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CII IF5 practice questions

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Question 1Insurance law

Under the Insurance Act 2015, which duty does a commercial policyholder owe to the insurer before the contract is formed?

  1. A duty of fair presentation of the risk Correct answer.
  2. A duty to warrant the accuracy of every statement made
  3. A duty to disclose only facts the insurer expressly requests
  4. A duty to obtain independent verification of all material facts

Explanation

The Insurance Act 2015 replaced the old duty of utmost good faith disclosure with a duty of fair presentation of the risk, which applies to commercial insureds before the contract is entered into. It requires disclosure of material circumstances and a reasonable search for information.

Question 2Insurance law

In insurance contract law, what does the principle of indemnity mean for a property policy?

  1. The insured receives a fixed sum stated in the policy regardless of loss
  2. The insured is restored to the financial position held before the loss Correct answer.
  3. The insured may recover a sum unrelated to the loss suffered
  4. The insurer must always replace damaged property in kind

Explanation

Indemnity means the insured is placed back in the same financial position as before the loss, no better and no worse. This underpins the rules on subrogation and the prevention of profit from insurance.

Question 3Insurance law

Which statutory provision permits an insurer to avoid a policy for fraudulent misrepresentation or non-disclosure by the insured?

  1. Section 12 of the Insurance Act 2015 Correct answer.
  2. Section 1 of the Third Parties (Rights against Insurers) Act 2010
  3. Section 2 of the Consumer Insurance (Disclosure and Representations) Act 2012
  4. Section 14 of the Marine Insurance Act 1906

Explanation

Section 12 of the Insurance Act 2015 entitles the insurer to avoid the policy and retain the premium where the insured deliberately or recklessly makes a fraudulent misrepresentation. The remedy is available only where the breach was deliberate or reckless.

Question 4Insurance law

A consumer inadvertently fails to mention a previous declined application when renewing home insurance. Under the Consumer Insurance (Disclosure and Representations) Act 2012, the insurer would most likely treat this as which type of misrepresentation?

  1. A deliberate misrepresentation
  2. A reckless misrepresentation
  3. An innocent misrepresentation Correct answer.
  4. A fraudulent misrepresentation

Explanation

A careless but honest failure to take reasonable care to answer accurately is an innocent misrepresentation under the 2012 Act. The insurer's remedy depends on the type of misrepresentation and what it would have done had it known the truth.

Question 5Insurance law

Which element must a claimant generally prove to establish negligence against an insurance broker?

  1. That the broker owed a duty of care, breached it, and caused loss Correct answer.
  2. That the broker charged a commission above the market rate
  3. That the broker was regulated by the Financial Conduct Authority
  4. That the broker held a written agency agreement

Explanation

Negligence requires a duty of care, a breach of that duty, causation of loss, and damage that is not too remote. Regulation or commission levels do not by themselves establish liability.

Question 6Insurance law

What is the effect of a warranty in a commercial insurance contract following the Insurance Act 2015?

  1. Breach has no effect unless the insurer can show prejudice
  2. Breach terminates the contract immediately
  3. Breach automatically discharges the insurer from all liability from inception
  4. Breach suspends cover for the duration of the breach only Correct answer.

Explanation

Section 10 of the Insurance Act 2015 abolished the rule that breach of warranty discharges the insurer entirely. Instead, the insurer's liability is suspended during the period of breach and resumes once the breach is remedied.

Question 7Insurance law

An insured fails to comply with a claims notification condition and the insurer suffers no prejudice. Under the Insurance Act 2015, what is the likely outcome?

  1. The insurer may reduce the claim proportionately
  2. The insurer may avoid the policy from inception
  3. The insurer may refuse the claim in full
  4. The insurer has no remedy because the breach did not prejudice it Correct answer.

Explanation

Section 11 of the Insurance Act 2015 provides that where a breach of a term relating to a claim does not prejudice the insurer, the insurer cannot rely on the breach to refuse the claim. The remedy must reflect the prejudice actually suffered.

Question 8Insurance law

Which Act introduced the requirement for insurers to pay damages for late payment of insurance claims?

