INSURANCE BROKER EXAM — 230
REVISION MCQs With Correct Answers &
Rationale
Sections Covered:
Section A: Principles of Insurance (Q1–35)
Section B: US Regulatory Framework (Q36–70)
Section C: Property Insurance (Q71–90)
Section D: Liability Insurance (Q91–100)
Section E: Life & Health Insurance (Q101–140)
Section F: Auto Insurance (Q141–150)
Section G: Commercial Lines & Specialty (Q151–165)
Section H: Broking Practice, Ethics & Miscellaneous (Q166–185)
Section I: Advanced Topics & Final Review (Q186–230)
SECTION A: PRINCIPLES OF INSURANCE (Q1–35)
1. Which principle prevents an insured from profiting from an insurance claim?
A) Subrogation B) Indemnity C) Insurable interest D) Utmost good faith
(Correct Answer: B) Indemnity Rationale: The principle of indemnity states the insured
should be restored to the same financial position as before the loss — no better, no worse.
Property and casualty insurance is governed by this principle; life insurance is not.
2. Insurable interest in property insurance must exist:
A) Only at the time of policy inception B) Only at the time of the loss C) At both inception and
at the time of loss D) At the time of renewal only
(Correct Answer: C) At both inception and at the time of loss Rationale: For
property/casualty insurance, insurable interest must exist both when the policy is written and
when the loss occurs. For life insurance, it only needs to exist at inception.
,3. Which of the following is NOT a required element of an insurance contract?
A) Offer and acceptance B) Consideration C) Legal purpose D) Notarization
(Correct Answer: D) Notarization Rationale: A valid insurance contract requires offer and
acceptance, consideration (premium), competent parties, and legal purpose. Notarization is not
a requirement for an insurance contract to be enforceable.
4. The legal concept that makes insurance contracts enforceable on the insurer even when
policy language is ambiguous — interpreted in the insured's favor — is called:
A) Subrogation B) Estoppel C) Contra proferentem D) Waiver
(Correct Answer: C) Contra proferentem Rationale: Because insurance policies are contracts
of adhesion (drafted solely by the insurer), any ambiguous language is interpreted against the
drafter — the insurer — and in favor of the insured.
5. An insurance contract is considered aleatory because:
A) Both parties exchange equal value B) One party may receive considerably more or less than
the other, depending on chance C) It is subject to state regulatory approval D) It requires good
faith from only one party
(Correct Answer: B) One party may receive considerably more or less than the other,
depending on chance Rationale: An aleatory contract involves an element of chance. The
insured pays premiums; the insurer may pay out much more (or nothing) depending on whether
a loss occurs. This distinguishes insurance from bilateral service contracts.
6. Which of the following describes a "unilateral" contract in the context of insurance?
A) Both parties make legally enforceable promises B) Only the insurer makes a legally
enforceable promise — the insured cannot be forced to pay premiums C) The contract requires
signatures from both parties to be valid D) Both parties must perform simultaneously
(Correct Answer: B) Only the insurer makes a legally enforceable promise Rationale: An
insurance contract is unilateral — only the insurer is legally bound to perform (pay claims). The
insured cannot be sued for not paying premiums; the policy simply lapses.
,7. "Consideration" in an insurance contract on the insured's part consists of:
A) A written application only B) The payment of premium and the statements made in the
application C) The signature on the policy document D) The agent's recommendation
(Correct Answer: B) The payment of premium and the statements made in the application
Rationale: Consideration from the insured includes both the premium paid and the
representations made in the application. The insurer's consideration is the promise to pay
covered losses.
8. The principle of subrogation allows the insurer to:
A) Cancel a policy after a claim B) Pursue a negligent third party in the insured's name after
paying a claim C) Increase premiums after a loss D) Share a loss with another insurer
(Correct Answer: B) Pursue a negligent third party in the insured's name after paying a
claim Rationale: After indemnifying the insured, the insurer is subrogated to the insured's rights
against the responsible third party. This prevents the insured from double recovery and holds
negligent parties accountable.
9. The principle of contribution applies when:
A) The insured has policies on different properties B) Two or more policies cover the same loss,
interest, and peril C) The insurer purchases reinsurance D) The insured is partially at fault for a
loss
(Correct Answer: B) Two or more policies cover the same loss, interest, and peril
Rationale: When two or more policies cover the same risk, each insurer contributes
proportionately to the loss. This prevents the insured from collecting more than the actual loss
from multiple policies.
