Home › California › California Insurance Contract Law, Unfair Practices and Claims

California Insurance Contract Law, Unfair Practices and Claims: Practice Questions

20 free practice questions with explanations. Pick an answer for each, then check your score.

Exam weight: California Insurance Code and fair claims objectives, both exams on the California Life-Only and Accident & Health agent exams. Updated 2026-11-04.

Quick study guide

Expect exact Insurance Code (CIC) definitions, "may the insurer rescind?" scenarios and the claim deadlines in Title 10 of the California Code of Regulations (10 CCR).

Basic definitions

Insurance is a contract to indemnify another against loss, damage or liability arising from a contingent or unknown event (CIC 22). Any contingent or unknown event, past or future, that may damage a person with an insurable interest can be insured (CIC 250). The policy is the written instrument (CIC 380), and it must specify six things (CIC 381): the parties, the property or life insured, the insured's interest in property he does not fully own, the risks insured against, the period, and the premium (or its basis).

Concealment, representations and warranties

Concealment, intentional or unintentional, entitles the injured party to rescind (CIC 330, 331). A party need not volunteer what the other knows, ought to know or waives, but must answer if asked (CIC 333); nobody has to share their own judgment, even when asked (CIC 339). Materiality is judged not by what later happened but by the probable and reasonable influence of the facts on the party receiving them (CIC 334).

A representation may be oral or written and may be altered or withdrawn only before the insurance takes effect (CIC 350, 355). If false in a material point, the injured party may rescind from the time it becomes false (CIC 359). A warranty is express or implied (CIC 440); an express warranty must be in the policy or a signed instrument it refers to (CIC 443); breach of a material warranty lets the other party rescind (CIC 447).

Unfair practices, free insurance, fraud and discrimination

CIC 790.03 lists unfair acts, including misrepresenting policy terms or an insurer's finances, inducing a surrender by misrepresentation, false advertising and unfair claims practices. Penalty (CIC 790.035): up to $5,000 per act, $10,000 if willful. Unlisted practices can be declared unfair after a hearing (CIC 790.06). Free insurance as an inducement to buy goods or services is banned, with narrow exceptions (CIC 777.1). Life and disability insurers may not refuse or surcharge applicants for race, carrier traits such as sickle cell trait, or blindness (CIC 10140–10145).

Fair claims deadlines (10 CCR 2695)

Duty	Deadline
Answer a Department of Insurance inquiry	21 calendar days
Acknowledge a claim, send forms, start investigating; answer a claimant's inquiry	15 calendar days
Accept or deny after proof of claim	40 calendar days; if more time is needed, written notice, repeated every 30 days
Pay after accepting	30 calendar days
Keep claim files	Current year plus four preceding years

The 40- and 30-day rules exclude health claims (CIC 10123.13) and disability income claims (CIC 10111.2).

