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CII I10 practice questions

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Question 1Insurance law and practice

Under the principle of indemnity, what is the fundamental purpose of a domestic household contents policy when a covered loss occurs?

  1. To restore the policyholder to the financial position held immediately before the loss Correct answer.
  2. To provide a fixed capital sum regardless of the actual value of the damaged items
  3. To pay an amount that exceeds the pre-loss value so the insured profits from the claim
  4. To guarantee replacement of every item with a brand-new equivalent of the same model

Explanation

Indemnity means the insured is placed back in the same financial position as before the loss, no better and no worse. It prevents recovery of more than the actual loss and underpins the calculation of most property claims. New-for-old replacement is a separate, optional extension rather than the default indemnity principle.

Question 2Insurance law and practice

A proposal form for household insurance includes a declaration that the answers given are true and complete. What is the main legal significance of this declaration?

  1. It converts the answers into warranties that must be literally true
  2. It confirms the information is accurate so the insurer can rely on it when rating and accepting the risk Correct answer.
  3. It transfers all risk of inaccurate answers onto the insurer
  4. It has no effect because only the policy wording is legally binding

Explanation

The declaration at the end of a proposal confirms the truth of the answers and gives the insurer a basis for assessing and rating the risk. It supports the insurer's reliance on the information supplied. The Consumer Insurance (Disclosure and Representations) Act 2012 now governs the remedies for inaccurate answers rather than treating every statement as a strict warranty.

Question 3Insurance law and practice

A customer takes out a home insurance policy and later discovers that a standard exclusion applies to damage caused by gradual deterioration. Which statement best describes how an exclusion operates in the policy?

  1. It describes the procedure for notifying a claim
  2. It sets the maximum sum the insurer will pay in total
  3. It extends cover to losses that would otherwise be included
  4. It removes specified causes or circumstances from the scope of cover Correct answer.

Explanation

An exclusion is a clause that removes particular perils, causes, or circumstances from the cover otherwise granted. It operates alongside the insuring clause to define the boundary of protection. Conditions, limits, and claims procedures are dealt with in separate parts of the policy.

Question 4Insurance law and practice

Which of the following is a key feature that distinguishes insurance contracts from most ordinary commercial contracts?

  1. The insurer may vary the terms unilaterally at any time
  2. The contract is one of utmost good faith, requiring fair presentation of the risk Correct answer.
  3. The contract must be signed by both parties to be enforceable
  4. The insured must always pay the premium in advance of cover commencing

Explanation

Insurance is a contract of utmost good faith, which imposes a duty of fair presentation of the risk on the proposer. This reflects the insurer's reliance on information held by the customer. The duty is now codified for commercial risks in the Insurance Act 2015 and modified for consumers by the 2012 Act.

Question 5Insurance law and practice

A policyholder suffers a fire at home and the insurer pays the claim. The insurer then seeks to recover the amount from the party who negligently caused the fire. What is this right called?

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

Explanation

Subrogation allows an insurer that has indemnified the insured to step into the insured's shoes and pursue recovery from the third party responsible for the loss. It supports the principle of indemnity by preventing the insured from recovering twice. Contribution and salvage are related but distinct doctrines.

Question 6Insurance law and practice

What is the primary purpose of the Financial Ombudsman Service in relation to general insurance complaints?

  1. To approve policy wordings before they can be sold
  2. To provide free, independent resolution of disputes between customers and firms Correct answer.
  3. To prosecute insurers for breaches of financial regulation
  4. To set the premiums insurers may charge for household cover

Explanation

The Financial Ombudsman Service resolves individual complaints between eligible complainants and financial firms in a free and independent way. It can make awards that bind the firm if accepted by the complainant. It does not prosecute, set prices, or pre-approve wordings.

Question 7Insurance law and practice

A household policy states that the sum insured is £250,000 and the insured's buildings are worth £500,000 at the time of loss. A £50,000 claim occurs. If the policy applies average (condition of average), what amount is typically payable?

  1. £12,500
  2. £50,000
  3. Nil
  4. £25,000 Correct answer.

Explanation

Under average, the claim is reduced in proportion to the underinsurance. The sum insured is half the required value, so the £50,000 loss is reduced by half to £25,000. This encourages policyholders to insure for the full reinstatement value.

