Property and Casualty Insurance Exam – State
Department of Insurance – 2026/2027 Edition –
Questions and Answers for Prospective Property and
Casualty Insurance Producers
SECTION I: FOUNDATIONAL INSURANCE PRINCIPLES
1. The principle that an insured should not profit from a loss but only be
restored to their approximate financial position before the loss is called:
• A) Utmost good faith
• B) Indemnity
• C) Subrogation
• D) Insurable interest
Correct Answer: B
Rationale: Indemnity ensures the insured is compensated for actual loss, not more.
Subrogation transfers rights to the insurer to recover from a negligent third party,
and insurable interest requires a financial stake in the insured property or person .
2. The cause of loss stated in an insurance policy is called:
• A) Hazard
• B) Risk
• C) Peril
• D) Exposure
,Correct Answer: C
Rationale: A peril is the actual cause of loss (e.g., fire, theft, wind). A hazard
increases the chance of a peril occurring. Risk is the uncertainty of loss .
3. Which type of hazard is a person's careless attitude about locking their car
because they have insurance?
• A) Physical hazard
• B) Moral hazard
• C) Morale hazard
• D) Legal hazard
Correct Answer: C
Rationale: A morale hazard arises from indifference to loss due to insurance—an
unconscious apathy or carelessness. A moral hazard involves malicious intent to
defraud (e.g., arson). A physical hazard is a tangible condition (e.g., frayed
wiring) .
4. A condition or situation which increases the chance for loss is called a:
• A) Risk
• B) Peril
• C) Hazard
• D) Exposure
Correct Answer: C
Rationale: A hazard is a condition or situation that increases the chance of a loss.
Hazards can be physical (tangible conditions), moral (dishonesty), or morale
(carelessness due to insurance) .
,5. Which of the following is NOT an element of an insurable risk?
• A) Definite and measurable loss
• B) Catastrophic perils affecting many at once
• C) Large number of similar exposure units
• D) Accidental and unintentional loss
Correct Answer: B
Rationale: Catastrophic perils (e.g., war, widespread flooding) are often excluded
because insurers cannot predict or pool them effectively. Insurable risks must be
definite, measurable, accidental, and involve a large number of similar exposure
units .
6. The predictability of loss improves when the number of similar units increases
because of which principle?
• A) The Law of Averages
• B) The Golden Rule of Underwriting
• C) Accumulated Experience
• D) The Law of Large Numbers
Correct Answer: D
Rationale: The Law of Large Numbers states that as the number of similar
exposure units increases, the actual loss experience will more closely approximate
the expected loss experience. This is the foundation of insurance .
7. Which type of risk involves a situation where there is no opportunity for gain,
only the possibility of loss or no loss?
• A) Speculative risk
• B) Pure risk
, • C) Substandard risk
• D) Morale hazard
Correct Answer: B
Rationale: Pure risk involves only a chance of loss or no loss (e.g., fire, theft,
death). Pure risks are insurable because they are predictable and not taken for
profit. Speculative risks (gambling) are not insurable .
8. An insured intentionally burns down their own building. This violates:
• A) Indemnity
• B) Insurable interest
• C) Public policy
• D) Subrogation
Correct Answer: C
Rationale: Public policy prohibits indemnifying intentional acts. Insurance
contracts cannot be used to encourage crime; arson is excluded and can void the
policy .
9. Which of the following is a characteristic of an insurance contract?
• A) Adhesion
• B) Valued
• C) Periodic
• D) Conditional
Correct Answer: A
Rationale: Insurance contracts are contracts of adhesion—they are drafted by the
insurer, and the insured must "adhere" to the terms. Any ambiguities are
interpreted in favor of the insured .
Department of Insurance – 2026/2027 Edition –
Questions and Answers for Prospective Property and
Casualty Insurance Producers
SECTION I: FOUNDATIONAL INSURANCE PRINCIPLES
1. The principle that an insured should not profit from a loss but only be
restored to their approximate financial position before the loss is called:
• A) Utmost good faith
• B) Indemnity
• C) Subrogation
• D) Insurable interest
Correct Answer: B
Rationale: Indemnity ensures the insured is compensated for actual loss, not more.
Subrogation transfers rights to the insurer to recover from a negligent third party,
and insurable interest requires a financial stake in the insured property or person .
2. The cause of loss stated in an insurance policy is called:
• A) Hazard
• B) Risk
• C) Peril
• D) Exposure
,Correct Answer: C
Rationale: A peril is the actual cause of loss (e.g., fire, theft, wind). A hazard
increases the chance of a peril occurring. Risk is the uncertainty of loss .
3. Which type of hazard is a person's careless attitude about locking their car
because they have insurance?
• A) Physical hazard
• B) Moral hazard
• C) Morale hazard
• D) Legal hazard
Correct Answer: C
Rationale: A morale hazard arises from indifference to loss due to insurance—an
unconscious apathy or carelessness. A moral hazard involves malicious intent to
defraud (e.g., arson). A physical hazard is a tangible condition (e.g., frayed
wiring) .
4. A condition or situation which increases the chance for loss is called a:
• A) Risk
• B) Peril
• C) Hazard
• D) Exposure
Correct Answer: C
Rationale: A hazard is a condition or situation that increases the chance of a loss.
Hazards can be physical (tangible conditions), moral (dishonesty), or morale
(carelessness due to insurance) .
,5. Which of the following is NOT an element of an insurable risk?
• A) Definite and measurable loss
• B) Catastrophic perils affecting many at once
• C) Large number of similar exposure units
• D) Accidental and unintentional loss
Correct Answer: B
Rationale: Catastrophic perils (e.g., war, widespread flooding) are often excluded
because insurers cannot predict or pool them effectively. Insurable risks must be
definite, measurable, accidental, and involve a large number of similar exposure
units .
6. The predictability of loss improves when the number of similar units increases
because of which principle?
• A) The Law of Averages
• B) The Golden Rule of Underwriting
• C) Accumulated Experience
• D) The Law of Large Numbers
Correct Answer: D
Rationale: The Law of Large Numbers states that as the number of similar
exposure units increases, the actual loss experience will more closely approximate
the expected loss experience. This is the foundation of insurance .
7. Which type of risk involves a situation where there is no opportunity for gain,
only the possibility of loss or no loss?
• A) Speculative risk
• B) Pure risk
, • C) Substandard risk
• D) Morale hazard
Correct Answer: B
Rationale: Pure risk involves only a chance of loss or no loss (e.g., fire, theft,
death). Pure risks are insurable because they are predictable and not taken for
profit. Speculative risks (gambling) are not insurable .
8. An insured intentionally burns down their own building. This violates:
• A) Indemnity
• B) Insurable interest
• C) Public policy
• D) Subrogation
Correct Answer: C
Rationale: Public policy prohibits indemnifying intentional acts. Insurance
contracts cannot be used to encourage crime; arson is excluded and can void the
policy .
9. Which of the following is a characteristic of an insurance contract?
• A) Adhesion
• B) Valued
• C) Periodic
• D) Conditional
Correct Answer: A
Rationale: Insurance contracts are contracts of adhesion—they are drafted by the
insurer, and the insured must "adhere" to the terms. Any ambiguities are
interpreted in favor of the insured .