  1. The Insurance Act 2015
  2. The Enterprise Act 2016 Correct answer.
  3. The Consumer Insurance (Disclosure and Representations) Act 2012
  4. The Financial Services and Markets Act 2000

Explanation

The Enterprise Act 2016 inserted an implied term into insurance contracts requiring payment of sums due within a reasonable time, with damages available for late payment. The provision applies to contracts entered into on or after 4 May 2017.

Question 9Insurance law

What is the doctrine of subrogation designed to prevent?

  1. The insurer avoiding liability for fraudulent claims
  2. The insured recovering more than an indemnity from multiple sources Correct answer.
  3. The insurer raising premiums after a claim
  4. The insured cancelling the policy mid-term

Explanation

Subrogation allows the insurer, having indemnified the insured, to step into the insured's shoes and pursue third parties liable for the loss. It prevents the insured from recovering twice and preserves the principle of indemnity.

Question 10Insurance law

Which of the following best describes the principle of insurable interest in non-marine insurance?

  1. The insured must name a beneficiary on the policy
  2. The insured must have paid the first premium before cover begins
  3. The insured must have a legally recognised relationship with the subject matter such that loss would affect them Correct answer.
  4. The insured must own the property insured outright

Explanation

Insurable interest requires a legally recognised relationship with the subject matter such that the insured benefits from its preservation or suffers loss from its damage. Ownership is one example but not the only form.

Question 11Insurance law

A commercial insured deliberately conceals a known fire risk to obtain cheaper cover. What remedy is available to the insurer under the Insurance Act 2015?

  1. The insurer may cancel the policy only with prospective effect
  2. The insurer must pay the claim but may increase future premiums
  3. The insurer may only reduce the claim proportionately
  4. The insurer may avoid the policy and retain the premium Correct answer.

Explanation

Where the insured deliberately or recklessly breaches the duty of fair presentation, section 12 allows the insurer to avoid the policy and retain the premium. This is the most severe remedy available under the Act.

Question 12Insurance law

What does the term 'contra proferentem' mean in the context of insurance contract interpretation?

  1. Exclusions are always void if unclear
  2. The contract is interpreted in favour of the insured at all times
  3. Terms are read literally regardless of commercial context
  4. Ambiguities are construed against the party that drafted the term Correct answer.

Explanation

Contra proferentem is a rule of interpretation under which ambiguous wording is construed against the party who drafted it, usually the insurer. It is a rule of last resort applied only where genuine ambiguity remains after considering context.

Question 13Insurance law

Which of the following would most likely be considered an unfair term under the Consumer Rights Act 2015 in a consumer insurance contract?

  1. A term setting out the complaints procedure
  2. A term defining the geographical scope of cover
  3. A term allowing the insurer to vary the premium without notice at any time Correct answer.
  4. A term requiring the consumer to notify claims within a reasonable time

Explanation

The Consumer Rights Act 2015 requires terms in consumer contracts to be fair and transparent, and a term allowing arbitrary variation without notice is likely to fail the fairness test. Terms that merely define cover or set out processes are generally not unfair.

Question 14Insurance law

Under the Third Parties (Rights against Insurers) Act 2010, when does a third party's right against the insurer arise?

  1. When the insured becomes insolvent and liability has been established Correct answer.
  2. When the insurer admits liability
  3. When the insured notifies the insurer of the claim
  4. When the third party obtains a court judgment

Explanation

The 2010 Act transfers the insured's rights against the insurer to the third party when the insured becomes insolvent and the liability is established. The Act improved on the 1930 Act by allowing information to be obtained before proceedings.

Question 15Insurance law

Which remedy is available to an insurer where a consumer makes a careless misrepresentation and the insurer would have charged a higher premium had it known the truth?

  1. Pay the claim in full without adjustment
  2. Avoid the policy and retain the premium
  3. Reduce the claim proportionately Correct answer.
  4. Cancel the policy from inception

Explanation

Under the Consumer Insurance (Disclosure and Representations) Act 2012, where the misrepresentation was careless and the insurer would have charged more, the claim is reduced proportionately. The aim is to place the insurer in the position it would have occupied.

Question 16Insurance law

What is the effect of a 'basis of contract' clause in a commercial insurance policy?