Question 8Insurance law and practice

Which of the following best describes the role of the Financial Conduct Authority (FCA) in relation to insurance firms?

  1. It writes standard policy wordings for the market
  2. It acts as the ombudsman for individual customer complaints
  3. It guarantees payment of claims if an insurer becomes insolvent
  4. It authorises and supervises firms and sets conduct rules to protect consumers Correct answer.

Explanation

The FCA authorises and supervises insurance firms and sets conduct requirements, including the fair treatment of customers. Its objective is to protect consumers and maintain market integrity. It does not handle individual complaints, guarantee claims, or draft standard wordings.

Question 9Insurance law and practice

A consumer household policyholder fails to disclose that a previous insurer declined their cover. Under the Consumer Insurance (Disclosure and Representations) Act 2012, what is the insured's duty when answering the insurer's questions?

  1. To provide only the information the insurer specifically asks for, however inaccurate
  2. To disclose every fact that could conceivably influence the insurer
  3. To disclose only facts that have already been recorded by a previous insurer
  4. To take reasonable care to answer the insurer's questions fully and accurately Correct answer.

Explanation

The 2012 Act replaced the consumer's duty to volunteer information with a duty to take reasonable care to answer the insurer's questions fully and accurately. The insurer must ask clear questions. If a consumer answers carelessly, proportionate remedies apply depending on the insurer's hypothetical reaction.

Question 10Insurance law and practice

A commercial policyholder makes a fraudulent claim for fire damage that includes genuine and exaggerated elements. What is the insurer's usual entitlement under the Insurance Act 2015?

  1. To pay the whole claim but cancel the policy at renewal
  2. To reduce the whole claim by 50 per cent as a proportionate remedy
  3. To refuse the whole claim and recover any sums already paid in respect of it Correct answer.
  4. To pay the genuine portion and refuse only the fraudulent element

Explanation

Under section 12 of the Insurance Act 2015, a fraudulent claim allows the insurer to refuse the whole claim and recover any sums already paid in respect of it. The insurer may also terminate the contract and retain the premium. This reflects the serious nature of fraudulent claims.

Question 11Insurance law and practice

A home insurance policy contains a condition precedent to liability requiring the insured to maintain a working burglar alarm. The alarm is not set and a theft occurs. What is the likely effect of the condition?

  1. The insurer may decline the claim because the condition must be satisfied before liability arises Correct answer.
  2. The insurer must pay but may reduce the amount for betterment
  3. The insurer must pay and then seek recovery from the alarm company
  4. The insurer must pay because theft is a covered peril

Explanation

A condition precedent to liability means the insurer is not liable unless the condition is met. If the alarm was not maintained or set as required, the insurer may decline the theft claim. This differs from a condition subsequent, which affects the insurer's rights after liability has arisen.

Question 12Insurance law and practice

Two insurers cover the same property against fire. Insurer A has a sum insured of £300,000 and Insurer B £100,000. A fire loss of £80,000 is paid. How is the loss typically shared under the doctrine of contribution?

  1. Each insurer pays £40,000 regardless of the sums insured
  2. Insurer B pays £80,000 because it is the excess insurer
  3. Insurer A pays £80,000 and Insurer B pays nothing
  4. Insurer A pays £60,000 and Insurer B pays £20,000 Correct answer.

Explanation

Contribution between insurers covering the same risk is generally apportioned according to the rateable proportion of the sums insured. With £300,000 and £100,000, the ratio is 3:1, so the £80,000 loss is split £60,000 and £20,000. This prevents the insured from recovering more than the loss.

Question 13Insurance law and practice

An insured deliberately sets fire to their own property to claim under a household policy. Which principle most directly prevents recovery?

  1. The doctrine of proximate cause
  2. The requirement of insurable interest and public policy against deliberate acts Correct answer.
  3. The condition of average
  4. The principle of indemnity alone

Explanation

Deliberate damage by the insured is not an insured peril and recovery is barred on grounds of public policy, as no one should benefit from their own wrongdoing. Insurable interest and the nature of the cover also support the refusal. The other doctrines do not directly address deliberate acts by the insured.