Practice questions

Under California Insurance Code section 22, insurance is a contract in which one party undertakes to:
1. A.Invest another person's money and guarantee a fixed rate of return.
2. B.Share equally in another person's business profits and losses.
3. C.Pay another a set sum on a fixed date, whether or not any loss occurs.
4. D.Indemnify another against loss, damage or liability arising from a contingent or unknown event.
Show answer
Answer: D. CIC 22 defines insurance as a contract to indemnify another against loss, damage or liability arising from a contingent or unknown event. A payment due on a fixed date regardless of loss has no contingent event, and guaranteeing investment returns or sharing business profits involves speculative risk, not indemnity.
Source: California objectives I.A.1 (Life-Only and A&H); Cal. Ins. Code § 22
Under California Insurance Code section 250, which events may be insured against?
1. A.Only events that happen inside California.
2. B.Only future events that are certain to happen.
3. C.Any contingent or unknown event, past or future, that may damage a person with an insurable interest or create a liability against that person.
4. D.Only events that cause physical damage to property.
Show answer
Answer: C. CIC 250 allows insurance against any contingent or unknown event, whether past or future, that may damage a person with an insurable interest or create a liability against them, subject to the rest of the Code. An event that is certain is not contingent, and the section is not limited to California events or to property damage.
Source: California objectives I.A.12 (Life-Only and A&H); Cal. Ins. Code § 250
Under California's Fair Claims Settlement Practices Regulations, for how long must an insurer keep its claim files available for the commissioner's examination?
1. A.Only until the claim is paid or denied
2. B.For ten years after the policy ends
3. C.For the current year and the four preceding years
4. D.For the current year and the preceding two years
Show answer
Answer: C. 10 CCR 2695.3(b) requires insurers to keep claim data and claim files for the current year and the four preceding years. The files must hold all documents, notes and work papers in enough detail that the events, their dates and the insurer's actions can be reconstructed.
Source: California objectives I.C.5.2 (Life-Only and A&H); 10 CCR § 2695.3
California Insurance Code section 380 defines the policy as the written instrument that sets out an insurance contract. Which item is NOT one of the things section 381 requires every policy to specify?
1. A.The parties between whom the contract is made
2. B.The period during which the insurance is to continue
3. C.The risks insured against
4. D.The name and commission rate of the agent who sold it
Show answer
Answer: D. CIC 381 requires a policy to specify the parties, the property or life insured, the insured's interest in property he does not fully own, the risks insured against, the period of coverage, and the premium (or the basis and rates for a premium that can only be worked out at the end). The selling agent's name and commission are not on that list.
Source: California objectives I.B.4 and I.B.7 (Life-Only and A&H); Cal. Ins. Code § 380; Cal. Ins. Code § 381
An applicant for life insurance forgets to mention a hospital stay for a heart condition two years earlier. The omission was an honest mistake, but the fact was material. Under the California Insurance Code, the insurer:
1. A.Can rescind only if the applicant signed a warranty about past hospital stays.
2. B.Can rescind, because concealment entitles the injured party to rescind whether it was intentional or unintentional.
3. C.Cannot rescind, because only intentional concealment allows rescission.
4. D.Can only raise the premium from now on.
Show answer
Answer: B. Concealment is neglecting to communicate what a party knows and ought to communicate (CIC 330), and CIC 331 says concealment, whether intentional or unintentional, entitles the injured party to rescind. No warranty is needed, and the Code does not limit the insurer to raising the premium. In practice, a life insurer's right to contest is also limited by the policy's incontestable clause.
Source: California objectives I.B.6.a (Life-Only and A&H); Cal. Ins. Code § 330; Cal. Ins. Code § 331
Under the California Insurance Code, which information is a party to an insurance contract NOT required to communicate, even when the other party asks for it?
1. A.Facts within its knowledge that are material to the risk
2. B.Answers to the questions on the application
3. C.Its own judgment on the matters in question
4. D.Material facts the other party has no means of finding out
Show answer
Answer: C. CIC 339 says neither party must communicate, even upon inquiry, information of its own judgment on the matters in question. Material facts the other side cannot find out must be disclosed in good faith (CIC 332). The matters listed in CIC 333, such as what the other party already knows, need not be volunteered but must be answered when asked.
Source: California objectives I.B.5.a (Life-Only and A&H); Cal. Ins. Code § 339; Cal. Ins. Code § 333; Cal. Ins. Code § 332
An insured hid a serious lung disease on her application and later died in a car accident unrelated to it. Under California Insurance Code section 334, whether the hidden fact was material is decided by:
1. A.Whether the lung disease caused or contributed to her death.
2. B.The probable and reasonable influence the fact would have had on the insurer in judging the risk or making its inquiries.
3. C.Whether the agent personally thought the condition was serious.
4. D.Whether the beneficiary knew about the condition.
Show answer
Answer: B. CIC 334 says materiality is determined not by the event but solely by the probable and reasonable influence of the facts on the party to whom the communication is due, in weighing the proposed contract or making its inquiries. So it does not matter that the death was unrelated to the hidden disease, and neither the agent's opinion nor the beneficiary's knowledge decides it.
