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Question 1General Insurance Principles and Concepts

Which principle holds that an insured should be restored to roughly the same financial position after a loss as before it, without profiting from the loss?

  1. Subrogation
  2. Indemnity Correct answer.
  3. Contribution
  4. Utmost good faith

Explanation

Indemnity means the insured is compensated for the actual loss suffered and is placed in approximately the same financial position as before the loss, neither better nor worse. Other doctrines such as subrogation and contribution are mechanisms that help enforce indemnity rather than being the principle itself.

Question 2General Insurance Principles and Concepts

An applicant for property insurance knowingly fails to disclose that the building has a history of repeated flooding. The insurer may be able to avoid the policy because the applicant breached which duty?

  1. Duty of utmost good faith Correct answer.
  2. Duty to mitigate
  3. Duty to contribute
  4. Duty of subrogation

Explanation

Insurance contracts are contracts of utmost good faith, which requires the proposer to disclose material facts the insurer would consider when deciding whether to accept the risk and on what terms. A prior history of flooding is clearly material to a property insurer.

Question 3General Insurance Principles and Concepts

Which of the following best describes insurable interest?

  1. A financial relationship such that the insured benefits from the continued existence of the subject matter and suffers loss from its damage Correct answer.
  2. A legal right to receive a premium refund
  3. A duty of the insured to disclose all prior claims
  4. A contractual promise by the insurer to pay a fixed sum on a fixed date

Explanation

Insurable interest exists where the insured has a financial stake in the subject matter such that its loss or damage causes the insured genuine financial detriment. Without it, the contract would resemble a wager.

Question 4General Insurance Principles and Concepts

A person who owns no interest in a car but takes out theft insurance on it would find the policy unenforceable primarily because of which requirement?

  1. The policy lacks a deductible
  2. The premium was paid annually
  3. The insurer did not issue a certificate
  4. The insured lacks insurable interest Correct answer.

Explanation

A contract of insurance requires the insured to have an insurable interest in the subject matter; otherwise the arrangement is a wager and is not enforceable as insurance. Mere possession of or curiosity about an item does not create that financial relationship.

Question 5General Insurance Principles and Concepts

Which term describes the amount the insured must bear before the insurer begins to pay on a claim?

  1. Premium
  2. Sum insured
  3. Excess Correct answer.
  4. Reserve

Explanation

An excess (or deductible) is the first portion of a loss that the insured absorbs, with the insurer paying the balance subject to policy limits. It reduces small claims and gives the insured a share in each loss.

Question 6General Insurance Principles and Concepts

An insurer agrees to pay 80% of each loss above a stated amount, with the insured bearing the remaining 20%. This arrangement is best described as:

  1. A policy excess
  2. A co-insurance or percentage participation clause Correct answer.
  3. A condition precedent
  4. A warranty

Explanation

A percentage participation or co-insurance clause makes the insured share a proportion of every loss, encouraging loss prevention and aligning the insured's interest with careful risk management. It differs from a fixed excess, which applies only up to a stated amount.

Question 7General Insurance Principles and Concepts

What is the main purpose of the principle of subrogation?

  1. To require the insured to disclose all material facts
  2. To permit the insurer to raise premiums after a claim
  3. To allow the insurer to recover from a third party who caused the loss, after paying the insured Correct answer.
  4. To allow several insurers to share a single loss

Explanation

Subrogation gives the insurer the right, after indemnifying the insured, to pursue recovery from the party responsible for the loss. This prevents the insured from recovering twice and keeps the ultimate cost with the party at fault.

Question 8General Insurance Principles and Concepts

An insured suffers a loss of 10,000 that is covered by two insurers under policies that both contain rateable contribution clauses. Insurer A covers 60% of the value and Insurer B covers 40%. How much will Insurer B pay, ignoring any excess?

  1. 4,000 Correct answer.
  2. 5,000
  3. 10,000
  4. 6,000

Explanation

Under rateable contribution, each insurer pays its proportion of the loss based on the share of the total risk it accepted. Insurer B's share is 40% of 10,000, which equals 4,000.

Question 9General Insurance Principles and Concepts

Which of the following is a characteristic that distinguishes insurance from a wager?