Question 14Insurance law and practice

A policyholder has buildings cover with a £250 excess and suffers a storm loss of £1,200. How much will the insurer typically pay, assuming no other adjustments?

  1. £1,200
  2. £1,000
  3. £950 Correct answer.
  4. £250

Explanation

The excess is deducted from the loss before payment. £1,200 minus £250 gives £950. The excess is the first part of each claim that the insured bears, which reduces small claims and admin costs.

Question 15Insurance law and practice

What is the effect of the 'reasonable precautions' condition in a household policy?

  1. It transfers liability for all accidental damage to the insured
  2. It requires the insured to take all conceivable steps to prevent loss, however impractical
  3. It obliges the insurer to inspect the property annually
  4. It requires the insured to take reasonable steps to avoid loss and to comply with statutory requirements Correct answer.

Explanation

The reasonable precautions condition requires the insured to take reasonable steps to prevent loss and comply with relevant legislation. It does not demand absolute protection against every risk. Breach may allow the insurer to decline a claim where the failure was causative.

Question 16Insurance law and practice

A customer's household policy is cancelled mid-term by the insurer for non-payment of premium. How is the refund of premium usually calculated?

  1. A pro rata refund of the unused premium is made
  2. The full annual premium is retained by the insurer
  3. A short-period refund using the insurer's customary scale is made Correct answer.
  4. No refund is due because cancellation was for breach

Explanation

Where the insurer cancels mid-term, refunds are often calculated on a short-period basis using a customary scale rather than a strict pro rata calculation. This reflects the administrative cost of providing cover for part of a year. If the insured cancels, the same short-period approach may apply.

Question 17Insurance law and practice

Which statement correctly describes the position of the Financial Services Compensation Scheme (FSCS) in relation to insurance claims?

  1. It replaces the Financial Ombudsman Service for complaints
  2. It pays all claims that an insurer has declined
  3. It sets the maximum premium insurers may charge
  4. It protects eligible policyholders if an authorised insurer becomes unable to meet claims Correct answer.

Explanation

The FSCS provides a safety net for eligible policyholders when an authorised financial firm, including an insurer, fails. It does not review the merits of declined claims or regulate pricing. Complaints about conduct remain within the ombudsman's remit.

Question 18Insurance law and practice

An insurer issues a household policy with a condition requiring the insured to notify any change in risk, such as a change of occupation or occupancy. Why is this condition important?

  1. It guarantees the premium will never increase
  2. It removes the need for the insured to disclose material facts at renewal
  3. It transfers the risk of all future changes to the insured
  4. It allows the insurer to re-rate or reassess the risk if circumstances change Correct answer.

Explanation

A change-in-risk condition enables the insurer to reassess and re-rate the risk when circumstances alter during the policy period. The insurer can then adjust terms or cover as appropriate. It does not remove the duty of disclosure at renewal or guarantee a fixed premium.

Question 19Insurance law and practice

Which of the following is the best example of an insurable interest in a domestic buildings policy?

  1. An owner-occupier who would suffer financial loss if the building were destroyed Correct answer.
  2. A neighbour who would like the property to be maintained
  3. A tenant who has no legal liability for the structure
  4. A passer-by who admires the property

Explanation

Insurable interest requires a legal or equitable relationship such that the insured benefits from the continued existence of the subject matter or suffers loss on its destruction. An owner-occupier clearly has that interest. Mere emotional or aesthetic interest is insufficient.

Question 20Insurance law and practice

A policyholder's home is damaged by a burst pipe, and the insurer pays for repairs. Which statement best explains the insurer's subrogation rights?

  1. The insurer may not pursue the plumber because the insured has been paid
  2. The insurer may recover only if the insured assigns the whole policy to the plumber
  3. The insurer may recover any amount from the plumber, including a profit
  4. The insurer may recover from the plumber who negligently installed the pipe, but only up to the amount paid Correct answer.

Explanation

Subrogation allows the insurer to pursue third parties responsible for the loss, but recovery is limited to the amount the insurer has paid. Any surplus belongs to the insured. The right arises once the insurer has indemnified the insured.

Question 21Insurance law and practice

A household policy has a 'new-for-old' replacement extension for contents. Which statement best explains how this interacts with the indemnity principle?

