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Section 4 of 7

CSLB Business Insurance Practice Questions

10 free practice questions on business insurance, part of the Insurance and Liens section (about 12% of the exam). Try each one, then open the answer: every choice is explained and the law is quoted.

Questions and answers

  1. Insurance and Liens

    1. Under Business and Professions Code section 7071.19, what must a limited liability company (LLC) keep in addition to its bonds, as a condition of holding a contractor license?

    • A. A cash reserve equal to its yearly payroll
    • B. A personal guarantee signed by each LLC member
    • C. Liability insurance for claims from its contracting work
    • D. Builder's risk insurance on every project it builds
    Show answer

    Correct answer: C

    • A. A cash reserve equal to its yearly payroll

      Section 7071.19 does not require a cash reserve equal to payroll. What it adds on top of the bond is a liability insurance requirement.

    • B. A personal guarantee signed by each LLC member

      Section 7071.19 does not require personal guarantees from LLC members. The extra condition it sets is liability insurance.

    • C. Liability insurance for claims from its contracting work

      Correct answer

      Correct. In addition to any required bond, an LLC must maintain liability insurance against claims for acts, errors, or omissions arising out of the contracting services it provides.

    • D. Builder's risk insurance on every project it builds

      Section 7071.19 does not require builder's risk insurance on each project. It requires liability insurance for claims arising out of the LLC's contracting services.

    Explanation

    Business and Professions Code section 7071.19 says that, in addition to any required bond, an LLC must maintain liability insurance against claims for acts, errors, or omissions arising out of the contracting services it provides. This is a condition of getting and keeping the license. Section 7071.19 does not require a payroll cash reserve, personal guarantees, or builder's risk insurance on each project.

    Source

  2. Insurance and Liens

    2. An LLC contractor wants a lower premium for its required liability insurance. Under Business and Professions Code section 7071.19, may the policy have a deductible?

    • A. Yes, because a deductible or self-insured retention is allowed
    • B. No, because the policy must pay every claim from the first dollar
    • C. Yes, but only if the CSLB approves the deductible in writing
    • D. No, because only workers' compensation policies may have one
    Show answer

    Correct answer: A

    • A. Yes, because a deductible or self-insured retention is allowed

      Correct answer

      Correct. Section 7071.19 says a policy maintained under the section may be subject to a deductible or self-insured retention.

    • B. No, because the policy must pay every claim from the first dollar

      The section does not require first-dollar coverage. The policy may be subject to a deductible or self-insured retention.

    • C. Yes, but only if the CSLB approves the deductible in writing

      The section allows a deductible or self-insured retention without requiring CSLB approval.

    • D. No, because only workers' compensation policies may have one

      Section 7071.19 itself says the LLC's required liability policy may have a deductible or self-insured retention, so the answer is yes.

    Explanation

    Business and Professions Code section 7071.19 says a policy kept under this section may be subject to a deductible or self-insured retention (an amount the LLC pays itself before the insurer pays). The section does not require the CSLB to approve the deductible. It also does not require first-dollar coverage.

    Source

  3. Insurance and Liens

    3. A new applicant needs the $25,000 contractor bond. According to the CSLB guide Get Licensed to Build, where can the applicant get the bond?

    • A. From an insurance agent or a licensed surety company
    • B. Directly from the CSLB when it issues the license
    • C. From the county recorder where the business is located
    • D. From a Department of Industrial Relations field office
    Show answer

    Correct answer: A

    • A. From an insurance agent or a licensed surety company

      Correct answer

      Right: the CSLB guide says you may buy bonds from your insurance agent or from one of the private companies licensed by the California Department of Insurance.

    • B. Directly from the CSLB when it issues the license

      Wrong: the guide states that CSLB does not issue bonds.

    • C. From the county recorder where the business is located

      Wrong: the county recorder does not sell contractor bonds; the guide points to an insurance agent or a company licensed by the California Department of Insurance.

    • D. From a Department of Industrial Relations field office

      Wrong: the Department of Industrial Relations does not sell contractor bonds; the guide points to an insurance agent or a company licensed by the California Department of Insurance.

    Explanation

    The CSLB guide says you may buy bonds from your insurance agent or from one of the private companies licensed by the California Department of Insurance. It also says the CSLB does not issue bonds. The county recorder and the Department of Industrial Relations do not sell contractor bonds.

    Source

  4. Insurance and Liens

    4. A contractor has a disciplinary contractor's bond that must stay on file for 2 years. After 1 year, the license becomes inactive for 6 months. Then it becomes active again. Under Business and Professions Code section 7071.8, how do the 6 inactive months affect the bond period?

    • A. They do not count, so the bond period is extended
    • B. They count toward the 2 years like any other time
    • C. They end the bond period, and no bond is needed
    • D. They restart the 2-year bond period from the beginning
    Show answer

    Correct answer: A

    • A. They do not count, so the bond period is extended

      Correct answer

      Correct. The bond period runs only while the license is current, active, and in good standing, so the 6 inactive months do not count and the period is extended.

