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Assam ASSEB HS Class 11-12 Insurance study materials
Assam ASSEB HS Class 11-12 Insurance study resources

Assam ASSEB HS Class 11-12 Insurance practice questions

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Question 1Introduction to Insurance and Risk Management

In insurance terminology, what does the term 'peril' refer to?

  1. The cause of a possible loss, such as fire or flood Correct answer.
  2. The financial value of the insured property
  3. The person who calculates the premium
  4. The document that records the contract terms

Explanation

A peril is the actual cause of loss, such as fire, lightning, flood or theft. It is distinguished from a hazard, which is a condition that increases the chance of loss or its severity. Insurers list covered perils explicitly in the policy.

Question 2Introduction to Insurance and Risk Management

A shop owner stores large quantities of oily rags near a heater. In risk management terms, the oily rags are best described as:

  1. A moral hazard
  2. A physical hazard Correct answer.
  3. A pure risk
  4. A speculative risk

Explanation

A physical hazard is a tangible condition of the property or its surroundings that increases the chance or severity of loss. Oily rags near a heater are a physical condition that raises fire risk. Moral hazard instead concerns dishonest behaviour, and pure or speculative risk describes the outcome type, not the condition.

Question 3Introduction to Insurance and Risk Management

Which statement correctly distinguishes risk from uncertainty?

  1. Uncertainty is measurable, while risk is purely subjective
  2. Risk can be measured and its probability estimated, while uncertainty cannot be reliably measured Correct answer.
  3. Risk and uncertainty are identical in insurance practice
  4. Risk always involves the possibility of profit, while uncertainty involves only loss

Explanation

Risk refers to situations where outcomes and their probabilities can be estimated, allowing insurers to price cover. Uncertainty describes situations where outcomes or probabilities cannot be reliably measured. This measurable-versus-unmeasurable distinction is fundamental to insurability.

Question 4Introduction to Insurance and Risk Management

A factory owner installs an automatic sprinkler system to reduce the extent of damage if a fire occurs. This action is an example of:

  1. Risk avoidance
  2. Risk reduction Correct answer.
  3. Risk retention
  4. Risk transfer

Explanation

Risk reduction (loss control) aims to lower the frequency or severity of losses while keeping the activity. Sprinklers limit fire damage, so they reduce severity. Avoidance would mean not running the factory at all, retention means bearing the loss, and transfer means passing it to an insurer.

Question 5Introduction to Insurance and Risk Management

Which of the following is a speculative risk that an insurer normally does not insure?

  1. Fire damaging a warehouse
  2. A person falling ill and needing hospital care
  3. A vehicle being damaged in a collision
  4. Buying shares in the hope of a price rise Correct answer.

Explanation

Speculative risk involves the possibility of gain as well as loss, as with share trading or gambling. Insurance is designed for pure risks, where the only outcomes are loss or no loss. Fire, illness and collision are all pure risks and are commonly insurable.

Question 6Introduction to Insurance and Risk Management

An individual decides to bear the financial consequences of minor damage to a mobile phone rather than buy cover. This risk-handling method is called:

  1. Risk sharing
  2. Risk avoidance
  3. Risk transfer
  4. Risk retention Correct answer.

Explanation

Retention means accepting the risk and bearing any resulting loss yourself. Choosing not to insure small exposures and paying for minor damage is deliberate retention. Avoidance would mean not using the phone, transfer would mean buying insurance, and sharing would mean pooling the loss with others.

Question 7Introduction to Insurance and Risk Management

Which feature best explains why insurance operates as a mechanism of risk pooling?

  1. The insurer guarantees that no insured event will ever occur
  2. Premiums are refunded in full if no claim is made
  3. Losses of the few are spread across the contributions of the many Correct answer.
  4. Each policyholder pays a premium equal to the exact loss they will suffer

Explanation

Insurance pools contributions from many policyholders so that the losses suffered by a few are shared across the group. This is why individual premiums can be small relative to a serious loss. Premiums are not refunded merely because no claim arises, and insurers do not prevent losses.