  1. It is an agreed extension that may pay the cost of new items, subject to its own terms and limits Correct answer.
  2. It replaces indemnity entirely, so the sum insured is irrelevant
  3. It is illegal because it breaches the indemnity principle
  4. It applies only to buildings, never to contents

Explanation

New-for-old is a contractual extension that modifies strict indemnity for specified items, subject to conditions and limits. It is lawful and common in household contents cover. The sum insured and policy limits still apply.

Question 22Insurance law and practice

An insured householder fails to disclose that the property has previously suffered repeated flood damage. The insurer would have charged a higher premium had it known. Under the Consumer Insurance (Disclosure and Representations) Act 2012, what remedy is likely if the misrepresentation was careless?

  1. The insurer may avoid the policy from inception and retain the premium
  2. The insurer must pay the full claim because the policy is already in force
  3. The insurer may apply a proportionate remedy, such as reducing the claim payment Correct answer.
  4. The insurer may only cancel at the next renewal without adjusting the claim

Explanation

For careless misrepresentation, the 2012 Act provides proportionate remedies based on what the insurer would have done had it known the truth. If it would have charged more, the claim may be reduced proportionately. Avoidance is reserved for deliberate or reckless misrepresentation.

Question 23Insurance law and practice

Under the Insurance Act 2015, what is the consequence for a commercial insured that breaches the duty of fair presentation deliberately or recklessly?

  1. The insurer may only reduce the claim proportionately
  2. The insurer must pay the claim in full but may increase the premium
  3. The insurer may avoid the contract and retain the premium Correct answer.
  4. The insurer must refer the matter to the Financial Ombudsman Service

Explanation

For deliberate or reckless breach of the duty of fair presentation, the Insurance Act 2015 allows the insurer to avoid the contract and retain the premium. Proportionate remedies apply to non-deliberate breaches. This reflects the seriousness of intentional or reckless non-disclosure.

Question 24Insurance law and practice

A commercial property owner insures a building for £1 million, but the full reinstatement value is £2 million. The policy contains a condition of average. A £400,000 loss occurs. What is the insurer's liability, assuming the condition applies?

  1. £200,000 Correct answer.
  2. £800,000
  3. £100,000
  4. £400,000

Explanation

The sum insured is half the required value, so the loss is reduced by half under average. £400,000 divided by two is £200,000. The insured bears the balance because of the underinsurance.

Question 25Insurance law and practice

An insurer discovers that a commercial insured made a fraudulent claim and had already paid £10,000 toward it before the fraud was discovered. What is the insurer's position under the Insurance Act 2015?

  1. The insurer may recover the £10,000 and refuse the remainder of the claim Correct answer.
  2. The insurer may reduce the claim by the £10,000 already paid
  3. The insurer must allow the £10,000 as a goodwill payment and pay the rest
  4. The insurer may only cancel the policy at renewal

Explanation

Section 12 of the Insurance Act 2015 allows the insurer to refuse the fraudulent claim and recover any sums already paid in respect of it. The insurer may also terminate the contract and retain the premium. The remedy is designed to deter fraudulent claims.

Question 26Insurance law and practice

Under the Consumer Insurance (Disclosure and Representations) Act 2012, which duty does a consumer owe the insurer when proposing for cover?

  1. No duty at all, because the insurer must investigate the risk itself
  2. An absolute duty to volunteer every fact that might influence the insurer
  3. A duty to disclose only facts the insurer specifically asks about in writing
  4. A duty to take reasonable care not to make a misrepresentation Correct answer.

Explanation

The 2012 Act replaced the consumer's old duty of disclosure with a duty to take reasonable care not to make a misrepresentation. The insurer bears responsibility for asking clear questions, and the consumer answers them honestly and carefully. The standard is one of reasonable care, not absolute completeness.

Question 27Insurance law and practice

Which piece of legislation principally governs the remedies available to an insurer when a consumer makes a careless misrepresentation on a proposal?

  1. The Insurance Act 2015
  2. The Third Parties (Rights against Insurers) Act 2010
  3. The Consumer Insurance (Disclosure and Representations) Act 2012 Correct answer.
  4. The Financial Services and Markets Act 2000

Explanation

The 2012 Act sets out a proportionate remedies scheme for consumer misrepresentation, ranging from proportionate reduction of claim to avoidance for deliberate or reckless conduct. The Insurance Act 2015 governs commercial insureds rather than consumers. The other statutes deal with regulation and with transferring rights against insolvent insureds respectively.

