I85PREP
⌘ K
CII Basic Insurance study materials
CII Basic Insurance study resources

CII Basic Insurance practice questions

One question at a time. Build your CII Basic Insurance understanding.

First 50 of 200 questions. Each one lists the choices, the correct answer, and an explanation. The checker at the top of this page saves progress in this browser when it is available.

Continue in the practice tool above to load more questions, 50 at a time.

Question 1Basic insurance principles and practice

A household policyholder deliberately sets fire to their own insured property to claim the sum insured. Under the principle of indemnity, what is the insurer's usual position?

  1. The claim is not payable because deliberate acts by the insured fall outside cover Correct answer.
  2. The claim is payable only if the mortgage lender also agrees
  3. The claim is payable because the loss has occurred and is measurable
  4. The claim is payable at half the sum insured as a compromise

Explanation

Indemnity restores the insured to their pre-loss financial position but does not reward deliberate loss creation. Fraudulent or intentional damage by the insured is excluded, and the insurer may also avoid the policy for non-disclosure or pursue recovery. The loss being measurable does not make an intentional act a valid claim.

Question 2Basic insurance principles and practice

Which feature distinguishes a valued policy from an uninsured (indemnity) policy?

  1. The policy only responds to total loss of the property
  2. The premium is always calculated on the reinstatement value
  3. The sum payable is agreed in advance rather than measured at the time of loss Correct answer.
  4. The insurer may reduce the settlement at its discretion

Explanation

In a valued policy the parties agree the value of the subject matter at inception, and that agreed figure is the measure of indemnity. This avoids later disputes about value, which is why valued cover is used for items such as fine art. An ordinary indemnity policy instead measures the loss at the time it occurs.

Question 3Basic insurance principles and practice

An insured fails to disclose a material fact that a prudent insurer would consider when setting terms. What is the general legal consequence if the insurer would have declined the risk had it known?

  1. The insurer must pay the claim but may increase future premiums
  2. The policy remains fully valid and the claim is paid in full
  3. The insurer may avoid the policy and refuse the claim Correct answer.
  4. The insurer may only recover the unpaid premium

Explanation

Insurance contracts are contracts of the utmost good faith, so material facts must be disclosed. Where a fact is material and induced the insurer to accept a risk it would otherwise have declined, the insurer may avoid the contract. Avoidance means the policy is treated as never having existed.

Question 4Basic insurance principles and practice

Under the principle of insurable interest, when must a person generally have an insurable interest in the subject matter of an indemnity policy?

  1. At any time during the policy period
  2. Only when the policy is renewed each year
  3. Only at the date the claim is settled
  4. At the inception of the policy and at the time of loss Correct answer.

Explanation

For indemnity insurance the insured must have insurable interest when the contract is formed and again when the loss occurs. Otherwise the arrangement would amount to a wager rather than a contract of indemnity. Life assurance follows a different rule, requiring interest at inception only.

Question 5Basic insurance principles and practice

A fire at a factory causes smoke damage to stock. Which term describes this damage when the fire policy covers it as part of the fire peril?

  1. A consequential loss
  2. A remote loss
  3. An uninsured peril
  4. A proximate result Correct answer.

Explanation

The proximate cause is the dominant, effective cause of a loss, and damage that flows directly from that cause is treated as a proximate result. Smoke damage arising directly from a fire is therefore covered as part of the fire loss. Remoteness would break the chain of causation and remove cover.

Question 6Basic insurance principles and practice

Which statement best describes the role of reinsurance in the insurance market?

  1. It allows an insurer to transfer part of the risk it has accepted to another insurer Correct answer.
  2. It guarantees that the original insurer will never make an underwriting loss
  3. It replaces the original policy so the policyholder claims directly from the reinsurer
  4. It is a savings product sold to individual policyholders

Explanation

Reinsurance is insurance for insurers: the ceding insurer passes part of the accepted risk to a reinsurer in return for a share of premium. The original policyholder still deals with the original insurer, who remains liable for the whole claim. Reinsurance protects the insurer's capacity and solvency rather than removing all underwriting risk.

Question 7Basic insurance principles and practice

An insurer's underwriting process is best described as which of the following?

  1. Paying claims promptly after a loss is notified
  2. Calculating the tax payable on premium income
  3. Selecting and pricing risks so that premiums reflect the hazard Correct answer.
  4. Marketing policies to as many customers as possible

Explanation

Underwriting is the process of assessing a risk, deciding whether to accept it, and setting terms and premium that reflect the likelihood and severity of loss. It balances the insurer's need for adequate premium against commercial appetite for the risk. Claims handling and marketing are separate functions.