  1. It requires the insured to appoint a loss adjuster
  2. It limits the policy period to twelve months
  3. It converts all statements in the proposal into warranties Correct answer.
  4. It excludes all liability for negligent acts

Explanation

A basis of contract clause treats the answers in the proposal as the basis of the contract, effectively converting them into warranties. The Insurance Act 2015 restricts their effect by requiring the insurer to give the insured a notice and by disapplying the automatic discharge rule.

Question 17Insurance law

Which principle prevents an insured from recovering twice for the same loss from two separate policies?

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

Explanation

The principle of contribution allows an insurer that has paid a claim to seek a proportionate share from other insurers covering the same loss. It prevents double recovery and supports indemnity.

Question 18Insurance law

An insured fails to disclose a material circumstance to a commercial insurer. The insurer would have declined the risk altogether had it known. Under the Insurance Act 2015, what remedy is available if the breach was not deliberate or reckless?

  1. The insurer may treat the contract as if it had never been entered into
  2. The insurer may avoid the policy and retain the premium
  3. The insurer may avoid the policy but must return the premium Correct answer.
  4. The insurer may only reduce the claim proportionately

Explanation

Where the insurer would not have entered the contract at all but the breach was not deliberate or reckless, section 8 of the Insurance Act 2015 allows the insurer to avoid the contract but the premium must be returned. This distinguishes it from the deliberate breach remedy.

Question 19Insurance law

Which of the following statements about the duty of utmost good faith under the Insurance Act 2015 is correct?

  1. It remains a standalone duty enforceable by damages
  2. It is abolished entirely
  3. It applies only to marine insurance
  4. It is restated as a duty of fair presentation for commercial insureds Correct answer.

Explanation

The Insurance Act 2015 replaced the old duty of utmost good faith with the duty of fair presentation of the risk for commercial insureds. The Act removed the remedy of avoidance for breach of the general duty of good faith.

Question 20Insurance law

What is the primary purpose of the Financial Ombudsman Service in the context of insurance disputes?

  1. To resolve disputes between consumers and financial firms informally and free of charge Correct answer.
  2. To set premium rates for the insurance market
  3. To provide legal representation to policyholders in court
  4. To prosecute insurers for regulatory breaches

Explanation

The Financial Ombudsman Service resolves disputes between eligible complainants and financial firms, including insurers, in an informal and cost-free way. Its decisions are binding on the firm if the complainant accepts them.

Question 21Insurance law

Which of the following is a key requirement for a valid contract of insurance to exist?

  1. The insured must have a written policy document
  2. The insured must have paid the full annual premium
  3. There must be offer, acceptance, consideration and intention to create legal relations Correct answer.
  4. The insurer must have issued a cover note

Explanation

A contract of insurance, like any contract, requires offer and acceptance, consideration, and intention to create legal relations. A written policy is evidence of the contract but is not essential to its formation.

Question 22Insurance law

An insurer relies on an exclusion clause that is ambiguous. How will a court most likely interpret it?

  1. In favour of the insurer as the party relying on it
  2. In favour of the insured because of contra proferentem Correct answer.
  3. By referring it to the Financial Ombudsman Service
  4. By striking it out entirely

Explanation

Where an exclusion clause is genuinely ambiguous, the contra proferentem rule construes it against the party who drafted and relies on it, usually the insurer. Courts consider the natural meaning in context before resorting to this rule.

Question 23Insurance law

What is the significance of the case of Carter v Boehm in insurance law?

  1. It created the doctrine of subrogation
  2. It established the duty of utmost good faith and disclosure Correct answer.
  3. It abolished the requirement for insurable interest
  4. It introduced the principle of contribution

Explanation

Carter v Boehm (1766) is the foundational case establishing the duty of utmost good faith and the insured's obligation to disclose material facts. The principle was later codified in the Marine Insurance Act 1906 and reformed by the Insurance Act 2015.

Question 24Insurance law

A consumer policy contains a term allowing the insurer to rely on a breach of any condition to reject a claim, even where the breach is trivial and unrelated to the loss. How is this term likely to be treated under the Consumer Rights Act 2015?

  1. It will be enforced as written
  2. It is likely to be unfair and therefore not binding Correct answer.
  3. It will be referred to the PRA for approval
  4. It will be interpreted in favour of the insurer

Explanation

The Consumer Rights Act 2015 requires fairness and transparency in consumer contracts. A term allowing the insurer to reject a claim for a trivial, unrelated breach is likely to be regarded as unfair and therefore not binding on the consumer.

