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C12: Insurance on Property study materials
C12: Insurance on Property study resources

C12: Insurance on Property practice questions

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Question 1Introduction to Property Insurance and the Insurance Contract

Which principle holds that an insured should be restored to roughly the same financial position after a loss as before it, no better and no worse?

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

Explanation

Indemnity is the core principle of property insurance: the payout is meant to place the insured back in the same financial position as before the loss, without allowing profit from the loss. Sums insured, deductibles and valuation rules all exist to enforce this principle.

Question 2Introduction to Property Insurance and the Insurance Contract

An applicant for property insurance fails to disclose that the building is used for storing fireworks. This omission most directly breaches which duty?

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

Explanation

Proposals for insurance require disclosure of every circumstance a prudent insurer would consider material, and a fireworks store is clearly material to fire risk. Failing to disclose it breaches the duty of utmost good faith, giving the insurer potential remedies such as avoidance of the contract.

Question 3Introduction to Property Insurance and the Insurance Contract

In property insurance, what does the insurable interest requirement mean?

  1. The insured must stand to suffer a financial loss if the property is damaged Correct answer.
  2. The property must be inspected and valued before cover begins
  3. The insured must own the property outright with no mortgage
  4. The insurer must have a physical presence in the property's location

Explanation

Insurable interest exists where damage to the property would cause the insured genuine financial detriment. Ownership is the most obvious form, but tenants, mortgagees and bailees can also hold an insurable interest tied to their exposure.

Question 4Introduction to Property Insurance and the Insurance Contract

Which document contains the full terms, conditions, exclusions and definitions that govern a property policy?

  1. The policy wording Correct answer.
  2. The cover note
  3. The proposal form
  4. The certificate of insurance

Explanation

The policy wording is the contractual document setting out the insuring agreement, exclusions, conditions and definitions that together form the terms of cover. Other documents may evidence or initiate cover but do not contain the full terms.

Question 5Introduction to Property Insurance and the Insurance Contract

A property policy states that cover applies 'subject to the conditions printed in the schedule'. What is the schedule?

  1. The section that records the specific details of the risk, such as the address, sums insured and deductible Correct answer.
  2. The section that reproduces the standard exclusions in full
  3. The section listing the insurer's registered office and regulatory authorisations
  4. The section containing the claims notification procedure only

Explanation

The schedule personalises the standard wording by recording the particulars of the individual risk, including the insured's name, the situation, the sums insured, the deductible and the period of cover. It is read together with the wording and can override it where the two conflict.

Question 6Introduction to Property Insurance and the Insurance Contract

An insured deliberately sets fire to their own insured building to claim the money. Which principle most directly bars recovery?

  1. Salvage
  2. Indemnity Correct answer.
  3. Contribution
  4. Average

Explanation

Indemnity allows recovery only for accidental loss and never for loss the insured intentionally causes, since paying would enrich rather than restore them. Deliberate damage by the insured therefore falls outside the indemnity the policy provides.

Question 7Introduction to Property Insurance and the Insurance Contract

After paying a fire claim, an insurer pursues the contractor whose negligence started the blaze. Which principle is the insurer relying on?

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

Explanation

Subrogation transfers to the insurer, once it has indemnified the insured, the insured's legal rights of recovery against the party responsible for the loss. This prevents the insured from recovering twice and keeps the cost with the party at fault.

Question 8Introduction to Property Insurance and the Insurance Contract

A building worth 400,000 is insured for 300,000 under a policy with a 75% average condition, and a partial loss of 100,000 occurs. What is the claim payment before any deductible?

  1. 75,000 Correct answer.
  2. 66,667
  3. 300,000
  4. 100,000

Explanation

Under average the claim is reduced in the proportion that the sum insured bears to the required amount, here 75% of 400,000, which is 300,000. Since the sum insured equals that required amount, no reduction applies and the loss of 100,000 is paid in full at 100,000. The option of 75,000 reflects a misapplication of the 75% factor to the loss itself.