Question 8Basic insurance principles and practice

In a motor policy, a compulsory excess of £200 applies and the insured also chose a voluntary excess of £150. The assessed repair cost is £1,400. What amount will the insurer pay, assuming no other deductions?

  1. £1,050 Correct answer.
  2. £1,400
  3. £1,200
  4. £1,250

Explanation

Both the compulsory and the voluntary excess are deducted from the assessed loss before settlement. The total excess is £350, so the insurer pays £1,400 minus £350, which is £1,050. Excesses are the insured's agreed first share of each loss.

Question 9Basic insurance principles and practice

What is the main purpose of the Financial Services Compensation Scheme (FSCS) in relation to insurance?

  1. To protect eligible policyholders if an authorised insurer fails Correct answer.
  2. To regulate the conduct of insurance brokers
  3. To set the premium rates that insurers may charge
  4. To arbitrate every dispute between insurer and policyholder

Explanation

The FSCS provides a last-resort safety net, paying valid claims to eligible policyholders when an authorised financial firm becomes insolvent. It does not set prices, arbitrate individual disputes, or act as the general conduct regulator. Those functions sit elsewhere in the regulatory framework.

Question 10Basic insurance principles and practice

An insured arranges cover with two insurers for the same property and the same interest, each policy containing a rateable contribution clause. A loss of £60,000 occurs. Insurer A covers £120,000 and insurer B covers £80,000. How much will insurer A pay?

  1. £36,000 Correct answer.
  2. £60,000
  3. £24,000
  4. £30,000

Explanation

Rateable contribution shares the loss in proportion to the sums insured. Insurer A's share is £120,000 divided by the total £200,000, which is 60 per cent of £60,000, giving £36,000. Insurer B bears the remaining £24,000, so the insured is fully indemnified without recovering more than the loss.

Question 11Basic insurance principles and practice

After an insurer pays a claim for water damage caused by a contractor's negligence, it takes over the insured's right to sue that contractor. Which principle is being applied?

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

Explanation

Subrogation allows the insurer, having indemnified the insured, to step into the insured's shoes and pursue third parties responsible for the loss. It supports the principle of indemnity by preventing the insured from recovering twice. Contribution, by contrast, allocates a loss between insurers covering the same interest.

Question 12Basic insurance principles and practice

Which of the following is an example of a peril rather than a hazard?

  1. Storage of flammable solvents on the premises
  2. A poorly maintained electrical installation
  3. Loose roof tiles on an old building
  4. A fire Correct answer.

Explanation

A peril is the event that causes loss, such as fire, flood or theft. A hazard is a condition that increases the likelihood or severity of that event, such as poor maintenance or flammable materials. Distinguishing the two helps underwriters price and control risk.

Question 13Basic insurance principles and practice

What is the principal difference between a moral hazard and a morale hazard?

  1. Moral hazard applies only to commercial risks, while morale hazard applies only to personal lines
  2. Moral hazard concerns weather, while morale hazard concerns theft
  3. Moral hazard concerns dishonest intent, while morale hazard concerns careless behaviour Correct answer.
  4. Moral hazard is always excluded, while morale hazard is always covered

Explanation

Moral hazard refers to the risk that someone acts dishonestly, for example by exaggerating a claim or arranging a loss deliberately. Morale hazard refers to the indifference or carelessness that may arise from having insurance, such as leaving premises unlocked. Both are underwriting considerations but differ in whether dishonesty is involved.

Question 14Basic insurance principles and practice

A commercial property policy has a sum insured of £400,000 and an average (under-insurance) condition. The property's true reinstatement value at inception is £500,000, and a loss of £50,000 occurs. Applying the average condition, what will the insurer pay?

  1. £40,000 Correct answer.
  2. £50,000
  3. £25,000
  4. £45,000

Explanation

The average condition scales the claim by the ratio of sum insured to the value at risk. Here the ratio is £400,000 divided by £500,000, which is 80 per cent, so the insurer pays 80 per cent of £50,000, giving £40,000. The insured bears the shortfall because they under-insured the property.

Question 15Basic insurance principles and practice

Which statement correctly describes the role of an insurance broker acting for a commercial client?