Question 28Insurance law and practice

A court is asked to decide whether a claim notification clause in a commercial property policy is a condition precedent to liability. What is the practical effect if it is held to be one?

  1. The clause is void because notification terms are always merely descriptive
  2. The insurer must still pay the claim but may cancel the policy at renewal
  3. The insured's claim is reduced by the same percentage as any delay in days
  4. The insured must comply with the clause before the insurer's liability to pay arises Correct answer.

Explanation

A condition precedent to liability makes compliance a precondition of the insurer's obligation to pay, so breach can defeat the claim entirely. It differs from an ordinary condition, where the insurer's remedy is damages for breach rather than a complete defence. Whether a clause is a condition precedent depends on its wording and the parties' intention.

Question 29Insurance law and practice

An insured takes out a marine cargo policy and the insurer later alleges the insured failed to disclose a material fact. Which statute provides the default framework for the insured's duty of disclosure in this commercial context?

  1. The Marine Insurance Act 1906, as modified by the Insurance Act 2015 Correct answer.
  2. The Enterprise Act 2002
  3. The Consumer Insurance (Disclosure and Representations) Act 2012
  4. The Limitation Act 1980

Explanation

The Marine Insurance Act 1906 codified the commercial duty of utmost good faith and disclosure, and the Insurance Act 2015 amended that framework for non-consumer contracts. The 2012 Act applies only to consumer contracts. The Limitation Act and Enterprise Act are unrelated to disclosure duties.

Question 30Insurance law and practice

Which statement best describes the insurer's right of subrogation after paying a claim under an indemnity policy?

  1. The insurer automatically becomes the owner of any damaged property and may sell it for profit
  2. The insurer may step into the insured's legal rights against a third party who caused the loss, up to the amount paid Correct answer.
  3. The insurer may recover the full loss from the insured personally if a third party is at fault
  4. The insurer may pursue the third party for more than it paid, keeping the surplus as a windfall

Explanation

Subrogation allows the insurer, having indemnified the insured, to exercise the insured's rights of recovery against the responsible third party. Recovery is limited to the amount the insurer has paid, because the insured must not be deprived of full indemnity and the insurer must not profit. It is a right of recovery, not a transfer of ownership in the property.

Question 31Insurance law and practice

What is the doctrine of contribution intended to achieve where more than one policy covers the same loss?

  1. It extinguishes the insured's claim once one insurer has paid anything
  2. It transfers the whole loss to the insurer with the earliest inception date
  3. It allows the insured to recover the full loss from each insurer in turn
  4. It shares the loss among insurers so that no insurer pays more than its proper proportion Correct answer.

Explanation

Contribution operates between insurers covering the same interest against the same peril so that each bears its rateable share of the loss. It prevents one insurer bearing the whole burden while another escapes liability. The insured cannot recover more than a full indemnity in total.

Question 32Insurance law and practice

An insured's factory is damaged by fire and the insurer pays the claim. The insured had also signed a contract waiving all rights of recovery against the neighbouring occupier who caused the fire. What is the likely effect on the insurer's position?

  1. The insurer may avoid the policy from inception for non-disclosure of the waiver
  2. The waiver is automatically void because subrogation rights cannot be contracted away
  3. The insurer must still pay in full and has no remedy because subrogation is only a moral right
  4. The insurer may be prejudiced because the insured destroyed the rights of subrogation it would otherwise have exercised Correct answer.

Explanation

An insured must not prejudice the insurer's subrogation rights, and a pre-loss waiver of recovery against a responsible third party can breach that obligation. The insurer may have a defence or a right of recovery against the insured for the loss of those rights. Subrogation is a legal right, not merely a moral one, and the waiver is not automatically void.

Question 33Insurance law and practice

Which principle requires that an insured benefit financially from a valid policy only to the extent of restoring the loss suffered, no more and no less?