Question 9Introduction to Property Insurance and the Insurance Contract

Which statement best describes the difference between a warranty and a representation in a property policy?

  1. A warranty is enforceable only after a loss, while a representation is enforceable only at renewal
  2. A warranty is always written, while a representation must always be oral
  3. A warranty is a term the insured promises to comply with, while a representation is a statement of fact made before the contract Correct answer.
  4. A warranty is made before the contract, while a representation is part of the policy wording

Explanation

A warranty is a promise forming part of the contract, such as maintaining a sprinkler system, and breach may entitle the insurer to deny liability. A representation is a factual statement made during negotiations which, if untrue, may give the insurer remedies for misrepresentation.

Question 10Introduction to Property Insurance and the Insurance Contract

An insured holds a property policy with Insurer A for 200,000 and another with Insurer B for 200,000 on the same building, which suffers a 120,000 loss. What does the principle of contribution allow?

  1. The insured may recover the loss once, with the insurers sharing it in agreed proportions Correct answer.
  2. Only the first policy to be issued responds, and the second is void
  3. The insured may recover 120,000 from each insurer, giving a total of 240,000
  4. Each insurer must pay 200,000 regardless of the actual loss

Explanation

Contribution lets an insurer that has paid a claim call on other insurers covering the same interest to share the cost, so the insured recovers the loss once but not twice. The insurers typically contribute in proportion to their independent liability or rateable shares.

Question 11Introduction to Property Insurance and the Insurance Contract

A tenant rents a warehouse and insures the stock it stores there. What is the basis of the tenant's insurable interest?

  1. Ownership of the freehold of the warehouse
  2. The landlord's mortgage over the building
  3. Possession and financial exposure to the goods stored Correct answer.
  4. A statutory duty to insure all commercial premises

Explanation

Insurable interest arises wherever damage would cause the insured financial loss, and a tenant in possession of stock is exposed to loss if that stock is destroyed. Ownership of the building is not required for the tenant to insure goods it holds.

Question 12Introduction to Property Insurance and the Insurance Contract

What is the main purpose of a deductible in a property policy?

  1. To transfer liability for the whole loss to a third party
  2. To leave a small first portion of each loss with the insured and discourage small claims Correct answer.
  3. To increase the sum insured automatically each year
  4. To replace the need for an average condition

Explanation

A deductible is the amount the insured bears on each claim before the insurer pays, which removes small administrative claims and keeps the insured sharing in the risk. It also reduces premium compared with a nil deductible.

Question 13Introduction to Property Insurance and the Insurance Contract

An insured property policy contains a 'reasonable precautions' condition. What does this require of the insured?

  1. Installing every safety device recommended by the insurer
  2. Maintaining cover at full reinstatement value at all times
  3. Taking the steps a prudent person would take to prevent loss or damage Correct answer.
  4. Reporting every minor incident to the insurer within 24 hours

Explanation

A reasonable precautions condition requires the insured to act as a prudent uninsured owner would to avoid loss, but it does not demand perfection or every conceivable safeguard. It is judged objectively against ordinary standards of care.

Question 14Introduction to Property Insurance and the Insurance Contract

A policy is arranged on a 'reinstatement as new' basis rather than indemnity value. What does this mean for a partial loss?

  1. The insurer may choose to pay only the market value of the whole building
  2. The damaged part is repaired or replaced to a condition equivalent to new, subject to the sum insured Correct answer.
  3. The insured receives the second-hand value of the damaged property in cash
  4. The insured must accept a reduction for wear and tear and age

Explanation

Reinstatement cover pays the cost of restoring the damaged property to a condition equivalent to new, usually by repair or replacement rather than a cash payment of depreciated value. It is subject to the sum insured and often to conditions about actually carrying out the work.

Question 15Introduction to Property Insurance and the Insurance Contract

Which of these is an example of a 'peril' insured under a named-perils property policy?

