The correct answer is D) 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 pass over the coils, absorbing heat from the air and causing the refrigerant inside the coils to evaporate. The evaporation of the refrigerant is what provides the cooling effect in the refrigeration system. The other answer choices are incorrect because: A) the coils are not covered on the outside with insulation, as that would prevent the air from effectively absorbing heat; B) the coils are not coated on the inside with insulation, as that would prevent the refrigerant from absorbing heat efficiently; and C) the coils are not surrounded on the outside by refrigerant, as the refrigerant is contained within the coils.