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CII I11 practice questions

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Question 1The legal system and sources of law

In the English legal system, which body of law is developed by judges through the decisions of courts rather than by Parliament?

  1. European Union law
  2. Delegated legislation
  3. Statute law
  4. Common law Correct answer.

Explanation

Common law is the body of rules built up from judicial decisions, applying the doctrine of precedent. Statute law and delegated legislation are both made through the legislative process rather than by courts, so they are not judge-made.

Question 2The legal system and sources of law

Which court's decisions are binding on the High Court and the Court of Appeal under the doctrine of precedent?

  1. The county court
  2. The magistrates' court
  3. The Crown Court
  4. The Supreme Court Correct answer.

Explanation

The Supreme Court is the highest court in the domestic hierarchy, so its decisions bind all lower courts, including the High Court and the Court of Appeal. Lower courts such as the Crown Court, magistrates' court and county court cannot create binding precedent for higher courts.

Question 3The legal system and sources of law

A judge is considering an earlier decision of a higher court where the material facts are indistinguishable. What is the operative part of that judgment that the judge must follow?

  1. The headnote
  2. The obiter dicta
  3. The ratio decidendi Correct answer.
  4. The dissenting judgment

Explanation

The ratio decidendi is the legal reasoning on which the decision rests, and it is this part that binds lower courts in later cases with materially similar facts. Obiter dicta, headnotes and dissents are not binding, though they may be persuasive.

Question 4The legal system and sources of law

Which source of law takes precedence where an Act of Parliament conflicts with a rule of common law?

  1. Neither, so the point is referred to the monarch
  2. The common law rule, because judges interpret statutes
  3. The common law rule, because precedent is binding
  4. The Act of Parliament, because of parliamentary sovereignty Correct answer.

Explanation

Parliamentary sovereignty means that an Act of Parliament is the highest form of law and can override or change judge-made rules. Courts must apply statute where it conflicts with common law, subject only to interpretation of the statutory wording.

Question 5The legal system and sources of law

Which type of legislation is made by a local authority under powers conferred by an Act of Parliament?

  1. A private Act
  2. A byelaw Correct answer.
  3. A public general Act
  4. An Order in Council

Explanation

Byelaws are a form of delegated legislation made by local authorities and certain other bodies under enabling powers in a parent Act. Public general Acts and private Acts are primary legislation, and Orders in Council are made at national level by the Privy Council.

Question 6The legal system and sources of law

Which doctrine requires courts to follow decisions of superior courts in earlier cases involving materially similar facts?

  1. Ultra vires
  2. Mens rea
  3. Stare decisis Correct answer.
  4. Ratio decidendi

Explanation

Stare decisis, meaning to stand by things decided, is the principle underpinning binding precedent. Ultra vires concerns acting beyond legal powers, mens rea is a criminal state of mind, and ratio decidendi is the binding reasoning itself rather than the doctrine of following it.

Question 7The legal system and sources of law

A statute uses a broad term that judges have previously interpreted in a related context. Which approach allows a court to apply that established meaning to the new provision?

  1. The doctrine of precedent Correct answer.
  2. The golden rule
  3. The mischief rule
  4. The literal rule

Explanation

Where a court has already placed a settled meaning on a term, later courts may apply that interpretation to comparable statutory wording through the doctrine of precedent. The literal, golden and mischief rules are interpretive approaches, but it is precedent that carries an existing meaning forward.

Question 8The legal system and sources of law

A court is asked to depart from an earlier decision of the Supreme Court. In what circumstances may the Supreme Court normally do so?

  1. Only when the European Court of Human Rights has ruled
  2. When it appears right to do so, considering the effect on certainty Correct answer.
  3. Only when Parliament authorises it
  4. Whenever a party requests it

Explanation

Since the Practice Statement 1966 the Supreme Court (formerly the House of Lords) may depart from its own previous decisions when it appears right to do so, weighing the risk of injustice against the need for certainty. It is not a power exercised on request alone, and it does not depend on parliamentary or Strasbourg authorisation.

Question 9The legal system and sources of law

An Act empowers a minister to make regulations but the minister imposes a charge not authorised by the parent Act. On what ground would a court most likely hold the regulations invalid?

