18 Free Texas Risk, Liability & Insurance Market Practice Questions (2026)
How to Use This Risk and Markets Set
Advanced Insurance Terms is 15 of the 130 scored questions on the Texas Property & Casualty exam, and it is the block that looks least like the rest of the exam. Instead of policies and claims it asks about negligence law, reinsurance treaties between insurers, and which companies are allowed to write business in Texas at all.
That makes it easy to leave until last and easy to lose marks on, because very little of it can be reasoned out from how insurance works. Either you know what retrocession means, or you do not.
These 18 questions come from LanePrep's Texas P&C quiz bank and cover the three areas the exam uses: liability law and how risk is treated before it is insured, the reinsurance arrangements that sit behind every policy, and the insurer types and Texas residual markets that exist for risks nobody else will write.
Learn the vocabulary as vocabulary. Quota share, facultative, excess of loss and retrocession are definitions with arithmetic attached, not concepts to reason about under time pressure.
Practice Questions 1-6: Negligence, Damages and Treating Risk
Before insurance, there is liability. Negligence has four elements and Texas applies a modified comparative fault rule with a threshold that decides whether a claimant recovers anything at all — a state-specific number that appears on the exam.
Question 1 (Chapter 5)
A warehouse owner installs a sprinkler system and fire alarms to reduce the severity of a potential fire loss. This is an example of which risk management technique?
- A) Risk avoidance
- B) Risk reduction (loss control)
- C) Risk transfer
- D) Risk retention
Show answer & explanation
Answer: B
Risk reduction (also called loss control) involves taking steps to reduce the frequency or severity of losses. Installing sprinklers and alarms reduces the severity of fire damage. Risk avoidance would mean not operating the warehouse at all. Risk transfer involves shifting the risk to another party (e.g., insurance).
Question 2 (Chapter 5)
A delivery driver runs a red light and strikes a pedestrian. To establish the driver's negligence, the pedestrian must prove all of the following EXCEPT:
- A) The driver owed a duty of care to the pedestrian
- B) The driver breached that duty of care
- C) The breach was the proximate cause of the pedestrian's injuries
- D) The driver intended to cause harm to the pedestrian
Show answer & explanation
Answer: D
Negligence requires four elements: duty, breach, proximate cause, and damages. Intent to harm is NOT required for negligence — negligence is unintentional. If the driver intended to cause harm, it would be an intentional tort, which is generally excluded from liability insurance coverage.
Question 3 (Chapter 5)
A contractor's employee is injured while working on a client's construction site. The client's CGL insurer pays the medical claim and then seeks to recover from the contractor, alleging the contractor's negligence caused the injury. The contractor's share of responsibility is determined to be 40%. Under Texas's modified comparative fault rule, what is the result?
- A) The contractor pays 40% of the damages
- B) The contractor pays nothing because they are less than 51% at fault
- C) The contractor pays 100% of the damages because any negligence creates full liability
- D) The contractor pays nothing because subrogation does not apply between co-defendants
Show answer & explanation
Answer: A
Under Texas's proportionate responsibility system (Chapter 33, CPRC), a defendant is liable only for their proportionate share of damages. At 40% fault, the contractor owes 40% of the damages. A claimant who is more than 50% at fault is barred from recovery entirely. Since the contractor is 40% responsible, they pay their proportionate 40% share.
Question 4 (Chapter 5)
A restaurant patron suffers food poisoning and incurs $50,000 in medical bills and $10,000 in lost wages. She also experiences significant pain and emotional distress. Which category of damages would cover her pain and suffering?
- A) Special damages (economic damages)
- B) General damages (non-economic damages)
- C) Punitive damages
- D) Nominal damages
Show answer & explanation
Answer: B
General damages (non-economic damages) compensate for intangible losses such as pain, suffering, emotional distress, and loss of consortium. Special damages (economic damages) cover quantifiable financial losses like medical bills and lost wages. Punitive damages are awarded to punish egregious conduct, not to compensate the injured party.
