacement cost minus depreciation [CORRECT]
C. Market value plus land value
D. Original purchase price minus inflation
Correct Answer: B
, Rationale: Actual Cash Value = Replacement Cost - Depreciation (or Broad Evidence of
Value in some jurisdictions). This represents the damaged property's value at the time
of loss, accounting for wear and tear. Texas courts generally accept replacement cost
less depreciation as the standard ACV calculation. Option A would inflate value
incorrectly. Option C incorrectly includes land (typically uninsurable under standard
property policies). Option D ignores depreciation and current replacement costs.
Q7: Which of the following is an example of a morale hazard in insurance?
A. A person who intentionally burns their house for insurance money
B. A person who is careless about locking doors because they have insurance
[CORRECT]
C. A person with a pre-existing medical condition
D. A person who lives in a high-crime neighborhood
Correct Answer: B
Rationale: A morale hazard is a condition of carelessness or indifference to loss
because of the existence of insurance protection. It differs from moral hazard (Option A
- intentional dishonesty) and physical hazards (Options C and D - tangible conditions
increasing risk). Morale hazards increase loss frequency through negligence rather than
intentional acts.
Q8: Under Texas law, the maximum time period for filing a sworn proof of loss after
receiving a request from the insurer is typically:
A. 15 days
B. 30 days
C. 60 days [CORRECT]
D. 90 days
Correct Answer: C