  1. The principle of utmost good faith
  2. The principle of proximate cause
  3. The principle of indemnity Correct answer.
  4. The principle of insurable interest

Explanation

Indemnity means the insured is restored to the financial position held before the loss, without profit. Sums insured, excesses and average clauses all serve to keep recovery within the loss. The other principles govern disclosure, causation and the requirement of a legal relationship to the subject matter.

Question 34Insurance law and practice

An insured holds a life assurance policy on their own life and dies within the term. Why does the payout not breach the indemnity principle?

  1. The payout is capped at the funeral expenses actually incurred
  2. The indemnity principle applies only to property, so all non-property policies are unregulated
  3. Life assurance is void without a medical examination, which converts it into an indemnity
  4. Life assurance is a benefit policy, so the sum assured is paid as agreed rather than measured against a financial loss Correct answer.

Explanation

Indemnity applies to policies of indemnity such as property and liability cover. Life and personal accident policies are benefit policies, where the insurer agrees to pay a fixed sum on the specified event regardless of measured loss. The absence of a measurable financial loss does not invalidate the contract.

Question 35Insurance law and practice

A commercial insured is asked to complete a proposal form containing a declaration that the answers are true and complete. How does this interact with the insurer's own duty under the Insurance Act 2015?

  1. The insurer must still ask clear and accessible questions, and a declaration cannot convert the insured's duty into an absolute one Correct answer.
  2. The declaration has no legal effect whatsoever and can be ignored by both parties
  3. The declaration shifts the burden of disclosure entirely onto the insurer's underwriters
  4. The declaration removes the insurer's obligations entirely, so any inaccuracy allows avoidance in all cases

Explanation

The Insurance Act 2015 requires the insurer to take reasonable steps to ensure questions are clear and accessible and to draw unusual features to the insured's attention. A declaration of truth does not override these obligations or make the insured's duty absolute. The duty of fair presentation is a two-way process.

Question 36Insurance law and practice

In a commercial property policy, what does a rateable proportion (or average) clause typically do when the sum insured is less than the value at risk?

  1. It voids the policy from inception for breach of a warranty
  2. It transfers the shortfall to any other insurer covering the same property
  3. It increases the sum insured automatically to the full value
  4. It reduces the claim payment in proportion to the under-insurance Correct answer.

Explanation

An average clause applies the ratio of sum insured to value at risk to the loss, so the insured bears a share of the shortfall. It is a contractual response to under-insurance rather than a penalty or avoidance. The insured therefore has an incentive to insure for full value.

Question 37Insurance law and practice

Which of the following is the most accurate description of an insurer's duty of utmost good faith under the Insurance Act 2015?

  1. It applies only to marine insurance and not to other classes
  2. It applies only to the insured and permits avoidance for any breach
  3. It was abolished entirely by the Insurance Act 2015
  4. It is a duty owed by both parties, but the Act removed the general right to avoid a contract solely for breach of the duty Correct answer.

Explanation

The Insurance Act 2015 retained good faith as a duty of both parties but abolished the old remedy of avoidance for breach of the duty itself. Breach of the duty of fair presentation is dealt with by the Act's specific remedies. Good faith continues to inform how the parties deal with each other.

Question 38Insurance law and practice

An insured under a commercial combined policy breaches a warranty that a fire suppression system will be maintained. At the time of a subsequent fire the system was working. Which statement reflects the position under the Insurance Act 2015?

  1. The warranty is unenforceable because warranties are void in commercial insurance
  2. The insurer may refuse the claim automatically for any historic breach, whenever it occurred
  3. The insurer may avoid the policy from inception regardless of the state of the system at the time of loss
  4. The insurer may not rely on the breach to refuse the claim because the breach was remedied before the loss Correct answer.

Explanation

The Insurance Act 2015 provides that where a warranty is breached, the insurer's liability is suspended during the period of breach. Once the breach is remedied, the cover is restored, so a loss occurring after remediation is covered. Avoidance is not the consequence of a breach of warranty.

Question 39Insurance law and practice

Which statement best explains why an insurer may be liable for a loss even where the immediate cause was excluded, provided an unexcluded peril was the dominant cause?