  1. They are protected by parliamentary privilege
  2. They are impliedly repealed
  3. They are ultra vires Correct answer.
  4. They are procedurally regular

Explanation

Delegated legislation is valid only within the scope of the enabling Act, and a provision going beyond that scope is ultra vires and can be quashed. Procedural regularity would not cure a substantive excess of power, and implied repeal concerns conflicting statutes rather than delegated instruments.

Question 10The legal system and sources of law

Which parliamentary procedure allows a proposed new law to be examined line by line by a smaller group of members?

  1. The report stage
  2. The committee stage Correct answer.
  3. The second reading
  4. The royal assent stage

Explanation

The committee stage is where a bill is scrutinised clause by clause, usually in a public bill committee or, for some bills, the whole House. The second reading debates the principle, the report stage considers amendments, and royal assent is the formal enactment.

Question 11The legal system and sources of law

A judgment contains a statement on a point of law that was not necessary to the decision. How should a later court treat that statement?

  1. As void and of no effect
  2. As a form of delegated legislation
  3. As persuasive but not binding Correct answer.
  4. As binding in all later cases

Explanation

Such a statement is an obiter dictum, made by the way and not essential to the decision. It does not bind later courts but may be highly persuasive, particularly where it comes from a senior judge.

Question 12The legal system and sources of law

Which characteristic distinguishes primary legislation from delegated legislation?

  1. Delegated legislation is made directly by the monarch alone
  2. Primary legislation is always made by local authorities
  3. Primary legislation is never subject to judicial interpretation
  4. Primary legislation is made by Parliament, whereas delegated legislation is made by another body under powers granted by Parliament Correct answer.

Explanation

Primary legislation consists of Acts of Parliament, while delegated legislation is made by ministers, local authorities or other bodies using powers conferred by a parent Act. This distinction underpins the different scrutiny and control mechanisms applying to each.

Question 13The legal system and sources of law

A court applying the mischief rule to a statute would primarily seek to identify which of the following?

  1. The parliamentary debate on the bill
  2. The ordinary dictionary meaning of each word
  3. The financial cost of compliance
  4. The defect or wrong the statute was designed to remedy Correct answer.

Explanation

The mischief rule, associated with Heydon's Case, asks what defect in the common law the statute was passed to cure and interprets the words to suppress that mischief. It is not concerned with ordinary meaning, Hansard debates or compliance cost.

Question 14The legal system and sources of law

Which statement best describes the effect of a Practice Statement issued by the Supreme Court on its own previous decisions?

  1. It transfers the court's precedent-making power to Parliament
  2. It allows the court to depart from its own precedent where it appears right to do so Correct answer.
  3. It abolishes all earlier decisions of the court
  4. It requires the court to follow its own precedent absolutely

Explanation

The Practice Statement 1966 permits the highest appellate court to depart from its own earlier decisions when it appears right to do so, balancing justice in the individual case against legal certainty. It does not abolish precedent, impose absolute adherence, or transfer power to Parliament.

Question 15The legal system and sources of law

Which of the following is a recognised advantage of delegated legislation?

  1. It always overrides the parent Act
  2. It allows detailed technical rules to be made quickly by those with expertise Correct answer.
  3. It receives no parliamentary scrutiny at all
  4. It cannot be challenged in the courts

Explanation

Delegated legislation permits detailed and technical provision to be made and updated quickly by ministers or expert bodies, saving parliamentary time. It remains subject to parliamentary scrutiny and to judicial review, and it cannot override its parent Act.

Question 16The legal system and sources of law

A lower court is faced with a decision of the Court of Appeal and a conflicting decision of the Supreme Court on the same point. Which decision must it follow?

  1. The Supreme Court decision, as it is higher in the hierarchy Correct answer.
  2. The Court of Appeal decision, as it is more recent
  3. Neither, so it must refer the matter to Parliament
  4. Whichever decision it considers better reasoned

Explanation

Where decisions conflict, the court higher in the hierarchy prevails, so a Supreme Court decision binds lower courts over a contrary Court of Appeal ruling. The lower court cannot choose on the basis of reasoning quality or recency, nor refer the point to Parliament.

Question 17The legal system and sources of law

Which feature of the Human Rights Act 1998 preserves parliamentary sovereignty when legislation is incompatible with Convention rights?

