NJ PSI PROPERTY AND CASUALTY EXAM 2026/2027
200 QUESTIONS WITH CORRECT ANSWERS AND RATIONALES
Question 1
In insurance terminology, risk is defined as:
A) The certainty of financial loss
B) The uncertainty or chance of loss
C) The actual occurrence of a damaging event
D) The premium amount charged by the insurer
Correct Answer: B) The uncertainty or chance of loss
Rationale: Risk in insurance is defined as the uncertainty or chance of
loss. This uncertainty is the fundamental basis for insurance—it is the
possibility that a loss may occur. Insurance transfers this risk from the
insured to the insurer in exchange for a premium. The other options
describe certainty, actual loss events, or premium calculations, none of
which constitute the definition of risk itself .
Question 2
An insurance contract is considered a contract of adhesion because:
A) Both parties have equal bargaining power in drafting terms
B) The insured can negotiate policy language before purchase
C) One party drafts the contract without input from the other
D) The contract is reviewed by the state insurance department before
issuance
,Correct Answer: C) One party drafts the contract without input from the
other
Rationale: A contract of adhesion is one where the insurer drafts the
policy language and presents it to the insured on a "take-it-or-leave-it"
basis. Because the insurer writes the contract, any ambiguous language
is legally construed against the drafter (the insurer) and in favor of the
consumer under the doctrine of adhesion. The insured typically has no
opportunity to negotiate policy terms .
Question 3
Which of the following BEST defines a peril in insurance?
A) A condition that increases the chance of loss
B) The uncertainty surrounding a potential loss
C) The direct cause of a loss
D) The dollar amount of damage sustained
Correct Answer: C) The direct cause of a loss
Rationale: A peril is defined explicitly as the direct cause of a loss, such
as fire, lightning strike, windstorm, or explosion. A hazard is a condition
that increases the likelihood or severity of a peril occurring.
Understanding the distinction between perils (causes) and hazards
(conditions) is fundamental to insurance principles .
Question 4
Storing unlabelled open containers of highly flammable gasoline next to
a commercial heating unit represents which type of hazard?
A) Moral hazard
,B) Morale hazard
C) Physical hazard
D) Legal hazard
Correct Answer: C) Physical hazard
Rationale: A physical hazard is a tangible, structural, or environmental
condition inherent in an operation that increases the probability of a
loss. Flammable materials stored near heat sources constitute a physical
or structural danger. This is distinguishable from moral hazard
(dishonesty) or morale hazard (carelessness due to insurance) .
Question 5
An individual intentionally sets fire to their own retail store to collect
insurance proceeds. This action is classified as:
A) Physical hazard
B) Morale hazard
C) Moral hazard
D) Legal hazard
Correct Answer: C) Moral hazard
Rationale: A moral hazard involves dishonesty or character defects in
the insured that increase the chance of loss. Arson committed for profit
is a classic example of moral hazard—the insured intentionally causes a
loss for financial gain. This differs from morale hazard (carelessness) and
physical hazard (tangible conditions) .
, Question 6
When must insurable interest exist in property insurance for coverage
to be valid?
A) At the time of policy application
B) At the time of policy issuance only
C) At the time of loss
D) At both application and time of loss
Correct Answer: C) At the time of loss
Rationale: In property insurance, insurable interest is required to exist
at the time of loss. This is different from life insurance, where insurable
interest must exist at the time of application. The insured must have a
financial stake in the property at the moment damage occurs to
recover .
Question 7
Actual Cash Value (ACV) is defined as:
A) Market value of the property
B) Replacement cost minus depreciation
C) Original purchase price
D) Current market value minus selling costs
Correct Answer: B) Replacement cost minus depreciation
Rationale: Actual Cash Value is defined as replacement cost minus
depreciation. This means the insurer pays the cost to replace the
property minus a deduction for wear and tear, age, and obsolescence.
