18 Free Texas Insurance Terms & Concepts Practice Questions (2026)

Answer: C

While the intentional loss exclusion in the policy is the direct provision that bars recovery for arson, the underlying principle violated is utmost good faith, which requires both parties to act honestly and in good faith. Arson is a deliberate act of fraud that violates this duty. Among the fundamental insurance principles listed, utmost good faith best addresses the dishonesty involved in intentional destruction of property for insurance proceeds.

Answer: C

Insurable interest requires the insured to suffer a financial loss if the insured property is damaged. Once the building was sold, the former owner no longer had a financial stake in the property and cannot collect. Property insurance policies do not automatically transfer to new owners.

Answer: B

The principle of indemnity states that insurance should restore the insured to their pre-loss financial condition — no better and no worse. If the homeowner collects $180,000 in insurance proceeds and also keeps a $40,000 lot, she would be in a better financial position than before the loss, violating the indemnity principle. Insurance is not meant to be a source of profit for the insured.

Answer: C

Subrogation is the insurer's right to recover from a responsible third party after paying a claim. Once the insurer pays the insured, it 'steps into the shoes' of the insured and can pursue the negligent party for reimbursement.

Answer: C

Under the principle of subrogation, the insurer recovers only the amount it has paid out. If the subrogation recovery exceeds the amount the insurer paid, the excess belongs to the insured to cover any unreimbursed losses (such as the deductible or uncovered expenses). The insured cannot profit from subrogation (per the indemnity principle), but they are entitled to be made whole. In this scenario, since the recovery exactly equals what the insurer paid, the insurer keeps the full $15,000, and the homeowner would need to pursue the contractor separately for the additional $3,000.

Answer: C

Pro rata liability divides the loss proportionally. Policy B's share is $300,000 / $500,000 (total coverage) = 60%. Policy B pays 60% of $100,000 = $60,000.

Answer: B

The coinsurance requirement is 80% of $300,000 = $240,000. The insured carries $240,000, meeting the requirement exactly. Since the requirement is met, the insurer pays the full loss of $100,000 (minus any deductible).

Answer: B

The coinsurance requirement is 80% of $500,000 = $400,000. The insured carries only $300,000, which is less than the required $400,000. Applying the coinsurance penalty formula: ($300,000 / $400,000) x $200,000 = 0.75 x $200,000 = $150,000. The insured is penalized for being underinsured and must absorb $50,000 of the loss as a co-insurer.

Answer: B

With a flat (also called straight or dollar) deductible, the insured pays the first portion of the loss up to the deductible amount, and the insurer pays the rest. The insurer pays $4,500 - $1,000 = $3,500. A flat deductible is a fixed dollar amount that does not change based on the value of the property or the size of the loss.

Answer: C

A percentage deductible is calculated based on the insured value of the property, not the loss amount. The deductible is 5% of $200,000 = $10,000. The insurer would pay $30,000 - $10,000 = $20,000. Percentage deductibles are commonly used for wind, hail, and hurricane losses in coastal and storm-prone regions. They can result in much higher out-of-pocket costs than flat deductibles.

Answer: B

Under a valued policy, the insurer and insured agree on the value of the property at the inception of the policy. In the event of a total loss, the insurer pays the agreed-upon value ($500,000), regardless of the actual market value at the time of loss. This differs from an unvalued (open) policy, where the value is determined at the time of loss. Valued policies are commonly used for items that are difficult to value after a loss, such as fine art, antiques, and collectibles. The trade-off is that the insured cannot benefit if the item appreciates, but they have certainty of payment.

Answer: B

Stated amount coverage pays the lesser of the stated amount, the actual cash value, or the cost to repair/replace the property. Unlike agreed value, stated amount does not guarantee a specific payout. The stated amount serves as a cap, but the insurer will not pay more than the actual value of the property. In this case, since the ACV ($35,000) is less than the stated amount ($50,000), the insurer pays $35,000. This is an important distinction from agreed value coverage, where the agreed amount would be paid regardless of ACV.

Answer: A

A peril is the actual cause of a loss, such as fire, windstorm, theft, or lightning. A hazard is a condition that creates or increases the chance that a loss will occur. For example, fire is a peril; faulty wiring that could cause a fire is a hazard. Understanding this distinction is fundamental to insurance — policies are often structured around which perils are covered (named peril vs. open peril).

Answer: C

A physical hazard is a tangible condition that increases the probability or severity of a loss. Oily rags near a furnace is a physical condition of the property that increases fire risk. A peril is the actual cause of loss (fire itself). A moral hazard involves intentional dishonesty (like arson for profit). A morale hazard is carelessness or indifference because insurance exists (like not locking doors because you have theft coverage).

Answer: B

Morale hazard (note: not 'moral' hazard) is carelessness or indifference to loss because insurance exists. The homeowner is not trying to cause a loss (which would be moral hazard), but the existence of insurance makes them less careful about preventing one. Moral hazard, by contrast, involves intentional dishonesty or deliberate actions to cause a loss for financial gain, such as staging a theft.

Answer: C

The Declarations page (also called the 'dec page') is the first section of a policy and contains the specific details that personalize the policy: the named insured, property address, policy period, coverage limits, deductibles, and premium. It serves as a summary of the policy's key information. Conditions outline duties and rights, exclusions list what is not covered, and the insuring agreement describes what the insurer promises to cover.

Answer: C

Exclusions are the section of a policy that lists perils, losses, property, or conditions that are NOT covered. Common exclusions in property policies include flood, earthquake, war, nuclear hazard, intentional acts, and wear and tear. Exclusions serve to keep premiums manageable, eliminate coverage for uninsurable risks, and prevent duplicate coverage. The declarations identify the insured and coverage details; conditions outline duties; the insuring agreement states what is covered.

Answer: B

A binder is a temporary contract that provides immediate evidence of insurance coverage until the formal policy is issued. Binders are commonly used in property insurance when coverage needs to be effective immediately, such as at a real estate closing. They typically remain in force for a limited time (usually 30 to 90 days) and contain the essential terms of coverage.