10. "Proximate cause" in insurance refers to:
A) The most distant cause of a loss B) The efficient, dominant cause that sets the chain of events
leading to a loss in motion C) The last event before a loss D) Any contributing cause of a loss
(Correct Answer: B) The efficient, dominant cause that sets the chain of events leading to a
loss in motion Rationale: Proximate cause determines whether a loss is covered. If the
, proximate cause is an insured peril, the loss is covered — even if excluded perils contributed —
unless the policy uses a concurrent causation exclusion.
11. "Moral hazard" in insurance refers to:
A) Physical conditions increasing the probability of loss B) The tendency of insured persons to
be less careful because they are covered C) The risk that the insurer becomes insolvent D) Risks
arising from dishonest insurance agents
(Correct Answer: B) The tendency of insured persons to be less careful because they are
covered Rationale: Moral hazard is a behavioral risk — the insured changes behavior post-
insurance. Deductibles, co-insurance, and policy conditions are used to manage it by ensuring
the insured retains financial stake in loss prevention.
12. "Physical hazard" refers to:
A) The character and intentions of the insured B) Tangible, measurable conditions that increase
the probability or severity of a loss C) The insured's indifferent attitude toward loss prevention
D) Legal conditions affecting insurance contracts
(Correct Answer: B) Tangible, measurable conditions that increase the probability or
severity of a loss Rationale: Physical hazards are objective, observable characteristics of a risk
— e.g., a wood-frame building (fire risk), icy roads (accident risk), or a swimming pool (liability
risk). They directly influence underwriting decisions.
13. Which of the following is an example of a "pure risk"?
A) Investing in the stock market B) Starting a new business venture C) The possibility that one's
home is destroyed by fire D) Gambling at a casino
(Correct Answer: C) The possibility that one's home is destroyed by fire Rationale: Pure
risk involves only the possibility of loss or no loss — never a gain. Only pure risks are insurable.
Speculative risks (investments, gambling) involve the possibility of profit and are not insurable.
14. The Law of Large Numbers enables insurers to:
REVISION MCQs With Correct Answers &
Rationale
Sections Covered:
Section A: Principles of Insurance (Q1–35)
Section B: US Regulatory Framework (Q36–70)
Section C: Property Insurance (Q71–90)
Section D: Liability Insurance (Q91–100)
Section E: Life & Health Insurance (Q101–140)
Section F: Auto Insurance (Q141–150)
Section G: Commercial Lines & Specialty (Q151–165)
Section H: Broking Practice, Ethics & Miscellaneous (Q166–185)
Section I: Advanced Topics & Final Review (Q186–230)
SECTION A: PRINCIPLES OF INSURANCE (Q1–35)
1. Which principle prevents an insured from profiting from an insurance claim?
A) Subrogation B) Indemnity C) Insurable interest D) Utmost good faith
(Correct Answer: B) Indemnity Rationale: The principle of indemnity states the insured
should be restored to the same financial position as before the loss — no better, no worse.
Property and casualty insurance is governed by this principle; life insurance is not.
2. Insurable interest in property insurance must exist:
A) Only at the time of policy inception B) Only at the time of the loss C) At both inception and
at the time of loss D) At the time of renewal only
(Correct Answer: C) At both inception and at the time of loss Rationale: For
property/casualty insurance, insurable interest must exist both when the policy is written and
when the loss occurs. For life insurance, it only needs to exist at inception.
,3. Which of the following is NOT a required element of an insurance contract?
A) Offer and acceptance B) Consideration C) Legal purpose D) Notarization
(Correct Answer: D) Notarization Rationale: A valid insurance contract requires offer and
acceptance, consideration (premium), competent parties, and legal purpose. Notarization is not
a requirement for an insurance contract to be enforceable.
4. The legal concept that makes insurance contracts enforceable on the insurer even when
policy language is ambiguous — interpreted in the insured's favor — is called:
A) Subrogation B) Estoppel C) Contra proferentem D) Waiver
(Correct Answer: C) Contra proferentem Rationale: Because insurance policies are contracts
of adhesion (drafted solely by the insurer), any ambiguous language is interpreted against the
drafter — the insurer — and in favor of the insured.