  1. Wear and tear
  2. Depreciation
  3. Fire Correct answer.
  4. Negligence

Explanation

A peril is the cause of loss, such as fire, lightning, explosion or storm, and named-perils policies list the perils covered. Negligence, depreciation and wear and tear are not fortuitous perils and are normally excluded or treated as uninsured deterioration.

Question 16Introduction to Property Insurance and the Insurance Contract

An insurer discovers after a fire that the insured overstated the building's value in the proposal by a large margin, apparently to obtain a larger payout, though the sum insured was not increased. How does indemnity interact with the overstated proposal?

  1. The policy becomes a valued policy and pays the stated figure regardless of loss
  2. The claim is automatically doubled because the proposal was inaccurate
  3. The insured may recover the overstated value because the insurer accepted the proposal
  4. Recovery is still limited to the actual loss suffered, and the misrepresentation may give the insurer remedies independently Correct answer.

Explanation

Indemnity caps recovery at the actual financial loss, so an overstated value cannot by itself increase the payout. Separately, a material misrepresentation may entitle the insurer to remedies such as avoidance or a proportionate reduction depending on the applicable law.

Question 17Property Insurance Policy Structure and Statutory Conditions

Under a standard property policy, what is the primary purpose of the insuring agreement section?

  1. It sets out the procedure for resolving disputes
  2. It states the broad promise to indemnify the insured for covered loss Correct answer.
  3. It defines the exclusions that limit coverage
  4. It lists the duties owed by the insured after a loss occurs

Explanation

The insuring agreement is the core grant of coverage; it identifies the perils insured against and the broad promise to pay for covered loss. The other sections modify or condition that promise rather than create it.

Question 18Property Insurance Policy Structure and Statutory Conditions

In a named-perils property policy, which statement best describes the scope of coverage?

  1. Coverage applies only to fire and lightning
  2. Coverage depends solely on the insured's negligence
  3. Every cause of loss is covered unless expressly excluded
  4. Only the perils specifically listed in the policy are covered Correct answer.

Explanation

A named-perils form covers only the causes of loss enumerated in the policy; the burden of fitting a loss within a listed peril rests with the insured. All-risk forms reverse this logic by covering everything not excluded.

Question 19Property Insurance Policy Structure and Statutory Conditions

Which policy section typically defines terms such as 'insured', 'occurrence' and 'actual cash value'?

  1. The definitions section Correct answer.
  2. The endorsements
  3. The declarations page
  4. The conditions section

Explanation

The definitions section assigns specific meanings to key terms used throughout the policy so that the wording is applied consistently. Declarations supply facts about the risk, while conditions set out duties and endorsements amend the form.

Question 20Property Insurance Policy Structure and Statutory Conditions

What information is normally found on the declarations page of a property policy?

  1. The complete text of the exclusions
  2. The insured's name, the property location, the limit of insurance and the policy period Correct answer.
  3. The insurer's claims handling manual
  4. The statutory conditions governing proof of loss

Explanation

Declarations are the summary page that identifies the parties, the insured property and its location, the coverage limits, the deductible and the policy term. They individualize the standard form for a particular risk.

Question 21Property Insurance Policy Structure and Statutory Conditions

Which of the following is a statutory condition commonly found in property insurance legislation?

  1. The insured must give prompt notice of loss to the insurer Correct answer.
  2. The insured must install a sprinkler system
  3. The insurer must pay all claims within 24 hours
  4. The insurer may cancel at any time without notice

Explanation

Statutory conditions are mandatory policy terms imposed by statute, and prompt notice of loss is a typical example. They also commonly address proof of loss, appraisal and the limitation period for bringing action.

Question 22Property Insurance Policy Structure and Statutory Conditions

What is the function of a deductible in a property policy?

  1. It replaces the need for a coinsurance clause
  2. It increases the policy limit after a loss
  3. It reduces the amount the insured recovers by a stated amount or percentage of each loss Correct answer.
  4. It transfers the entire loss to the insured

Explanation

A deductible is the portion of each covered loss the insured absorbs before the insurer pays, and it may be a flat sum or a percentage of the limit or value. It reduces small claims and aligns part of the risk with the insured.

