The correct answer is B) the coils are surrounded on the outside by air. In a dry-type direct expansion refrigeration evaporator, the evaporator coils are designed to be surrounded by air on the outside. This allows the air to flow across the coils and absorb heat from the refrigerant inside, causing the refrigerant to evaporate and provide the desired cooling effect. The coils are not surrounded by refrigerant on the outside (choice A), nor are they coated or covered with insulation on the inside or outside (choices C and D), as that would prevent the efficient heat transfer between the air and the refrigerant.