    • B. They count toward the 2 years like any other time

      Inactive time does not count. The bond period runs only while the license is current, active, and in good standing.

    • C. They end the bond period, and no bond is needed

      Inactive time does not end the bond requirement. The period is extended until the license has been current, active, and in good standing for the required time.

    • D. They restart the 2-year bond period from the beginning

      The law does not restart the period at zero. The year of active time already served still counts, and the contractor needs at least 1 more year of active time.

    Explanation

    Section 7071.8(c) says the disciplinary bond period runs only while the license is current, active, and in good standing. The period is extended until the license has been current, active, and in good standing for the required time. So the 6 inactive months do not count, and the contractor still needs at least 1 more year of active time after reactivation. The law does not restart the period at zero, and inactive time does not end the bond requirement.

    Source

  5. Insurance and Liens

    5. An employee finds out that a contractor did not pay some of the employee's wages. The employee wants to claim on the contractor's surety bond. Under Business and Professions Code section 7071.11, when must the claim be brought?

    • A. Within 30 days after the unpaid wages were due
    • B. Within 6 months after the unpaid wages are discovered
    • C. Within 2 years after the license period expires
    • D. Within 3 years after the employee stopped working
    Show answer

    Correct answer: B

    • A. Within 30 days after the unpaid wages were due

      There is no 30-day deadline. A wage claim must be brought within six months from the date the unpaid wages were discovered.

    • B. Within 6 months after the unpaid wages are discovered

      Correct answer

      Correct. Section 7071.11(d) says a claim to recover wages must be brought within six months from the date the unpaid wages were discovered.

    • C. Within 2 years after the license period expires

      Two years after the license period ends is the rule in section 7071.11(c), which does not cover wage claims. For wages, a civil action can be no later than two years from the date the wages were due.

    • D. Within 3 years after the employee stopped working

      The law does not use a 3-year deadline. A wage claim must be brought within six months from the date the unpaid wages were discovered.

    Explanation

    Section 7071.11(d) says a claim to recover wages or fringe benefits must be brought within six months from the date the unpaid wages were discovered. A civil action on the claim can never be brought later than two years from the date the wages were due. The rule of two years after the license period ends is in section 7071.11(c), and that subdivision does not cover wage claims. The law does not use a 30-day or 3-year deadline for these claims.

    Source

  6. Insurance and Liens

    6. A licensee owed a materials supplier $12,000 under a final court judgment. Later, the debt was discharged (legally wiped out) in the licensee's bankruptcy case. Under Business and Professions Code section 7071.17, must the licensee file a judgment bond for this debt?

    • A. Yes, a bond equal to the full $12,000 judgment
    • B. Yes, but only for half of the judgment amount
    • C. No, because the debt was discharged in bankruptcy
    • D. No, because judgments owed to suppliers are never covered
    Show answer

    Correct answer: C

    • A. Yes, a bond equal to the full $12,000 judgment

      Wrong. Section 7071.17 does not apply when the debt has been discharged in a bankruptcy proceeding, so no bond for the $12,000 is needed.

    • B. Yes, but only for half of the judgment amount

      Wrong. The law has no rule for a bond of half the judgment. Because the debt was discharged in bankruptcy, the bond rules do not apply at all.

    • C. No, because the debt was discharged in bankruptcy

      Correct answer

      Correct. Section 7071.17 says it does not apply when the financial obligation has been discharged in a bankruptcy proceeding, so no judgment bond is needed.

    • D. No, because judgments owed to suppliers are never covered

      Wrong. The section does cover judgments owed to materials suppliers when the debt is not discharged. No bond is needed here only because of the bankruptcy discharge.

    Explanation

    Business and Professions Code section 7071.17 says the judgment bond rules do not apply when the debt has been discharged in a bankruptcy proceeding. So no judgment bond is needed for this debt. The section does cover judgments owed to materials suppliers when the debt is not discharged, so suppliers are not excluded. The law has no rule for a bond of half the judgment.

    Source

  7. Insurance and Liens

    7. An LLC contractor buys the liability insurance that Business and Professions Code section 7071.19 requires. The policy is not a surplus line policy. Under that section, who must report the policy's coverage dates and any cancellation date to the registrar?

    • A. The LLC's qualifier, at each license renewal
    • B. The insurer that issues the policy's certificate
    • C. The LLC's accountant, in its yearly report
    • D. The surety that issued the LLC's contractor bond
    Show answer

    Correct answer: B

    • A. The LLC's qualifier, at each license renewal

      Wrong. Section 7071.19 gives the reporting duty to the insurer that issues the certificate, not to the LLC's qualifier.

    • B. The insurer that issues the policy's certificate

      Correct answer

      Correct. Section 7071.19 says the insurer issuing the Certificate of Liability Insurance reports the policy information, including cancellation date, to the registrar. A surplus line broker reports only for a surplus line policy.