Question 23Property Insurance Policy Structure and Statutory Conditions

An endorsement attached to a property policy generally has what effect?

  1. It automatically voids the policy
  2. It amends, adds to or restricts the coverage of the base policy Correct answer.
  3. It applies only after the policy expires
  4. It replaces all statutory conditions

Explanation

Endorsements are riders that modify the standard form to fit a particular risk, and their wording prevails over conflicting base policy text. They can broaden, narrow or clarify coverage.

Question 24Property Insurance Policy Structure and Statutory Conditions

A property policy contains a coinsurance clause requiring insurance to at least 80% of value. The building is worth $500,000 and the insured carries $300,000. A covered loss of $100,000 occurs. Ignoring any deductible, what does the insurer pay?

  1. $100,000
  2. $60,000
  3. $80,000
  4. $75,000 Correct answer.

Explanation

The coinsurance formula pays the greater of the limit or the ratio of carried insurance to required insurance, multiplied by the loss. Required insurance is $400,000, the ratio is 300,000/400,000 = 0.75, and 0.75 x $100,000 = $75,000, which is below the $300,000 limit.

Question 25Property Insurance Policy Structure and Statutory Conditions

A policy covers the peril of 'windstorm' but excludes 'water damage'. A storm-driven rain enters through a window broken by wind and damages interior contents. How is the loss most likely treated?

  1. Excluded, because contents are never covered
  2. Covered only if the insured proves negligence by a third party
  3. Excluded, because the damage was caused by water
  4. Covered, because the efficient proximate cause was the windstorm Correct answer.

Explanation

Where a covered peril sets in motion an unbroken chain of events leading to loss, the efficient proximate cause is the covered peril and the loss is payable. The water exclusion generally targets water damage from other sources rather than rain admitted through storm-opened openings.

Question 26Property Insurance Policy Structure and Statutory Conditions

The insured discovers a loss and delays reporting it for several months, prejudicing the insurer's ability to investigate. Under statutory conditions, what is the insurer's likely position?

  1. It may deny the claim because the insured breached the notice condition Correct answer.
  2. It must pay because notice is only a courtesy
  3. It must pay because the policy has no time limits
  4. It may deny only if the loss exceeds the deductible

Explanation

Statutory conditions require the insured to give prompt notice of loss, and failure to do so can entitle the insurer to deny the claim where it has been prejudiced. Relief from forfeiture may be available in some jurisdictions, but breach of the condition is a valid defence.

Question 27Property Insurance Policy Structure and Statutory Conditions

What is the purpose of the appraisal (or appraisal/dispute) provision in a property policy?

  1. To decide which perils are excluded
  2. To determine whether the policy was validly issued
  3. To resolve disagreements about the amount of loss without litigation Correct answer.
  4. To set the premium for the next renewal

Explanation

Appraisal is a mechanism for resolving disputes over the value of the loss or the cost of repair, using independent appraisers and possibly an umpire. It addresses quantum, not coverage questions or contract validity.

Question 28Property Insurance Policy Structure and Statutory Conditions

An insured intentionally sets fire to the insured building to collect insurance. What is the effect on the claim?

  1. The claim is paid because fire is a named peril
  2. The claim is denied because intentional acts by the insured are excluded Correct answer.
  3. The claim is paid only for the contents
  4. The claim is paid but the deductible is doubled

Explanation

Property policies exclude loss caused intentionally by or at the direction of the insured, and proof of arson by the insured defeats the claim. The named-peril grant of coverage does not override an applicable exclusion.

Question 29Property Insurance Policy Structure and Statutory Conditions

Which of the following losses would most likely fall within a typical 'vacancy' exclusion in a commercial property policy?

