17 Free California Property & Casualty Practice Questions: Property Insurance Basics (2026)
How to Use This Property Insurance Basics Set
Property Insurance Basics covers the vocabulary and mechanics that every property question assumes: policy forms and perils, valuation, reserves, ratios, rating, claimants and the classes of insurance. It sits in the General Insurance and Property Insurance sections of the objectives, which carry 15% each in the Property exam, and the same general-insurance ideas come back in the Casualty exam.
The set also includes a handful of California Insurance Code questions on replacement cost, total-loss payments and classes of insurance. They are written as scenarios, so you must apply the rule, not just recite it.
Practice Questions 1-6: Policy Forms, Valuation and Reserves
Perils, valuation and the money an insurer holds back. Know the difference between a named-peril and an open-peril form before you read the options, and keep reserves and refunds apart.
Question 1 (Chapter 2)
An insurance company's annual statement shows incurred losses of $60 million and earned premiums of $150 million. What is the insurer's loss ratio?
- A) 0.60 or 60%
- B) 2.5 or 250%
- C) 0.25 or 25%
- D) 0.40 or 40%
Show answer & explanation
Answer: D
Loss ratio = incurred losses / earned premiums = $60M / $150M = 0.40 or 40%. Option A incorrectly calculates earned premiums/losses. Option B inverts the fraction and multiplies by 100 incorrectly. Option C uses incorrect values.
Question 2 (Chapter 2)
A business owner purchases a commercial property policy with an agreed value settlement option for specialized manufacturing equipment. After a total loss, the insurer pays the agreed value. Which statement best describes why agreed value is used?
- A) To avoid disputes over the actual cash value of unique or hard-to-value property.
- B) To ensure the payment reflects the current market value of the equipment.
- C) To allow the insurer to pay replacement cost without depreciation.
- D) To comply with the valued policy law provisions of §§2053-2054.
Show answer & explanation
Answer: A
Agreed value is used to establish a predetermined amount for hard-to-value or unique property, avoiding disputes at claim time. Option B describes market value, not agreed value. Option C describes replacement cost. Option D refers to valued policy law, which applies to real property and is distinct from agreed value for personal property.
Question 3 (Chapter 2)
A property insurance policy explicitly lists 'fire, lightning, and windstorm' as the only perils for which coverage is provided. If damage occurs due to an earthquake, the policy will not cover it because it's not on the list. What type of policy form is this?
- A) An 'all-risk' form
- B) An 'open peril' form
- C) A 'special form'
- D) A 'named peril' form
Show answer & explanation
Answer: D
A 'named peril' policy form specifically lists the perils that are covered. If a peril is not listed, it is not covered. 'All-risk,' 'open peril,' and 'special form' are all synonymous terms for policies that cover all perils except those specifically excluded. Since this policy explicitly lists only certain perils, it is a named peril form.
Question 4 (Chapter 2)
An insurer sets aside a specific amount of money to cover claims that have been reported but not yet paid, as well as claims that have occurred but have not yet been reported (IBNR). These funds are earmarked to fulfill the insurer's future obligations to policyholders. What are these funds primarily referred to as?
- A) Statutory reserves
- B) Unearned premium reserves
- C) Contingency funds
- D) Loss reserves
Show answer & explanation
Answer: D
Loss reserves are funds set aside by an insurer to pay for anticipated future claims, including those reported but not yet settled, and those incurred but not yet reported (IBNR). Statutory reserves are broader regulatory requirements for solvency, while unearned premium reserves represent the portion of premiums paid that corresponds to the unexpired policy period. Contingency funds are generally for unforeseen expenses, not specific claim obligations.
Question 5 (Chapter 2)
Following a total loss of a furnished residence due to a declared state of emergency, an insured is struggling to itemize all their destroyed personal property. According to California Insurance Code §10103.7(b), what is the minimum percentage of the policy limit for contents (personal property) that the insurer must pay without requiring an itemized claim?
- A) 10% of the policy limit for contents
- B) 20% of the policy limit for contents
- C) The full policy limit for contents, provided the loss is total.