  1. The contract is always written in a standard form
  2. The premium is always paid monthly
  3. Both parties expect to make a profit
  4. The insured must have an insurable interest in the subject matter Correct answer.

Explanation

Insurance requires an insurable interest so that the contract compensates genuine loss rather than creating an opportunity to gain from a chance event. A wager, by contrast, creates a risk where none previously existed for the parties.

Question 10General Insurance Principles and Concepts

In insurance terminology, what does the term 'risk' most commonly refer to?

  1. The premium charged for cover
  2. The claims department of the insurer
  3. The uncertainty of a loss occurring Correct answer.
  4. The legal document evidencing cover

Explanation

In insurance, risk generally means the uncertainty surrounding the occurrence and extent of a loss. It can also refer to the subject matter insured, but the core meaning is uncertainty of loss.

Question 11General Insurance Principles and Concepts

Which type of risk can be insured because it involves many similar independent exposures and the chance of loss is measurable?

  1. Market risk
  2. Systemic risk
  3. Pure risk Correct answer.
  4. Speculative risk

Explanation

Pure risk involves only the possibility of loss or no loss, and it is generally insurable when exposures are numerous, similar, and independent so that losses can be predicted in aggregate. Speculative risk involves the possibility of gain as well as loss and is typically not insurable.

Question 12General Insurance Principles and Concepts

Which of the following describes a peril, as distinct from a hazard?

  1. The cause of a loss, such as fire or theft Correct answer.
  2. The amount the insurer will pay
  3. A condition that increases the chance of loss
  4. The process of assessing a proposal

Explanation

A peril is the event that causes loss, such as fire, flood, or theft. A hazard is a condition that increases the likelihood or severity of that loss.

Question 13General Insurance Principles and Concepts

Leaving oily rags piled in a workshop increases the likelihood of fire. In insurance terms, the oily rags represent:

  1. A moral hazard
  2. A peril
  3. A physical hazard Correct answer.
  4. A proximate cause

Explanation

A physical hazard is a tangible condition that increases the chance or severity of loss, such as poor housekeeping or flammable materials. The peril would be the fire itself.

Question 14General Insurance Principles and Concepts

An insured deliberately exaggerates the value of goods stolen in order to obtain a larger settlement. This behaviour is an example of:

  1. Morale hazard
  2. Legal hazard
  3. Moral hazard Correct answer.
  4. Physical hazard

Explanation

Moral hazard arises where the insured's dishonesty or questionable conduct increases the likelihood or size of a claim, such as exaggerating a loss. It reflects a deliberate intent to gain improperly.

Question 15General Insurance Principles and Concepts

Which term describes the process by which an insurer evaluates a proposal and decides whether to accept the risk and on what terms?

  1. Subrogation
  2. Underwriting Correct answer.
  3. Claims adjustment
  4. Reinsurance

Explanation

Underwriting is the insurer's assessment of the risk presented in a proposal, leading to a decision to accept, decline, or accept with conditions or a higher premium. It protects the insurer's portfolio by ensuring risks are priced and selected appropriately.

Question 16General Insurance Principles and Concepts

An insurer declines a proposal because the applicant has been convicted of several counts of insurance fraud. Which underwriting factor is most directly at play?

  1. Physical hazard
  2. Moral hazard Correct answer.
  3. Occupational risk
  4. Geographical risk

Explanation

A history of insurance fraud suggests a heightened moral hazard, meaning the insured may be more likely to act dishonestly in relation to a claim. Underwriters weigh such indicators when deciding whether to accept the risk.

Question 17General Insurance Principles and Concepts

What is the primary function of a reinsurance arrangement?

  1. To enable a broker to place business with several insurers
  2. To provide cover directly to members of the public
  3. To allow an insurer to transfer part of the risk it has accepted to another insurer Correct answer.
  4. To guarantee that an insurer will never become insolvent

Explanation

Reinsurance is insurance for insurers: the ceding insurer transfers part of the risk it has accepted to a reinsurer in exchange for a share of the premium. This protects the insurer's capital and capacity.

Question 18General Insurance Principles and Concepts

Under a proportional reinsurance treaty, the reinsurer agrees to accept 30% of every risk within the treaty scope. If the insurer accepts a risk with a sum insured of 500,000, what amount is ceded to the reinsurer?