  1. The doctrine of subrogation transfers causation questions to the third party
  2. The doctrine of proximate cause looks to the dominant or effective cause rather than the last event in the chain Correct answer.
  3. The doctrine of indemnity requires the insurer to pay for all losses regardless of cause
  4. The contra proferentem rule automatically resolves all causation disputes in the insured's favour

Explanation

Proximate cause asks which cause was dominant and effective in bringing about the loss, not merely which event came last. If an insured peril is the proximate cause, an excluded remote cause does not defeat the claim. The other doctrines address recovery amounts, interpretation of ambiguities and recovery from third parties.

Question 40Insurance law and practice

A fire policy excludes loss caused by 'earthquake'. A fire breaks out after an earthquake damages wiring, and the fire is the dominant cause of the destruction. How is the claim likely to be treated?

  1. The claim is likely covered because the proximate cause was fire, an insured peril, rather than the excluded earthquake Correct answer.
  2. The claim is likely excluded because the earthquake was the first event in the chain
  3. The claim is likely void because the insured failed to disclose the earthquake risk
  4. The claim is likely excluded because any excluded peril in the chain defeats cover

Explanation

Where fire is the dominant and effective cause of the loss, the claim falls within the fire cover, even if an excluded peril such as earthquake played an earlier part. The proximate cause rule prevents remote excluded events from automatically defeating cover. The outcome can differ if the policy contains a specific exclusion extending to consequential loss from earthquake.

Question 41Insurance law and practice

Which of the following best describes the effect of the Third Parties (Rights against Insurers) Act 2010?

  1. It allows an insurer to recover defence costs from a third party who sues the insured
  2. It allows a third party with a judgment against an insolvent insured to pursue the insurer directly for the insured's liability Correct answer.
  3. It requires all liability insurers to pay claims within 14 days of notification
  4. It gives the Financial Ombudsman Service power to decide coverage disputes between insurers

Explanation

The 2010 Act transfers the insured's rights under a liability policy to the third party when the insured becomes insolvent, allowing direct recovery from the insurer. It replaced the 1930 Act and simplified the procedure by removing the need for a prior judgment in some circumstances. It does not impose payment deadlines or give the Ombudsman jurisdiction over insurer-to-insurer disputes.

Question 42Insurance law and practice

An insured under a commercial liability policy becomes insolvent and a claimant obtains a judgment against it. What is the significance of the Third Parties (Rights against Insurers) Act 2010 in these circumstances?

  1. The claimant loses all rights because the insured no longer exists to bring the claim
  2. The claimant must first sue the insurer's directors personally before any recovery
  3. The claimant may enforce the insured's rights against the insurer directly, subject to the policy terms and limits Correct answer.
  4. The insurer is automatically discharged from all liability on insolvency of the insured

Explanation

The Act transfers the insured's policy rights to the third party so that the claimant can proceed directly against the insurer. The insurer can rely on the same defences and limits it could have raised against the insured. Insolvency of the insured does not extinguish the third party's statutory rights.

Question 43Insurance law and practice

Which statement correctly describes how the Financial Services Compensation Scheme treats eligible general insurance claims?

  1. It only covers life assurance and not general insurance policies
  2. It guarantees every claim in full regardless of the insurer's solvency or the policy type
  3. It can pay compensation for valid claims against an insurer that is in default, up to the scheme's limits Correct answer.
  4. It replaces the need for insurers to hold regulatory capital

Explanation

The FSCS provides a last-resort safety net for eligible claimants when an authorised insurer is unable to meet claims. Compensation is subject to scheme limits and eligibility rules, and it does not guarantee every claim in full. It operates alongside, not instead of, prudential regulation and capital requirements.

Question 44Insurance law and practice

A retail customer complains that an insurer wrongly declined their household claim. Which body can consider the complaint if the insurer does not resolve it within eight weeks?

  1. The Prudential Regulation Authority
  2. The Insolvency Service
  3. The Competition and Markets Authority
  4. The Financial Ombudsman Service Correct answer.

Explanation

The Financial Ombudsman Service can consider eligible complaints about authorised firms once the firm has had the chance to resolve them, or after eight weeks. It can make awards within its monetary limits and its decisions are binding on the firm if accepted by the complainant. The other bodies have different regulatory or insolvency functions.

Question 45Insurance law and practice

Which of the following best describes the role of the Financial Conduct Authority in the day-to-day conduct of insurance business?

