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IAI SA4 practice questions

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Question 1General Insurance

Under a typical commercial property policy, which principle explains why an insured cannot recover more than the actual loss suffered after a fire?

  1. The principle of subrogation
  2. The principle of contribution
  3. The principle of indemnity Correct answer.
  4. The principle of utmost good faith

Explanation

Indemnity means the insured is restored to the financial position held immediately before the loss, no better and no worse. Subrogation, good faith and contribution are separate doctrines that support or limit recovery but do not themselves cap the payout at the value of the loss.

Question 2General Insurance

An insurer pays a fire claim and then sues the contractor whose welding caused the blaze. Which doctrine gives the insurer the right to bring that action?

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

Explanation

Subrogation transfers to the insurer, once it has indemnified the insured, the insured's rights of recovery against the party responsible for the loss. It prevents the insured from being paid twice and places the ultimate burden on the wrongdoer.

Question 3General Insurance

A proposal form asks whether the applicant has had any fire losses in the past five years. The applicant omits a small kitchen fire that was settled. What is the main consequence under the duty of fair presentation?

  1. The insurer must pay all claims but may raise the renewal premium
  2. The insurer may have a remedy because a question was answered misleadingly Correct answer.
  3. The policy is automatically void from inception with no remedy for the insurer
  4. The omission is irrelevant because the loss was small

Explanation

Fair presentation requires disclosure of every material circumstance the insured knows or ought to know, and answering a clear question misleadingly breaches that duty even if the individual loss seems minor. The insurer then gains proportionate or other remedies depending on what it would have done had it known the truth.

Question 4General Insurance

Which statement best describes the role of a warranty in a general insurance contract?

  1. A warranty is a clause that automatically increases the sum insured each year
  2. A warranty is a promise by the insurer to renew the policy
  3. A warranty is a term whose breach may suspend cover, depending on its classification Correct answer.
  4. A warranty is a non-binding statement of intent made during negotiations

Explanation

A warranty is a term of the contract that the insured promises to comply with; under modern insurance law, breach no longer automatically discharges the insurer but suspends cover for the period of non-compliance. The classification of the term and any causal link between breach and loss affect the insurer's liability.

Question 5General Insurance

A property policy has a sum insured of 200,000 and an average (underinsurance) condition. At the time of loss the property is worth 400,000 and damage of 100,000 occurs. Ignoring deductibles, what does the insurer pay?

  1. 50,000 Correct answer.
  2. 200,000
  3. 25,000
  4. 100,000

Explanation

The average condition scales the claim by the ratio of sum insured to value at risk: 200,000 divided by 400,000 equals one half, so half of the 100,000 loss is paid. The insured bears the remainder as a co-insurer for having underinsured.

Question 6General Insurance

Which of the following is the primary purpose of a coinsurance clause in a large commercial property programme?

  1. To limit liability to the reinstatement value
  2. To penalise late payment of premium
  3. To share the risk between several insurers each accepting a percentage Correct answer.
  4. To require the insured to carry a stated minimum share of the risk

Explanation

In commercial property, coinsurance usually describes the arrangement where several insurers each subscribe a percentage of the risk and liability. It is distinct from average, which penalises underinsurance, and from a deductible, which transfers a first slice of loss to the insured.

Question 7General Insurance

An insured holds two property policies covering the same building on an indemnity basis. Both contain rateable contribution clauses. A loss occurs. How is the claim apportioned?

  1. Each insurer pays in proportion to the rate it would have charged for the whole risk Correct answer.
  2. The insurer with the earliest inception date pays the whole claim
  3. The insured chooses one insurer, which pays in full and cannot recover from the other
  4. Each insurer pays an equal share regardless of its rate

Explanation

Rateable contribution apportions the loss according to the independent rate each insurer would have applied to the entire risk. This avoids penalising an insurer that charged a lower rate for the same exposure and ensures the insured is indemnified once only.

Question 8General Insurance

Which statement correctly distinguishes a deductible from an excess?

  1. A deductible is deducted from the loss, while an excess is a fixed first amount the insured bears Correct answer.
  2. A deductible reduces the premium, while an excess increases it
  3. A deductible applies only to liability claims, while an excess applies only to property claims
  4. A deductible is refundable, while an excess is never refundable

Explanation

A deductible is subtracted from the amount of the loss before the insurer's share is calculated, whereas an excess is a fixed sum the insured bears before the insurer responds. The practical effect differs where the loss is close to the deductible amount.

