PROPERTY AND CASUALTY EXAM – TEXAS | STUDY GUIDE QUESTIONS WITH VERIFIED ANSWERS | 2026 | 2027 (RATED A) LATEST UPDATE.

PROPERTY AND CASUALTY EXAM – TEXAS | STUDY GUIDE QUESTIONS WITH VERIFIED
ANSWERS | 2026 | 2027 (RATED A) LATEST UPDATE.


Question 1
What is defined as the uncertainty of loss?
A) Hazard
B) Peril
C) Risk
D) Indemnity
E) Subrogation
Correct Answer: C) risk
Rationale: In insurance terms, risk is defined specifically as the uncertainty or chance of a
financial loss occurring.

Question 2
The transfer of risk from the insured to the insurer is known as:
A) Indemnity
B) Subrogation
C) Arbitration
D) Insurance
E) Negligence
Correct Answer: D) insurance
Rationale: Insurance is the contractual mechanism used to transfer the financial
consequences of a risk from an individual or entity to an insurance company.

Question 3
Which type of risk involves no chance of gain and is the only type that is generally insurable?
A) Speculative risk
B) Pure risk
C) Dynamic risk
D) Fundamental risk
E) Particular risk
Correct Answer: B) pure
Rationale: Pure risk involves only the possibility of loss or no loss (e.g., a fire). Because there
is no possibility of profit, it meets the requirements for insurability.

Question 4
A risk that involves the chance of either a loss or a gain is known as:
A) Pure risk
B) Absolute risk
C) Speculative risk
D) Material risk
E) Adverse risk

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Correct Answer: C) speculative
Rationale: Speculative risks, such as gambling or investing in the stock market, involve a
chance for gain. These are not insurable in the standard insurance market.

Question 5
Something that increases the likelihood or severity of a loss is called a:
A) Peril
B) Risk
C) Hazard
D) Proximate cause
E) Binder
Correct Answer: C) hazard
Rationale: A hazard is a condition or situation that increases the probability of a loss
occurring (e.g., oily rags near a furnace or icy steps).

Question 6
Which principle states that the purpose of an insurance policy is to restore the insured financially
to the position they held prior to the loss?
A) Subrogation
B) Adhesion
C) Utmost Good Faith
D) Indemnity
E) Estoppel
Correct Answer: D) indemnity
Rationale: The principle of indemnity ensures that an insured does not profit from a loss
but is simply "made whole" again financially.

Question 7
On a casualty policy, when must insurable interest exist for coverage to be provided?
A) Only at the time the policy is purchased
B) Only at the time of the application
C) Only at the time of the loss
D) Both at the time of application and time of loss
E) Only during the underwriting period
Correct Answer: C) insurable interest
Rationale: In property and casualty insurance, the insured must demonstrate a financial
interest in the property or event at the exact time the loss occurs.
Question 8
Which mathematical principle is used by insurers to predict the likelihood of loss by looking at a
large group of similar risks?

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A) The Law of Diminishing Returns
B) The Law of Large Numbers
C) The Principle of Probability
D) The Rule of Averages
E) The Actuarial Law
Correct Answer: B) large numbers
Rationale: The Law of Large Numbers states that the larger the number of similar exposure
units, the more predictable the future losses will be.

Question 9
How is Actual Cash Value (ACV) calculated?
A) Original cost minus appreciation
B) Replacement cost plus depreciation
C) Market value minus land value
D) Replacement cost minus depreciation
E) Repair cost minus deductible
Correct Answer: D) actual cash value
Rationale: Actual Cash Value is a standard valuation method calculated by taking the
current cost to replace the item and subtracting the accumulated depreciation based on its
age or wear.

Question 10
A tort or civil wrong that provides grounds for a lawsuit is known as:
A) A Breach of Warranty
B) Negligence
C) Concealment
D) Misrepresentation
E) A Hazard
Correct Answer: B) Negligence
Rationale: Negligence is a type of tort. It involves a failure to exercise the care that a
reasonably prudent person would exercise in similar circumstances, leading to unintended
harm.

Question 11
What is the definition of the failure to act as a reasonable person would in the same set of
circumstances?
A) Strict Liability
B) Vicarious Liability
C) Negligence
D) Absolute Liability
E) Moral Hazard

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Correct Answer: C) negligence
Rationale: Negligence is the legal standard used to determine liability; it measures an
individual's actions against what a "reasonable person" would have done.

Question 12
In insurance terminology, a loss that happens over a continuous or repeated period of time is
called an:
A) Accident
B) Occurrence
C) Event
D) Incident
E) Exposure
Correct Answer: B) Occurrence
Rationale: While an accident is sudden and unforeseen, an occurrence includes losses that
happen over time (e.g., a slow leak causing wood rot).

Question 13
Which of the following acts as a temporary insurance contract and may be oral or written?
A) Endorsement
B) Application
C) Rider
D) Binder
E) Declarations
Correct Answer: D) binder
Rationale: A binder provides immediate, temporary coverage until a formal policy is issued
or the binder is cancelled.

Question 14
A binder provides coverage until the policy is issued and includes:
A) Only the most basic fire coverage
B) All coverages provided by the policy
C) Only liability coverage
D) Coverage excluding the deductible
E) Only the coverages specifically listed in the oral agreement
Correct Answer: B) binder
Rationale: A binder is legally considered to include all the standard coverages, conditions,
and exclusions found in the actual policy that is being applied for.
Question 15
A statement made in an insurance contract that is guaranteed to be a literal truth is a:
A) Representation