  1. 350,000
  2. 30,000
  3. 150,000 Correct answer.
  4. 500,000

Explanation

In proportional reinsurance, the reinsurer takes a fixed percentage of each risk and receives the same percentage of the premium. Thirty percent of 500,000 is 150,000.

Question 19General Insurance Principles and Concepts

Which of the following is the best definition of a premium?

  1. The amount of a loss borne by the insured
  2. The maximum amount payable under a policy
  3. The value of the insured property at the time of loss
  4. The consideration paid by the insured to the insurer for accepting the risk Correct answer.

Explanation

The premium is the consideration the insured pays in exchange for the insurer's promise to indemnify covered losses. It reflects the assessed risk and the expenses of providing cover.

Question 20General Insurance Principles and Concepts

A property policy is written for a sum insured of 80,000, but the property is actually worth 100,000 at the time of loss. An average clause applies and the loss is 20,000. How much will the insurer pay?

  1. 80,000
  2. 20,000
  3. 16,000 Correct answer.
  4. 25,000

Explanation

Under the average clause, the insurer pays the same proportion of the loss as the sum insured bears to the value at risk. Here 80,000 divided by 100,000 is 80%, and 80% of the 20,000 loss is 16,000.

Question 21General Insurance Principles and Concepts

What is the purpose of an average (or underinsurance) clause in a property policy?

  1. To allow the insurer to cancel the policy without notice
  2. To penalise the insured for failing to insure the property for its full value Correct answer.
  3. To increase the premium after every claim
  4. To guarantee that the insurer will pay the full sum insured regardless of value

Explanation

An average clause reduces a claim in proportion to the underinsurance, so an insured who insures for less than the full value bears a share of every loss. This discourages deliberate underinsurance and preserves fairness among policyholders.

Question 22General Insurance Principles and Concepts

Which principle states that after a loss the insured should not be able to recover more than the actual financial loss suffered?

  1. Subrogation
  2. Contribution
  3. Proximate cause
  4. Indemnity Correct answer.

Explanation

Indemnity ensures the insured is compensated for the actual loss and cannot profit from it. Subrogation and contribution are tools that help uphold indemnity where third parties or multiple insurers are involved.

Question 23General Insurance Principles and Concepts

A fire starts in a building and, as a direct and natural consequence, an explosion occurs that destroys the property. The fire is treated as which of the following in relation to the explosion damage?

  1. An intervening cause
  2. A remote cause
  3. A proximate cause Correct answer.
  4. A concurrent cause

Explanation

Proximate cause is the dominant, effective cause that sets in motion an unbroken chain of events leading to loss. Where the explosion is a natural consequence of the fire, the fire is the proximate cause of the resulting damage.

Question 24General Insurance Principles and Concepts

Which of the following best describes a warranty in an insurance contract?

  1. A promise by the insurer to renew the policy indefinitely
  2. A written quotation of premium provided before cover begins
  3. A promise by the insured that a particular state of affairs exists or will be maintained Correct answer.
  4. A statement of opinion by the insured that need not be true

Explanation

A warranty is a promise by the insured that something is or will be done, or that a state of affairs exists. Breach of a warranty can entitle the insurer to treat liability as discharged, depending on the applicable law and policy terms.

Question 25General Insurance Principles and Concepts

A proposal form asks whether the applicant has any criminal convictions. The applicant answers 'no' honestly, but a conviction is later discovered because the applicant misunderstood the question. This answer is best treated as:

  1. A condition precedent
  2. A fraudulent concealment
  3. A warranty
  4. A misrepresentation Correct answer.

Explanation

An inaccurate statement made honestly and without intent to deceive is a misrepresentation, not fraud. The insurer's remedy depends on whether the statement was material and induced the contract, and on the applicable law.

Question 26General Insurance Principles and Concepts

Which party to an insurance contract is legally obliged to disclose all material facts to the insurer before cover begins?

  1. The insurance broker's bank
  2. The insurer's reinsurer
  3. The applicant for insurance Correct answer.
  4. The loss adjuster

Explanation

The duty of utmost good faith requires the applicant to volunteer every fact that a prudent insurer would regard as material to the decision to accept and rate the risk. The duty rests on the person seeking cover, not on third parties such as reinsurers or adjusters.