Source: California objectives I.B.5.e (Life-Only and A&H); Cal. Ins. Code § 334
Under California Insurance Code section 355, a representation made by an applicant may be altered or withdrawn:
1. A.Only with the Insurance Commissioner's written approval.
2. B.Only during the policy's free-look period.
3. C.Before the insurance takes effect, but not afterwards.
4. D.At any time while the policy is in force.
Show answer
Answer: C. CIC 355 allows a representation to be altered or withdrawn before the insurance is effected, but not afterwards. Once coverage is in place the insurer has relied on it. A representation may be oral or written (CIC 350), and it is false when the facts fail to match what it asserts (CIC 358).
Source: California objectives I.B.5.c (Life-Only and A&H); Cal. Ins. Code § 355; Cal. Ins. Code § 358
Under California Insurance Code section 359, if a representation is false in a material point, the injured party may rescind the contract:
1. A.Only if the false statement was made on purpose.
2. B.Only if the statement was written into the policy as a warranty.
3. C.Only after the applicant is convicted of fraud.
4. D.From the time the representation becomes false.
Show answer
Answer: D. CIC 359 says that if a representation is false in a material point, whether affirmative or promissory, the injured party may rescind from the time it becomes false. The section does not require proof of intent, a warranty or a criminal conviction; materiality is what matters.
Source: California objectives I.B.6 (Life-Only and A&H); Cal. Ins. Code § 359
Which statement about warranties is correct under the California Insurance Code?
1. A.A warranty is valid only if it uses a particular legal form of words.
2. B.A warranty may be express or implied, and violating a material warranty entitles the other party to rescind.
3. C.An express warranty may be kept in the agent's notes without being referred to in the policy.
4. D.Only the insurer, never the insured, can be bound by a warranty.
Show answer
Answer: B. A warranty is either express or implied (CIC 440), and violating a material warranty or other material provision by either party entitles the other to rescind (CIC 447). No particular form of words is needed (CIC 442), and an express warranty must be in the policy itself or in a signed instrument the policy refers to (CIC 443).
Source: California objectives I.B.5.b (Life-Only and A&H); Cal. Ins. Code § 440; Cal. Ins. Code § 443; Cal. Ins. Code § 447
An agent tells a client that her current life insurer is about to fail, knowing this is untrue, so that she will surrender her policy and buy a new one from him. Under California Insurance Code section 790.03, this is:
1. A.An unfair practice: misrepresentation to induce a policyholder to surrender her insurance.
2. B.Allowed, because opinions about insurers' finances are protected speech.
3. C.Rebating.
4. D.Allowed, as long as the new policy has a lower premium.
Show answer
Answer: A. CIC 790.03(a) lists as unfair any misrepresentation about an insurer's financial condition and any misrepresentation made to induce a policyholder to lapse, forfeit or surrender her insurance (often called twisting). A lower premium does not excuse it. Rebating means giving the buyer an inducement such as part of the commission, which is not what happened here.
Source: California objectives I.C.4 (Unfair Practices article; Life-Only and A&H); Cal. Ins. Code § 790.03
Under California Insurance Code section 790.03(h), an insurer commits an unfair claims settlement practice if it knowingly commits a listed act, or commits it often enough to show a general business practice. Which is one of the listed acts?
1. A.Directly advising a claimant not to hire an attorney
2. B.Asking a beneficiary for a certified death certificate
3. C.Denying a claim in writing and explaining the policy provision relied on
4. D.Investigating a claim made soon after the policy was issued
Show answer
Answer: A. CIC 790.03(h)(14) lists directly advising a claimant not to obtain an attorney. Other listed acts include misrepresenting policy provisions, failing to affirm or deny coverage within a reasonable time after proof of loss, and misleading a claimant about the statute of limitations. Asking for proof of death, giving a written explanation of a denial and investigating an early claim are normal claims handling.
Source: California objectives I.C.4 (Unfair Practices article; Life-Only and A&H); Cal. Ins. Code § 790.03
A licensee is found to have willfully committed an unfair act defined in California Insurance Code section 790.03. The maximum civil penalty the commissioner may set under section 790.035 is:
1. A.$10,000 for each act
2. B.$55,000 for each act
3. C.$5,000 for each act
4. D.$1,000 for each act
Show answer
Answer: A. CIC 790.035 sets a civil penalty of up to $5,000 for each act, or up to $10,000 for each act if it was willful, and lets the commissioner decide what counts as an act (inadvertent issuance or servicing of a policy counts as a single act). The $55,000 figure is the cap for a willful violation of a final cease-and-desist order under CIC 790.07.
Source: California objectives I.C.4 (Unfair Practices article; Life-Only and A&H); Cal. Ins. Code § 790.035; Cal. Ins. Code § 790.07
A furniture store plans to give every customer who buys a sofa a free life insurance policy, with no separate charge for the coverage. Under California Insurance Code section 777.1:
1. A.It is allowed if each customer signs a written waiver.
2. B.This is prohibited free insurance: no insurer may take part and no agent may arrange it.
3. C.It is allowed because the store, not the customer, pays the premium.
4. D.It is allowed if the face amount is under $5,000.
Show answer