  1. The broker is a party to the insurance contract alongside the insurer
  2. The broker acts as the agent of the client when placing the risk Correct answer.
  3. The broker guarantees the solvency of the insurer selected
  4. The broker acts as the agent of the insurer when placing the risk

Explanation

In placing a risk, a broker generally acts for the client, advising on cover and approaching insurers on the client's behalf. The insurer's agent is typically the agent who binds the risk for that insurer. The broker is not a party to the contract and does not guarantee the insurer's solvency.

Question 16Basic insurance principles and practice

What is the key difference between an insurance agent and an insurance broker in the UK market?

  1. An agent acts for the insurer, while a broker typically acts for the client Correct answer.
  2. An agent cannot give advice, while a broker must always give advice
  3. An agent may only sell life products, while a broker may only sell general products
  4. A broker is employed by the insurer, while an agent is self-employed

Explanation

The defining distinction is whose interests the intermediary represents. An agent represents the insurer and can usually bind cover on its behalf, whereas a broker represents the client in arranging cover. Product range and employment status are not what determine the classification.

Question 17Basic insurance principles and practice

Under the Consumer Insurance (Disclosure and Representations) Act 2012, an insurer may avoid a consumer policy for a qualifying misrepresentation only where the consumer acted in which way?

  1. Carelessly
  2. Innocently
  3. Negligently in any degree
  4. Deliberately or recklessly 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 honestly and accurately. Avoidance is available only for deliberate or reckless misrepresentation. Careless misrepresentation instead leads to a proportionate remedy.

Question 18Basic insurance principles and practice

A householder leaves a pan of oil unattended and a kitchen fire results. The insurer pays the claim but notes that the insured's carelessness contributed. Which principle explains why the insurer can still pay despite the insured's negligence?

  1. The loss was caused by an insured peril, and mere negligence by the insured is not automatically excluded Correct answer.
  2. The insured had no insurable interest in the kitchen
  3. The insurer has waived all its rights under the policy
  4. The policy was a valued policy, so cause is irrelevant

Explanation

Indemnity policies respond to loss caused by an insured peril, and ordinary negligence by the insured does not usually defeat the claim unless the policy says otherwise. Insurers may apply excesses or conditions, but carelessness alone is not a standard exclusion for fire. The insured clearly retained an insurable interest in their home.

Question 19Basic insurance principles and practice

Which of the following best describes 'utmost good faith' as it applies to insurance contracts?

  1. A duty on the insured alone to read every policy wording
  2. A rule that insurers must always pay every claim in full
  3. A requirement that premiums be paid before cover begins
  4. A duty on both parties to disclose material facts and deal fairly Correct answer.

Explanation

Utmost good faith is a mutual duty: the insured must disclose material facts, and the insurer must deal fairly, for example by not using unfair terms or concealing material information. It is not a one-sided obligation on the insured. Modern consumer law has refined how the duty operates in practice.

Question 20Basic insurance principles and practice

Which of the following is a proximate cause question that an adjuster must resolve when a storm causes a wall to collapse and crush stock?

  1. Whether the policy was arranged through a broker
  2. Whether the stock was valued correctly at inception
  3. Whether the collapse was caused by the storm or by pre-existing structural weakness Correct answer.
  4. Whether the insured paid the premium by direct debit

Explanation

Proximate cause asks what dominant cause set the loss in motion. Where a storm triggers collapse, the storm is usually proximate, but if pre-existing weakness was the real cause the claim may fail or be reduced. The other matters concern valuation, payment method and distribution, not causation.

Question 21Basic insurance principles and practice

What is the purpose of a policy excess?

  1. To increase the premium for high-risk policyholders
  2. To limit the insurer's liability to the sum insured
  3. To transfer the whole risk back to the insured
  4. To make the insured bear a first portion of each loss, reducing small claims and moral hazard Correct answer.

Explanation

An excess is the amount the insured must bear on each claim before the insurer pays. It removes small claims from the insurer's cost base and gives the insured a financial interest in avoiding loss. It does not cap the insurer's total liability, which is the role of the sum insured.

Question 22Basic insurance principles and practice

An insured's building is damaged by a fire that was started by a neighbouring property's bonfire spreading out of control. The insurer pays and then seeks recovery from the neighbour. Which principle supports this action?

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

Explanation

Having indemnified the insured, the insurer is subrogated to the insured's rights against the party responsible for the damage. This allows recovery from the negligent neighbour and keeps the insured from being paid twice. Contribution would apply only if another insurer covered the same interest.