Question 8Introduction to Insurance and Risk Management

The principle of insurable interest requires that the policyholder:

  1. Must live in the same district as the insured property
  2. Has paid premiums for at least one full year
  3. Suffers a financial loss if the insured event occurs Correct answer.
  4. Must own the insured property outright with no mortgage

Explanation

Insurable interest means the policyholder stands to suffer a genuine financial loss from the occurrence of the insured event. Ownership is not essential, since a mortgagee or a bailee can also have insurable interest. Residence and premium duration are irrelevant to the principle.

Question 9Introduction to Insurance and Risk Management

Which situation is the clearest example of the principle of indemnity being applied?

  1. A life policy paying the agreed sum on death
  2. A personal accident policy paying a fixed daily benefit
  3. A policy paying a fixed lump sum for loss of a limb
  4. A motor policy paying the market value of a car that is written off Correct answer.

Explanation

Indemnity restores the insured to the financial position held before the loss, no better and no worse. Paying the market value of a written-off car reflects that principle. Fixed-benefit covers such as life, personal accident and specified-injury policies pay agreed sums and are not contracts of indemnity.

Question 10Introduction to Insurance and Risk Management

Under the principle of subrogation, after an insurer pays a claim for damage caused by a negligent third party, the insurer:

  1. May recover the amount paid from the negligent third party Correct answer.
  2. Can refuse to renew the policy without notice
  3. Must return the premium paid by the policyholder
  4. Must pay the claim twice to protect the insured

Explanation

Subrogation allows the insurer, having indemnified the insured, to step into the insured's legal position and recover the loss from the responsible third party. This prevents the insured from recovering twice and keeps the cost with the party at fault. It does not involve premium refunds or double payment.

Question 11Introduction to Insurance and Risk Management

The principle of utmost good faith requires the proposer to:

  1. Pay the first premium before any risk begins
  2. Disclose all material facts that would influence the insurer's decision Correct answer.
  3. Visit the insurer's office in person to sign the proposal
  4. Insure all property with the same insurer for life

Explanation

Utmost good faith obliges the proposer to disclose all material facts, and the insurer to deal fairly, because the insurer relies on the proposer's information. A material fact is one that would affect the insurer's decision on acceptance or terms. Physical visits, single-insurer loyalty and advance payment are not requirements of this principle.

Question 12Introduction to Insurance and Risk Management

A proposer conceals a serious heart condition when applying for a life policy and dies of that condition later. The insurer may:

  1. Be forced to pay because the policy was already issued
  2. Avoid the contract and refuse the claim because a material fact was not disclosed Correct answer.
  3. Increase the premium after the death and pay the claim
  4. Pay only the premium paid, without any other remedy

Explanation

Non-disclosure of a material fact breaches utmost good faith and allows the insurer to avoid the contract, refusing the claim. The insurer relied on the withheld information when accepting the risk. Issuing the policy does not cure the breach, and premium adjustment after death is not a remedy.

Question 13Introduction to Insurance and Risk Management

Which of the following is the best example of a moral hazard in insurance?

  1. A policyholder who becomes careless about security because insurance will pay Correct answer.
  2. A poorly maintained electrical wiring system
  3. A building located in a flood-prone valley
  4. A driver who has poor eyesight

Explanation

Moral hazard arises from behaviour or attitude changes caused by having insurance, such as reduced care about loss prevention. Poor wiring, flood-prone location and poor eyesight are physical hazards, which are tangible conditions. The distinction matters because insurers use deductibles and conditions to counter moral hazard.

Question 14Introduction to Insurance and Risk Management

Which characteristic is essential for a risk to be considered insurable by a private insurer?

  1. The loss must be accidental and measurable in money Correct answer.
  2. The loss must be certain to occur to every policyholder
  3. The loss must be intentional on the part of the insured
  4. The risk must affect only one person in the community

Explanation

Insurable risks generally involve accidental losses that can be measured in money and are shared across a large number of similar exposures. Certain, unique or intentional losses fail these tests. Intentional loss is excluded because insurance covers fortuitous events.