Question 5 (Chapter 5)
After a covered auto accident, the insured's vehicle is declared a total loss. The actual cash value (ACV) of the vehicle is determined to be $18,000, and the insured still owes $22,000 on the auto loan. What type of coverage would pay the $4,000 difference?
- A) Collision coverage
- B) Comprehensive coverage
- C) Guaranteed Auto Protection (GAP) coverage
- D) Underinsured motorists coverage
Show answer & explanation
Answer: C
GAP (Guaranteed Auto Protection) coverage pays the difference between the actual cash value of a totaled vehicle and the outstanding loan balance. Without GAP coverage, the insured would owe $4,000 to the lender after the insurance settlement.
Question 6 (Chapter 5)
A Texas employer with a strong safety record and substantial financial reserves applies to the Texas Department of Insurance to self-insure its workers' compensation obligations instead of purchasing a policy. If approved, the employer becomes a:
- A) Risk retention group member
- B) Qualified self-insurer (certified self-insurer)
- C) Surplus lines policyholder
- D) Captive insurance company
Show answer & explanation
Answer: B
A qualified self-insurer (also called certified self-insurer) is an employer approved by the state to fund its own workers' compensation claims rather than purchasing insurance. Texas requires applicants to demonstrate financial strength, adequate reserves, and a satisfactory safety record. The employer must post a security deposit or surety bond to guarantee payment of claims. This is distinct from a captive insurer, which is a separate legal entity.
Practice Questions 7-12: Reinsurance Arrangements
Reinsurance is where insurers insure themselves, and the exam tests the shapes: treaty against facultative, proportional against excess of loss, and what happens when a reinsurer passes risk on again. Several questions want a figure, not a name.
Question 7 (Chapter 5)
A large property insurer enters into an agreement where it automatically cedes 30% of every homeowners policy it writes to another insurer. This arrangement is an example of which type of reinsurance?
- A) Facultative reinsurance
- B) Treaty reinsurance
- C) Excess of loss reinsurance
- D) Surplus lines insurance
Show answer & explanation
Answer: B
Treaty reinsurance is an automatic agreement where the ceding insurer automatically transfers a specified portion of all policies within a defined class of business. The reinsurer must accept all ceded risks. Facultative reinsurance, by contrast, is negotiated on a case-by-case basis for individual risks. Excess of loss is a type of nonproportional reinsurance, not a blanket automatic arrangement.
Question 8 (Chapter 5)
An insurer negotiates a reinsurance agreement for a single high-value commercial property risk worth $50 million. The reinsurer evaluates the specific risk before agreeing to accept it. This is an example of:
- A) Treaty reinsurance — pro rata
- B) Treaty reinsurance — excess of loss
- C) Facultative reinsurance
- D) Retrocession
Show answer & explanation
Answer: C
Facultative reinsurance involves individual risk underwriting — the ceding insurer submits a specific risk to the reinsurer, who evaluates it and decides whether to accept or decline. This is commonly used for large or unusual risks. Treaty reinsurance is automatic and covers entire classes of business. Retrocession is when a reinsurer cedes risk to another reinsurer.
Question 9 (Chapter 5)
Under a quota share reinsurance arrangement, the ceding insurer retains 60% of premiums and losses on its commercial auto book of business. A $200,000 loss occurs on a covered claim. How much does the reinsurer pay?
- A) $200,000
- B) $120,000
- C) $80,000
- D) $140,000
Show answer & explanation
Answer: C
A quota share arrangement is a type of pro rata (proportional) reinsurance where premiums and losses are shared at a fixed percentage. If the ceding insurer retains 60%, the reinsurer assumes 40%. On a $200,000 loss, the reinsurer pays 40% = $80,000. The ceding insurer pays the remaining $120,000.
Question 10 (Chapter 5)
A primary insurer has an excess of loss reinsurance treaty with a retention of $500,000 per occurrence. A single covered loss totals $1,200,000. How much does the reinsurer pay under this arrangement?