Question 9General Insurance

A public liability policy is written on an occurrence basis. A customer is injured by a defective floor in 2022 but the claim is notified in 2025. Which policy responds?

  1. The policy in force when the injury occurred Correct answer.
  2. No policy, because notification was delayed
  3. The policy in force when the claim is notified
  4. The policy in force when the defect was installed

Explanation

Occurrence-basis cover responds to the policy in force at the time the injury or damage occurred, regardless of when the claim is made. Claims-made cover, by contrast, responds to the policy in force when the claim is first notified.

Question 10General Insurance

Which of the following best describes the trigger of cover under a claims-made professional indemnity policy?

  1. The date the insured's policy period ends
  2. The date the claim is first made against the insured Correct answer.
  3. The date the negligent act was committed
  4. The date the third party suffers financial loss

Explanation

Claims-made policies respond to claims first made against the insured during the policy period, which is why retroactive dates and extended reporting periods matter. The date of the negligent act may be covered only if it falls after any retroactive date.

Question 11General Insurance

An insured negligently starts a fire that spreads to a neighbouring property. The property insurer pays the neighbour and seeks recovery from the insured. What limit typically applies?

  1. Recovery is unlimited because the insured was negligent
  2. No recovery is possible because the insured is the policyholder
  3. Recovery is limited to the policy excess
  4. Recovery is limited to the subrogation rights the insurer has against the insured Correct answer.

Explanation

An insurer cannot subrogate against its own insured for the insured risk, so recovery is generally confined to rights the insurer holds against third parties. Where the insured is personally liable to a neighbour, that liability is a matter for liability cover rather than subrogation against the policyholder.

Question 12General Insurance

Which element is essential for a contract of insurance to be legally binding?

  1. A written proposal form signed by the broker
  2. A survey report on the risk
  3. Consideration in the form of premium and the insurer's promise to indemnify Correct answer.
  4. A minimum policy period of twelve months

Explanation

Insurance requires offer, acceptance, consideration and an intention to create legal relations, with consideration typically being the premium in exchange for the insurer's promise. Proposal forms, surveys and policy periods are practical features but not essential legal elements.

Question 13General Insurance

What is the effect of a 'claims cooperation' condition in a liability policy?

  1. The insurer must settle every claim within thirty days
  2. The insured must assist the insurer in investigating and defending claims Correct answer.
  3. The insured must pay claims below the deductible without notifying the insurer
  4. The insured must appoint its own defence lawyer at its own cost

Explanation

Claims cooperation conditions require the insured to notify claims promptly, provide information and assist the insurer's investigation and defence. Breach may entitle the insurer to decline or reduce cover where it is prejudiced.

Question 14General Insurance

A broker places cover with an insurer but fails to pass on the premium. The policy contains a condition precedent that premium must be paid. What is the likely position?

  1. Cover may be affected because the premium condition has not been satisfied Correct answer.
  2. Cover is unaffected because the broker is the insurer's agent for premium
  3. The insurer must pay all claims but may sue the broker
  4. The insured must pay the premium twice

Explanation

Where payment of premium is a condition precedent, cover does not attach until the premium is received, and the insured may be exposed if the broker failed to transmit it. The insured's remedy is generally against the broker, but the insurer's liability depends on the condition.

Question 15General Insurance

Which statement best explains the purpose of a reinstatement (replacement) basis of claim settlement in property insurance?

  1. It pays only the outstanding mortgage balance
  2. It pays the market value of the property at the date of loss
  3. It restores the property to its pre-loss condition using new materials, subject to conditions Correct answer.
  4. It pays the original purchase price of the property

Explanation

Reinstatement cover pays the cost of rebuilding or replacing with new property of equivalent kind, subject to limits and conditions such as actually carrying out the works. It contrasts with indemnity, which deducts for wear, tear and depreciation.

Question 16General Insurance

An insured's business suffers a fire. Under a business interruption policy, which factor most directly determines the amount of the loss?