Question 27General Insurance Principles and Concepts

An insured holds a policy covering stock in a warehouse. Which of the following best describes the insured's insurable interest in that stock?

  1. A contractual promise by the insurer to pay claims promptly
  2. A legal or financial relationship such that the insured benefits from its safety and suffers from its loss Correct answer.
  3. A moral duty to protect the property of others
  4. A statutory licence to trade in the goods

Explanation

Insurable interest exists where the insured stands in a relationship to the subject matter such that its preservation benefits the insured and its loss causes financial detriment. Mere moral concern or a licence to trade does not create that financial stake.

Question 28General Insurance Principles and Concepts

Which of the following best describes the role of a policy excess?

  1. It is the maximum amount the insurer will ever pay under the policy
  2. It is a charge levied by the broker for arranging cover
  3. It is a discount applied to the premium at renewal
  4. It is the first portion of each loss that the insured agrees to bear Correct answer.

Explanation

An excess is the amount of each claim the insured must absorb before the insurer's liability begins. It reduces small claims handling and is reflected in the premium, but it is neither a discount nor a cap on total cover.

Question 29General Insurance Principles and Concepts

An insured pays a premium of 1,200 for a policy that runs from 1 April to 31 March. The insured cancels the policy on 30 September and the insurer refunds premium on a pro rata basis. Which amount is closest to the refund?

  1. 1,200
  2. 300
  3. 600 Correct answer.
  4. 900

Explanation

A pro rata refund returns the unused portion of the premium in proportion to the unexpired period. Six of the twelve months remain, so half of the 1,200 premium is returned.

Question 30General Insurance Principles and Concepts

A policy covers 'loss or damage caused by fire'. A fire destroys the building and the fire service then causes water damage while extinguishing it. Which principle determines whether the water damage is covered?

  1. Contribution, because more than one policy may respond
  2. Proximate cause, because the water damage is a direct consequence of the fire Correct answer.
  3. Subrogation, because the insurer may recover from the fire service
  4. Average, because the sum insured may be inadequate

Explanation

Where a loss results from a chain of events, the law looks to the dominant or proximate cause rather than the last event. Damage caused by reasonable steps to extinguish a fire is generally treated as part of the fire loss.

Question 31General Insurance Principles and Concepts

Which of the following statements about indemnity is correct?

  1. It guarantees that the insured receives new-for-old replacement in every case
  2. It applies only to life assurance contracts
  3. It entitles the insured to recover a sum unrelated to the loss suffered
  4. It aims to restore the insured financially to the position held immediately before the loss Correct answer.

Explanation

Indemnity places the insured, so far as money can, in the same financial position as before the loss, allowing for depreciation and excess. New-for-old replacement is a contractual extension, not a feature of indemnity itself.

Question 32General Insurance Principles and Concepts

An insured's building is damaged by an earthquake, and the policy excludes earthquake but covers fire. A fire following the earthquake destroys the remaining structure. How is the fire damage generally treated?

  1. It may be recoverable if fire is the proximate cause of that damage, subject to any specific exclusion wording Correct answer.
  2. It is recoverable only up to the value of the earthquake damage
  3. It is automatically excluded because an excluded peril occurred first
  4. It is recoverable only if the insured can prove negligence by a third party

Explanation

Each loss is assessed by reference to its proximate cause, so a covered peril that is the dominant cause of particular damage can bring that damage within cover. The precise outcome depends on the policy wording, including any exclusion extending to consequences of excluded perils.

Question 33General Insurance Principles and Concepts

Which of the following best describes the principle of contribution between insurers?

  1. The insured must claim against each insurer in the order the policies were issued
  2. The insurer with the lowest premium pays the whole claim
  3. Insurers covering the same interest against the same peril share the loss so the insured does not recover twice Correct answer.
  4. Each insurer pays its full policy limit regardless of other cover in force

Explanation

Contribution prevents double recovery by requiring insurers that cover the same interest against the same peril to share the indemnity, commonly in proportion to the rates they would have charged. The insured cannot profit, and no single insurer bears more than its proper share.