- A) $500,000
- B) $700,000
- C) $1,200,000
- D) $600,000
Show answer & explanation
Answer: B
Under excess of loss reinsurance, the ceding insurer (primary insurer) retains losses up to a specified amount (the retention), and the reinsurer pays losses that exceed that retention. With a $500,000 retention and a $1,200,000 loss, the primary insurer pays the first $500,000 and the reinsurer pays the excess: $1,200,000 - $500,000 = $700,000. This is a nonproportional form of reinsurance.
Question 11 (Chapter 5)
After Hurricane season, a property insurer's total catastrophe losses across all policies reach $80 million. The insurer has a catastrophe reinsurance treaty with a $50 million retention and a $100 million limit. How much does the catastrophe reinsurer pay?
- A) $80 million
- B) $50 million
- C) $30 million
- D) $100 million
Show answer & explanation
Answer: C
Catastrophe reinsurance (cat reinsurance) is a type of excess of loss reinsurance that protects the ceding insurer against accumulation of losses from a single catastrophic event. The insurer retains the first $50 million, and the reinsurer pays the excess up to the treaty limit. Here: $80 million - $50 million = $30 million. If total losses exceeded $150 million ($50M retention + $100M limit), the insurer would bear the additional losses.
Question 12 (Chapter 5)
Reinsurer Alpha accepts risk from a primary insurer and then transfers a portion of that assumed risk to Reinsurer Beta. The transfer of risk from Reinsurer Alpha to Reinsurer Beta is called:
- A) Cession
- B) Retrocession
- C) Facultative reinsurance
- D) Surplus share reinsurance
Show answer & explanation
Answer: B
Retrocession is the process by which a reinsurer transfers (cedes) a portion of its assumed reinsurance risk to another reinsurer (called a retrocessionaire). Cession refers to the original transfer from a primary insurer to a reinsurer. Retrocession allows reinsurers to manage their own risk accumulations and maintain adequate capacity.
Practice Questions 13-18: Insurer Types and Texas Residual Markets
Who may write, and what happens when nobody will. Admitted against nonadmitted, captives and reciprocals, and the three Texas residual markets — TWIA for coastal windstorm, the FAIR Plan for property nobody else will take, and the assigned risk plan for drivers no insurer wants. These are Texas institutions and national material does not cover them.
Question 13 (Chapter 5)
A Texas homeowner in a designated high-risk coastal area cannot find windstorm coverage from any private insurer. Which government-backed program provides windstorm and hail coverage for properties in this area?
- A) National Flood Insurance Program (NFIP)
- B) Texas FAIR Plan Association
- C) Texas Windstorm Insurance Association (TWIA)
- D) Texas Automobile Insurance Plan Association
Show answer & explanation
Answer: C
The Texas Windstorm Insurance Association (TWIA) provides windstorm and hail coverage to property owners in designated catastrophe areas along the Texas coast (first tier coastal counties and parts of Harris County). TWIA is the insurer of last resort for windstorm/hail coverage. The NFIP covers flood, not wind. The FAIR Plan provides basic property coverage for fire and other perils in urban areas.
Question 14 (Chapter 5)
A property owner in an urban area of Texas has been declined property insurance by multiple private insurers due to the age and condition of the building. Which residual market mechanism is designed to provide basic property coverage for such situations?
- A) Texas Windstorm Insurance Association (TWIA)
- B) Texas FAIR Plan Association
- C) National Flood Insurance Program (NFIP)
- D) Texas Mutual Insurance Company
Show answer & explanation
Answer: B
The Texas FAIR Plan Association (Fair Access to Insurance Requirements) provides basic property insurance to property owners who cannot obtain coverage in the voluntary market. FAIR Plans provide coverage for fire and certain other perils. TWIA provides only windstorm and hail coverage in coastal areas. The NFIP covers flood damage only.