- D) 30% of the policy limit for contents
Show answer & explanation
Answer: D
California Insurance Code §10103.7(b) provides specific protections for insureds experiencing a total loss of a furnished residence during a declared state of emergency. It states that 'for a total loss of a furnished residence, the insurer shall pay at least 30 percent of the policy limit for contents without requiring an itemized claim.' This provision aims to expedite payments and alleviate the burden on insureds during a difficult time, while still allowing for further itemized claims up to the full limit.
Question 6 (Chapter 2)
A commercial property policy states that it covers all causes of loss unless specifically excluded in the policy. This type of policy provides broader coverage than one that lists only specific covered perils. What is this policy form commonly known as?
- A) Named Peril Policy
- B) Basic Form Policy
- C) Broad Form Policy
- D) Special Form Policy
Show answer & explanation
Answer: D
A 'Special Form Policy,' also known as an 'all-risk' or 'open peril' policy, covers all causes of loss unless specifically excluded. This provides the broadest coverage. 'Named peril' policies (like Basic Form and Broad Form) only cover the perils explicitly listed in the policy.
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Practice Questions 7-12: Policy Structure, Rating and Replacement Cost
The anatomy of a policy, how rates are chosen, and how California treats replacement cost after a loss. Expect scenarios where one word decides the answer.
Question 7 (Chapter 2)
A policyholder receives their new homeowner's insurance policy. They notice a section that lists their name, address, the property's location, the policy period, coverage limits for the dwelling and personal property, and the premium amount. Which major policy component is this section?
- A) Conditions
- B) Insuring Agreement
- C) Exclusions
- D) Declarations
Show answer & explanation
Answer: D
The Declarations page (or 'Dec Page') is the front part of the policy that provides specific information about the insured, the property, the coverage limits, the policy period, and the premium. The Insuring Agreement describes the perils covered, Conditions outline the duties and responsibilities of both parties, and Exclusions list what is not covered.
Question 8 (Chapter 2)
An insured's home is a total loss, and they elect to rebuild at the same location. The replacement cost coverage includes the cost to rebuild the structure. According to California Insurance Code §2051.5(c)(2), what aspect of the property value is explicitly excluded from the calculation of replacement cost for the structure?
- A) The cost of building permits.
- B) The value of the land.
- C) The cost of architectural plans.
- D) The cost of debris removal.
Show answer & explanation
Answer: B
California Insurance Code §2051.5(c)(2) clarifies that when determining the replacement cost for a dwelling, the 'value of the land' upon which the dwelling is located shall not be included. Replacement cost applies to the structure itself, not the underlying land, which typically does not lose value in a structural loss.
Question 9 (Chapter 2)
An insurer is approached by a unique manufacturing company with highly specialized equipment and operations that do not fit into standard rating classifications. To determine the appropriate premium, the underwriter evaluates the individual characteristics of this specific risk, including its unique hazards and loss control measures. What type of rating method is the insurer most likely using?
- A) Manual Rating
- B) Merit Rating
- C) Experience Rating
- D) Judgment Rating
Show answer & explanation
Answer: D
Judgment rating is used when there is insufficient data to establish a class rate, or when the risk is so unique that it cannot be adequately classified. The underwriter uses their professional judgment to determine the premium. Manual rating uses a pre-established set of rates for various classes of risks. Merit rating (which includes experience and schedule rating) modifies manual rates based on the insured's unique characteristics or loss history, but still starts from a manual base. Experience rating is a form of merit rating that adjusts premiums based on past loss experience.
Question 10 (Chapter 2)
According to California Insurance Code §§100-124, which class of insurance specifically covers loss or damage by fire, lightning, and other perils usually insured against in connection with fire insurance, including loss by water or other means used to extinguish the fire?
- A) Casualty Insurance
- B) Fire Insurance
- C) Marine Insurance
- D) Surety Insurance
Show answer & explanation
Answer: B
Under Cal. Ins. Code §§100-124, 'Fire insurance' includes insurance against loss or damage by fire, lightning, and other perils customarily insured against in connection with fire insurance, including loss by water or other means used to extinguish fire. This is a fundamental class of property insurance. Casualty insurance covers liability, accident, health, and other non-property perils. Marine insurance covers risks of navigation and transportation. Surety insurance covers financial guarantees.