  1. The number of employees at the time of the fire
  2. The reduction in gross profit or turnover during the indemnity period Correct answer.
  3. The replacement cost of the building
  4. The book value of the destroyed stock

Explanation

Business interruption cover indemnifies the insured for lost gross profit or increased cost of working following an insured peril, measured over the indemnity period. Property damage is settled under the property section, not the interruption section.

Question 17General Insurance

What is the main function of a deductible in a liability policy from the insurer's perspective?

  1. To guarantee renewal of the policy
  2. To transfer small, frequent claims to the insured and reduce administrative cost Correct answer.
  3. To remove the insurer's duty to defend
  4. To increase the limit of indemnity

Explanation

Deductibles remove small claims from the insurer's book, reducing handling costs and moral hazard while lowering premium. They do not change the limit of indemnity or the insurer's defence obligations.

Question 18General Insurance

An insured deliberately sets fire to its own warehouse to claim the insurance money. What is the insurer's position?

  1. The insurer must pay but may recover from the insured's directors
  2. The insurer must pay because the fire is an insured peril
  3. The insurer may avoid the policy for fraudulent claim and decline the claim Correct answer.
  4. The insurer must pay only the mortgagee's interest

Explanation

Deliberate damage by the insured is not an insured peril, and pursuing a fraudulent claim allows the insurer to decline the claim and, in serious cases, treat the policy as terminated. The fraud also removes the basis on which indemnity could be claimed.

Question 19General Insurance

Which of the following best describes the doctrine of proximate cause in general insurance?

  1. The last event before the loss, regardless of its nature
  2. The dominant, effective cause of the loss that sets the chain of events in motion Correct answer.
  3. The cause that occurs closest in time to the notification of the claim
  4. The cause chosen by the insured in the claim form

Explanation

Proximate cause is the dominant and effective cause that initiates the chain of events leading to loss, not necessarily the last event in time. Determining it decides whether an excluded or included peril applies to the claim.

Question 20General Insurance

A policy excludes damage caused by 'wear and tear'. A pipe bursts because of gradual corrosion and water damages stock. How is the claim typically treated?

  1. The whole claim is paid because water damage is an insured peril
  2. The corrosion damage to the pipe is excluded, but resulting water damage may be covered Correct answer.
  3. The claim is paid only if the pipe is replaced first
  4. The whole claim is excluded because the origin was wear and tear

Explanation

Exclusions for wear and tear generally apply to the damage caused by the gradual process itself, while resulting damage from an insured peril such as escape of water may still be covered. The policy wording and any corrosion exclusion determine the exact split.

Question 21General Insurance

Which of the following is a typical insurable interest in a commercial property policy?

  1. A competitor's expectation of future sales
  2. A supplier's interest in the insured's profitability
  3. A tenant's liability under a lease for damage to the premises Correct answer.
  4. A bank's hope that the borrower repays the loan

Explanation

Insurable interest requires a legal or equitable relationship to the subject matter such that the insured benefits from its preservation or suffers loss from its damage. A tenant's leasehold liability creates that interest, whereas hopes of profit or repayment do not.

Question 22General Insurance

What is the effect of an 'average' condition being applied to a policy where the sum insured is adequate but the declared value at inception was understated?

  1. The premium is refunded in full
  2. The claim may be reduced because the sum insured is compared to the value at risk Correct answer.
  3. The policy is void for misrepresentation
  4. No effect, because the sum insured is adequate

Explanation

Average compares the sum insured with the value of the property at risk at the time of loss, so an understated declared value can still lead to a reduced settlement even if the sum insured seemed adequate. The insured effectively bears a share of the loss.

Question 23General Insurance

Which statement best describes the role of the Financial Ombudsman Service in the UK general insurance market?

  1. It resolves disputes between eligible complainants and insurers without recourse to court Correct answer.
  2. It sets the premiums insurers may charge
  3. It licenses insurance brokers
  4. It writes standard policy wordings

Explanation

The Financial Ombudsman Service provides an alternative dispute resolution route for eligible complainants, deciding what is fair and reasonable in the circumstances. It does not set premiums, license brokers or draft policy wordings.

Question 24General Insurance

An insured fails to disclose a material fact at renewal. The insurer would still have accepted the risk but at a 40% higher premium. What remedy is most likely under the Insurance Act 2015?