Question 23Basic insurance principles and practice

Which statement about the sum insured in a property policy is correct?

  1. It represents the maximum the insurer will pay for a loss, subject to policy terms Correct answer.
  2. It is always equal to the market value of the property
  3. It is the amount of premium payable each year
  4. It is the amount the insured must contribute to each claim

Explanation

The sum insured is the limit of the insurer's liability for the insured property, subject to any excess, average condition or specific limits. It should be set at the appropriate basis of settlement, such as reinstatement value, but it is not automatically the market value. The insured's contribution to a claim is the excess, not the sum insured.

Question 24Basic insurance principles and practice

A proposal form asks whether the applicant has had any claims in the last five years. The applicant omits a small settled claim. Under the consumer disclosure rules, how is this omission most likely to be treated?

  1. As irrelevant, because the claim was small
  2. As an innocent misrepresentation, so no remedy is available
  3. As a careless misrepresentation, with a proportionate remedy if it induced the terms Correct answer.
  4. Always as deliberate, leading to avoidance of the policy

Explanation

The applicant answered a clear question inaccurately, which is a misrepresentation rather than a failure to volunteer information. Whether it was careless depends on the circumstances, but a small omission is unlikely to be deliberate or reckless. If it induced the insurer's terms, a proportionate remedy applies rather than automatic avoidance.

Question 25Basic insurance principles and practice

Which of the following is an example of a consequential loss that a business interruption policy is designed to address?

  1. The cost of extinguishing the fire by the fire service
  2. The cost of replacing stock destroyed by the fire
  3. The cost of repairing fire damage to a factory roof
  4. The loss of trading profit while the factory is unusable after a fire Correct answer.

Explanation

Consequential loss is the financial loss that follows from physical damage, such as lost profit and continuing fixed costs while a business is disrupted. Business interruption cover addresses this loss of income. Repair costs, stock replacement and firefighting costs are direct material damage or response costs.

Question 26Basic insurance principles and practice

Which principle explains why an insurer can decline a claim where the insured deliberately caused the loss that is being claimed for?

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

Explanation

Utmost good faith requires both parties to deal openly and honestly, and deliberately causing a loss breaches the duty of good faith owed to the insurer. The insurer is entitled to refuse the claim because the insured has not acted honestly in the relationship. Insurable interest, indemnity and proximate cause address different issues and do not by themselves defeat a claim for deliberate loss.

Question 27Basic insurance principles and practice

An insured owns a watch worth £3,000 and insures it for £3,000. It is stolen and the insurer pays £3,000. Which principle prevents the insured from also recovering the full value from a second policy covering the same watch?

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

Explanation

Indemnity means the insured should be restored to the financial position held before the loss, no better and no worse. Recovering twice for the same loss would leave the insured better off, which indemnity forbids. Contribution and subrogation are mechanisms that support indemnity rather than replace it.

Question 28Basic insurance principles and practice

A proposal form asks whether the applicant has ever been convicted of a fraud offence. The applicant has one such conviction but answers 'no'. What is this an example of?

  1. An innocent breach of a condition
  2. A breach of a warranty
  3. A non-disclosure of a material fact Correct answer.
  4. A misrepresentation of a peril

Explanation

Omitting information that a prudent insurer would treat as material to the risk is non-disclosure. A fraud conviction is clearly relevant to the assessment of an insurance risk, so the failure to reveal it is a material non-disclosure. Warranties and conditions concern promises about the risk or claims conduct, not the truth of information given at proposal.

Question 29Basic insurance principles and practice

Which term describes the amount of money an insured must bear personally before the insurer pays anything on a claim?

  1. The excess Correct answer.
  2. The limit of indemnity
  3. The sum insured
  4. The premium

Explanation

An excess is the first portion of a loss that the insured must bear, and the insurer pays the balance up to the policy limit. It reduces small claims and gives the insured a share of each loss. The premium is the price of cover, the sum insured is the amount covered, and the limit of indemnity is the maximum payable.

Question 30Basic insurance principles and practice

Which of the following is an insurable interest in a building?

  1. A prospective buyer who has made an offer but exchanged no contract
  2. The freeholder who receives rent from tenants in the building Correct answer.
  3. A neighbour who admires the building from across the street
  4. A courier who delivers parcels to the building weekly

Explanation

Insurable interest exists where a person has a legal or equitable relationship to the subject matter such that they benefit from its continued existence or suffer loss from its damage. A freeholder with a financial interest in the property and its rental income clearly satisfies this. Admiration, a weekly delivery round and an unexchanged offer do not create a recognised financial interest.