Question 15Introduction to Insurance and Risk Management

Why do insurers exclude losses caused by intentional acts of the insured?

  1. Intentional losses are always covered by government schemes
  2. Intentional losses would undermine the pooling principle and encourage fraud Correct answer.
  3. Insurers lack the legal power to price such losses
  4. Intentional losses are too small to matter to the insurer

Explanation

Insurance depends on fortuitous, accidental losses being shared across a pool. Covering deliberate acts would create a strong incentive to cause loss for payment and would break the pooling mechanism. Intentional acts are therefore excluded as a matter of principle.

Question 16Introduction to Insurance and Risk Management

The amount a policyholder must pay towards a loss before the insurer pays the balance is called:

  1. The sum insured
  2. The premium
  3. The deductible or excess Correct answer.
  4. The surrender value

Explanation

A deductible, also called an excess, is the portion of each loss borne by the insured. It reduces small claims and gives the insured an incentive to prevent loss. The premium is the price of cover, the sum insured is the maximum limit, and surrender value relates to savings policies.

Question 17Introduction to Insurance and Risk Management

Which statement best explains why an insurer charges different premiums to different policyholders?

  1. Premiums are set randomly so that all policyholders pay similar amounts
  2. Premiums depend only on the policyholder's age and nothing else
  3. Premiums reflect the expected loss experience and risk characteristics of each group Correct answer.
  4. Premiums are fixed by law and cannot vary between risks

Explanation

Premium rating reflects the expected frequency and severity of losses for a given risk group, so higher-risk groups pay more. This keeps the pool equitable and financially sound. Random pricing, fixed legal rates or age alone do not explain rating.

Question 18Introduction to Insurance and Risk Management

The maximum amount an insurer will pay under a property policy is known as the:

  1. Premium
  2. Deductible
  3. Loading
  4. Sum insured Correct answer.

Explanation

The sum insured is the upper limit of the insurer's liability under the policy. It is usually based on the value of the property and should be adequate to avoid underinsurance. A deductible is the insured's share of a loss, a premium is the price, and loading is an addition to the base rate.

Question 19Introduction to Insurance and Risk Management

A property worth ₹20 lakh is insured for only ₹10 lakh. Under the principle of average, if a loss of ₹4 lakh occurs, the insurer will typically pay:

  1. ₹10 lakh
  2. Nil
  3. ₹4 lakh
  4. ₹2 lakh Correct answer.

Explanation

Under average, the claim is reduced in proportion to underinsurance: sum insured divided by value, multiplied by the loss. Here ₹10 lakh ÷ ₹20 lakh × ₹4 lakh equals ₹2 lakh. Paying the full loss would breach indemnity and reward inadequate insurance.

Question 20Introduction to Insurance and Risk Management

Which of the following best describes reinsurance?

  1. A government scheme for uninsured losses
  2. A broker arranging cover for several policyholders
  3. A policyholder buying a second policy on the same property
  4. An insurer insuring part of its own risk with another insurer Correct answer.

Explanation

Reinsurance is insurance for insurers: the original insurer transfers part of its risk to a reinsurer. It protects the insurer against very large or accumulated losses and supports capacity. A second policy by a policyholder, broker activity or a government scheme is not reinsurance.

Question 21Introduction to Insurance and Risk Management

A policyholder buys two fire policies covering the same property and the same interest, and a fire loss occurs. This situation is called:

  1. Coinsurance
  2. Reinsurance
  3. Double insurance Correct answer.
  4. Subrogation

Explanation

Double insurance arises when the same interest is insured more than once against the same risk. The insured cannot recover more than the actual loss, and the insurers share the claim. Reinsurance is insurer-to-insurer, coinsurance involves sharing a large risk among insurers, and subrogation is recovery from a wrongdoer.

Question 22Introduction to Insurance and Risk Management

Which of the following is a pure risk that is generally insurable?

  1. Loss from a fall in the price of shares
  2. Loss of profit from choosing the wrong product to launch
  3. Loss from a gamble at a casino
  4. Loss of a factory building due to an earthquake Correct answer.