This is distinguished from replacement cost coverage which pays
without deduction for depreciation .
200 QUESTIONS WITH CORRECT ANSWERS AND RATIONALES
Question 1
In insurance terminology, risk is defined as:
A) The certainty of financial loss
B) The uncertainty or chance of loss
C) The actual occurrence of a damaging event
D) The premium amount charged by the insurer
Correct Answer: B) The uncertainty or chance of loss
Rationale: Risk in insurance is defined as the uncertainty or chance of
loss. This uncertainty is the fundamental basis for insurance—it is the
possibility that a loss may occur. Insurance transfers this risk from the
insured to the insurer in exchange for a premium. The other options
describe certainty, actual loss events, or premium calculations, none of
which constitute the definition of risk itself .
Question 2
An insurance contract is considered a contract of adhesion because:
A) Both parties have equal bargaining power in drafting terms
B) The insured can negotiate policy language before purchase
C) One party drafts the contract without input from the other
D) The contract is reviewed by the state insurance department before
issuance
,Correct Answer: C) One party drafts the contract without input from the
other
Rationale: A contract of adhesion is one where the insurer drafts the
policy language and presents it to the insured on a "take-it-or-leave-it"
basis. Because the insurer writes the contract, any ambiguous language
is legally construed against the drafter (the insurer) and in favor of the
consumer under the doctrine of adhesion. The insured typically has no
opportunity to negotiate policy terms .
Question 3
Which of the following BEST defines a peril in insurance?
A) A condition that increases the chance of loss
B) The uncertainty surrounding a potential loss
C) The direct cause of a loss
D) The dollar amount of damage sustained
Correct Answer: C) The direct cause of a loss
Rationale: A peril is defined explicitly as the direct cause of a loss, such
as fire, lightning strike, windstorm, or explosion. A hazard is a condition
that increases the likelihood or severity of a peril occurring.
Understanding the distinction between perils (causes) and hazards
(conditions) is fundamental to insurance principles .
Question 4
Storing unlabelled open containers of highly flammable gasoline next to
a commercial heating unit represents which type of hazard?
A) Moral hazard
,B) Morale hazard
C) Physical hazard
D) Legal hazard
Correct Answer: C) Physical hazard
Rationale: A physical hazard is a tangible, structural, or environmental
condition inherent in an operation that increases the probability of a
loss. Flammable materials stored near heat sources constitute a physical
or structural danger. This is distinguishable from moral hazard
(dishonesty) or morale hazard (carelessness due to insurance) .
Question 5
An individual intentionally sets fire to their own retail store to collect
insurance proceeds. This action is classified as:
A) Physical hazard
B) Morale hazard
C) Moral hazard
D) Legal hazard
Correct Answer: C) Moral hazard
Rationale: A moral hazard involves dishonesty or character defects in
the insured that increase the chance of loss. Arson committed for profit
is a classic example of moral hazard—the insured intentionally causes a
loss for financial gain. This differs from morale hazard (carelessness) and
physical hazard (tangible conditions) .
, Question 6
When must insurable interest exist in property insurance for coverage
to be valid?
A) At the time of policy application
B) At the time of policy issuance only
C) At the time of loss
D) At both application and time of loss
Correct Answer: C) At the time of loss
Rationale: In property insurance, insurable interest is required to exist
at the time of loss. This is different from life insurance, where insurable
interest must exist at the time of application. The insured must have a
financial stake in the property at the moment damage occurs to
recover .
Question 7
Actual Cash Value (ACV) is defined as:
A) Market value of the property
B) Replacement cost minus depreciation
C) Original purchase price
D) Current market value minus selling costs
Correct Answer: B) Replacement cost minus depreciation
Rationale: Actual Cash Value is defined as replacement cost minus
depreciation. This means the insurer pays the cost to replace the
property minus a deduction for wear and tear, age, and obsolescence.
This is distinguished from replacement cost coverage which pays
without deduction for depreciation .