Question 31Basic insurance principles and practice

An insured's shop is destroyed by fire and the business must close for three months while it is rebuilt. Which type of policy is designed to cover the lost trading profit during that period?

  1. An employers' liability policy
  2. A public liability policy
  3. A business interruption policy Correct answer.
  4. A commercial property policy

Explanation

Business interruption cover responds to the loss of profit and continuing fixed costs that follow damage to insured property. The shutdown caused by the fire is exactly the kind of interruption the cover addresses. Property policies pay for physical damage, while liability policies respond to claims from third parties.

Question 32Basic insurance principles and practice

What is the main purpose of a proposal form in the insurance process?

  1. To serve as proof of the insured's ownership of the property
  2. To set out the claims procedure the insured must follow
  3. To collect information the insurer needs to assess and rate the risk Correct answer.
  4. To record the insurer's decision to decline a risk

Explanation

The proposal form gathers the facts an insurer needs to decide whether to accept a risk and on what terms and premium. It also forms the basis of the contract and records information the insured is responsible for disclosing accurately. It is not a claims manual, a proof of ownership or a record of the insurer's decision.

Question 33Basic insurance principles and practice

Which document must an insurer provide to a consumer that sets out the key features, significant exclusions and important terms of the policy before or at the point of sale?

  1. The statement of fact
  2. The policy schedule
  3. The insurance product information document Correct answer.
  4. The certificate of insurance

Explanation

The insurance product information document is a standardised summary of the main features and exclusions of a non-investment insurance product, given to consumers to aid comparison and understanding. The schedule records the individual details of the cover, and the statement of fact records the information supplied by the applicant. Neither of those is the standardised key features summary.

Question 34Basic insurance principles and practice

A householder's policy contains a condition requiring the insured to notify the insurer of any claim within 30 days. The insured notifies a burglary claim after 90 days. Which statement best describes the insurer's position?

  1. The insurer may be able to refuse or reduce the claim because the condition was breached Correct answer.
  2. The insurer must pay because the claim is genuine
  3. The insurer must pay but can increase the next premium
  4. The insurer can only refuse the claim if the loss was caused deliberately

Explanation

A claims notification condition is a term of the policy, and breach may entitle the insurer to decline the claim or reduce the amount where it has been prejudiced. The consequence depends on the wording and on whether the late notice caused prejudice to the insurer. The mere genuineness of the claim does not override the condition.

Question 35Basic insurance principles and practice

A property policy covers 'fire, lightning, explosion and aircraft'. Damage from a burst water pipe is excluded. Which approach to defining perils does this policy use?

  1. Named perils Correct answer.
  2. All risks
  3. Accident only
  4. Extended cover

Explanation

A named perils policy lists the specific events that are covered, so anything not listed is excluded. All risks cover, by contrast, covers all accidental loss unless a specific exclusion applies. The listed perils of fire, lightning, explosion and aircraft are typical named perils.

Question 36Basic insurance principles and practice

An insurer discovers that an insured failed to disclose a material fact when the policy was taken out. The insurer decides to treat the policy as never having existed. Which legal remedy is this?

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

Explanation

Rescission is the remedy that puts the parties back in the position they would have occupied had the contract never been made. For material non-disclosure or misrepresentation an insurer may rescind and return the premium, subject to statutory rules for consumers. Subrogation, contribution and salvage are mechanisms for dealing with losses and recoveries, not for undoing the contract.

Question 37Basic insurance principles and practice

A commercial insured has a public liability policy with a limit of indemnity of £2 million. A judgment against the insured for £2.4 million becomes payable. What is the insurer's maximum liability?

  1. £2 million, subject to the terms of the policy Correct answer.
  2. £2.4 million, because the court has determined the loss
  3. Nothing, because the loss exceeds the limit
  4. £2 million less any excess, with the balance paid by the insured

Explanation

The limit of indemnity is the maximum the insurer will pay for any one claim, so liability is capped at £2 million even though the judgment is higher. The insured remains responsible for the excess and for any amount above the limit. The insurer does not pay the full judgment simply because it has been awarded.

Question 38Basic insurance principles and practice

Which statement best describes the difference between a warranty and a condition in an insurance policy?

