TEXAS SURPLUS LINES
PRACTICE TEST EXAM
PREP 60 QUESTIONS
Question 1: Which insurance principle is intended to restore an insured to
approximately the same �nancial position occupied before a covered loss?
Choices:
1) Indemnity 2) Contribution 3) Subrogation 4) Adhesion
Correct Answer: Indemnity
Explanation: Indemnity is the principle that insurance should compensate for a covered loss without allowing the insured to pro�t from the loss.Page 1
Question 2: Which situation is an example of pure risk?
Choices:
1) Buying stock in hopes its price rises 2) Opening a new business location 3) A warehouse being damaged by �re 4) Wagering on a sporting event
Correct Answer: A warehouse being damaged by �re
Explanation: Pure risk involves the possibility of loss or no loss but no possibility of gain.Accidental �re damage is a pure risk.Question 3: A restaurant stores oily rags next to a furnace, increasing the chance of �re. The oily rags are best classi�ed as what?
Choices:
1) A peril 2) A physical hazard 3) A direct loss 4) A speculative risk
Correct Answer: A physical hazard
Explanation: A hazard is a condition that increases the frequency or severity of loss. The oily rags increase the likelihood of a �re loss.Page 2
Question 4: In property insurance terminology, �re that actually damages a building is best described as what?
Choices:
1) A hazard 2) A peril 3) A retention 4) A warranty
Correct Answer: A peril
Explanation: A peril is the cause of loss, such as �re, wind, or theft. A hazard is a condition that increases the chance or severity of loss.Question 5: A covered �re damages a store and forces it to close for two months.Which loss is most clearly an indirect loss?
Choices:
1) The burned shelving 2) The smoke-damaged inventory 3) The lost business income during closure 4) The cost to remove charred debris
Correct Answer: The lost business income during closure
Explanation: Lost business income results from the direct physical damage rather than being the physical damage itself, so it is an indirect or consequential loss.Page 3