Question 34General Insurance Principles and Concepts

An insured fails to disclose that the premises have been unoccupied for six months, a fact that would have led the insurer to impose a condition. The insurer later discovers this after a theft loss. What is the insurer's usual position?

  1. It may only cancel cover from the next renewal date
  2. It must pay the claim because the theft was not caused by the non-disclosure
  3. It may avoid the policy and decline the claim because a material fact was not disclosed Correct answer.
  4. It must pay the claim but may increase the next premium

Explanation

Non-disclosure of a material fact entitles the insurer to avoid the contract from inception, which means it may treat the policy as never having existed and decline the claim. The remedy does not depend on whether the undisclosed fact caused the particular loss.

Question 35General Insurance Principles and Concepts

Which of the following best explains why insurance transfers risk rather than eliminating it?

  1. The premium removes the possibility of future loss
  2. The insured's legal liability for negligence is extinguished
  3. The chance of loss remains, but its financial consequences are pooled across many policyholders Correct answer.
  4. The insurer prevents the insured peril from occurring

Explanation

Insurance does not stop perils from happening; it spreads the financial cost of losses across a large pool of similar exposures in exchange for premiums. The individual insured still faces the event, but the financial impact is transferred.

Question 36General Insurance Principles and Concepts

A commercial client asks for a policy that will respond to claims made against the business by members of the public for injury or property damage. Which class of insurance is most appropriate?

  1. Term life assurance
  2. Business interruption insurance
  3. Marine hull insurance
  4. Public liability insurance Correct answer.

Explanation

Public liability insurance covers the insured's legal liability for bodily injury or property damage suffered by third parties in connection with the business. Marine hull and life assurance address entirely different exposures, and business interruption covers lost income after a covered event.

Question 37General Insurance Principles and Concepts

Which of the following best describes the difference between a condition precedent and a condition subsequent in an insurance policy?

  1. A condition precedent must be met before liability attaches, while a condition subsequent may entitle the insurer to terminate or refuse payment after a breach Correct answer.
  2. A condition precedent applies only to marine policies, while a condition subsequent applies only to life policies
  3. A condition precedent concerns premium payment only, while a condition subsequent concerns claims only
  4. A condition precedent is always written in bold type, while a condition subsequent is implied by law

Explanation

Conditions precedent are requirements the insured must satisfy before the insurer's promise becomes operative, such as disclosure or maintaining protective measures. Conditions subsequent operate after cover has attached and may allow the insurer to deny liability or end the contract if breached.

Question 38General Insurance Principles and Concepts

An insured holds a household policy with a sum insured of 150,000. At the time of a total loss the contents are worth 200,000, and the policy is subject to average. Ignoring any excess, what proportion of the loss will the insurer pay?

  1. 100%
  2. 75% Correct answer.
  3. 133%
  4. 50%

Explanation

Under average the insurer pays the same proportion of the loss as the sum insured bears to the value at risk. Here 150,000 divided by 200,000 is 75%, so the insured bears the shortfall.

Question 39General Insurance Principles and Concepts

Which of the following best describes the effect of a 'claims made' liability policy compared with an 'occurrence' policy?

  1. A claims made policy covers only claims brought by the insured against third parties
  2. A claims made policy responds only to incidents that occur during the policy period
  3. A claims made policy responds to claims first notified during the policy period, regardless of when the incident occurred Correct answer.
  4. A claims made policy never covers incidents that occurred before inception

Explanation

Under a claims made policy the trigger is the making or notification of the claim during the period of cover, subject to any retroactive date. An occurrence policy instead responds according to when the incident happened.

Question 40General Insurance Principles and Concepts

Which of the following best describes the function of a deductible in a commercial property policy?

  1. It transfers the insured's liability to third parties to the insurer
  2. It guarantees that small claims will be paid in full
  3. It increases the sum insured automatically at renewal
  4. It reduces the premium in exchange for the insured retaining a defined amount of each loss Correct answer.

Explanation

A deductible, like an excess, leaves the insured to bear a fixed amount of each loss, which lowers the insurer's administrative burden and the premium charged. It does not alter the sum insured or create third-party liability cover.

Question 41Insurance Contract Law and Policy Provisions

Which principle requires an insured to disclose all material facts relevant to the risk being underwritten?