  1. It sets and enforces conduct rules and can take action against firms that treat customers unfairly Correct answer.
  2. It sets interest rates and monetary policy for the insurance market
  3. It adjudicates individual coverage disputes between insurers and reinsurers
  4. It guarantees the solvency of every insurer by providing capital

Explanation

The FCA regulates conduct, setting rules such as those on fair treatment of customers and handling of claims, and can impose sanctions for breaches. It does not set monetary policy, provide capital to insurers, or decide commercial coverage disputes. Prudential soundness is primarily the PRA's remit.

Question 46Insurance law and practice

An insurer wishes to rely on a policy term that is unusual and potentially disadvantageous to a commercial insured. Under the Insurance Act 2015, what must the insurer have done to rely on that term in a schedule or standard terms?

  1. Taken sufficient steps to draw the term to the insured's attention before the contract was entered into Correct answer.
  2. Had the term approved in advance by the Financial Ombudsman Service
  3. Obtained the insured's signature on every page of the policy wording
  4. Published the term on its website for at least 30 days before inception

Explanation

The Insurance Act 2015 requires an insurer that seeks to rely on a disadvantageous term in a schedule or standard terms to take sufficient steps to draw it to the insured's attention before the contract is made. The requirement is about transparency, not about page-by-page signatures or regulatory pre-approval. Failure can prevent reliance on the term.

Question 47Insurance law and practice

An insured deliberately exaggerates a legitimate storm damage claim by adding items that were not damaged. What is the insurer's position under the Insurance Act 2015 in relation to the whole claim?

  1. The insurer may only cancel the policy prospectively and must still pay the full claim
  2. The insurer must pay the genuine element and may only refuse the exaggerated element
  3. The insurer must pay the whole claim because the storm damage itself was genuine
  4. The insurer may refuse the whole claim and recover any sums already paid in respect of it Correct answer.

Explanation

Under the Insurance Act 2015, a fraudulent claim allows the insurer to refuse the entire claim and to recover any amount already paid in respect of it. The Act also permits the insurer to treat the contract as terminated and to retain premiums. This reflects the serious nature of deliberate exaggeration.

Question 48Insurance law and practice

Which of the following statements about the duty of fair presentation under the Insurance Act 2015 is correct?

  1. The insured must disclose every material circumstance it knows or ought to know, and make the presentation clear and accessible Correct answer.
  2. The insurer must investigate every fact independently before accepting the risk
  3. The duty is satisfied by providing a complete set of accounts regardless of other material facts
  4. The insured need only answer the insurer's questions truthfully and nothing more

Explanation

The duty of fair presentation requires disclosure of material circumstances the insured knows or ought to know, supported by a reasonable search. The presentation must also be clear and accessible to a prudent underwriter. Answering questions truthfully is part of the duty but does not exhaust it.

Question 49Insurance law and practice

An insured fails to disclose a material fact in a commercial policy and the insurer would have charged a higher premium but would still have written the risk. Which remedy is most likely under the Insurance Act 2015?

  1. Automatic avoidance of the policy from inception with a full premium refund
  2. A proportionate reduction of the claim reflecting the higher premium that would have been charged Correct answer.
  3. Payment of the claim in full with a separate penalty equal to the premium shortfall
  4. No remedy at all, because the insurer would still have accepted the risk

Explanation

Where the insurer would have entered the contract on different terms, the Act provides proportionate remedies. If the insurer would have charged more, the claim is reduced by the proportion that the higher premium bears to the actual premium. Avoidance is reserved for cases where the insurer would not have entered the contract at all.

Question 50Insurance law and practice

Which statement accurately describes the effect of an insurable interest requirement in property insurance?

  1. The insured must have an insurable interest only at inception, not at the time of loss
  2. The insured must have a legal or equitable relationship to the property such that they benefit from its preservation or suffer loss from its damage Correct answer.
  3. The insured must occupy the property personally at the time of loss
  4. The insured must own the property outright with no mortgage or lease

Explanation

Insurable interest exists where the insured has a legal or equitable relationship to the subject matter and would benefit from its preservation or be prejudiced by its loss. Ownership is not required; mortgagees, tenants and bailees can have interests. The interest must generally exist at the time of loss as well as when the contract is made.