  1. A referendum on the offending provision
  2. A requirement that judges rewrite statutes
  3. A power to strike down Acts of Parliament
  4. A declaration of incompatibility Correct answer.

Explanation

Under section 4 the courts may make a declaration of incompatibility, which does not invalidate the Act but invites Parliament to amend it. Courts cannot strike down primary legislation or rewrite it, so sovereignty remains with Parliament.

Question 18The legal system and sources of law

A statutory provision is ambiguous and the court considers the purpose of the Act and the context of the words to reach a sensible result. Which approach is being applied?

  1. The golden rule
  2. The purposive approach Correct answer.
  3. The literal rule
  4. The doctrine of stare decisis

Explanation

The purposive approach looks beyond literal wording to the purpose the legislation is intended to achieve, drawing on context and the overall aim of the Act. The literal and golden rules focus on the words themselves, and stare decisis is about precedent rather than interpretation.

Question 19The legal system and sources of law

Which combination correctly describes the hierarchy of sources where a conflict arises between an Act of Parliament, delegated legislation made under it, and a rule of common law?

  1. All three have equal standing and the court chooses freely
  2. Delegated legislation prevails over the Act that authorised it
  3. Common law prevails over both statute and delegated legislation
  4. The Act prevails over delegated legislation, and both prevail over conflicting common law Correct answer.

Explanation

Parliamentary sovereignty places an Act above delegated legislation made under it, and statute generally prevails over conflicting common law. Delegated legislation cannot override its parent Act, and the sources are not of equal standing.

Question 20The legal system and sources of law

A UK insurer is defending a claim and wishes to rely on a reported decision of the Court of Appeal that supports its position. The claimant's solicitor argues the decision should be disregarded because the reasoning in it was unnecessary to the outcome. Which part of that judgment is capable of binding the court hearing the present case?

  1. The obiter dicta, being the observations made in passing on points not requiring decision
  2. The headnote, being the summary of the judgment prepared by the law reporter
  3. The dissenting judgment, being the opinion of the judge who disagreed with the majority
  4. The ratio decidendi, being the legal principle on which the decision of the case rested Correct answer.

Explanation

Under the doctrine of precedent, only the ratio decidendi binds later courts: it is the legal rule or principle that was essential to the court reaching its decision on the material facts. Everything else in a judgment is persuasive at most. A court may therefore distinguish a case by showing the material facts differ, but it cannot simply ignore the ratio of a higher court.

Question 21Contract law and the essentials of a valid contract

Under the general rule applied in English insurance contract law, when does acceptance of an offer take effect if the acceptance is sent by post?

  1. When the letter is delivered to the offeror's address
  2. On the date the offeror actually reads the letter
  3. When the offeror acknowledges receipt in writing
  4. When the letter is posted by the offeree Correct answer.

Explanation

The postal acceptance rule provides that acceptance is complete as soon as a properly addressed and stamped letter is posted, even if it is later delayed or lost. This exception to the general receipt rule applies unless the offeror has stipulated that actual communication is required.

Question 22Contract law and the essentials of a valid contract

A prospective insured completes a proposal form and pays the first premium, and the insurer issues a cover note stating that cover begins immediately. Which element of a valid contract is most clearly demonstrated by the payment and issue of the cover note?

  1. Privity of contract
  2. Certainty of subject matter
  3. Capacity of the parties
  4. Intention to create legal relations and consideration Correct answer.

Explanation

The premium payment supplies consideration moving from the insured, while the formal cover note evidences that both sides intended legal relations. These two elements are essential alongside offer, acceptance and capacity for a binding insurance contract to exist.

Question 23Contract law and the essentials of a valid contract

Which of the following best describes the legal effect of a counter-offer made in response to an original offer?

  1. It automatically converts the original offer into an invitation to treat
  2. It creates a binding contract on the original terms
  3. It operates as a rejection of the original offer and destroys it Correct answer.
  4. It merely requests further information and keeps the original offer open

Explanation

A counter-offer is a new offer that rejects the original offer, so the original offer can no longer be accepted unless the original offeror renews it. A mere request for information, by contrast, does not destroy the offer.

Question 24Contract law and the essentials of a valid contract

In insurance law, which party is generally required to disclose material facts to the other before the contract is formed?

