Property and Casualty Insurance
Licensing Exam Practice Exam Questions
And Correct Answers (Verified Answers)
Plus Rationales 2026 Q&A Instant
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1. What is the primary purpose of insurance?
A. To eliminate risk
B. To transfer risk
C. To increase risk
D. To avoid contracts
Correct Answer: To transfer risk
Rationale: Insurance shifts financial risk from the insured to the insurer in
exchange for a premium.
2. Which principle requires the insured to provide complete honesty when
applying for insurance?
A. Indemnity
B. Utmost good faith
C. Subrogation
D. Contribution
Correct Answer: Utmost good faith
Rationale: Both parties must act honestly and disclose all material facts.
,3. What does “indemnity” mean in insurance?
A. Profit from a loss
B. Restoration to prior financial condition
C. Punishment for negligence
D. Avoidance of claims
Correct Answer: Restoration to prior financial condition
Rationale: Indemnity restores the insured to their pre-loss financial
position.
4. Which document outlines coverage terms between insurer and insured?
A. Claim form
B. Insurance policy
C. Binder only
D. Loss notice
Correct Answer: Insurance policy
Rationale: The policy is the legal contract defining coverage and
conditions.
5. What is a deductible?
A. Amount insurer always pays
B. Portion paid by insurer only
C. Amount insured pays before coverage applies
D. Premium refund
Correct Answer: Amount insured pays before coverage applies
Rationale: Deductibles reduce small claims and shared risk.
6. Which peril is typically covered under a standard homeowners policy?
A. Earthquake
B. Flood
C. Fire
D. Nuclear hazard
Correct Answer: Fire
Rationale: Fire is a named covered peril in standard property policies.
, 7. What is liability insurance designed to cover?
A. Insured’s own property damage only
B. Legal responsibility to others
C. Life insurance needs
D. Investment loss
Correct Answer: Legal responsibility to others
Rationale: Liability insurance covers damages owed to third parties.
8. What is a premium?
A. Insurance claim
B. Payment for coverage
C. Deductible amount
D. Coverage exclusion
Correct Answer: Payment for coverage
Rationale: Premium is the cost paid for insurance protection.
9. What is a binder in insurance?
A. Policy cancellation
B. Temporary proof of coverage
C. Final contract
D. Claim denial
Correct Answer: Temporary proof of coverage
Rationale: A binder provides temporary coverage until the policy is issued.
10.What is subrogation?
A. Insurer cancels policy
B. Transfer of rights to insurer after payment
C. Insured refusal to pay premium
D. Claim adjustment process
Correct Answer: Transfer of rights to insurer after payment
Rationale: The insurer may recover losses from responsible third parties.
11.What is moral hazard?
A. Physical property damage risk
B. Dishonest behavior increasing risk
Licensing Exam Practice Exam Questions
And Correct Answers (Verified Answers)
Plus Rationales 2026 Q&A Instant
Download Pdf
1. What is the primary purpose of insurance?
A. To eliminate risk
B. To transfer risk
C. To increase risk
D. To avoid contracts
Correct Answer: To transfer risk
Rationale: Insurance shifts financial risk from the insured to the insurer in
exchange for a premium.
2. Which principle requires the insured to provide complete honesty when
applying for insurance?
A. Indemnity
B. Utmost good faith
C. Subrogation
D. Contribution
Correct Answer: Utmost good faith
Rationale: Both parties must act honestly and disclose all material facts.
,3. What does “indemnity” mean in insurance?
A. Profit from a loss
B. Restoration to prior financial condition
C. Punishment for negligence
D. Avoidance of claims
Correct Answer: Restoration to prior financial condition
Rationale: Indemnity restores the insured to their pre-loss financial
position.
4. Which document outlines coverage terms between insurer and insured?
A. Claim form
B. Insurance policy
C. Binder only
D. Loss notice
Correct Answer: Insurance policy
Rationale: The policy is the legal contract defining coverage and
conditions.
5. What is a deductible?
A. Amount insurer always pays
B. Portion paid by insurer only
C. Amount insured pays before coverage applies
D. Premium refund
Correct Answer: Amount insured pays before coverage applies
Rationale: Deductibles reduce small claims and shared risk.
6. Which peril is typically covered under a standard homeowners policy?
A. Earthquake
B. Flood
C. Fire
D. Nuclear hazard
Correct Answer: Fire
Rationale: Fire is a named covered peril in standard property policies.
, 7. What is liability insurance designed to cover?
A. Insured’s own property damage only
B. Legal responsibility to others
C. Life insurance needs
D. Investment loss
Correct Answer: Legal responsibility to others
Rationale: Liability insurance covers damages owed to third parties.
8. What is a premium?
A. Insurance claim
B. Payment for coverage
C. Deductible amount
D. Coverage exclusion
Correct Answer: Payment for coverage
Rationale: Premium is the cost paid for insurance protection.
9. What is a binder in insurance?
A. Policy cancellation
B. Temporary proof of coverage
C. Final contract
D. Claim denial
Correct Answer: Temporary proof of coverage
Rationale: A binder provides temporary coverage until the policy is issued.
10.What is subrogation?
A. Insurer cancels policy
B. Transfer of rights to insurer after payment
C. Insured refusal to pay premium
D. Claim adjustment process
Correct Answer: Transfer of rights to insurer after payment
Rationale: The insurer may recover losses from responsible third parties.
11.What is moral hazard?
A. Physical property damage risk
B. Dishonest behavior increasing risk