  1. Fire damage to a building left vacant beyond the stated period without the insurer's consent Correct answer.
  2. Wind damage to an occupied warehouse
  3. Water damage from a burst pipe in an occupied unit
  4. Theft from an occupied retail store

Explanation

Vacancy provisions restrict or exclude coverage where a building has been vacant beyond a specified number of days, because vacant premises present increased and unmonitored risk. Occupied premises do not trigger the exclusion.

Question 30Property Insurance Policy Structure and Statutory Conditions

What does the 'duties after loss' section of a property policy typically require the insured to do?

  1. Increase the policy limit to the replacement cost
  2. Renew the policy before the loss is adjusted
  3. Protect the property from further damage and cooperate in the investigation Correct answer.
  4. Pay the insurer's legal costs

Explanation

Post-loss duties commonly include mitigating further damage, notifying the insurer, providing a proof of loss and cooperating with the investigation. These duties are conditions precedent to recovery.

Question 31Property Insurance Policy Structure and Statutory Conditions

A policy states that the insurer will not be liable for more than the 'limit of insurance' shown on the declarations, regardless of the value of the property. What principle does this reflect?

  1. The policy automatically increases with inflation
  2. The insurer shares the limit with other insurers
  3. The insured is guaranteed full replacement of the property
  4. The limit is the maximum the insurer will pay for a covered loss Correct answer.

Explanation

The limit of insurance caps the insurer's liability for a covered loss, even where the property's value is higher. Insuring to full value avoids coinsurance penalties but does not raise the stated limit.

Question 32Property Insurance Policy Structure and Statutory Conditions

Which statutory condition typically governs the time within which an insured must bring a legal action against the insurer?

  1. The abandonment condition
  2. The subrogation condition
  3. The limitation period condition Correct answer.
  4. The salvage condition

Explanation

Statutory conditions usually include a limitation period, often one year from the date of loss, within which an action must be commenced. Subrogation, salvage and abandonment address other rights and duties.

Question 33Property Insurance Policy Structure and Statutory Conditions

After paying a claim for fire damage caused by a negligent contractor, the insurer seeks reimbursement from the contractor. Which policy provision enables this?

  1. The coinsurance clause
  2. The appraisal provision
  3. The subrogation condition Correct answer.
  4. The deductible clause

Explanation

Subrogation transfers to the insurer, to the extent of its payment, the insured's right to recover from the party responsible for the loss. It supports the principle of indemnity by preventing double recovery.

Question 34Property Insurance Policy Structure and Statutory Conditions

What is the effect of a 'mortgage clause' (or loss payable clause) in a property policy?

  1. It transfers ownership of the property to the insurer
  2. It protects the mortgagee's interest by paying it to the extent of its interest Correct answer.
  3. It removes the insured's duty to give notice
  4. It waives the deductible for all losses

Explanation

A mortgage clause recognizes the lender's financial interest in the insured property and provides that loss payments go to the mortgagee to the extent of its interest. It may also give the mortgagee notice and separate rights.

Question 35Property Insurance Policy Structure and Statutory Conditions

An insured carries a policy with an 80% coinsurance requirement and insures the property to its full value. A total loss occurs. What is the effect of the coinsurance clause?

  1. No penalty applies because the limit meets or exceeds the required amount Correct answer.
  2. The insurer pays only 80% of the loss
  3. The deductible is doubled
  4. The insurer pays nothing because the property is fully insured

Explanation

The coinsurance penalty applies only when the limit carried is less than the required percentage of value. Insuring to full value satisfies the requirement, so the loss is paid up to the limit without a penalty.

Question 36Property Insurance Policy Structure and Statutory Conditions

Which of the following best describes the 'pair or set' clause in a property policy?

  1. Loss of one item in a set may be settled by paying the difference in value of the set Correct answer.
  2. The clause excludes all losses to collections
  3. The insured must surrender the remaining items without payment
  4. The insurer must replace the entire set at full cost

Explanation

The pair or set clause limits recovery when one item of a matched set is lost or damaged, often to the difference between the value of the set before and after the loss. This avoids paying for an entire set when only part is affected.