  1. A warranty is always imposed by law, while a condition is always negotiated
  2. A warranty relates only to claims handling, while a condition relates only to the premium
  3. A warranty applies only to life insurance, while a condition applies only to general insurance
  4. A warranty is a promise about the risk that must be complied with exactly, while a condition is a term governing the contract or claims that may allow a remedy for breach Correct answer.

Explanation

A warranty is a promise that something about the risk is or will be true, and traditionally any breach discharges the insurer from liability for the period of breach. A condition is a term of the contract, such as a claims notification requirement, where breach gives the insurer a remedy depending on the wording and any prejudice. The distinction lies in the nature of the promise and the consequences of breach.

Question 39Basic insurance principles and practice

A policyholder's building is damaged by a fire caused by faulty wiring that the policyholder knew was unsafe but ignored. Which factor is most relevant to whether the insurer can reduce or decline the claim?

  1. The value of the building
  2. Whether the policyholder's conduct amounts to recklessness or a breach of a policy condition Correct answer.
  3. Whether the fire brigade attended promptly
  4. The age of the wiring

Explanation

Insurers assess whether the insured's conduct was reckless, deliberate or in breach of a policy condition such as a duty to maintain the property. Mere knowledge of a defect may not defeat a claim, but recklessness or breach of a condition can allow the insurer to reduce or decline it. The age of the wiring, the building's value and the response of the fire service are not the decisive issues.

Question 40Basic insurance principles and practice

Which of the following best describes the role of a loss adjuster in the claims process?

  1. To set the premium for the following year
  2. To represent the insured in court proceedings
  3. To investigate and quantify a claim on behalf of the insurer Correct answer.
  4. To sell policies on behalf of the insurer

Explanation

A loss adjuster is appointed by the insurer to investigate the circumstances of a claim and to quantify the loss so the insurer can decide how much to pay. The adjuster may also advise on recovery and on steps to mitigate further loss. Selling policies and setting premiums are underwriting and distribution functions, while legal representation is the role of a solicitor.

Question 41Basic insurance principles and practice

An insured's policy has a 'new for old' basis for household contents. A five-year-old television is destroyed in a fire and a replacement of the same specification costs £800. What is the insured entitled to under a new for old basis, before any excess?

  1. £800, the cost of a new replacement of the same specification Correct answer.
  2. Nothing, because the television was not new
  3. The original purchase price of the television
  4. The second-hand value of a five-year-old television

Explanation

Under a new for old basis the insurer pays the cost of replacing the damaged item with a new one of similar specification, rather than its depreciated value. That is a departure from strict indemnity, permitted because the policy expressly provides for it. The original purchase price is irrelevant and the second-hand value would apply under an indemnity basis.

Question 42Basic insurance principles and practice

What is the effect of an average (under-insurance) condition when the sum insured is less than the value of the property at the time of loss?

  1. The insurer pays the full loss up to the sum insured
  2. The policy is automatically void
  3. The insurer pays the loss but cancels the policy
  4. The claim is reduced in the same proportion that the sum insured bears to the value of the property Correct answer.

Explanation

An average condition applies the ratio of the sum insured to the value of the property to the loss, so the insured bears a share of every claim reflecting the under-insurance. This is intended to prevent an insured who has paid a lower premium from recovering in full. The policy is not automatically void, and the insurer does not simply pay the full loss.

Question 43Basic insurance principles and practice

Which statement best explains why an insurer uses a no claims discount in motor insurance?

  1. To transfer the cost of claims to the government
  2. To reward claim-free years and encourage careful driving Correct answer.
  3. To comply with a legal requirement to discount premiums
  4. To replace the need for an excess

Explanation

A no claims discount rewards policyholders who do not claim, giving them a financial incentive to drive carefully and reducing the insurer's claims experience. It is a commercial rating tool rather than a legal requirement. It does not transfer costs to government or remove the need for an excess.

Question 44Basic insurance principles and practice

An insured's factory is flooded and production stops for four months. The business interruption policy has an indemnity period of six months. Which factor most directly determines the amount payable for lost profit?

  1. The replacement cost of the factory machinery
  2. The reduction in turnover and the increased cost of working during the interruption Correct answer.
  3. The market value of the factory building
  4. The number of employees on the payroll

Explanation

Business interruption cover pays for the loss of profit resulting from the interruption, measured by the shortfall in turnover plus any additional expenditure incurred to maintain output. The machinery replacement cost is a property claim, and the building's market value is not the measure of lost profit. Payroll may affect the calculation of fixed costs but is not the measure itself.

