Property and Casualty Insurance Exam
1. What is the primary purpose of insurance?
A. To create profits for policyholders
B. To transfer risk from an individual to an insurer
C. To eliminate all losses
D. To guarantee investment returns
Correct Answer: B
Rationale: Insurance transfers the financial burden of potential losses from an individual or business
to an insurer in exchange for a premium. It does not eliminate risk but spreads it among many
policyholders.
2. Which principle states that an insured should not profit from a loss?
A. Contribution
B. Indemnity
C. Waiver
D. Adhesion
Correct Answer: B
Rationale: The principle of indemnity ensures that insurance restores the insured to approximately
the same financial condition that existed before the loss, without allowing a gain.
3. A peril is best defined as:
A. A condition increasing the chance of loss
B. The amount of loss
C. The cause of loss
D. A preventive measure
Correct Answer: C
Rationale: A peril is the direct cause of a loss, such as fire, theft, lightning, windstorm, or explosion.
4. Which of the following is a hazard?
A. Fire
B. Tornado
C. Smoking in bed
D. Lightning
Correct Answer: C
,Rationale: Smoking in bed is a physical hazard because it increases the likelihood that a fire loss may
occur.
5. What is consideration in an insurance contract?
A. Policy endorsements
B. Premium payment and insurer's promise to pay
C. Claims settlement
D. Declarations page
Correct Answer: B
Rationale: Consideration refers to the exchange of value between parties. The insured pays
premiums and provides truthful information, while the insurer agrees to provide coverage.
6. Insurance contracts are generally considered:
A. Bilateral
B. Aleatory only
C. Unilateral
D. Executed contracts
Correct Answer: C
Rationale: Insurance contracts are unilateral because only the insurer makes a legally enforceable
promise to perform if covered conditions are met.
7. What is subrogation?
A. Sharing losses among insurers
B. Cancellation of coverage
C. The insurer's right to recover from a responsible third party
D. Transfer of ownership
Correct Answer: C
Rationale: Subrogation allows an insurer that has paid a claim to seek reimbursement from the party
legally responsible for the loss.
8. Which is an example of a morale hazard?
A. Defective wiring
B. Ice-covered sidewalk
C. Indifference to loss because insurance exists
D. Flood-prone property
Correct Answer: C
, Rationale: A morale hazard arises when an insured becomes careless or less cautious because
insurance coverage is available.
9. Actual Cash Value (ACV) is generally calculated as:
A. Market value plus appreciation
B. Replacement cost minus depreciation
C. Purchase price only
D. Assessed value
Correct Answer: B
Rationale: Actual cash value reflects the cost to replace damaged property after accounting for
depreciation due to age and wear.
10. The declarations page contains:
A. Policy exclusions only
B. Information specific to the insured and policy
C. State regulations
D. Claims history
Correct Answer: B
Rationale: The declarations page identifies the insured, policy period, limits, deductibles, covered
property, and premium information.
11. Which homeowners form provides the broadest protection?
A. HO-2
B. HO-3
C. HO-4
D. HO-5
Correct Answer: D
Rationale: The HO-5 offers open-peril coverage on both the dwelling and personal property, making
it the broadest homeowners form.
12. The HO-4 policy is commonly known as:
A. Condo Form
B. Broad Form
C. Renters Form
D. Special Form
Correct Answer: C
1. What is the primary purpose of insurance?
A. To create profits for policyholders
B. To transfer risk from an individual to an insurer
C. To eliminate all losses
D. To guarantee investment returns
Correct Answer: B
Rationale: Insurance transfers the financial burden of potential losses from an individual or business
to an insurer in exchange for a premium. It does not eliminate risk but spreads it among many
policyholders.
2. Which principle states that an insured should not profit from a loss?
A. Contribution
B. Indemnity
C. Waiver
D. Adhesion
Correct Answer: B
Rationale: The principle of indemnity ensures that insurance restores the insured to approximately
the same financial condition that existed before the loss, without allowing a gain.
3. A peril is best defined as:
A. A condition increasing the chance of loss
B. The amount of loss
C. The cause of loss
D. A preventive measure
Correct Answer: C
Rationale: A peril is the direct cause of a loss, such as fire, theft, lightning, windstorm, or explosion.
4. Which of the following is a hazard?
A. Fire
B. Tornado
C. Smoking in bed
D. Lightning
Correct Answer: C
,Rationale: Smoking in bed is a physical hazard because it increases the likelihood that a fire loss may
occur.
5. What is consideration in an insurance contract?
A. Policy endorsements
B. Premium payment and insurer's promise to pay
C. Claims settlement
D. Declarations page
Correct Answer: B
Rationale: Consideration refers to the exchange of value between parties. The insured pays
premiums and provides truthful information, while the insurer agrees to provide coverage.
6. Insurance contracts are generally considered:
A. Bilateral
B. Aleatory only
C. Unilateral
D. Executed contracts
Correct Answer: C
Rationale: Insurance contracts are unilateral because only the insurer makes a legally enforceable
promise to perform if covered conditions are met.
7. What is subrogation?
A. Sharing losses among insurers
B. Cancellation of coverage
C. The insurer's right to recover from a responsible third party
D. Transfer of ownership
Correct Answer: C
Rationale: Subrogation allows an insurer that has paid a claim to seek reimbursement from the party
legally responsible for the loss.
8. Which is an example of a morale hazard?
A. Defective wiring
B. Ice-covered sidewalk
C. Indifference to loss because insurance exists
D. Flood-prone property
Correct Answer: C
, Rationale: A morale hazard arises when an insured becomes careless or less cautious because
insurance coverage is available.
9. Actual Cash Value (ACV) is generally calculated as:
A. Market value plus appreciation
B. Replacement cost minus depreciation
C. Purchase price only
D. Assessed value
Correct Answer: B
Rationale: Actual cash value reflects the cost to replace damaged property after accounting for
depreciation due to age and wear.
10. The declarations page contains:
A. Policy exclusions only
B. Information specific to the insured and policy
C. State regulations
D. Claims history
Correct Answer: B
Rationale: The declarations page identifies the insured, policy period, limits, deductibles, covered
property, and premium information.
11. Which homeowners form provides the broadest protection?
A. HO-2
B. HO-3
C. HO-4
D. HO-5
Correct Answer: D
Rationale: The HO-5 offers open-peril coverage on both the dwelling and personal property, making
it the broadest homeowners form.
12. The HO-4 policy is commonly known as:
A. Condo Form
B. Broad Form
C. Renters Form
D. Special Form
Correct Answer: C