  1. Both parties equally, but only after the policy is issued
  2. The insured only, subject to the duty of utmost good faith Correct answer.
  3. The insurer only
  4. Neither party, because disclosure is voluntary

Explanation

Insurance contracts are contracts of utmost good faith, and the proposer must disclose all material facts that would influence a prudent insurer's decision. The duty rests principally on the insured, although the insurer also has duties such as fair presentation under modern regimes.

Question 25Contract law and the essentials of a valid contract

Which of the following persons lacks the capacity to enter into a binding contract for insurance?

  1. A trustee acting within the trust's powers
  2. A company incorporated under the Companies Act
  3. A partner acting on behalf of the partnership
  4. A person aged 17 acting for themselves Correct answer.

Explanation

A minor generally lacks full contractual capacity, so a person aged 17 cannot ordinarily be bound by an insurance contract. Companies, partners and trustees acting within their authority all have capacity to contract.

Question 26Contract law and the essentials of a valid contract

An insurer's advertisement in a newspaper states that it will insure any homeowner at a stated premium. A homeowner applies and the insurer refuses. What is the legal status of the advertisement?

  1. A unilateral offer that the insurer cannot revoke
  2. An invitation to treat, so no contract arises from the application alone Correct answer.
  3. A binding offer that the homeowner accepted by applying
  4. A misrepresentation giving rise to damages

Explanation

Advertisements are generally invitations to treat, inviting the customer to make an offer that the insurer may accept or decline. No contract exists until the insurer accepts the application, so refusal does not breach a contract.

Question 27Contract law and the essentials of a valid contract

Which of the following is the best example of valid consideration in an insurance contract?

  1. An oral promise by a third party to pay the insured's losses
  2. A gift made by the insurer to the insured after the policy begins
  3. A statement by the insured that they hope to buy insurance
  4. A promise by the insured to pay the premium in return for the insurer's promise of cover Correct answer.

Explanation

Consideration is something of value given in exchange for the other party's promise. The insured's premium promise supports the insurer's promise of cover, and vice versa, forming the exchange required for a binding contract.

Question 28Contract law and the essentials of a valid contract

Which term describes the requirement that the parties must have reached agreement on the essential terms of an insurance contract without ambiguity?

  1. Novation
  2. Frustration
  3. Privity of contract
  4. Certainty of terms Correct answer.

Explanation

Certainty of terms requires that the essential elements, such as the subject matter, sum insured and premium, be clear and agreed. If terms are too vague or incomplete, the contract may be void for uncertainty.

Question 29Contract law and the essentials of a valid contract

An insured fails to disclose a previous declined application when completing a proposal form that specifically asks about declined applications. Which type of misrepresentation is this?

  1. Innocent non-disclosure
  2. Negligent misrepresentation
  3. Fraudulent misrepresentation Correct answer.
  4. Innocent misrepresentation

Explanation

Deliberately withholding information in answer to a direct question is a fraudulent misrepresentation because the proposer knows the answer is false or incomplete. Fraud requires knowledge of falsity or reckless indifference to the truth, which is present here.

Question 30Contract law and the essentials of a valid contract

Under the general rule on intention to create legal relations, which presumption applies to commercial agreements such as insurance contracts?

  1. Intention is irrelevant in commercial agreements
  2. There is a presumption that the parties did intend legal relations Correct answer.
  3. There is a presumption that the parties did not intend legal relations
  4. Intention must be proved by a notarised document

Explanation

In commercial dealings there is a strong presumption that the parties intend to create legal relations, which can be rebutted by clear evidence to the contrary. Social and domestic arrangements carry the opposite presumption.

Question 31Contract law and the essentials of a valid contract

An insurer sends a renewal notice stating that cover will continue unless the insured responds. The insured does not respond. What is the most likely legal position?

  1. No contract exists because the insured never communicated acceptance
  2. The renewal notice is a mere invitation to treat with no contractual effect
  3. A contract is formed because the original offer stipulated that silence would constitute acceptance Correct answer.
  4. The insured has made a counter-offer by remaining silent

Explanation

Although silence cannot generally amount to acceptance, an offeror may stipulate a mode of acceptance, and where the parties have agreed that continued cover results from silence a contract can arise. The original contractual framework supports that stipulated mechanism.