Question 45Basic insurance principles and practice

A policyholder insures a painting for £50,000 after an independent valuation, but the painting is later found to be worth £20,000. The painting is destroyed and the insurer pays £20,000. Which principle explains the payment?

  1. The principle of insurable interest
  2. The principle of subrogation
  3. The principle of contribution
  4. The principle of indemnity Correct answer.

Explanation

Indemnity limits recovery to the actual financial loss suffered, so the insurer pays the true value of the painting rather than the higher sum insured. Over-insurance does not entitle the insured to a profit. Contribution, subrogation and insurable interest are related principles but do not determine the measure of the loss in this situation.

Question 46Basic insurance principles and practice

An insurer is considering a commercial fire risk. Which combination of factors would most appropriately lead to a higher premium?

  1. A concrete office block with a recent fire risk assessment
  2. A retail unit with a part-time caretaker and no previous claims
  3. A modern building with sprinklers and a full-time fire warden
  4. A timber-framed warehouse storing flammable solvents with no sprinkler system Correct answer.

Explanation

Rating reflects the likelihood and severity of loss, so combustible construction, hazardous storage and absent suppression systems all point to a higher premium. A timber-framed warehouse storing flammable solvents without sprinklers presents a materially greater fire risk than the other options. The presence of sprinklers, fire wardens or a recent assessment reduces the risk and would normally improve the terms.

Question 47Basic insurance principles and practice

A consumer fails to answer a question on a proposal form accurately but does so honestly and without carelessness. Under the consumer protection regime, what is the insurer's most likely remedy if the inaccuracy is material?

  1. The insurer may only increase the premium for future years
  2. The insurer's remedy is proportionate to the consumer's culpability and may be limited to adjusting the terms or reducing the claim Correct answer.
  3. The insurer has no remedy because the consumer acted honestly
  4. The insurer may avoid the policy and retain the premium in all cases

Explanation

The consumer regime requires a proportionate remedy that reflects what the insurer would have done had the information been accurate and how culpable the consumer was. For an honest and reasonable misstatement the remedy may be limited, for example to the terms the insurer would have offered. Avoidance and premium retention are not automatic, and the insurer is not left without any remedy.

Question 48Basic insurance principles and practice

An insured holds two policies covering the same property for the same interest, one with a rateable proportion clause and one without. A loss occurs. Which statement best describes the position between the insurers?

  1. The insurer without the clause pays nothing because the other policy exists
  2. The insurers share the loss, and a rateable proportion clause governs how the insurer containing it responds Correct answer.
  3. The insured can recover the full loss from each insurer and keep both payments
  4. The insured must choose one policy and the other is automatically cancelled

Explanation

Where more than one policy covers the same interest, the insurers contribute to the loss, and a rateable proportion clause sets out how the insurer containing it will respond. The insured cannot recover more than the loss because indemnity applies. The existence of another policy does not automatically cancel either policy.

Question 49Basic insurance principles and practice

A liability insurer receives a claim from a third party. The policy has a claims-made basis rather than an occurrence basis. Which statement best describes when cover responds?

  1. Cover responds to the policy in force when the insured pays the third party
  2. Cover responds to the policy in force when the insured was established
  3. Cover responds to the policy in force when the claim is first made against the insured Correct answer.
  4. Cover responds to the policy in force when the negligent act occurred

Explanation

A claims-made policy responds to claims first notified during the policy period, regardless of when the underlying act occurred, subject to any retroactive date. An occurrence policy, by contrast, responds according to when the act or event happened. The date of payment or the insured's incorporation is not the trigger.

Question 50Basic insurance principles and practice

An insured deliberately exaggerates the value of a claim, including items that were not lost. What is the most likely consequence under the policy?

  1. The insurer must pay the claim and increase the excess
  2. The insurer must pay the claim but report the insured to the police
  3. The insurer may decline the whole claim because the claim is fraudulent Correct answer.
  4. The insurer must pay the genuine part of the claim in full

Explanation

Most policies contain a fraud condition allowing the insurer to decline the entire claim and recover any sums already paid where any part of the claim is deliberately exaggerated or false. This reflects the duty of good faith and deters fraudulent claims. The insurer is not obliged to pay the genuine element once fraud is established.