Question 37Property Insurance Policy Structure and Statutory Conditions

Under the principle of indemnity, what is the maximum amount an insured should recover for a covered property loss?

  1. An amount equal to the annual premium
  2. The original purchase price of the property
  3. The market value of the insurer's shares
  4. The actual financial loss suffered, subject to the policy limit Correct answer.

Explanation

Indemnity aims to restore the insured to the same financial position as before the loss, no better and no worse. Recovery is therefore measured by the actual loss, capped by the limit of insurance and adjusted for any deductible.

Question 38Property Insurance Policy Structure and Statutory Conditions

An insured fails to submit a sworn proof of loss within the period required by the statutory conditions. What is the most likely consequence?

  1. The policy is automatically cancelled from inception
  2. The insurer may deny the claim for breach of a condition precedent Correct answer.
  3. The loss becomes an excluded peril
  4. The insurer must pay the claim in full automatically

Explanation

Providing a proof of loss within the required time is a condition precedent to recovery, and failure can entitle the insurer to deny the claim. Courts may grant relief from forfeiture where the insurer was not prejudiced and the breach was technical.

Question 39Property Insurance Policy Structure and Statutory Conditions

Which statement accurately distinguishes an 'all-risk' (special) form from a 'named-perils' form?

  1. The all-risk form covers all risks of direct physical loss unless specifically excluded Correct answer.
  2. The named-perils form requires the insurer to prove the cause of loss
  3. The named-perils form covers every cause of loss unless excluded
  4. The all-risk form covers only fire and extended perils

Explanation

An all-risk or special form starts from a broad grant covering all risks of direct physical loss and then limits coverage through exclusions. A named-perils form covers only the perils listed, and the insured must show the loss arose from one of them.

Question 40Property Insurance Policy Structure and Statutory Conditions

What is the role of the 'salvage' provision after a covered loss?

  1. It transfers the claim to a third party
  2. It allows the insurer to take or dispose of damaged property and credit its value against the claim Correct answer.
  3. It requires the insured to rebuild before payment
  4. It increases the policy limit by the salvage value

Explanation

Salvage provisions let the insurer take possession of damaged property and apply its value against the loss, reducing the net payment. This supports indemnity by ensuring the insured does not recover for property that still has value.

Question 41Insurable Interest, Indemnity, and Valuation of Property Losses

Which of the following best describes the principle of indemnity in property insurance?

  1. The insured may collect from multiple policies up to the total of all limits
  2. The insured always receives the full sum insured regardless of the actual loss
  3. The insured is restored to approximately the same financial position as before the loss, without profiting Correct answer.
  4. The insurer is entitled to recover all premiums paid after a total loss

Explanation

Indemnity means the insured is put back into roughly the same financial position occupied immediately before the loss, no better and no worse. It prevents profit from loss and underpins valuation, limits, and subrogation.

Question 42Insurable Interest, Indemnity, and Valuation of Property Losses

Insurable interest in property is best described as:

  1. Any emotional attachment to the property insured
  2. A financial relationship to the property such that loss or damage would cause the insured pecuniary disadvantage Correct answer.
  3. A promise by the insurer to pay the sum insured on demand
  4. A legal title deed registered in the insured's name only

Explanation

Insurable interest requires a pecuniary relationship: the insured must benefit from the property's continued existence or suffer loss from its damage or destruction. Legal ownership is one route, but possession, custody, and liability relationships can also create it.

Question 43Insurable Interest, Indemnity, and Valuation of Property Losses

A building owner insures a warehouse for 400,000 when its actual replacement cost is 500,000, and the policy contains an 80 percent coinsurance (average) clause. A fire causes a 100,000 loss. Ignoring deductibles, what amount is payable?

  1. 100,000
  2. 50,000
  3. 64,000
  4. 80,000 Correct answer.