Explanation

Earthquake damage is a pure risk: the outcome is loss or no loss, with no possibility of gain, and it is measurable and accidental. Share price falls, gambling and product-launch decisions are speculative risks with possible gain, which insurers normally do not cover.

Question 23Introduction to Insurance and Risk Management

Which statement about the relationship between risk and insurance is most accurate?

  1. Insurance transfers the financial consequences of risk while the physical risk remains Correct answer.
  2. Insurance eliminates the risk of loss entirely
  3. Insurance removes the need for any loss-prevention measures
  4. Insurance increases the chance that a loss will occur

Explanation

Insurance transfers the financial burden of a loss to the insurer, but the physical risk of the event still exists. Loss prevention therefore remains important, and insurers often require or reward it. Insurance cannot eliminate risk or make losses more likely.

Question 24Introduction to Insurance and Risk Management

An insured deliberately sets fire to his own stock to claim the insurance money. Which principle is most directly breached?

  1. The principle of subrogation, since no third party is involved
  2. The principle of average, since the sum insured is adequate
  3. The principle of indemnity, since he seeks more than his actual loss Correct answer.
  4. The principle of contribution, since only one policy exists

Explanation

A deliberate act to obtain insurance money seeks payment beyond the genuine loss and offends the indemnity principle. It also breaches the requirement that losses be fortuitous, and the insurer may avoid the contract. Subrogation, contribution and average are unrelated to the deliberate act itself.

Question 25Principles of Insurance (insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

Under the principle of insurable interest, which of the following best describes the relationship a policyholder must have with the subject matter of insurance?

  1. A relationship that exists only where the insured is the registered legal owner of the property
  2. A relationship of friendship or distant acquaintance with the owner of the insured property
  3. A relationship that arises automatically once the premium has been paid to the insurer
  4. A relationship recognised by law by which the insured benefits from its preservation or suffers loss from its damage Correct answer.

Explanation

Insurable interest is a legally recognised relationship in which the insured stands to gain from the continued existence of the subject matter or to lose from its destruction. It is a requirement of law, not something created by paying a premium, and it can exist in relationships other than ownership.

Question 26Principles of Insurance (insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

In a contract of indemnity, the amount payable on a loss is measured by reference to which standard?

  1. The market value of the policy itself if it were sold to another party
  2. The total of all premiums the insured has paid over the life of the policy
  3. The sum that restores the insured financially to the position held immediately before the loss Correct answer.
  4. The maximum sum insured stated in the schedule, regardless of the actual loss

Explanation

Indemnity means the insured is placed financially in the same position as before the loss, no better and no worse. The sum insured is only a ceiling on liability, not an automatic payout. Premiums paid and resale value of the policy are irrelevant to measuring loss.

Question 27Principles of Insurance (insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

Which principle obliges a proposer to disclose every material fact that a prudent insurer would consider relevant to the risk, even if no question about it appears on the proposal form?

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

Explanation

Utmost good faith places a positive duty on the proposer to volunteer material facts, not merely to answer the questions asked. Contribution, subrogation, and proximate cause operate after a loss rather than at the stage of disclosure.

Question 28Principles of Insurance (insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

An insurer that has paid a claim and then recovers the same amount from the negligent third party is exercising which right?

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

Explanation

Subrogation allows the insurer, after indemnifying the insured, to step into the insured's shoes and pursue the third party responsible for the loss. Contribution deals with sharing between insurers, while indemnity and average relate to measuring the payout.

Question 29Principles of Insurance (insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

Two fire policies with identical terms both cover the same building for the same interest. When a fire loss occurs, how do the insurers normally settle it?

  1. Only the policy issued first in time responds, and the second insurer pays nothing
  2. The insured must choose one insurer, and the other policy is automatically cancelled
  3. The insured collects the full amount from both insurers because two premiums were paid
  4. Each insurer pays its rateable share of the loss so the insured recovers no more than the actual loss Correct answer.