Answer: B. CIC 777.1 bars insurers from any plan offering insurance, without a separate charge, as an inducement to buy or rent property or services, and bars agents and brokers from arranging it. The exceptions are narrow, such as credit life or disability insurance that pays off a debt and insurance incidental to services costing the seller no more than $1 a year per purchaser; a face-amount limit or a waiver is not among them.
Source: California objectives I.C.2.11 (A&H; also Life-Only I.C2); Cal. Ins. Code § 777.1
California Insurance Code section 985 defines insolvency as:
1. A.Writing fewer new policies than in the previous year.
2. B.Any impairment of the insurer's required minimum paid-in capital, or an inability to meet its financial obligations when they are due.
3. C.Reporting a net loss for any one calendar year.
4. D.Stopping the sale of new policies in California.
Show answer
Answer: B. CIC 985(a) defines insolvency as an impairment of the minimum paid-in capital the Code requires (paid-in capital is defined in CIC 36) or an inability to meet financial obligations when due. An insurer cannot escape insolvency just by covering its liabilities and reinsurance; it must also hold additional assets equal to the required paid-in capital. A single loss year or lower sales is not insolvency. (Section 985 itself states that it does not apply to life, title or mortgage insurers.)
Source: California objectives I.C.4.5 (A&H; also Life-Only I.C4); Cal. Ins. Code § 985; Cal. Ins. Code § 36
Under California Insurance Code section 1871.4, a person who knowingly makes a false material statement to obtain workers' compensation benefits can be fined up to:
1. A.$150,000 or double the value of the fraud, whichever is greater
2. B.The amount of the false claim, with no prison term possible
3. C.$50,000
4. D.$10,000
Show answer
Answer: A. CIC 1871.4(b) allows a fine of up to $150,000 or double the value of the fraud, whichever is greater, and imprisonment (one year in county jail, or two, three or five years under Penal Code 1170(a)), or both; restitution must be ordered. A prior conviction adds a two-year enhancement for each prior.
Source: California objectives I.C.4.8 (False and Fraudulent Claims article; Life-Only and A&H); Cal. Ins. Code § 1871.4
Which practice is permitted under California's discriminatory practices law for life and disability insurance (Insurance Code sections 10140–10145)?
1. A.Charging a higher rate solely because the applicant is blind
2. B.Refusing to issue a life policy solely because the applicant carries the sickle cell trait
3. C.Asking for the applicant's birthplace, if the answer is used only to identify the applicant
4. D.Including a question about the applicant's race on the application
Show answer
Answer: C. CIC 10142 allows a birthplace question if it is used only to identify the applicant and not to discriminate. Refusing coverage solely because the applicant carries a trait such as sickle cell trait is barred by CIC 10143, a different rate solely because of blindness or partial blindness is barred by CIC 10145, and applications may not ask for race (CIC 10141).
Source: California objectives I.C.4.10 (A&H; also Life-Only I.C4); Cal. Ins. Code § 10142; Cal. Ins. Code § 10143; Cal. Ins. Code § 10145; Cal. Ins. Code § 10141
Under 10 CCR 2695.5, after an insurer receives notice of a claim (other than a notice of legal action), it must acknowledge it, give the claimant the necessary forms and instructions, and begin any needed investigation within:
1. A.15 calendar days
2. B.40 calendar days
3. C.21 calendar days
4. D.30 calendar days
Show answer
Answer: A. 10 CCR 2695.5(e) gives the insurer 15 calendar days (acknowledgment is not needed if it pays within that time). The same 15-day limit applies to answering a claimant's communication that reasonably calls for a response. The 21-day limit is for answering a Department of Insurance inquiry, and 40 days is the time to accept or deny after proof of claim.
Source: California objectives I.C.5.3 (Life-Only and A&H); 10 CCR § 2695.5
A beneficiary submits proof of claim on a life insurance policy. Under 10 CCR 2695.7, the insurer must accept or deny the claim within 40 calendar days. If it needs more time, it must:
1. A.Pay half of the claim while it continues to investigate.
2. B.Get the Insurance Commissioner's written permission for an extension.
3. C.Phone the beneficiary once; no further notice is required.
4. D.Give written notice within the 40 days saying what it needs and why, and repeat the notice every 30 days until it decides.
Show answer
Answer: D. 10 CCR 2695.7(b) requires acceptance or denial within 40 calendar days of proof of claim, and 2695.7(c)(1) requires written notice of the need for more time within that period, stating the information needed and the reasons, then every 30 calendar days until a decision or notice of legal action. No commissioner approval or partial payment is required. These timelines do not apply to health claims under CIC 10123.13 or disability income claims under CIC 10111.2.
Source: California objectives I.C.5.4 (Life-Only and A&H); 10 CCR § 2695.7
Once a life insurer accepts a claim and receives any properly executed release it needs, 10 CCR 2695.7(h) requires it to pay within:
1. A.40 calendar days
2. B.60 calendar days
3. C.15 calendar days
4. D.30 calendar days
Show answer
Answer: D. 10 CCR 2695.7(h) requires the insurer to tender payment immediately, and in no event more than 30 calendar days after acceptance, unless the policy provides a waiting period between acceptance and payment. Forty days is the limit for accepting or denying after proof of claim, and 15 days is the limit for acknowledging a notice of claim.
Source: California objectives I.C.5.4 (Life-Only and A&H); 10 CCR § 2695.7

Where these questions come from: California Department of Insurance educational objectives for the Life-Only and/or Accident & Health agent examinations, sections I.A–I.B (basic concepts and contract law), I.C.2 (free insurance), I.C.4 (market regulation: unfair practices, insolvency, fraud, discrimination) and I.C.5 (Fair Claims Settlement Practices Regulations). See how we write questions.