    • C. The LLC's accountant, in its yearly report

      Wrong. The law does not give this duty to an accountant. The insurer that issues the certificate must report to the registrar.

    • D. The surety that issued the LLC's contractor bond

      Wrong. The bond surety does not have this duty. The insurer that issues the liability insurance certificate must report to the registrar.

    Explanation

    Business and Professions Code section 7071.19 says the insurer that issues the Certificate of Liability Insurance must report the policy information to the registrar. That information includes the dates coverage starts and lapses, claim payments, and any cancellation date. Only for a surplus line policy does the surplus line broker report instead. The law does not give this duty to the qualifier, an accountant, or the bond surety.

    Sources

  8. Insurance and Liens

    8. Business and Professions Code section 7071.20 requires a contractor to report certain construction defect judgments, settlements, and arbitration awards to the registrar. The case must involve the load-bearing parts of a multifamily rental building and meet the other listed conditions. What is the lowest amount that makes the case reportable?

    • A. $15,000
    • B. $250,000
    • C. $500,000
    • D. $1,000,000
    Show answer

    Correct answer: D

    • A. $15,000

      $15,000 is a different rule: a co-defendant assigned less than $15,000 of liability does not have to report. It is not the threshold that makes a case reportable.

    • B. $250,000

      Too low. The judgment, settlement payment, or arbitration award must be $1,000,000 or more.

    • C. $500,000

      Too low. The judgment, settlement payment, or arbitration award must be $1,000,000 or more.

    • D. $1,000,000

      Correct answer

      Correct. Section 7071.20 applies when the judgment, settlement payment, or arbitration award is $1,000,000 or more, not counting investigative costs or earlier repairs by the licensee.

    Explanation

    Business and Professions Code section 7071.20 applies when the judgment, settlement payment, or arbitration award is one million dollars ($1,000,000) or more. Investigative costs and earlier repairs by the licensee are not counted toward this amount. The contractor must report within 90 days after it knows of the result. The $15,000 figure is a different rule: a co-defendant assigned less than $15,000 of liability does not have to report.

    Sources

  9. Insurance and Liens

    9. An LLC contractor has four persons listed on its personnel of record. Under Business and Professions Code section 7071.19, what is the lowest total aggregate limit (the most the policy pays in one period) its liability insurance may have?

    • A. $100,000
    • B. $500,000
    • C. $1,000,000
    • D. $5,000,000
    Show answer

    Correct answer: C

    • A. $100,000

      $100,000 is the extra amount added per person for larger LLCs, not the minimum aggregate limit. An LLC with five or fewer persons needs at least $1,000,000.

    • B. $500,000

      $500,000 is too low. An LLC with five or fewer persons on its personnel of record must have an aggregate limit of at least $1,000,000.

    • C. $1,000,000

      Correct answer

      Correct. An LLC with five or fewer persons on its personnel of record must have an aggregate limit of at least $1,000,000, and four persons is five or fewer.

    • D. $5,000,000

      $5,000,000 is the most that can ever be required, not the minimum. With only four persons, the minimum is $1,000,000.

    Explanation

    Business and Professions Code section 7071.19 says an LLC with five or fewer persons on its personnel of record must have an aggregate limit of at least $1,000,000. Four persons is five or fewer, so $1,000,000 is the minimum. The $100,000 figure is the extra amount per person for larger LLCs, and $5,000,000 is the most that can ever be required.

    Source

  10. Insurance and Liens

    10. An LLC contractor's required liability policy is written on an occurrence basis. Under Business and Professions Code section 7071.19, what must the policy cover?

    • A. Occurrences that happen during the designated period
    • B. Claims that are first made during the designated period
    • C. Only claims made within one year after the job ends
    • D. Only damage to the LLC's own tools and equipment
    Show answer

    Correct answer: A

    • A. Occurrences that happen during the designated period

      Correct answer

      Correct. Under section 7071.19, an occurrence policy must cover occurrences (events) during the designated period.

    • B. Claims that are first made during the designated period

      This describes a claims-made policy, which must cover claims first asserted in the designated period. An occurrence policy covers occurrences during the designated period instead.

    • C. Only claims made within one year after the job ends

      The statute ties coverage to the designated period, not to a one-year window after the job ends. For an occurrence policy, what counts is that the occurrence happened during the designated period.

    • D. Only damage to the LLC's own tools and equipment

      The required policy covers the LLC's liability to others, not damage to the LLC's own tools and equipment.

    Explanation

    Business and Professions Code section 7071.19 says a claims-made policy must cover claims first asserted in the designated period, and an occurrence policy must cover occurrences (events) during the designated period. Because this is an occurrence policy, it covers occurrences during the designated period. Covering claims first made in the period describes a claims-made policy instead. The required policy covers liability to others, not damage to the LLC's own tools.

    Source

Keep studying

Read the Section 4 study notes: Insurance and Liens

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