Question 11 (Chapter 2)
A driver (Driver A) negligently causes an accident that damages another driver's (Driver B) car. Driver B files a claim with their own insurer for the damage. Driver B is considered a first-party claimant in relation to their own policy. What is Driver B considered in relation to Driver A's liability policy, and what action might Driver B's insurer take after paying the claim?
- A) First-party claimant; Driver B's insurer will seek arbitration with Driver A.
- B) Third-party claimant; Driver B's insurer will seek a declaratory judgment against Driver A.
- C) Third-party claimant; Driver B's insurer will exercise subrogation rights against Driver A.
- D) First-party claimant; Driver B's insurer will have no further recourse.
Show answer & explanation
Answer: C
A first-party claimant is the insured making a claim under their own policy. A third-party claimant is someone other than the insured who has suffered damage or injury due to the insured's actions and is making a claim against the insured's liability policy. After paying Driver B, Driver B's insurer will typically exercise subrogation rights, stepping into Driver B's shoes to recover the amount paid from Driver A (or Driver A's insurer), who was responsible for the loss.
Question 12 (Chapter 2)
A small business owner decides to self-insure a portion of their property risk by setting aside a specific fund to cover minor damages up to $5,000 per incident. Which risk management method is this, and what is a primary disadvantage of this approach?
- A) Risk avoidance; the primary disadvantage is that the business misses out on potential opportunities.
- B) Risk retention; the primary disadvantage is the potential for significant financial loss if actual losses exceed the retained amount.
- C) Risk reduction; the primary disadvantage is the high upfront cost of implementing loss control measures.
- D) Risk transfer; the primary disadvantage is the ongoing cost of premiums regardless of whether a loss occurs.
Show answer & explanation
Answer: B
Setting aside funds to cover potential losses is a form of risk retention. The primary disadvantage of risk retention is that if the actual losses are much higher than the amount retained, the business could face significant financial hardship. Risk avoidance involves not engaging in the activity at all. Risk reduction involves minimizing the severity or frequency of losses. Risk transfer involves shifting the burden of risk to an insurer through a policy.
Practice Questions 13-17: Classes of Insurance, Ratios and Ensuing Fire
Which class of insurance fits which risk, how the ratios are built, and how fire that follows an earthquake is treated. Do the arithmetic on paper.
Question 13 (Chapter 2)
A homeowner's property is completely destroyed in a declared state of emergency. The homeowner plans to rebuild but faces significant delays due to widespread damage in the area, leading to labor shortages and material supply chain issues. According to California Insurance Code §2051.5, how do these circumstances affect the timeline for the insured to collect the full replacement cost for their dwelling?
- A) The standard 12-month period to complete repairs is strictly enforced, regardless of the state of emergency.
- B) The insurer may deny the full replacement cost if repairs are not completed within 24 months of the loss, even during a state of emergency.
- C) The policy automatically converts to an actual cash value settlement if rebuilding is not completed within 18 months.
- D) The insured is granted an extended timeline, typically 24 months, and potentially more if good cause is shown, to collect full replacement cost during a state of emergency.
Show answer & explanation
Answer: D
California Insurance Code §2051.5 provides for extended timelines to collect full replacement cost during a declared 'state of emergency.' The standard period is often extended to 24 months, and further extensions may be granted if the insured can show good cause for the delays, acknowledging the difficulties in rebuilding after widespread disasters. Options A, B, and C describe incorrect or less flexible timelines.
Question 14 (Chapter 2)
A bank offers loans to small businesses. To protect itself against losses if a business borrower defaults on their loan due to specific unforeseen circumstances, the bank seeks a type of insurance. Which class of insurance, as defined by California Insurance Code §§100-124, is designed to indemnify creditors against loss from the nonpayment of debts due to them?