Question 32Contract law and the essentials of a valid contract

An insured signs a proposal form containing a declaration that all answers are true, but the insurer's agent completed the form incorrectly without the insured checking it. Which statement best reflects the insured's position?

  1. The insured is always bound by the signed declaration regardless of the agent's error
  2. The contract is void because an agent was involved in completion
  3. The insured may be able to avoid the declaration if they reasonably relied on the agent and did not know of the error Correct answer.
  4. The insurer must automatically pay all claims because an agent completed the form

Explanation

Signing a proposal generally binds the signatory, but where an insurer's agent has completed the form and the insured reasonably relied on the agent's skill, the insured may not be bound by the error. The outcome depends on knowledge, reliance and the agent's authority.

Question 33Contract law and the essentials of a valid contract

Which of the following statements about the doctrine of privity of contract is correct?

  1. A third party can enforce a contract if they know of its existence
  2. Only the parties to a contract can generally enforce its terms Correct answer.
  3. Privity prevents an insurer from paying a third party directly
  4. Any person who benefits from a contract may sue on it

Explanation

The privity rule limits enforcement to the parties who provided consideration under the contract. Statutory exceptions, such as the Contracts (Rights of Third Parties) Act 1999, allow a third party to enforce a term where the contract expressly provides or purports to confer a benefit.

Question 34Contract law and the essentials of a valid contract

An insured omits to disclose a medical condition that would have led a prudent insurer to decline the risk or charge a higher premium. What is the legal test for whether the fact is material?

  1. Whether the insured considered the fact important
  2. Whether the fact would influence the judgment of a prudent insurer in fixing the premium or determining whether to take the risk Correct answer.
  3. Whether the fact appears on the proposal form
  4. Whether the fact was known to the insured's doctor

Explanation

Materiality is judged objectively by reference to a prudent insurer's judgment, not the insured's subjective view. A fact is material if it would influence the decision to accept the risk or the terms on which it is accepted.

Question 35Contract law and the essentials of a valid contract

An insured deliberately conceals a material fact and the insurer would not have issued the policy had it known. Which remedy is most likely available to the insurer?

  1. Damages for breach of warranty only
  2. Avoidance of the policy from the outset, subject to statutory protections Correct answer.
  3. Specific performance of the policy
  4. A reduction of the sum insured only

Explanation

Fraudulent non-disclosure entitles the insurer to avoid the contract ab initio, meaning it is treated as never having existed. Under the Consumer Insurance (Disclosure and Representations) Act 2012 and the Insurance Act 2015, proportionate remedies apply for lesser culpability.

Question 36Contract law and the essentials of a valid contract

A contract of insurance contains a term described as a warranty. What is the traditional common law consequence of a breach of warranty by the insured?

  1. The insurer must continue cover but may increase the premium
  2. The insurer is discharged from liability from the date of breach, subject to statutory reform Correct answer.
  3. The policy is automatically void from inception in all cases
  4. The insurer may only claim damages for the breach

Explanation

At common law, breach of a warranty discharged the insurer from liability as at the date of breach. The Insurance Act 2015 modified this so that breach suspends cover rather than discharging it, and the insurer cannot rely on the breach if the insured remedies it.

Question 37Contract law and the essentials of a valid contract

An insured is asked in a proposal form whether they have ever been convicted of a criminal offence. They answer 'no' because they genuinely believe a spent conviction is not a conviction. Which type of misrepresentation is this?

  1. Innocent Correct answer.
  2. Fraudulent
  3. Not a misrepresentation
  4. Negligent

Explanation

An innocent misrepresentation arises where the maker honestly believes the statement is true and has reasonable grounds for that belief. The insured's genuine belief means there is no fraud or negligence, though the statement is still false.

Question 38Contract law and the essentials of a valid contract

Which of the following best explains why an insurance contract is described as one of 'utmost good faith'?

  1. Because the insured must accept all terms offered
  2. Because the insurer must always pay claims without investigation
  3. Because both parties must act honestly and disclose material facts throughout the relationship Correct answer.
  4. Because the contract is governed by equity rather than common law

Explanation

Utmost good faith imposes a higher standard than ordinary commercial dealing, requiring honesty and disclosure of material facts at inception and during the relationship. It underpins duties such as fair presentation of the risk.