Question 15 (Chapter 5)
A Texas driver with multiple DUI convictions cannot obtain auto liability insurance from any private insurer. To comply with Texas financial responsibility requirements, the driver can obtain coverage through which mechanism?
- A) Texas FAIR Plan Association
- B) Texas Windstorm Insurance Association (TWIA)
- C) Texas Automobile Insurance Plan Association (assigned risk pool)
- D) Texas Workers' Compensation Insurance Fund
Show answer & explanation
Answer: C
The Texas Automobile Insurance Plan Association is an assigned risk pool that provides auto liability coverage to high-risk drivers who cannot obtain insurance in the voluntary market. Each insurer writing auto insurance in Texas is required to participate and accept an assigned share of these risks. This ensures all drivers can meet Texas financial responsibility requirements.
Question 16 (Chapter 5)
A Texas insurance agent has a client who needs specialized pollution liability coverage that no admitted insurer in Texas will write. What must the agent do before placing the coverage with a nonadmitted (surplus lines) insurer?
- A) Obtain approval from the policyholder's mortgage company
- B) Conduct a diligent search of admitted insurers and document the declinations
- C) File a surplus lines exemption with the Texas Supreme Court
- D) Obtain a federal surplus lines permit from the NAIC
Show answer & explanation
Answer: B
Texas law requires a diligent search of the admitted market before placing coverage with a surplus lines (nonadmitted) insurer. The agent must document that the coverage was declined by or unavailable from admitted insurers. Surplus lines insurance is regulated at the state level by the Texas Department of Insurance, not by the courts or federal entities. Only a licensed surplus lines agent can place this coverage.
Question 17 (Chapter 5)
An insurer is chartered in Texas, licensed by the Texas Department of Insurance, and subject to Texas regulatory oversight. This insurer writes homeowners policies across multiple states. In Texas, this insurer is classified as a:
- A) Foreign insurer
- B) Alien insurer
- C) Domestic insurer
- D) Surplus lines insurer
Show answer & explanation
Answer: C
A domestic insurer is one that is incorporated (chartered or domiciled) in the state where it is being classified. Since this insurer is chartered in Texas, it is a domestic insurer in Texas. A foreign insurer is chartered in another U.S. state. An alien insurer is chartered in another country. These classifications determine which state's regulatory authority has primary oversight.
Question 18 (Chapter 5)
A large oil company creates a wholly owned subsidiary insurance company domiciled in Vermont to insure the parent company's own property and liability risks. This subsidiary is best described as a:
- A) Surplus lines insurer
- B) Reciprocal exchange
- C) Captive insurance company
- D) Risk retention group
Show answer & explanation
Answer: C
A captive insurance company is a subsidiary created and wholly owned by a parent company (or group of companies) to insure the risks of its owner(s). It is a formalized method of self-insurance. Vermont is the most common domicile for captive insurers in the U.S. Unlike a risk retention group, a captive is typically owned by a single parent or affiliated group rather than unrelated members.
The Risk and Markets Mistakes That Cost Marks
Confusing treaty with facultative. A treaty covers a whole book automatically; facultative reinsurance is negotiated for one risk, which the reinsurer evaluates before accepting. The word “automatically” in a question is doing real work.
Splitting an excess of loss treaty proportionally. Excess of loss pays only above the retention; the primary insurer keeps everything below it. Quota share splits every dollar. Applying the wrong one produces a plausible wrong figure.
Treating surplus lines as unregulated. A nonadmitted insurer can be used in Texas only after a diligent search establishes that admitted insurers will not write the risk, and only through a licensed surplus lines agent. The process is the answer.
Mixing up the three residual markets. TWIA is coastal windstorm, the FAIR Plan is property, the assigned risk plan is auto. The scenario always names the peril or the vehicle.
TWIA gets its own explainer in the Texas windstorm guide. All nine chapters are audio lessons — chapter 1 is free, no signup. The chapter 2 vocabulary sits in the insurance terms and concepts set.
Question counts and content weighting come from the Pearson VUE Texas examination content outline. Read September 2026.
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