Explanation

Contribution requires insurers covering the same interest against the same peril to share the loss rateably, preventing the insured from profiting. The insured cannot recover more than the actual loss even though two premiums were paid.

Question 30Principles of Insurance (insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

In insurance law, the proximate cause of a loss is best described as which of the following?

  1. The cause that occurred earliest in time, whatever its connection to the damage
  2. The cause that the insured believes is most likely to be accepted by the insurer
  3. The final event in the sequence, regardless of how it was triggered
  4. The dominant, effective cause that sets in motion the unbroken chain of events leading to the loss Correct answer.

Explanation

Proximate cause is the efficient, dominant cause that is actively linked to the loss through an unbroken chain of events. It is not simply the first event in time or the last event before damage, and the insured's belief has no legal weight.

Question 31Principles of Insurance (insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

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

  1. The insurer is entitled to make a profit from every individual policy
  2. The insured may freely transfer the policy to any stranger without consent
  3. The insurer relies on facts disclosed by the insured, creating a duty of utmost good faith Correct answer.
  4. The contract becomes binding only after a loss has actually occurred

Explanation

Insurance is a contract of utmost good faith because the insurer cannot inspect the risk itself and depends on the insured's disclosure. Cover begins when the contract is formed, not when a loss happens, and assignment generally requires insurer consent.

Question 32Principles of Insurance (insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

A marine policy covers a shipment, and the insured has an insurable interest in the cargo at the time of loss. Which statement correctly applies the timing rule for insurable interest in marine insurance?

  1. The interest must exist at both inception and loss, failing which the claim is void
  2. The interest must exist only when the policy is effected and may lapse before the loss
  3. The interest is irrelevant in marine insurance because the policy is a wager
  4. The interest must exist at the time of the loss, though it need not exist when the policy is effected Correct answer.

Explanation

In marine insurance, insurable interest must attach at the time of the loss, but it need not exist when the policy is taken out, which allows cover for goods not yet acquired. Life insurance, by contrast, requires interest at inception.

Question 33Principles of Insurance (insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

A building insured for ₹20,00,000 suffers a fire loss of ₹8,00,000, but its actual value at the time of loss is ₹40,00,000. Applying the average clause, what amount is payable?

  1. ₹20,00,000
  2. ₹8,00,000
  3. ₹4,00,000 Correct answer.
  4. ₹2,00,000

Explanation

The average clause reduces the claim in proportion to under-insurance: sum insured divided by actual value, multiplied by the loss. Here ₹20,00,000 / ₹40,00,000 × ₹8,00,000 = ₹4,00,000, so the insured bears the balance.

Question 34Principles of Insurance (insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

An insured fails to disclose a previous rejection of a similar claim by another insurer, a fact that would have led a prudent insurer to decline or rate the risk differently. What is the usual consequence?

  1. The policy remains fully enforceable because the proposal form did not ask the question
  2. The insurer may avoid the policy because a material fact was not disclosed Correct answer.
  3. The insurer must pay the claim but may increase the next premium
  4. The insurer can only cancel cover prospectively with no effect on the current claim

Explanation

Non-disclosure of a material fact breaches utmost good faith and entitles the insurer to avoid the contract, treating it as though it never existed. The duty to disclose is not limited to questions on the proposal form.

Question 35Principles of Insurance (insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

An insurer pays a fire claim of ₹5,00,000 to the insured. It later discovers the fire was caused by a neighbour's negligence and recovers ₹5,00,000 from that neighbour. Who is entitled to the recovered money?

  1. The insured, because the recovery relates to damage to the insured's own property
  2. The insurer, because it has already indemnified the insured and is subrogated to the insured's rights Correct answer.
  3. Neither party, because the recovery must be paid into a court deposit
  4. Both parties equally, since the loss and the recovery are of the same amount

Explanation

Once the insurer has indemnified the insured, subrogation transfers the insured's right of action against the third party to the insurer. The insurer may retain the recovery up to the amount it paid, since the insured has already been made whole.