Question 39Contract law and the essentials of a valid contract

An insurer and insured agree that a policy will be governed by English law and that disputes will be resolved in the English courts. Which element of a valid contract does this clause primarily support?

  1. Certainty of terms
  2. Capacity
  3. Consideration
  4. Intention to create legal relations Correct answer.

Explanation

A jurisdiction and governing law clause is strong evidence that the parties intended their arrangement to have legal consequences. It reinforces the commercial presumption of intention to create legal relations.

Question 40Contract law and the essentials of a valid contract

A proposal form states that the insured's answers are the 'basis of the contract'. What is the effect of such a declaration under the Insurance Act 2015?

  1. It is effective only if the insured signs in the presence of a witness
  2. It is of no effect; the Act abolishes basis of contract clauses Correct answer.
  3. It converts every answer into a warranty, so any inaccuracy discharges the insurer
  4. It applies only to life insurance policies

Explanation

Section 9 of the Insurance Act 2015 abolishes basis of contract clauses by preventing representations from being converted into warranties. Such a declaration therefore cannot turn every answer into a term whose breach discharges liability.

Question 41Contract law and the essentials of a valid contract

An insured makes a negligent misrepresentation in a consumer insurance proposal. Under the Consumer Insurance (Disclosure and Representations) Act 2012, which remedy may the insurer apply if it would have charged a higher premium?

  1. Avoid the policy entirely and retain the premium
  2. Refuse the claim in full and cancel the policy
  3. Take no action because negligent misrepresentation is not actionable
  4. Pay the claim but reduce it proportionately to reflect the higher premium that would have been charged Correct answer.

Explanation

For negligent misrepresentation by a consumer, the insurer's remedy is proportionate: it may reduce the claim to reflect what it would have charged had the true position been disclosed. Avoidance is reserved for qualifying deliberate or reckless misrepresentation.

Question 42Contract law and the essentials of a valid contract

An insured fails to disclose a material fact but the insurer would have issued the policy on the same terms regardless. What is the position on the insurer's right to avoid the policy?

  1. The insurer may avoid because any non-disclosure is a breach of duty
  2. The insurer may avoid only if the insured acted fraudulently
  3. The insurer may avoid only if the premium exceeds a statutory threshold
  4. The insurer cannot avoid because the fact did not induce the contract Correct answer.

Explanation

Inducement is required: the insurer must show that it would have acted differently had the fact been disclosed. If the insurer would have issued the same policy on the same terms, the non-disclosure did not induce the contract and avoidance is unavailable.

Question 43Contract law and the essentials of a valid contract

An insured breaches a term that is not a warranty and the breach does not defeat the purpose of the contract. Under the Insurance Act 2015, what is the insurer's position?

  1. The insurer may avoid the policy from inception
  2. The insurer is automatically discharged from liability from the date of breach
  3. The insurer cannot rely on the breach to refuse a claim if the breach was not material to the loss Correct answer.
  4. The insurer may only increase the premium for the following year

Explanation

For non-warranty terms, section 11 of the Insurance Act 2015 prevents the insurer from relying on a breach to refuse a claim unless the breach was material to the loss or the term was designed to reduce a particular type of risk. The remedy must be proportionate.

Question 44Contract law and the essentials of a valid contract

A court is asked to decide whether a term in an insurance policy is a condition precedent to liability. Which approach best reflects how the court will construe the term?

  1. It will treat every term as a condition precedent to maximise insurer protection
  2. It will ignore the term if the insured did not read the policy
  3. It will apply a fixed statutory list of condition precedent terms
  4. It will look at the words used and the commercial context to decide whether the parties intended the term to be essential Correct answer.

Explanation

Whether a term is a condition precedent depends on the intention of the parties as gathered from the language and commercial context of the policy. Clear words are needed before a term will be treated as essential.

Question 45Contract law and the essentials of a valid contract

An insured and insurer agree to replace the original insurer with a new insurer on the same policy terms, with the consent of all parties. Which contractual doctrine does this illustrate?

  1. Novation Correct answer.
  2. Subrogation
  3. Frustration
  4. Rectification

Explanation

Novation occurs when all parties agree to substitute a new party for an existing one, extinguishing the original obligation and replacing it with a new one. It requires the consent of all parties, unlike assignment, which does not.