  1. Indemnity
  2. Utmost good faith Correct answer.
  3. Insurable interest
  4. Subrogation

Explanation

Utmost good faith obliges the insured to disclose material facts the insurer needs to assess and rate the risk. The other principles address recovery, recovery rights, and legal relationship to the loss.

Question 42Insurance Contract Law and Policy Provisions

The principle of indemnity means that after a loss the insured should be:

  1. Restored to approximately the same financial position as before the loss Correct answer.
  2. Paid a fixed sum stated in the policy regardless of loss
  3. Compensated for emotional distress only
  4. Entitled to profit from the loss

Explanation

Indemnity aims to place the insured back in the financial position held before the loss, no better and no worse. It prevents profit from insurance.

Question 43Insurance Contract Law and Policy Provisions

A person takes out a life insurance policy on a stranger with whom they have no legal or financial relationship. The policy is most likely:

  1. Valid because premiums were paid
  2. Voidable at the insurer's discretion
  3. Void for lack of insurable interest Correct answer.
  4. Valid but only for accidental death

Explanation

Insurable interest must exist at inception for a valid life policy. Without a legal or financial relationship to the life insured, the contract lacks insurable interest and is void.

Question 44Insurance Contract Law and Policy Provisions

Subrogation allows an insurer, after paying a claim, to:

  1. Deny the claim after payment
  2. Cancel the policy without notice
  3. Pursue the party responsible for the loss to recover the amount paid Correct answer.
  4. Increase the premium retroactively

Explanation

Subrogation transfers the insured's right of recovery against a third party to the insurer up to the amount paid. It supports indemnity by preventing double recovery.

Question 45Insurance Contract Law and Policy Provisions

In insurance contract law, a representation is:

  1. A promise that the insured will do or not do something
  2. A written endorsement attached to the policy
  3. A term that is essential to the contract
  4. A statement made by the proposer during negotiations that induces the insurer to enter the contract Correct answer.

Explanation

Representations are statements of fact made during negotiations that induce the insurer to contract. They are distinguished from warranties and conditions.

Question 46Insurance Contract Law and Policy Provisions

A warranty in an insurance policy is best described as:

  1. A marketing description of coverage
  2. A claim form requirement
  3. A statement of opinion about the risk
  4. A promise by the insured that a particular state of affairs exists or will be maintained Correct answer.

Explanation

A warranty is a promise that something is or will be as stated, and breach traditionally allows the insurer to avoid liability. It differs from a mere representation.

Question 47Insurance Contract Law and Policy Provisions

A deductible in an insurance policy is:

  1. A penalty for late payment
  2. The premium paid at inception
  3. The maximum the insurer will ever pay
  4. The amount of each loss the insured bears before the insurer pays Correct answer.

Explanation

A deductible is the first portion of a loss retained by the insured. It reduces premium and discourages small claims.

Question 48Insurance Contract Law and Policy Provisions

The sum insured in a property policy represents:

  1. The deductible amount
  2. The total premiums collected
  3. The value of the insured's business
  4. The maximum amount the insurer will pay for a loss Correct answer.

Explanation

The sum insured caps the insurer's liability for a covered loss, subject to policy terms such as average. It is not a measure of premium or business value.

Question 49Insurance Contract Law and Policy Provisions

An insured fails to disclose a prior declined application when completing a proposal form. The insurer may most likely:

  1. Ignore the omission
  2. Automatically increase the premium only
  3. Avoid the policy for non-disclosure of a material fact Correct answer.
  4. Reduce the sum insured by half

Explanation

A prior declined application is material to underwriting, and its non-disclosure can entitle the insurer to avoid the contract. Remedies depend on statute and the nature of the misrepresentation.

Question 50Insurance Contract Law and Policy Provisions

Which of the following best illustrates a material fact that must be disclosed to a property insurer?

  1. The insured prefers a particular claim adjuster
  2. The insured's office is painted blue
  3. The building has been unoccupied for six months Correct answer.
  4. The insured buys coffee from a nearby shop

Explanation

Extended unoccupancy increases the risk of loss and is material to underwriting. Trivial or unrelated facts need not be disclosed.