Question 25Insurance law

Which of the following best describes the remedy of 'damages for late payment' introduced by the Enterprise Act 2016?

  1. The insurer must pay interest on the claim automatically
  2. The insurer must pay double the claim amount
  3. The insured may cancel the policy without penalty
  4. The insured may claim damages for losses caused by the insurer's unreasonable delay in paying a claim Correct answer.

Explanation

The Enterprise Act 2016 implied a term into insurance contracts requiring payment within a reasonable time. If the insurer breaches this term, the insured may claim damages for losses flowing from the delay, subject to the policy terms.

Question 26Insurance law

Under the Insurance Act 2015, what is the effect of a 'basis of contract' clause in a commercial insurance policy?

  1. It is automatically void and of no effect. Correct answer.
  2. It converts representations into warranties, allowing the insurer to avoid the policy for any inaccuracy.
  3. It is valid but subject to the insurer showing prejudice before avoiding the policy.
  4. It is only effective if the insured is a large business.

Explanation

Section 9 of the Insurance Act 2015 abolishes 'basis of contract' clauses by rendering them automatically void. Such clauses previously turned all representations into warranties, allowing insurers to avoid policies for minor inaccuracies. The Act ensures that only genuine warranties have that effect.

Question 27Insurance law

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

  1. The insured can recover the full sum insured regardless of the actual loss.
  2. The insurer must pay all claims promptly without investigation.
  3. The insured must be restored to the same financial position as before the loss, no better or worse. Correct answer.
  4. The insured must disclose all material facts to the insurer.

Explanation

The principle of indemnity ensures that the insured is compensated for the actual financial loss suffered, without profit. It prevents the insured from recovering more than the value of the loss. This principle underpins many insurance rules, such as subrogation and contribution.

Question 28Insurance law

In the context of insurance, what is the purpose of the doctrine of subrogation?

  1. To prevent the insured from recovering twice for the same loss.
  2. To require the insured to disclose all material facts.
  3. To ensure that the insurer pays claims within a reasonable time.
  4. To allow the insurer to step into the insured's shoes and pursue third parties liable for the loss. Correct answer.

Explanation

Subrogation allows the insurer, after indemnifying the insured, to exercise the insured's rights against third parties responsible for the loss. This helps the insurer recover its outlay and reinforces the principle of indemnity. It does not prevent double recovery directly; that is the role of contribution.

Question 29Insurance law

Which case established that an insurer may avoid a policy where the insured failed to disclose a material fact, even if the non-disclosure was innocent?

  1. Carter v Boehm
  2. Woolcott v Sun Alliance
  3. Lambert v Co-operative Insurance Society Correct answer.
  4. Rozanes v Bowen

Explanation

In Lambert v Co-operative Insurance Society, the court held that an innocent non-disclosure of a material fact, such as a husband's criminal convictions, entitled the insurer to avoid the policy. The case illustrates the strict nature of the duty of disclosure before the Insurance Act 2015. The Act has since modified the remedy to be more proportionate.

Question 30Insurance law

Under the Insurance Act 2015, which remedy is available to an insurer if a commercial insured breaches the duty of fair presentation deliberately or recklessly?

  1. The insurer may not avoid the contract but may increase the premium.
  2. The insurer may only reduce the claim proportionately.
  3. The insurer may avoid the contract and refuse all claims, but must return the premium.
  4. The insurer may avoid the contract, refuse all claims, and retain the premium. Correct answer.

Explanation

For deliberate or reckless breaches of the duty of fair presentation, the insurer may avoid the contract, refuse all claims, and retain the premium. This is the most severe remedy under the Act. It reflects the serious nature of such breaches.

Question 31Insurance law

What is the effect of a warranty in a commercial insurance contract under the Insurance Act 2015?

  1. Breach of warranty allows the insurer to avoid the contract from inception.
  2. Breach of warranty has no effect unless it is material to the risk.
  3. Breach of warranty automatically discharges the insurer from liability for all losses.
  4. Breach of warranty suspends the insurer's liability for losses occurring during the period of breach. Correct answer.

