Illinois Property and Casualty Ultimate
Exam
Question 1. Which of the following best defines a moral hazard?
A) A physical condition that increases the probability of loss
B) An act of intentional wrongdoing by the insured
C) The tendency of a person to act more recklessly because they have insurance
D) A loss caused by a natural disaster
Answer: C
Explanation: Moral hazard refers to the increased likelihood of loss-causing
behavior when a person knows they are protected by insurance.
Question 2. Under the law of large numbers, insurers are able to:
A) Eliminate all uncertainty in loss prediction
B) Predict individual losses with perfect accuracy
C) Reduce the variance of loss experience by pooling many similar risks
D) Guarantee a profit on every policy written
Answer: C
Explanation: The law of large numbers allows insurers to estimate aggregate
losses more accurately when exposures are numerous and homogeneous.
Question 3. Which of the following is NOT a method of handling risk?
A) Transfer
B) Retention
C) Diversification
D) Avoidance
Answer: C
, Illinois Property and Casualty Ultimate
Exam
Explanation: Diversification is a principle of investing, not a primary risk-handling
technique; the main techniques are transfer, retention, avoidance, and reduction.
Question 4. A policy that provides coverage for a specific named perils only is
known as:
A) An all-risk (special) policy
B) A named-peril policy
C) A blanket policy
D) A liability-only policy
Answer: B
Explanation: Named-peril policies list the perils that are covered; any peril not
listed is excluded.
Question 5. In a contract of adhesion, ambiguous language is interpreted in favor
of:
A) The insurer
B) The insured
C) The state regulator
D) The underwriter
Answer: B
Explanation: Courts generally construe ambiguities in adhesion contracts against
the drafting party, which is usually the insurer, to protect the insured.
Question 6. Which element is NOT required for a valid legal contract?
, Illinois Property and Casualty Ultimate
Exam
A) Offer and acceptance
B) Consideration
C) Written form
D) Competent parties
Answer: C
Explanation: While many insurance contracts must be in writing for statutory
reasons, a contract can be oral if the law permits; the essential elements are
offer, acceptance, consideration, competency, and legal purpose.
Question 7. The principle of utmost good faith (uberrimae fidei) imposes on the
insured the duty to:
A) Pay premiums on time
B) Disclose all material facts to the insurer
C) Submit claims within 30 days
D) Accept any policy amendment proposed by the insurer
Answer: B
Explanation: Utmost good faith requires the insured to reveal all material
information that could affect the insurer’s decision to accept the risk.
Question 8. Which of the following is a characteristic of a unilateral contract?
A) Both parties exchange promises
B) Only the insurer promises to pay after a loss occurs
C) Both parties must perform simultaneously
D) The contract can be terminated by either party at any time
, Illinois Property and Casualty Ultimate
Exam
Answer: B
Explanation: In a unilateral contract, the insurer’s promise to pay is triggered only
by the insured’s performance (the occurrence of a loss).
Question 9. In property insurance, “actual cash value” (ACV) is calculated as:
A) Replacement cost minus depreciation
B) Replacement cost plus inflation adjustment
C) Market value at the time of loss
D) Stated amount agreed upon by the parties
Answer: A
Explanation: ACV equals the cost to replace the property less depreciation for age,
wear, and obsolescence.
Question 10. The “coinsurance” clause in a property policy is designed to:
A) Limit the insurer’s liability to a percentage of the loss
B) Encourage the insured to maintain adequate insurance relative to the value of
the property
C) Provide a discount for bundling multiple coverages
D) Require the insured to purchase a separate deductible policy
Answer: B
Explanation: Coinsurance requires the insured to carry a minimum percentage of
the property’s value; otherwise, the payout is reduced proportionally.
Question 11. Which of the following best describes “proximate cause” in a loss?
Exam
Question 1. Which of the following best defines a moral hazard?
A) A physical condition that increases the probability of loss
B) An act of intentional wrongdoing by the insured
C) The tendency of a person to act more recklessly because they have insurance
D) A loss caused by a natural disaster
Answer: C
Explanation: Moral hazard refers to the increased likelihood of loss-causing
behavior when a person knows they are protected by insurance.
Question 2. Under the law of large numbers, insurers are able to:
A) Eliminate all uncertainty in loss prediction
B) Predict individual losses with perfect accuracy
C) Reduce the variance of loss experience by pooling many similar risks
D) Guarantee a profit on every policy written
Answer: C
Explanation: The law of large numbers allows insurers to estimate aggregate
losses more accurately when exposures are numerous and homogeneous.
Question 3. Which of the following is NOT a method of handling risk?
A) Transfer
B) Retention
C) Diversification
D) Avoidance
Answer: C
, Illinois Property and Casualty Ultimate
Exam
Explanation: Diversification is a principle of investing, not a primary risk-handling
technique; the main techniques are transfer, retention, avoidance, and reduction.
Question 4. A policy that provides coverage for a specific named perils only is
known as:
A) An all-risk (special) policy
B) A named-peril policy
C) A blanket policy
D) A liability-only policy
Answer: B
Explanation: Named-peril policies list the perils that are covered; any peril not
listed is excluded.
Question 5. In a contract of adhesion, ambiguous language is interpreted in favor
of:
A) The insurer
B) The insured
C) The state regulator
D) The underwriter
Answer: B
Explanation: Courts generally construe ambiguities in adhesion contracts against
the drafting party, which is usually the insurer, to protect the insured.
Question 6. Which element is NOT required for a valid legal contract?
, Illinois Property and Casualty Ultimate
Exam
A) Offer and acceptance
B) Consideration
C) Written form
D) Competent parties
Answer: C
Explanation: While many insurance contracts must be in writing for statutory
reasons, a contract can be oral if the law permits; the essential elements are
offer, acceptance, consideration, competency, and legal purpose.
Question 7. The principle of utmost good faith (uberrimae fidei) imposes on the
insured the duty to:
A) Pay premiums on time
B) Disclose all material facts to the insurer
C) Submit claims within 30 days
D) Accept any policy amendment proposed by the insurer
Answer: B
Explanation: Utmost good faith requires the insured to reveal all material
information that could affect the insurer’s decision to accept the risk.
Question 8. Which of the following is a characteristic of a unilateral contract?
A) Both parties exchange promises
B) Only the insurer promises to pay after a loss occurs
C) Both parties must perform simultaneously
D) The contract can be terminated by either party at any time
, Illinois Property and Casualty Ultimate
Exam
Answer: B
Explanation: In a unilateral contract, the insurer’s promise to pay is triggered only
by the insured’s performance (the occurrence of a loss).
Question 9. In property insurance, “actual cash value” (ACV) is calculated as:
A) Replacement cost minus depreciation
B) Replacement cost plus inflation adjustment
C) Market value at the time of loss
D) Stated amount agreed upon by the parties
Answer: A
Explanation: ACV equals the cost to replace the property less depreciation for age,
wear, and obsolescence.
Question 10. The “coinsurance” clause in a property policy is designed to:
A) Limit the insurer’s liability to a percentage of the loss
B) Encourage the insured to maintain adequate insurance relative to the value of
the property
C) Provide a discount for bundling multiple coverages
D) Require the insured to purchase a separate deductible policy
Answer: B
Explanation: Coinsurance requires the insured to carry a minimum percentage of
the property’s value; otherwise, the payout is reduced proportionally.
Question 11. Which of the following best describes “proximate cause” in a loss?