  1. The insurer may avoid the policy and retain the premium
  2. The insurer may cancel cover with no remedy
  3. The insurer must pay the claim in full
  4. The insurer may reduce the claim proportionately to reflect the higher premium Correct answer.

Explanation

Where the insurer would have entered the contract on different terms, the Act allows the contract to be treated as if those terms applied, including a proportionate reduction in the claim where the difference is premium. Avoidance is reserved for cases where the insurer would not have written the risk at all.

Question 25General Insurance

Which of the following best explains the principle of 'uberrimae fidei' in insurance?

  1. The insured must disclose all material facts relevant to the risk Correct answer.
  2. The broker must guarantee the solvency of the insurer
  3. The insured must insure for the full market value
  4. The insurer must always pay claims within a fixed period

Explanation

Uberrimae fidei, or utmost good faith, requires the insured to disclose material facts that would influence a prudent insurer's decision, now codified in the duty of fair presentation. It does not impose fixed payment periods, solvency guarantees or a full-value requirement.

Question 26General Insurance

In a general insurance context, which party is responsible for paying the premium to the insurer under a typical broker-placed commercial policy?

  1. The insurer, who deducts it from any claim payment
  2. The broker, who then collects it from the insured Correct answer.
  3. The managing general agent, who funds it from commission
  4. The insured, who must pay the insurer directly in all circumstances

Explanation

Under the usual broker market practice, the broker is liable to the insurer for the premium once cover is placed, and separately collects the premium from the insured client. This creates a credit risk for the broker if the client fails to pay. The insured's obligation is to the broker, not directly to the insurer, unless the policy states otherwise.

Question 27General Insurance

Which of the following best describes the purpose of a 'duty of disclosure' under the Insurance Act 2015 for commercial insureds?

  1. The insured must disclose material circumstances it knows or ought to know, following a reasonable search Correct answer.
  2. The insured must volunteer every fact it knows, however trivial
  3. The insurer must disclose its underwriting manual to the insured before inception
  4. The insured must disclose only facts specifically asked about in the proposal form

Explanation

The Insurance Act 2015 replaced the old duty of utmost good faith with a duty of fair presentation. The insured must disclose material circumstances it knows or ought to know, and must conduct a reasonable search of information available to it. The duty is not limited to questions asked, nor does it require disclosure of irrelevant trivia.

Question 28General Insurance

An insured's factory is damaged by fire. The property policy has a sum insured of £1,000,000, a policy excess of £10,000 and an average condition. The loss is £200,000 and the reinstatement value at the time of loss is £1,250,000. Ignoring any other adjustments, what amount is payable?

  1. £200,000
  2. £150,000 Correct answer.
  3. £160,000
  4. £190,000

Explanation

The average condition reduces the claim in proportion to underinsurance: sum insured divided by value at risk, applied to the loss. £1,000,000 / £1,250,000 = 0.8, so 0.8 × £200,000 = £160,000, less the £10,000 excess = £150,000. The excess is applied after the average reduction.

Question 29General Insurance

Which of the following is a key difference between a 'claims-made' policy and an 'occurrence' policy in liability insurance?

  1. An occurrence policy covers only claims made within twelve months of the incident
  2. An occurrence policy responds only to claims notified during the policy period
  3. A claims-made policy responds to claims first made during the policy period, regardless of when the incident occurred Correct answer.
  4. A claims-made policy never covers incidents that occurred before inception

Explanation

A claims-made policy is triggered by the making of a claim during the policy period, subject to any retroactive date. An occurrence policy is triggered by the occurrence of the injury or damage during the policy period, regardless of when the claim is subsequently made. This distinction is central to professional indemnity and liability wordings.

Question 30General Insurance

An insured holds a commercial combined policy with a 'first loss' basis for business interruption, with a limit of £500,000 and a maximum indemnity period of 12 months. A fire causes a gross profit loss of £700,000 over 18 months. What is the maximum the insurer will pay, ignoring any other conditions?

  1. £350,000
  2. £333,333
  3. £500,000 Correct answer.
  4. £700,000

Explanation

A first loss limit caps the insurer's liability at the stated sum, regardless of the actual loss. Here the limit is £500,000, so the insurer pays no more than that even though the loss is £700,000. The maximum indemnity period also restricts cover to the 12-month period, but the limit is the binding cap.