Explanation

Section 10 of the Insurance Act 2015 provides that breach of warranty suspends the insurer's liability for losses occurring during the period of breach. Once the breach is remedied, the insurer's liability resumes. This is a significant change from the previous law, where breach of warranty automatically discharged the insurer.

Question 32Insurance law

Which of the following is a key requirement for a valid contract of insurance?

  1. The policy must be in writing.
  2. The insurer must be authorised and regulated by the Prudential Regulation Authority. Correct answer.
  3. The insured must have an insurable interest at the time the policy is taken out.
  4. The premium must be paid before cover commences.

Explanation

A key requirement for a valid insurance contract is that the insurer is authorised and regulated by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). This ensures that the insurer is subject to regulatory oversight and can meet its obligations. While insurable interest is important, it is not required for all types of insurance at inception.

Question 33Insurance law

In insurance law, what is the principle of contribution?

  1. The insurer's right to recover a proportionate share from other insurers liable for the same loss. Correct answer.
  2. The insurer's obligation to contribute to a central fund.
  3. The insured's right to claim from multiple insurers for the same loss.
  4. The insured's obligation to contribute to the premium.

Explanation

Contribution is the right of an insurer who has paid a claim to recover a proportionate share from other insurers that are also liable for the same loss. It prevents the insured from recovering more than the indemnity and ensures equitable sharing among insurers. It applies where multiple policies cover the same risk.

Question 34Insurance law

What is the primary purpose of the Financial Ombudsman Service (FOS) in the context of insurance disputes?

  1. To provide legal representation for insureds in court proceedings.
  2. To set premiums for insurance policies.
  3. To regulate insurers and enforce compliance with the FCA rules.
  4. To provide a free, independent dispute resolution service for consumers and small businesses. Correct answer.

Explanation

The Financial Ombudsman Service provides a free, independent and impartial service for resolving disputes between consumers and financial businesses, including insurers. It aims to resolve complaints quickly and informally. It does not regulate insurers or set premiums.

Question 35Insurance law

Which of the following is an example of a 'consumer' for the purposes of the Consumer Rights Act 2015 in the context of insurance?

  1. A sole trader purchasing insurance for their business.
  2. A partnership purchasing liability insurance.
  3. A large corporation purchasing commercial property insurance.
  4. An individual purchasing motor insurance for personal use. Correct answer.

Explanation

The Consumer Rights Act 2015 defines a consumer as an individual acting for purposes wholly or mainly outside their trade, business, craft or profession. An individual purchasing motor insurance for personal use is a consumer. Sole traders, partnerships and companies may not be consumers if the insurance is for business purposes.

Question 36Insurance law

Under the Consumer Insurance (Disclosure and Representations) Act 2012, what is the effect of a qualifying misrepresentation made by a consumer?

  1. The insurer must pay the claim in full regardless of the misrepresentation.
  2. The insurer's remedy depends on whether the misrepresentation was deliberate, reckless, or careless. Correct answer.
  3. The insurer can avoid the policy and retain the premium.
  4. The insurer can automatically increase the premium by 50%.

Explanation

The Consumer Insurance (Disclosure and Representations) Act 2012 introduces a proportionate remedy regime based on the consumer's state of mind. For deliberate or reckless misrepresentations, the insurer may avoid the policy and retain the premium. For careless misrepresentations, the remedy is proportionate to what the insurer would have done had it known the truth.

Question 37Insurance law

Which of the following is a 'qualifying misrepresentation' under the Consumer Insurance (Disclosure and Representations) Act 2012?

  1. A misrepresentation made by the insurer to the consumer.
  2. A misrepresentation made by a third party to the insurer.
  3. A misrepresentation made by the consumer that is material to the risk and induced the insurer to enter the contract. Correct answer.
  4. Any incorrect statement made by the consumer, regardless of materiality.

Explanation

A qualifying misrepresentation under the Act is one that is material to the risk and induced the insurer to enter into the contract. It must be made by the consumer. The Act provides remedies for such misrepresentations.

Question 38Insurance law

In insurance law, what is the effect of a 'condition precedent' to liability in a policy?

  1. The condition only applies to consumer policies.
  2. The insurer must pay the claim even if the condition is not met.
  3. The condition is void under the Insurance Act 2015.
  4. The insured must comply with the condition before the insurer is liable to pay the claim. Correct answer.

