17 Free California Property & Casualty Practice Questions: Casualty Insurance Basics (2026)
How to Use This Casualty Insurance Basics Set
Casualty Insurance Basics is the foundation under every liability, auto and workers' compensation question. It sits in the General Insurance and Casualty Insurance sections of the Casualty objectives, 15% each, and it introduces the California rating bureau for workers' compensation.
The concepts are old and simple, which is exactly why exam writers use them to test precision: insurable interest, assignment, direct against indirect loss, claimants and risk-management methods.
Practice Questions 1-6: WCIRB, Rating and Assignment
The California workers' compensation rating bureau, how rates are described, and who must agree before a policy can be assigned.
Question 1 (Chapter 5)
Under California Insurance Code §11750.3, which organization is designated as the advisory organization for workers' compensation in California?
- A) California Workers' Compensation Insurance Rating Bureau (WCIRB)
- B) National Council on Compensation Insurance (NCCI)
- C) Insurance Services Office (ISO)
- D) Workers' Compensation Insurance Rating Bureau of America (WCIRBA)
Show answer & explanation
Answer: A
California Insurance Code §11750.3 specifically designates the California Workers' Compensation Insurance Rating Bureau (WCIRB) as the advisory organization for workers' compensation in the state. The NCCI serves most other states but not California. ISO is involved in general property and casualty forms and data, not workers' comp rating. WCIRBA is not a recognized entity.
Question 2 (Chapter 5)
A policy is cancelled mid-term. The insurer uses a short-rate cancellation method, which results in a higher effective rate for the time the policy was in force compared to pro-rata. What is the primary reason insurers use short-rate cancellation?
- A) To comply with California Insurance Code §675, which mandates short-rate for all mid-term cancellations.
- B) Because flat-rate cancellation is prohibited in California for casualty policies.
- C) To ensure the insured receives a refund of the full unearned premium.
- D) To penalize the insured for terminating the policy before expiration, offsetting the insurer's higher acquisition costs.
Show answer & explanation
Answer: D
Short-rate cancellation retains a portion of the unearned premium as a penalty for early termination, reflecting the insurer's higher relative costs (like commissions and underwriting) incurred early in the policy term. California law does not mandate short-rate cancellation in every circumstance; the detailed notice and procedural requirements for cancellation are covered in Chapter 8. Flat-rate cancellation (no penalty) is permitted in some contexts but not typical. Short-rate does not refund the full unearned premium—it refunds less than pro-rata.
Question 3 (Chapter 5)
Which of the following classes of insurance is explicitly listed in California Insurance Code §§100-124 as a line that a property and casualty licensee may be appointed to transact?
- A) Title insurance
- B) Life insurance
- C) Annuities
- D) Burglary insurance
Show answer & explanation
Answer: D
California Insurance Code §§100-124 lists specific classes of insurance for P&C licensees, including burglary. Title insurance is a separate line requiring its own license. Life insurance and annuities fall under the life, accident, and health (L&H) license, not P&C. Burglary insurance, covering loss from unlawful taking of property, is a recognized casualty line under the P&C authority.
Question 4 (Chapter 5)
Under the California Workers' Compensation Insurance Rating Bureau (WCIRB) system, as defined in California Insurance Code §11750.3, what is the primary function of the WCIRB?
- A) To set mandatory workers' compensation premium rates that all California insurers must charge.
- B) To directly issue workers' compensation policies to California employers through a state fund.
- C) To adjudicate disputes between employers and employees regarding workers' compensation benefit claims.
- D) To collect data on workplace injuries and losses and provide advisory pure premium rates for workers' compensation insurance in California.
Show answer & explanation
Answer: D
D is correct because the WCIRB, under §11750.3, is the designated advisory organization that collects injury and loss data and provides advisory pure premium rates; it does not set mandatory rates (A is incorrect), issue policies (B is incorrect), or adjudicate claims (C is incorrect).
Question 5 (Chapter 5)
A California insurance agent is explaining to a new client the difference between ISO and ACORD. Which statement accurately describes their respective roles?
- A) ISO develops standardized insurance applications and certificates, while ACORD creates standard policy forms and rating manuals.
- B) Both ISO and ACORD are independent rating organizations that assess the financial strength of insurers.
- C) ISO sets workers' compensation rates in California, while ACORD handles general liability policy forms for all states.
- D) ISO creates standard policy forms and gathers data for ratemaking, while ACORD develops standardized applications and certificates of insurance.
Show answer & explanation
Answer: D
ISO (Insurance Services Office) develops standard policy forms (like HO-3 or auto policies) and collects loss data to assist with ratemaking. ACORD (Association for Cooperative Operations Research and Development) creates standardized forms such as insurance applications and certificates of insurance (e.g., ACORD 25). Option A reverses their roles. Option B is incorrect because neither ISO nor ACORD are rating agencies; AM Best, Moody's, etc., perform that function. Option C is wrong because ISO does not set workers' comp rates in California—the WCIRB does—and ACORD's forms are not limited to general liability.