Question 31General Insurance

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

  1. To sell policies on behalf of the insurer
  2. To set premium rates for commercial risks
  3. To represent the insured in negotiations with the insurer
  4. To investigate and quantify claims on behalf of the insurer Correct answer.

Explanation

A loss adjuster is appointed by the insurer to investigate the circumstances of a claim, verify cover and quantify the loss. The adjuster acts for the insurer, not the insured, and reports on liability and quantum. Loss adjusters do not sell policies or set premiums.

Question 32General Insurance

An insured has a liability policy with a £25,000 each-and-every-claim deductible. A single incident injures three people, and the insurer pays £300,000 in damages. How much does the insured bear, assuming the deductible applies once per claim?

  1. £8,333
  2. £0
  3. £75,000
  4. £25,000 Correct answer.

Explanation

An each-and-every-claim deductible applies once to each claim, not to each claimant. The three injuries arise from a single incident and therefore constitute one claim, so the insured bears £25,000. The insurer pays the remaining £275,000.

Question 33General Insurance

Which of the following is an example of a 'moral hazard' that an insurer would consider when underwriting a commercial property risk?

  1. The premises contain highly flammable stock
  2. The building is of non-standard construction
  3. The insured has a history of exaggerated claims Correct answer.
  4. The building is located in a flood zone

Explanation

Moral hazard relates to the character and behaviour of the insured, such as a propensity to exaggerate claims or act dishonestly. Physical hazards concern the tangible characteristics of the risk, such as location, construction and stock. A claims history suggesting dishonesty is a moral hazard.

Question 34General Insurance

A commercial property policy contains a 'reinstatement' condition requiring the insured to notify the insurer of any alteration to the risk. The insured installs a large quantity of flammable solvents without notifying the insurer. A fire occurs and the insurer discovers the change. What is the insurer's most likely position under a typical condition?

  1. The insurer must pay but may only cancel the policy from the next renewal
  2. The insurer must pay the claim in full because the policy was in force
  3. The insurer must pay because notification conditions are never enforceable
  4. The insurer may decline the claim or reduce it if the alteration increased the risk of loss Correct answer.

Explanation

Many property policies contain a condition requiring notification of alterations that increase the risk. If the insured fails to notify, the insurer may be entitled to decline or reduce the claim where the alteration is material to the loss. The exact remedy depends on the wording and on the Insurance Act 2015's proportionate remedies for breach of a term.

Question 35General Insurance

Which of the following best describes the principle of 'subrogation' in general insurance?

  1. The insurer's right to cancel a policy for non-payment of premium
  2. The insured's obligation to disclose all material facts before inception
  3. The insured's right to claim under more than one policy for the same loss
  4. The insurer's right to step into the insured's shoes and pursue recovery from a third party after paying a claim Correct answer.

Explanation

Subrogation allows the insurer, having indemnified the insured, to exercise the insured's legal rights against a third party responsible for the loss. It supports the principle of indemnity by preventing the insured from recovering twice. The right is subject to the insured's cooperation and to any policy terms.

Question 36General Insurance

An insured's public liability policy has a limit of indemnity of £2,000,000 for any one occurrence, inclusive of costs. A claim is settled for £1,800,000 in damages plus £300,000 in defence costs. How much will the insurer pay in total?

  1. £2,000,000 Correct answer.
  2. £1,500,000
  3. £1,800,000
  4. £2,100,000

Explanation

Where the limit of indemnity is inclusive of costs, the total payable, including defence costs, cannot exceed the limit. Here damages plus costs total £2,100,000, but the insurer's liability is capped at £2,000,000. The insured bears the £100,000 shortfall unless other cover applies.

Question 37General Insurance

Which of the following statements about the 'Financial Ombudsman Service' (FOS) in the UK is correct?

  1. The FOS can award unlimited compensation to any complainant
  2. The FOS sets premium rates for personal lines insurance
  3. The FOS can make binding awards against insurers up to a specified limit Correct answer.
  4. The FOS is funded by the Prudential Regulation Authority

Explanation

The FOS resolves complaints between consumers and financial firms and can make awards that are binding on the firm, subject to a statutory maximum limit. It does not set premiums or regulate prudentially. Its funding comes from levies on the industry and case fees, not from the PRA.