- A) Liability insurance
- B) Surety insurance
- C) Credit insurance
- D) Boiler and Machinery insurance
Show answer & explanation
Answer: C
Under Cal. Ins. Code §§100-124, 'Credit' is one of the classes of insurance and covers loss or damage from the failure of debtors to pay their obligations to the insured. This directly matches the scenario of a bank protecting against loan defaults. Surety insurance guarantees performance, while Liability and Boiler & Machinery cover different risks.
Question 15 (Chapter 2)
An insurance company reports the following financial data for its personal lines division: $100 million in earned premiums, $50 million in incurred losses, and $25 million in operating expenses (including commissions, salaries, and administrative costs). What is the company's expense ratio for this division?
- A) 50%
- B) 25%
- C) 75%
- D) 125%
Show answer & explanation
Answer: B
The expense ratio is calculated by dividing the operating expenses by the earned premiums. In this scenario, the operating expenses are $25 million and the earned premiums are $100 million. Therefore, the expense ratio is ($25 million / $100 million) = 0.25 or 25%. Option A represents the loss ratio. Option C represents the combined ratio (loss ratio + expense ratio). Option D is an incorrect calculation.
Question 16 (Chapter 2)
A homeowner's property is located in an area prone to both earthquakes and wildfires. The homeowner has a standard fire insurance policy but does not have earthquake coverage. A severe earthquake strikes, causing structural damage, which then leads to a fire that completely destroys the home. Under California Insurance Code §10088.5, how would the fire damage likely be treated in this scenario?
- A) The insurer would pay for the fire damage only if the earthquake damage was minor and did not contribute to the fire.
- B) The fire damage would be excluded because the initial cause, the earthquake, is an excluded peril.
- C) The fire damage would be fully covered, as fire is a covered peril, regardless of its cause.
- D) The insurer would cover the fire damage up to the policy limits, but only after a separate earthquake deductible is applied.
Show answer & explanation
Answer: C
Fire is a covered peril under the standard fire policy and the homeowners forms, and the earthquake exclusion in those forms expressly carves back direct loss by fire resulting from earthquake. The shaking damage itself is excluded without earthquake coverage, but the ensuing fire loss is paid in full. A invents a materiality test, B applies the exclusion to the ensuing fire, which the forms do not, and D invents an earthquake deductible for a fire claim.
Question 17 (Chapter 2)
An airline company operates a fleet of commercial passenger planes. They need insurance to cover potential damage to their aircraft, as well as their legal liability for injuries to passengers or third parties on the ground. According to California Insurance Code §§100-124, which class of insurance would primarily provide these coverages?
- A) Commercial Property Insurance
- B) Aircraft Insurance
- C) Inland Marine Insurance
- D) Common Carrier Liability Insurance
Show answer & explanation
Answer: B
Under Cal. Ins. Code §§100-124, Aircraft Insurance specifically covers loss or damage to aircraft and the legal liability arising from their ownership, maintenance, or use. Commercial Property Insurance (Option A) typically covers stationary property. Inland Marine Insurance (Option C) covers property in transit over land or certain instrumentalities. Common Carrier Liability Insurance (Option D) covers the carrier's legal liability for goods or passengers, but Aircraft Insurance is the overarching class that includes both physical damage to the aircraft and liability.
The Mistakes That Cost Marks
These are the slips the questions above are built to catch:
- Mixing named-peril and open-peril language. A form that lists its perils pays only for those. A form that excludes only what it names is broader. Special form, open peril and all-risk describe the same idea.
- Confusing reserves. Loss reserves are set aside for reported and incurred-but-not-reported claims. Unearned premium reserves relate to the unexpired part of the policy period.
- Mislabelling ratios. The expense ratio is operating expenses divided by earned premiums, the loss ratio is incurred losses over earned premiums, and the combined ratio is their sum. Wrong options are usually the other ratios.
- Treating the ensuing loss as excluded. The shaking damage is excluded without earthquake coverage, but a fire that follows is a covered peril.
- Forgetting that land is not rebuilt. Replacement cost applies to the structure, not the land it stands on.
- Picking the wrong class of insurance. Fire, credit, surety, marine and aircraft each have a defined meaning. Match the risk to the definition.
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