California Property & Casualty Practice Test

Answer choices

1. A. Risk avoidance, because the business has stopped all activities that could cause fire.
2. B. Risk retention, because the business has chosen to pay every fire loss itself.
3. C. Loss reduction, because sprinklers are intended to reduce the severity of a fire loss.
4. D. Risk transfer, because installing sprinklers transfers legal liability to the fire department.

Wrong-answer review

• A. Risk avoidance, because the business has stopped all activities that could cause fire.: Incorrect. Avoidance means discontinuing or eliminating the exposure itself. Installing sprinklers leaves the activity and property exposure in place while reducing the chance or severity of fire loss.
• B. Risk retention, because the business has chosen to pay every fire loss itself.: Incorrect. Retention means keeping the financial consequences of a loss rather than transferring them. Installing a mitigation device is an active loss-control measure, not retention.
• D. Risk transfer, because installing sprinklers transfers legal liability to the fire department.: Incorrect. Risk transfer shifts specified financial consequences to another party, such as through insurance or contract. Installing sprinklers reduces the hazard but does not transfer the financial risk.

Answer choices

1. A. The insurer pays only up to the liability limit; the insured can owe the excess.
2. B. Collision coverage on the at-fault vehicle automatically increases liability to match the claimant's loss.
3. C. The insurer must pay the entire $80,000 because California minimum limits are only rating guidelines.
4. D. The state automatically pays the difference through uninsured motorist coverage on the at-fault driver's policy.

Answer choices

1. A. The assumption is correct whenever the insured pays the FAIR Plan premium before the effective date.
2. B. Explain that basic FAIR Plan coverage is limited and supplemental coverage may be needed.
3. C. The assumption is correct because every FAIR Plan policy duplicates an HO-3 form by statute.
4. D. The assumption is correct if the property is owner occupied, because occupancy adds theft and liability automatically.

Answer choices

1. A. Yes. Every mortgage on California residential property requires CEA coverage.
2. B. Yes. Any home within California must carry earthquake insurance if it has a loan.
3. C. No. Earthquake insurance is illegal when a mortgage lender also requires homeowners insurance.
4. D. No. Earthquake insurance is separate and not universally required for mortgaged homes.

Answer choices

1. A. Yes. Any voluntary-market declination automatically creates a bound FAIR Plan policy with no application.
2. B. Yes. CDI pays the FAIR Plan premium automatically after one insurer declines the risk.
3. C. No. The FAIR Plan still requires an application, eligibility, premium, and policy terms.
4. D. No. The FAIR Plan may be used only after a property has remained uninsured for at least one year.

Answer choices

1. A. Elena has no insurable interest because a mortgage transfers the entire property interest to the lender.
2. B. Elena has an insurable interest because damage to the owned building can cause a direct financial loss.
3. C. Elena's interest depends on whether the tenant, rather than Elena, paid the most recent premium.
4. D. Daniel's insurable interest is limited to the $800,000 mortgage balance.

Answer choices

1. A. $30,000 per person bodily injury, $60,000 per accident bodily injury, and $15,000 property damage.
2. B. $50,000 per person bodily injury, $100,000 per accident bodily injury, and $25,000 property damage.
3. C. $15,000 per person bodily injury, $30,000 per accident bodily injury, and $5,000 property damage.
4. D. $20,000 per person bodily injury, $40,000 per accident bodily injury, and $10,000 property damage.

Answer choices

1. A. Coverage A — Building Property.
2. B. Coverage B — Personal and Advertising Injury.
3. C. Coverage C — Medical Payments for qualifying bodily injury expenses.
4. D. Products-Completed Operations aggregate coverage only.

Answer choices

1. A. Open-peril coverage lists only the causes that are insured, while specified-peril coverage covers everything not excluded.
2. B. Specified perils use a list; open perils begin broadly and then apply exclusions.
3. C. Both forms cover exactly the same causes of loss; only the deductible changes.
4. D. Specified-peril coverage is always broader than open-peril coverage because naming a peril overrides every exclusion.

Answer choices

1. A. Coinsurance.
2. B. Subrogation.
3. C. Proximate cause.
4. D. Salvage.