Question 38General Insurance

An insured's commercial property policy includes a 'denial of access' extension. A nearby chemical spill causes the police to cordon off the area, preventing customers from reaching the insured's shop for five days. Which of the following is the most likely basis for cover under such an extension?

  1. The insured must prove physical damage to its own premises
  2. The insured must show that access was prevented by a peril covered under the policy, subject to any waiting period Correct answer.
  3. The insured must show that the spill was caused by its own negligence
  4. The insured must show that the closure was ordered by the insurer

Explanation

Denial of access extensions typically cover loss following prevention or hindrance of access to the insured's premises due to damage by an insured peril at or near the premises, often subject to a waiting period. Physical damage to the insured's own property is not required. The insurer does not order closures, and the insured's own negligence may affect recovery under other conditions.

Question 39General Insurance

Which of the following is the primary purpose of a 'warranty' in a general insurance policy?

  1. To set out a promise by the insured that a particular state of affairs exists or will be maintained Correct answer.
  2. To describe the premium payment schedule
  3. To provide a cooling-off period for cancellation
  4. To limit the insurer's liability to the sum insured

Explanation

A warranty is a promise by the insured that certain facts are true or that a particular condition will be maintained. Breach of a warranty can suspend or discharge cover, depending on the wording. The Insurance Act 2015 modified the harsh common law rule by suspending cover during the breach rather than automatically discharging the insurer.

Question 40General Insurance

An insured operates a haulage business. A lorry is damaged in an accident caused by the negligent driving of the insured's employee. The insurer pays for the repair under the motor policy. Which principle allows the insurer to recover the cost from the negligent employee?

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

Explanation

Subrogation permits the insurer, having indemnified the insured, to pursue recovery from the party responsible for the loss. Here the insurer can exercise the insured's rights against the negligent employee. Contribution applies between insurers, indemnity is the measure of cover, and utmost good faith concerns disclosure.

Question 41General Insurance

Which of the following best explains the 'proximate cause' of a loss in general insurance?

  1. The cause that the insured believes is most important
  2. The first event in an unbroken chain of events leading to the loss
  3. The dominant, effective or efficient cause of the loss Correct answer.
  4. The event closest in time to the loss

Explanation

Proximate cause is the dominant, effective or efficient cause of a loss, not necessarily the first or last event in time. It is determined by applying common sense and the circumstances of the case. The insured's belief is irrelevant to the legal determination.

Question 42General Insurance

A commercial combined policy excludes 'damage caused by or arising from any process of cleaning, repair or renovation'. The insured's premises are damaged by fire caused by a contractor's hot works during renovation. Which of the following is the most likely outcome?

  1. The claim is covered because fire is a specified peril and the exclusion is interpreted narrowly Correct answer.
  2. The claim is covered only if the contractor has its own insurance
  3. The claim is excluded because contractors are not insured persons
  4. The claim is excluded because the damage arose during renovation

Explanation

Exclusions are construed narrowly against the insurer, and a fire caused by hot works may be regarded as a separate insured peril rather than damage 'caused by' the renovation process itself. The precise outcome depends on the wording and the facts, but the narrow interpretation favours cover. The existence of the contractor's insurance does not determine the insured's cover.

Question 43General Insurance

Which of the following is a typical feature of a 'combined liability' policy for a commercial insured?

  1. It covers property damage only
  2. It combines public liability and products liability under a single limit Correct answer.
  3. It excludes all liability arising from defective products
  4. It covers only employers' liability

Explanation

A combined liability policy typically brings together public liability and products liability, often under a shared or separate limit of indemnity. It does not usually cover property damage to the insured's own assets, which is the role of property cover. Products liability is a core section, not an automatic exclusion.

Question 44General Insurance

An insured's property policy has a 'sum insured' of £500,000 on a reinstatement basis. A fire destroys the building, and the cost of reinstatement is £600,000. The policy has no average condition. What is the insurer's liability, ignoring any other terms?

  1. £600,000
  2. £500,000 Correct answer.
  3. £550,000
  4. £0

Explanation

Where the sum insured is less than the cost of reinstatement and no average condition applies, the insurer's liability is still capped at the sum insured. The insured bears the shortfall of £100,000. Average would have reduced the claim proportionately, but it is absent here.

Question 45General Insurance

Which of the following best describes the 'indemnity' principle in general insurance?