Question 6 (Chapter 5)
A California business owner assigns their commercial property insurance policy to a new entity after selling the business. For the assignment to be valid under casualty insurance principles, which of the following is required?
- A) The assignee must have an insurable interest in the property at the time of assignment.
- B) The original policy must be cancelled and a new policy issued in the assignee's name.
- C) The assignment is automatically valid upon transfer of ownership of the property.
- D) The insurer must be notified and consent to the assignment in writing.
Show answer & explanation
Answer: D
D is correct because assignment of an insurance policy requires the insurer's consent; without it, the assignment is invalid. A is necessary but not sufficient—insurer consent is also required. B is incorrect because assignment does not require cancellation and reissue; the existing policy can be assigned. C is incorrect because transfer of ownership does not automatically assign the policy; insurer consent is still needed.
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Practice Questions 7-12: Insurable Interest, Assignment and Loss Types
Whether someone has an interest the law will insure, assignment of a policy, and the difference between direct and indirect loss.
Question 7 (Chapter 5)
Under the California Insurance Code, an insurable interest must exist for a contract of insurance to be valid. Which of the following scenarios describes a contingent or expectant interest that is NOT considered insurable under California Insurance Code §283?
- A) A person purchases life insurance on their spouse, who is currently alive and in good health.
- B) A business owner buys property insurance on a warehouse they currently own and use for storage.
- C) A homeowner buys flood insurance on their primary residence located in a FEMA-designated flood zone.
- D) An individual expects to inherit a valuable art collection from a relative who is still alive and has not made a will.
Show answer & explanation
Answer: D
California Insurance Code §283 explicitly states that contingent or expectant interests—such as an expectation to inherit property from a living relative—are not insurable because the interest is not certain and depends on an uncertain future event (the relative's death and the absence of a will). Option A describes a valid insurable interest in life insurance (spousal relationship). Option B describes a current ownership interest in property, which is insurable. Option C describes a present ownership interest in a residence, where the risk of flood is real and immediate, making the interest insurable. Only option D represents a mere expectancy, which is not sufficient to constitute an insurable interest under California law.
Question 8 (Chapter 5)
Under California Insurance Code §§280-287, an insurable interest must exist for a valid insurance contract. Which of the following scenarios best illustrates a situation where an insurable interest is present?
- A) A business owner purchases property insurance on their own warehouse, which they own and use to store inventory.
- B) A neighbor purchases a fire insurance policy on your house without your knowledge or consent.
- C) A person takes out a life insurance policy on a stranger they met once at a conference.
- D) A friend buys collision coverage on your car, hoping to benefit if you get into an accident.
Show answer & explanation
Answer: A
An insurable interest exists when the insured would suffer a direct financial loss from damage to, or destruction of, the insured property or would benefit from its preservation. Owning and using the warehouse for business creates a direct financial stake. Options B, C, and D describe situations where the policy owner has no legitimate financial stake in the property or life insured, which is prohibited as wagering or gambling under California law.
Question 9 (Chapter 5)
A California business owner purchases a commercial property insurance policy. They later sell the business and attempt to assign the policy to the buyer. For the assignment to be valid, which of the following is required?
- A) The assignment is automatically valid upon sale of the business; no insurer consent is needed.
- B) The assignment is valid only if the policy has been in force for less than one year.
- C) The insurer's consent to the assignment is required for it to be valid.
- D) The assignment is valid as long as the buyer pays the outstanding premium, regardless of insurer consent.
Show answer & explanation
Answer: C
An insurance policy is a personal contract between the insured and the insurer. Assigning it to another party transfers rights and obligations, which alters the insurer's risk exposure. Therefore, the insurer's consent is required for a valid assignment of a property or casualty insurance policy. Without consent, the assignment is ineffective, and the original insured may remain liable. Options A, B, and D are incorrect because insurer consent is mandatory, not automatic, time-dependent, or replaceable by payment of premium.
Question 10 (Chapter 5)
A dry cleaning business suffers a fire that destroys their specialized cleaning equipment. Because the equipment takes three months to replace, the business loses $45,000 in net income during the shutdown. In insurance terminology, the $45,000 loss is classified as a(n):
- A) Indirect (consequential) loss
- B) Direct loss
- C) Proximate loss
- D) Statutory loss
Show answer & explanation
Answer: A
An indirect or consequential loss is a financial loss that results from a direct loss. The fire damage to the equipment is the direct loss; the loss of income resulting from the inability to use that equipment is the indirect loss.
Question 11 (Chapter 5)
A young man applies for insurance on a classic car owned by his wealthy grandfather, arguing that since he is the sole heir to the estate, he has a 'contingent interest' in the vehicle. According to California Insurance Code §283, is this interest insurable?