Explanation

A condition precedent to liability requires the insured to comply with certain obligations before the insurer becomes liable to pay a claim. If the condition is not met, the insurer may refuse to pay. The Insurance Act 2015 and the Enterprise Act 2016 have modified some aspects, but conditions precedent remain valid if fair.

Question 39Insurance law

Which of the following best describes the 'fair presentation of the risk' duty under the Insurance Act 2015?

  1. The insured must disclose all material circumstances and not make misrepresentations. Correct answer.
  2. The insured must disclose only information that is in the public domain.
  3. The insured has no duty to disclose information that the insurer could have discovered.
  4. The insured must disclose only information that the insurer specifically requests.

Explanation

The duty of fair presentation requires the insured to disclose all material circumstances and to avoid misrepresentations. It is a broader duty than merely answering the insurer's questions. The insured must also conduct a reasonable search for information.

Question 40Insurance law

Under the Insurance Act 2015, what is the effect of a 'transparent' term in a commercial insurance contract?

  1. The term is automatically void if it is not transparent.
  2. The term is presumed to be fair and reasonable. Correct answer.
  3. The term is not subject to the requirement of good faith.
  4. The term is exempt from the fair presentation of the risk duty.

Explanation

Under the Insurance Act 2015, a transparent term is one that is clear and unambiguous and brought to the insured's attention. Such a term is presumed to be fair and reasonable for the purposes of the Act. This presumption can be rebutted.

Question 41Insurance law

Which of the following is a key feature of the Insurance Act 2015 in relation to remedies for breach of the duty of fair presentation?

  1. The remedies are proportionate and depend on the insurer's response had it known the truth. Correct answer.
  2. The insurer must always pay the claim but may increase the premium.
  3. The insurer can only avoid the policy if the breach was deliberate.
  4. The remedies are the same as under the Consumer Insurance (Disclosure and Representations) Act 2012.

Explanation

The Insurance Act 2015 introduces proportionate remedies for breach of the duty of fair presentation. The remedy depends on what the insurer would have done had it known the truth, such as charging a higher premium or imposing different terms. This is similar to the consumer regime but with some differences.

Question 42Insurance law

In the context of insurance law, what is the 'insurable interest' requirement for life insurance?

  1. There is no requirement for insurable interest in life insurance.
  2. The insured must have a financial interest in the life insured at the time the policy is taken out. Correct answer.
  3. The insured must have a financial interest in the life insured at both inception and death.
  4. The insured must have a financial interest in the life insured at the time of the insured's death.

Explanation

For life insurance, the insured must have an insurable interest in the life insured at the time the policy is taken out. This is required by the Life Assurance Act 1774. The interest need not continue at the time of death.

Question 43Insurance law

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

  1. The duty applies only to consumers.
  2. The duty requires the insured to disclose all material circumstances and to conduct a reasonable search. Correct answer.
  3. The duty is limited to information the insured actually knows.
  4. The duty is satisfied by answering the insurer's questions truthfully.

Explanation

The duty of fair presentation requires the insured to disclose all material circumstances and to conduct a reasonable search for information. It is not satisfied merely by answering questions truthfully. The duty applies to all insureds, not just consumers.

Question 44Insurance law

What is the effect of the 'Enterprise Act 2016' on the implied term to pay claims within a reasonable time?

  1. It applies only to consumer insurance contracts.
  2. It sets a fixed time limit of 30 days for all claims.
  3. It implies a term into all insurance contracts that claims must be paid within a reasonable time. Correct answer.
  4. It allows the insured to claim damages for late payment without proof of loss.

Explanation

The Enterprise Act 2016 implies a term into all insurance contracts that claims must be paid within a reasonable time. If the insurer breaches this term, the insured can claim damages for foreseeable loss. The Act does not set a fixed time limit.

Question 45Insurance law

Which of the following is a 'material circumstance' for the purposes of the duty of fair presentation under the Insurance Act 2015?

  1. Any circumstance that the insured considers important.
  2. A circumstance that is known to the insurer.
  3. A circumstance that is in the public domain.
  4. A circumstance that would influence the judgment of a prudent insurer in determining whether to take the risk and on what terms. Correct answer.

Explanation

A material circumstance is one that would influence the judgment of a prudent insurer in deciding whether to accept the risk and on what terms. This is an objective test. The insured must disclose such circumstances.