  1. The insured should receive a new replacement for any damaged item regardless of age
  2. The insured should profit from the loss to discourage underinsurance
  3. The insured should be restored to the financial position it occupied immediately before the loss Correct answer.
  4. The insurer should pay the full sum insured on every claim

Explanation

Indemnity means the insured is restored to its pre-loss financial position, no better and no worse. It prevents profit from insurance and underpins concepts such as subrogation and contribution. Replacement or reinstatement cover is an extension that may go beyond strict indemnity.

Question 46General Insurance

A commercial property policy contains a '72-hour clause' for riot and civil commotion. Which of the following best describes its effect?

  1. Cover is suspended for 72 hours after any riot
  2. Losses occurring within a 72-hour period are treated as a single occurrence for the purpose of the limit or deductible Correct answer.
  3. The insurer must pay all claims within 72 hours
  4. The insured must notify the insurer within 72 hours of any loss

Explanation

A 72-hour clause aggregates losses arising from the same event within a defined period, treating them as one occurrence. This affects the application of limits and deductibles. It is not a notification deadline or a payment deadline, nor does it suspend cover.

Question 47General Insurance

An insured's business is interrupted by a fire at a key supplier's premises. The business interruption policy includes a 'supplier's extension'. Which of the following is the most likely requirement for cover under such an extension?

  1. The supplier must be named in the policy schedule
  2. The supplier's premises must be damaged by a peril insured under the policy Correct answer.
  3. The supplier must be located within the UK
  4. The insured must have a financial interest in the supplier

Explanation

Supplier's extensions typically respond where the supplier's premises are damaged by an insured peril, causing interruption to the insured's business. The supplier is usually identified by type or name, but the key requirement is damage by a covered peril. A financial interest in the supplier is not normally required.

Question 48General Insurance

Which of the following best describes the effect of the 'Insurance Act 2015' on an insured's breach of a warranty in a commercial policy?

  1. The insured must pay a fixed penalty to the insurer
  2. The policy is void from inception
  3. The insurer is automatically discharged from liability from the date of breach
  4. The insurer's liability is suspended during the period of breach and resumes when the breach is remedied Correct answer.

Explanation

The Insurance Act 2015 replaced the automatic discharge rule with suspension of the insurer's liability during the period of breach. Once the breach is remedied, cover resumes. The insurer may still rely on the breach if the loss occurs during the suspension period.

Question 49General Insurance

Which of the following is a key purpose of a 'reinstatement' (replacement) basis of settlement in commercial property insurance?

  1. To limit the insurer's liability to the original purchase price
  2. To provide a cash payment without any requirement to rebuild
  3. To ensure the insured receives the market value of the damaged property
  4. To restore the property to its pre-loss condition using new materials, subject to the sum insured Correct answer.

Explanation

Reinstatement cover restores the property to its pre-loss condition using new materials, subject to the sum insured and any conditions such as rebuilding. It goes beyond strict indemnity, which would deduct for depreciation. Market value and original purchase price are not the basis of reinstatement.

Question 50General Insurance

An insured holds a commercial property policy that covers 'accidental damage' to specified machinery. During routine maintenance, a technician employed by the insured incorrectly reassembles a gearbox, causing it to seize and destroy itself. The policy contains a standard 'maintenance exclusion' that excludes damage arising from 'wear and tear, gradual deterioration, or faulty workmanship'. Which of the following best describes how an insurer would typically apply this exclusion to the loss?

  1. The exclusion applies only if the faulty workmanship was carried out by an external contractor rather than the insured's own employee.
  2. The exclusion applies to the entire loss, including damage to the gearbox and any other property, because the loss arose from faulty workmanship.
  3. The exclusion applies only to the cost of correcting the faulty workmanship, not to the resulting damage to other property. Correct answer.
  4. The exclusion does not apply because the damage was accidental and occurred during routine maintenance, which is not excluded.

Explanation

A maintenance exclusion typically excludes the cost of remedying faulty workmanship itself but does not exclude resultant damage to other insured property, provided the damage is accidental and not otherwise excluded. The exclusion is not intended to remove cover for the consequential damage caused by the defective work. Therefore, the insurer would usually indemnify the damage to the gearbox and any other affected property, while excluding the cost of redoing the faulty work.