- A) Yes, because he is the legal heir.
- B) No, a contingent or expectant interest not founded on an actual right to the property is not insurable.
- C) Yes, provided the grandfather gives written consent.
- D) No, because classic cars must be insured under a specialty 'Agreed Value' policy.
Show answer & explanation
Answer: B
California Insurance Code §283 explicitly states that a 'mere contingent or expectant interest in anything, not founded on an actual right to the thing, nor upon any valid contract for it, is not insurable.' Expecting to inherit something does not create an insurable interest.
Question 12 (Chapter 5)
An insurance company's actuary is setting aside funds to pay for claims that have been reported but not yet settled, as well as claims that have occurred but have not yet been reported (IBNR). These funds are known as:
- A) Statutory reserves
- B) Loss reserves
- C) Unearned premium reserves
- D) Earned surplus
Show answer & explanation
Answer: B
Loss reserves are the funds an insurer sets aside specifically to cover its estimated liability for unpaid claims. Statutory reserves (A) are the minimum capital requirements set by the state to ensure overall solvency.
Practice Questions 13-17: Retention, Policy Conditions, Ratios and Claimants
How risk is managed, where duties after a loss are found, how the combined ratio works and who the third party is.
Question 13 (Chapter 5)
A large corporation decides to handle its own minor liability claims by setting aside a specific fund of money rather than purchasing a traditional insurance policy for small losses. This corporation only buys insurance for losses exceeding $1,000,000. Which risk management method is the corporation using for the losses under $1,000,000?
- A) Risk Avoidance
- B) Risk Reduction
- C) Risk Retention
- D) Risk Transfer
Show answer & explanation
Answer: C
Risk retention involves keeping the financial burden of a loss. Self-insurance and high deductibles are forms of active risk retention. Transfer would involve insurance; avoidance would involve stopping the activity entirely.
Question 14 (Chapter 5)
An insured is involved in an auto accident. The policy states that the insured must notify the insurer 'as soon as practicable' and cooperate in the investigation. These requirements are found in which section of the policy?
- A) Exclusions
- B) Conditions
- C) Insuring Agreement
- D) Definitions
Show answer & explanation
Answer: B
The Conditions section sets forth the obligations and duties of both the insured and the insurer, including what must be done in the event of a loss.
Question 15 (Chapter 5)
An insurer determines that for every $1.00 of premium earned, it spends $0.65 on claims and $0.40 on administration, commissions, and taxes. Which of the following is true regarding this insurer's performance?
- A) The insurer has a loss ratio of 40% and is profitable.
- B) The insurer has a combined ratio of 105% and is experiencing an underwriting loss.
- C) The insurer has an expense ratio of 65% and is breaking even.
- D) The insurer has a combined ratio of 25% and is highly profitable.
Show answer & explanation
Answer: B
The combined ratio is the sum of the loss ratio (65%) and the expense ratio (40%), which equals 105%. A combined ratio over 100% indicates an underwriting loss, meaning the company is spending more on claims and expenses than it is taking in from premiums.
Question 16 (Chapter 5)
A driver negligently hits a pedestrian. The pedestrian files a claim against the driver's auto liability policy. In this scenario, the pedestrian is considered the:
- A) First-party claimant
- B) Second-party claimant
- C) Third-party claimant
- D) Named insured
Show answer & explanation
Answer: C
In casualty/liability insurance, the first party is the insured, the second party is the insurer, and the third party is the person who suffered injury or damage due to the insured's actions. Therefore, the pedestrian is a third-party claimant.
Question 17 (Chapter 5)
Under California Insurance Code §283, which of the following is true regarding a 'contingent or expectant interest' in property?
- A) It is always insurable if the person is a relative.
- B) It is not insurable.
- C) It is insurable only if it is founded on an actual right to the thing.
- D) It is insurable only for life insurance, not property insurance.
Show answer & explanation
Answer: B
California Insurance Code §283 explicitly states: 'A mere contingent or expectant interest in anything, not founded on an actual right to the thing, nor upon any valid contract for it, is not insurable.'
The Mistakes That Cost Marks
These are the slips the questions above are built to catch:
- Confusing advisory and mandatory rates. The California Workers' Compensation Insurance Rating Bureau (WCIRB) is the advisory organization; it collects data and provides advisory pure premium rates. It does not set mandatory rates, issue policies or decide disputes.
- Treating an expectation as an interest. A mere contingent or expectant interest, such as hoping to inherit, is not insurable.
- Forgetting insurer consent. Assigning a policy to a new owner requires the insurer's consent.
- Calling consequential loss direct. Lost income that follows damage is an indirect loss.
- Misplacing policy duties. Notice and cooperation duties live in the Conditions section.
- Adding the wrong ratios. The combined ratio is the loss ratio plus the expense ratio, and above 100% means an underwriting loss.
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