Question 46Insurance law

In insurance law, what is the 'principle of utmost good faith'?

  1. A duty on the insured only to disclose all information.
  2. A duty on the insurer only to pay claims promptly.
  3. A duty that applies only to marine insurance.
  4. A duty on both parties to act with the highest standards of honesty and disclosure. Correct answer.

Explanation

The principle of utmost good faith imposes a duty on both the insured and the insurer to act with honesty and to disclose material information. It is a fundamental principle of insurance law. The Insurance Act 2015 modifies some of its remedies.

Question 47Insurance law

Under the Insurance Act 2015, when an insurer has a remedy for a breach of the duty of fair presentation, which statement best describes how the Act's default scheme may be altered by the parties?

  1. The parties may contract out freely in every commercial policy, provided the term appears in the schedule of the policy.
  2. The parties may contract out of the default remedies only where the insured is a large business and the term is transparent and not detrimental to the insured's interests. Correct answer.
  3. The parties may contract out only with the written approval of the Financial Conduct Authority before the policy is issued.
  4. The parties may never contract out of the default remedies, because the Act's provisions are mandatory in all commercial contexts.

Explanation

The Insurance Act 2015 permits insurers and commercial insureds to agree terms that differ from the default regime, but section 15 restricts contracting out where the insured is a small or medium-sized enterprise, and any disadvantageous term must be transparent and not detrimental to the insured. The Act's protections therefore apply automatically unless a valid, clear agreement displaces them. Consumer insurance is governed separately and cannot be contracted out of in the same way.

Question 48Insurance law

An insurer has paid a claim in full to its insured for water damage to a warehouse. The damage was caused by the negligence of a neighbouring occupier. Which statement best describes the insurer's position under the doctrine of subrogation?

  1. The insurer may recover from the occupier only if the insured assigns the policy to the insurer in writing before payment.
  2. The insurer automatically becomes the owner of the insured's entire claim against the occupier, including any uninsured losses.
  3. The insurer may pursue the negligent occupier in the insured's name to recover the amount it has paid, provided the insured has not already released that party. Correct answer.
  4. The insurer has no rights against the occupier because the loss was not caused by the insured's own act.

Explanation

Subrogation allows an indemnity insurer that has paid a claim to stand in the insured's shoes and pursue third parties who caused the loss, recovering only up to the amount paid. The right is exercised in the insured's name and is defeated if the insured has already compromised the claim. The insured retains any recovery for uninsured losses.

Question 49Insurance law

Which statement correctly describes the effect of the Third Parties (Rights against Insurers) Act 2010 where an insured has incurred a liability to a third party and later becomes insolvent?

  1. The Act applies only to compulsory employers' liability insurance and not to other classes of liability cover.
  2. The third party must always obtain judgment against the insured before any rights transfer to them under the Act.
  3. The third party may bring proceedings directly against the insurer to establish and enforce the insured's liability, without first obtaining judgment against the insured. Correct answer.
  4. The Act gives the third party a claim limited to unpaid premiums owed by the insured to the insurer.

Explanation

The Third Parties (Rights against Insurers) Act 2010 transfers the insured's rights under the policy to the third party when the insured becomes insolvent. A key reform was that the third party may sue the insurer directly and can establish the insured's liability in those proceedings, rather than needing a prior judgment. The Act applies broadly to liability insurance, not just compulsory classes.

Question 50Insurance law

Which of the following best describes the effect of the Insurance Act 2015 on an insured's knowledge for the purposes of the duty of fair presentation?

  1. The insured is treated as knowing only what its directors personally recall at the time of placing the risk.
  2. The insured's knowledge is limited to information recorded in its audited financial statements.
  3. The insured must disclose material circumstances that it knows or ought to know, including matters known to individuals whose knowledge is attributable to it. Correct answer.
  4. The insured need disclose only matters it has been expressly asked about in the proposal form.

Explanation

The Insurance Act 2015 requires a fair presentation of the risk based on what the insured knows and ought to know, and it attributes to the insured the knowledge of senior managers and those responsible for arranging the insurance. This reflects the Act's aim of a realistic but demanding disclosure standard. Disclosure is not confined to questions asked in a proposal form.