5. An insurance contract is considered aleatory because:
A) Both parties exchange equal value B) One party may receive considerably more or less than
the other, depending on chance C) It is subject to state regulatory approval D) It requires good
faith from only one party
(Correct Answer: B) One party may receive considerably more or less than the other,
depending on chance Rationale: An aleatory contract involves an element of chance. The
insured pays premiums; the insurer may pay out much more (or nothing) depending on whether
a loss occurs. This distinguishes insurance from bilateral service contracts.
6. Which of the following describes a "unilateral" contract in the context of insurance?
A) Both parties make legally enforceable promises B) Only the insurer makes a legally
enforceable promise — the insured cannot be forced to pay premiums C) The contract requires
signatures from both parties to be valid D) Both parties must perform simultaneously
(Correct Answer: B) Only the insurer makes a legally enforceable promise Rationale: An
insurance contract is unilateral — only the insurer is legally bound to perform (pay claims). The
insured cannot be sued for not paying premiums; the policy simply lapses.
,7. "Consideration" in an insurance contract on the insured's part consists of:
A) A written application only B) The payment of premium and the statements made in the
application C) The signature on the policy document D) The agent's recommendation
(Correct Answer: B) The payment of premium and the statements made in the application
Rationale: Consideration from the insured includes both the premium paid and the
representations made in the application. The insurer's consideration is the promise to pay
covered losses.
8. The principle of subrogation allows the insurer to:
A) Cancel a policy after a claim B) Pursue a negligent third party in the insured's name after
paying a claim C) Increase premiums after a loss D) Share a loss with another insurer
(Correct Answer: B) Pursue a negligent third party in the insured's name after paying a
claim Rationale: After indemnifying the insured, the insurer is subrogated to the insured's rights
against the responsible third party. This prevents the insured from double recovery and holds
negligent parties accountable.
9. The principle of contribution applies when:
A) The insured has policies on different properties B) Two or more policies cover the same loss,
interest, and peril C) The insurer purchases reinsurance D) The insured is partially at fault for a
loss
(Correct Answer: B) Two or more policies cover the same loss, interest, and peril
Rationale: When two or more policies cover the same risk, each insurer contributes
proportionately to the loss. This prevents the insured from collecting more than the actual loss
from multiple policies.
10. "Proximate cause" in insurance refers to:
A) The most distant cause of a loss B) The efficient, dominant cause that sets the chain of events
leading to a loss in motion C) The last event before a loss D) Any contributing cause of a loss
(Correct Answer: B) The efficient, dominant cause that sets the chain of events leading to a
loss in motion Rationale: Proximate cause determines whether a loss is covered. If the
, proximate cause is an insured peril, the loss is covered — even if excluded perils contributed —
unless the policy uses a concurrent causation exclusion.
11. "Moral hazard" in insurance refers to:
A) Physical conditions increasing the probability of loss B) The tendency of insured persons to
be less careful because they are covered C) The risk that the insurer becomes insolvent D) Risks
arising from dishonest insurance agents
(Correct Answer: B) The tendency of insured persons to be less careful because they are
covered Rationale: Moral hazard is a behavioral risk — the insured changes behavior post-
insurance. Deductibles, co-insurance, and policy conditions are used to manage it by ensuring
the insured retains financial stake in loss prevention.
12. "Physical hazard" refers to:
A) The character and intentions of the insured B) Tangible, measurable conditions that increase
the probability or severity of a loss C) The insured's indifferent attitude toward loss prevention
D) Legal conditions affecting insurance contracts
(Correct Answer: B) Tangible, measurable conditions that increase the probability or
severity of a loss Rationale: Physical hazards are objective, observable characteristics of a risk
— e.g., a wood-frame building (fire risk), icy roads (accident risk), or a swimming pool (liability
risk). They directly influence underwriting decisions.
13. Which of the following is an example of a "pure risk"?
A) Investing in the stock market B) Starting a new business venture C) The possibility that one's
home is destroyed by fire D) Gambling at a casino
(Correct Answer: C) The possibility that one's home is destroyed by fire Rationale: Pure
risk involves only the possibility of loss or no loss — never a gain. Only pure risks are insurable.
Speculative risks (investments, gambling) involve the possibility of profit and are not insurable.
14. The Law of Large Numbers enables insurers to:
