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1. Which of the following is a PURE risk and therefore potentially insurable?

Pure risk produces either loss or no loss, never gain, and is the only type insurance addresses. A kitchen fire fits that definition. Buying stock, gambling, and opening a business all carry a chance of GAIN, which makes them speculative and uninsurable.

2. Which characteristic is NOT one of the elements of an ideally insurable risk (the DICE test)?

The DICE test asks that a risk be Definite, Independent (not catastrophic), Calculable, and Economical. Speculative risks are EXCLUDED from insurability because they involve the possibility of gain, which would create a wagering contract.

3. An applicant for a homeowners policy admits she has filed four small jewelry-theft claims in the last three years, two of which were closed as suspicious. This is BEST described as which type of hazard?

A pattern of suspicious prior claims signals dishonest tendencies in the applicant, which is the textbook definition of a moral hazard. A physical hazard is a tangible condition; a morale hazard is mere carelessness because coverage exists; 'fundamental peril' is not a hazard classification.

4. Leaving the garage door open all day because 'my homeowners policy will pay if anything is stolen' is an example of which type of hazard?

Carelessness or indifference that arises precisely BECAUSE insurance is in place is a morale hazard, sometimes called attitudinal hazard. Moral hazard requires dishonesty; physical hazard requires a tangible condition; 'speculative hazard' is not a real category.

5. Because only the insurer makes a legally enforceable promise to perform under an insurance policy, the contract is classified as:

Unilateral means only ONE party (the insurer) is legally bound. The insured can simply stop paying premium without being sued for breach. Bilateral contracts bind both sides; an executed contract is one already fully performed.

6. Because the insured cannot negotiate the wording of a standard homeowners policy, ambiguous language in the policy will generally be interpreted:

An insurance policy is a contract of ADHESION drafted by the insurer. Under longstanding California law, any genuine ambiguity is construed against the drafter — the insurer — to protect the insured who had no chance to negotiate the terms.

7. Under California Insurance Code §331, a MATERIAL concealment by the applicant entitles the insurer to rescind the policy:

Section 331 is one of the toughest rules for applicants: any MATERIAL concealment lets the insurer rescind, regardless of intent. There is no California 'incontestability' period for property and casualty policies; the two-year incontestability rule is a LIFE insurance concept.

8. For PROPERTY insurance in California, when must the insured have an insurable interest in the covered property?

California follows the majority rule for property: insurable interest must exist AT THE TIME OF LOSS. (Life insurance is the opposite — interest must exist at policy inception, not at death.) A homeowner who sold the property the day before the fire has no interest at the moment of loss and cannot collect.

9. An insured's home is damaged by a contractor working on the neighbor's property. The homeowner's insurer pays the $40,000 covered loss and then sues the contractor to recover the $40,000. This is an example of:

Subrogation is the insurer's right, after paying the insured, to 'step into the insured's shoes' and pursue any responsible third party. It enforces the principle of indemnity by preventing the insured from collecting twice — once from the policy and again from the wrongdoer.

10. A homeowner has two policies on the same dwelling: Policy A with a $300,000 limit and Policy B with a $100,000 limit. A covered loss of $80,000 occurs and both policies share on a pro rata basis. How much does Policy A pay?

Pro rata: each policy pays the share of the loss equal to its limit divided by the total of all applicable limits. Policy A pays 300,000 / 400,000 = 75% of $80,000 = $60,000. Policy B pays the remaining 25% = $20,000. Indemnity still limits total recovery to the actual $80,000 loss.

11. Which statement BEST describes the difference between an admitted and a non-admitted insurer in California?

Admitted (authorized) insurers hold a CDI Certificate of Authority, are rate-regulated, and contribute to the California Insurance Guarantee Association (CIGA), which pays covered claims up to limits if the insurer goes insolvent. Non-admitted (surplus lines) carriers can place coverage only for risks the admitted market won't write, and policyholders get NO CIGA protection.

12. Which statement about stock and mutual insurers is CORRECT?

A mutual insurer is owned by its policyholders; any return of surplus to them is a policyholder dividend, which is NEVER guaranteed. A stock insurer is owned by shareholders and pays shareholder dividends. Both stock and mutual carriers may be admitted in California.

13. The principle of indemnity is BEST expressed by which statement?

Indemnity means the insured is restored to the SAME financial position as before the loss — not enriched, not impoverished. That is why payments are capped at the actual loss, why subrogation prevents double recovery, and why coinsurance encourages adequate insurance to value.

14. An applicant for a homeowners policy fails to mention that her roof is 28 years old and showing daylight through cracked tiles. The insurer later denies a wind claim and rescinds the policy. The insurer's likely legal theory is:

California Insurance Code §334 defines a MATERIAL fact as one that would influence a prudent insurer in accepting the risk or fixing the premium. A 28-year-old failing roof clearly meets that test. Under §331 the insurer may rescind whether the omission was intentional or merely negligent.