Explanation

The required limit is 80 percent of 500,000, which is 400,000, and the insured carries exactly that amount. The payment is therefore the loss multiplied by 400,000 divided by 400,000, giving the full 100,000 loss.

Question 44Insurable Interest, Indemnity, and Valuation of Property Losses

Which valuation basis typically pays the cost to repair or replace the damaged property with new material of like kind and quality, without deduction for depreciation?

  1. Agreed value
  2. Market value
  3. Replacement cost Correct answer.
  4. Actual cash value

Explanation

Replacement cost is the cost to repair or replace with new property of comparable kind and quality, with no depreciation deduction. It is broader than indemnity in the strict sense and is usually subject to a limit and conditions.

Question 45Insurable Interest, Indemnity, and Valuation of Property Losses

Actual cash value in property insurance is generally calculated as:

  1. Outstanding mortgage balance on the property
  2. Replacement cost less depreciation Correct answer.
  3. Original purchase price without adjustment
  4. Replacement cost plus depreciation

Explanation

Actual cash value is commonly defined as replacement cost minus depreciation, reflecting the value of the property in its pre-loss condition. Some policies define it differently, but this is the standard formulation.

Question 46Insurable Interest, Indemnity, and Valuation of Property Losses

An insured holds a fire policy on stock with a limit of 200,000 and no coinsurance clause. A fire destroys stock worth 250,000. What is the maximum the insurer can pay, ignoring deductibles?

  1. 150,000
  2. 200,000 Correct answer.
  3. 250,000
  4. 100,000

Explanation

The sum insured is the maximum the insurer can be liable to pay, even where the actual loss exceeds it. The insured is underinsured for the excess and bears that portion of the loss.

Question 47Insurable Interest, Indemnity, and Valuation of Property Losses

Under the doctrine of subrogation, after indemnifying the insured, the insurer may:

  1. Pursue the negligent third party who caused the loss, up to the amount paid Correct answer.
  2. Cancel the policy and recover all prior premiums
  3. Retain the insured's entire claim against the third party regardless of amount paid
  4. Refuse to pay the insured until the third party has paid

Explanation

Subrogation lets the insurer step into the insured's shoes and recover from the responsible third party after paying the claim. Recovery is limited to the amount the insurer has paid, and the insured retains priority for any uninsured balance.

Question 48Insurable Interest, Indemnity, and Valuation of Property Losses

Two property policies cover the same loss on the same interest, one with a limit of 300,000 and the other with 100,000. Under the common contribution condition, how is a 200,000 loss shared?

  1. 150,000 and 50,000 Correct answer.
  2. 200,000 and 0
  3. 120,000 and 80,000
  4. 100,000 and 100,000

Explanation

Independent liability contribution apportions the loss in proportion to each policy's limit: 300,000/400,000 and 100,000/400,000 of the 200,000 loss. That yields 150,000 and 50,000 respectively.

Question 49Insurable Interest, Indemnity, and Valuation of Property Losses

A tenant rents premises under a lease that makes the tenant responsible for damage by fire. The tenant's insurable interest in the building arises because:

  1. The tenant occupies the building rent-free
  2. The lease imposes a liability on the tenant that would cause pecuniary loss if the building were damaged Correct answer.
  3. The tenant holds the freehold title to the building
  4. The tenant has an option to buy the building in future

Explanation

A contractual or legal liability for damage gives the tenant a pecuniary interest in the property's preservation. The interest stems from potential liability, not from ownership.

Question 50Insurable Interest, Indemnity, and Valuation of Property Losses

A mortgagee (lender) has an insurable interest in the mortgaged building because:

  1. The lender is legally obliged to insure the borrower's personal belongings
  2. The lender occupies the building as a tenant
  3. The lender holds a beneficial interest in the borrower's business profits
  4. Damage to the building could impair the security for the loan and cause the lender financial loss Correct answer.

Explanation

The lender's interest is in the property as security for repayment, so destruction of the building can cause pecuniary loss. Mortgagee interests are commonly protected by a mortgage clause in the policy.