Question 46Contract law and the essentials of a valid contract

A court is assessing whether the parties to an insurance arrangement intended to create legal relations. Which factor is most relevant to that assessment in a commercial insurance context?

  1. Whether the premium was paid by instalments or in a single sum
  2. Whether the parties intended the arrangement to have legal consequences Correct answer.
  3. Whether the insured read every clause of the policy wording
  4. Whether the arrangement was made in a social or domestic setting

Explanation

Intention to create legal relations is a separate requirement for a valid contract and asks whether the parties objectively intended their agreement to be legally binding. In commercial dealings there is a strong presumption that such intention exists, whereas social and domestic arrangements are presumed not to be binding. The method of paying premium and whether the insured read the wording are not tests of intention.

Question 47Contract law and the essentials of a valid contract

An insured completes a proposal for household cover and the insurer issues a policy. Which element of a valid contract is satisfied by the insurer's promise to indemnify the insured in return for the premium?

  1. Legality of purpose
  2. Certainty of terms
  3. Consideration Correct answer.
  4. Capacity

Explanation

Consideration is the exchange of value that makes a promise enforceable, and in insurance the premium is the consideration moving from the insured while the promise of cover is the consideration moving from the insurer. Capacity concerns the parties' legal ability to contract, and legality concerns whether the purpose is lawful. Certainty concerns whether the terms are sufficiently clear, not the exchange of value.

Question 48Contract law and the essentials of a valid contract

An insurer wishes to rely on a clause in a policy that excludes liability for damage caused by frost. The insured argues the clause was never properly incorporated. Which fact would most strongly support the insurer's case that the clause was incorporated into the contract?

  1. The clause appeared in a standard policy wording referred to in the proposal and supplied before the contract was concluded Correct answer.
  2. The clause reflected the insurer's usual practice even though it was never shown to the insured
  3. The clause was mentioned verbally by an agent after the insured had paid the premium
  4. The clause was printed in small type on the reverse of a certificate issued after the policy had incepted

Explanation

A term is incorporated if it is contained in a document that the party seeking to rely on it did reasonably enough to bring to the other party's attention before the contract was formed. A standard wording referred to in the proposal and supplied before conclusion is the classic route to incorporation. Terms first presented after the contract is made come too late, and a purely internal practice does not bind the insured.

Question 49Contract law and the essentials of a valid contract

An insured seeks to enforce a benefit conferred by an insurance policy taken out by their employer. Applying the doctrine of privity, which statement best describes the insured's position at common law?

  1. The insured may enforce the benefit only if the insurer agrees after a claim arises
  2. The insured cannot enforce the benefit because they are not a party to the contract Correct answer.
  3. The insured may enforce the benefit because they have an insurable interest in the subject matter
  4. The insured may enforce the benefit because they are named in the policy schedule

Explanation

At common law only a party to a contract can enforce rights under it, so a person who is not a party generally cannot sue on the policy even if they stand to benefit. Statutory reform has softened this rule in some jurisdictions, but the question asks about the common law position. Being named in a schedule or having an insurable interest does not by itself make the person a party.

Question 50Contract law and the essentials of a valid contract

An insured proposes for life cover and the insurer's underwriting guide states that applicants over a stated age will be declined. The proposal asks for the applicant's date of birth, and the insured enters a date that makes them appear younger than they are, knowing the true date would lead to refusal. The insurer issues the policy. Which analysis of the insured's conduct is most accurate?

  1. There is no misrepresentation because the insurer could have verified the date of birth independently
  2. The insured has made a fraudulent misrepresentation, entitling the insurer to rescind and refuse the claim Correct answer.
  3. The insured has breached a warranty of accuracy, so the policy is automatically void from inception
  4. The insured has made an innocent misrepresentation, so the insurer's only remedy is damages

Explanation

A statement of fact that is false, made knowingly or recklessly, and which induces the insurer to enter the contract is a fraudulent misrepresentation. The insurer may rescind the contract and, in appropriate cases, retain the premium, and a claim may be refused. The fact that the insurer could have checked the information does not cure a deliberate falsehood, and the conduct is not innocent.