Sample practice questions

A few real questions from this free bank, with full explanations. Use the practice tool above for the whole set.

1. 1. General Insurance Principles

   Insurance is best described as a method of handling risk by:

   • a.Eliminating the possibility that a loss will occur
   • b.Retaining every loss and paying for it out of pocket
   • c.Avoiding every activity that might produce a loss
   • d.Transferring the risk of loss to an insurer for a premium

   Answer: d

   Explanation: Insurance is the transfer of risk from an individual to an insurer in exchange for a premium; the insurer agrees to pay for covered losses. Avoidance and retention are other ways to handle risk, but they are not insurance. Insurance cannot eliminate the chance a loss will happen; it shifts the financial consequences of that loss from the insured to the insurer through pooling.

2. 2. General Insurance Principles

   In the jurisdiction where a policy is being written, an admitted insurer is one that:

   • a.was formed under the laws of the place where the risk sits
   • b.sells through employees rather than independent producers
   • c.holds a certificate of authority to write there
   • d.writes only coverage the standard market has already refused

   Answer: c

   Explanation: Admitted, or authorized, means the insurer has been licensed there and holds a certificate of authority; a non-admitted insurer lacks that license and can be used only through a surplus lines placement. Where an insurer was formed decides whether it is domestic, foreign or alien, which is a separate question from admission. How it distributes its product has no bearing on either.

3. 3. Property Insurance Fundamentals

   A homeowners policy shows a dwelling limit of $280,000 and a 2% deductible; the home's full replacement cost is $350,000. A covered $34,000 loss occurs. The insurer pays:

   • a.$33,320
   • b.$28,400
   • c.$34,000
   • d.$27,000

   Answer: b

   Explanation: The percentage deductible runs on the amount of insurance, so it is 2% of $280,000, or $5,600, leaving $28,400 of the $34,000 loss. The $27,000 answer takes 2% of the home's $350,000 replacement cost instead of the limit shown on the declarations. Applying the 2% to the loss itself gives only a $680 deductible, and $34,000 ignores the deductible.

4. 4. Dwelling Policy (DP)

   A windstorm tears shingles off a dwelling insured on an unendorsed basic form. The loss is:

   • a.Not covered, because windstorm is not a basic-form peril
   • b.Covered, because windstorm is a basic dwelling peril
   • c.Covered, but only for the depreciated value of shingles
   • d.Not covered, because roof surfaces are excluded property

   Answer: a

   Explanation: Windstorm reaches a dwelling policy only through the extended coverage endorsement, so an unendorsed basic form pays nothing for wind-torn shingles. The answer settling the claim at depreciated value states the basic form's loss settlement rule correctly but applies it to a peril the form does not insure, and roof surfaces are covered property under the dwelling limit.

5. 5. Homeowners Policy (HO)

   Under a Homeowners policy, which coverage provides additional living expense when a covered loss makes the home temporarily uninhabitable?

   • a.Coverage D – Loss of Use
   • b.Coverage E – Personal Liability
   • c.Coverage A – Dwelling
   • d.Coverage F – Medical Payments to Others

   Answer: a

   Explanation: Coverage D (Loss of Use) pays additional living expenses, the reasonable extra costs of maintaining a normal standard of living, when a covered loss makes the residence uninhabitable, such as hotel and increased meal costs. Coverage A insures the dwelling structure, while Coverages E and F are the Section II liability coverages. Loss of use addresses the insured's indirect costs, not the physical damage.

6. 6. Homeowners Policy (HO)

   Which of these is excluded from Coverage C on a Homeowners policy?

   • a.a riding mower used at the home
   • b.a motorcycle with plates
   • c.a bicycle stored in the shed
   • d.a laptop taken to a coffee shop

   Answer: b

   Explanation: Coverage C leaves out motor vehicles and their equipment, along with aircraft, animals, and the property of roomers and boarders, because those exposures belong on an auto or specialty policy. A riding mower is not treated as an excluded motor vehicle when it is used to service the residence and is not licensed for road use, and a bicycle is ordinary personal property.

7. 7. Homeowners Policy (HO)

   Immediately after a guest is hurt on the premises, the insured pays $300 for first aid at the scene. Under the Section II additional coverages, that expense is:

   • a.excluded, being a voluntary payment made
   • b.covered only when the insured is at fault
   • c.charged against the Coverage F limit first
   • d.covered as a Section II additional coverage

   Answer: d

   Explanation: First aid expenses an insured incurs for others after a covered bodily injury are one of the Section II additional coverages, paid in addition to the Coverage E and Coverage F limits rather than out of them. The answer charging the payment against Coverage F confuses an additional coverage with the medical payments limit. First aid to an insured is not covered.

8. 8. Personal Auto Policy

   An insured borrows a friend's boat trailer, and while it is hitched to the insured's car the trailer is crushed. Under Part A the $9,000 of damage is:

   • a.Covered up to the property damage limit less the deductible
   • b.Excluded only if the insured signed a rental contract
   • c.Covered, because the trailer belongs to somebody else
   • d.Excluded, as property in the insured's care is not covered

   Answer: d

   Explanation: Part A excludes damage to property owned by, transported by, rented to, used by, or in the care of an insured, and a borrowed trailer hitched to the insured's car is squarely in the insured's care. Liability coverage is for damage to other people's property the insured is not looking after; bailee-type exposures need different coverage. The answer applying a deductible also misstates Part A, which has none.

9. 9. Personal Auto Policy

   Under an unendorsed personal auto policy, custom furnishings or equipment in a pickup or van are:

   • a.Covered without any limit as part of the auto
   • b.Excluded unless coverage is added by endorsement
   • c.Covered up to the full value of the vehicle itself
   • d.Excluded even if an endorsement is later added

   Answer: b

   Explanation: Bars, special carpeting, height-extending roofs and custom murals in a pickup or van are excluded from Part D unless a custom equipment endorsement schedules them. Sound-reproducing equipment is treated the same way when it is not permanently installed in the auto. Saying no endorsement can restore the coverage is wrong, since insurers write the equipment back for extra premium.

10. 10. Endorsements & Optional Coverages

    A homeowner applies for flood insurance under the National Flood Insurance Program. Coverage generally begins:

    • a.Immediately once the agent binds it
    • b.On the day the first premium is paid
    • c.30 days after the application and premium
    • d.When the lender records the mortgage

    Answer: c

    Explanation: Flood is excluded by homeowners and dwelling forms and must be bought as a separate policy, and the National Flood Insurance Program applies a standard 30-day waiting period before coverage takes effect, with limited exceptions such as a loan closing. That waiting period is why a policy bought as a storm approaches does nothing; a producer cannot bind flood coverage for immediate effect the way home coverage is bound.