Question 36Principles of Insurance (insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

A house is insured against fire under Policy A for ₹6,00,000 and under Policy B for ₹4,00,000, both covering the same interest. A fire loss of ₹5,00,000 occurs. Under contribution, how much does Policy A pay?

  1. ₹5,00,000
  2. ₹2,00,000
  3. ₹6,00,000
  4. ₹3,00,000 Correct answer.

Explanation

Contribution shares the loss in proportion to the sums insured: Policy A bears 6/10 of ₹5,00,000, which is ₹3,00,000. Policy B then bears the remaining ₹2,00,000, keeping the total equal to the loss.

Question 37Principles of Insurance (insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

A building is damaged when a storm blows down a tree that falls onto it. The policy covers storm but excludes damage caused by trees. Which principle determines whether the insurer is liable?

  1. Utmost good faith, because the insured must disclose the presence of the tree
  2. Contribution, because the loss must be shared with any other policy in force
  3. Proximate cause, because the storm is the dominant cause that set the chain of events in motion Correct answer.
  4. Subrogation, because the tree owner may be pursued for the damage

Explanation

Where an insured peril and an excluded event are both involved, liability depends on the proximate cause. If the storm is the efficient cause and the fall of the tree is merely its consequence, the claim falls within the storm cover.

Question 38Principles of Insurance (insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

Which of the following persons typically holds an insurable interest in a building they do not own?

  1. A mortgagee who has lent money against the security of the building Correct answer.
  2. A prospective purchaser who has only verbally expressed interest
  3. A former owner who sold the building five years ago
  4. A passer-by who regularly admires the building from the street

Explanation

A mortgagee has a pecuniary interest because destruction of the building would impair the security for the loan. Admiration, past ownership, and mere intention to buy do not create a legal and pecuniary relationship.

Question 39Principles of Insurance (insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

An insured deliberately conceals that the premises will be used to store highly flammable chemicals, though the proposal form asks only about general storage. The insurer later discovers this after a fire. What is the insurer's position?

  1. It may only raise the premium retrospectively and must still settle the loss
  2. It must pay the claim because the form did not specifically ask about chemicals
  3. It must refer the matter to other insurers under the principle of contribution
  4. It may avoid the policy, as concealment of a material fact breaches utmost good faith Correct answer.

Explanation

Deliberate concealment of a fact that materially affects the risk is a breach of utmost good faith and allows the insurer to avoid the contract. The duty to disclose is not confined to the specific questions printed on the form.

Question 40Principles of Insurance (insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

A life insurance policy is taken out on the life of a person in whom the proposer has an insurable interest at inception. The proposer later loses that interest. What is the effect on the policy?

  1. The policy remains valid, because in life insurance interest is required only at inception Correct answer.
  2. The policy lapses unless the insurer agrees to waive the requirement
  3. The policy becomes void immediately, because interest must continue throughout the term
  4. The policy is automatically converted into a property indemnity policy

Explanation

Life insurance is not a contract of indemnity, and insurable interest is required only when the policy is effected. A subsequent loss of interest does not invalidate the cover, and the policy does not convert into another type.

Question 41Principles of Insurance (insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

Which statement correctly contrasts indemnity with the other principles?

  1. Indemnity allows the insured to profit from a loss, while subrogation prevents disclosure of facts
  2. Indemnity requires the insured to disclose all facts, while subrogation measures the loss
  3. Indemnity applies only to life insurance, while contribution applies to fire insurance
  4. Indemnity limits recovery to the actual loss, while contribution and subrogation help enforce that limit Correct answer.

Explanation

Indemnity is the governing aim of non-life insurance, and contribution and subrogation are mechanisms that prevent the insured from recovering more than the actual loss. Disclosure belongs to utmost good faith, and life insurance is generally not a contract of indemnity.

Question 42Principles of Insurance (insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

An insured under a fire policy negligently leaves a candle burning, causing a fire. The insurer pays the claim. Which statement about the insurer's subrogation rights is correct?

  1. The insurer cannot recover from the insured, because subrogation operates only against third parties Correct answer.
  2. The insurer may sue the insured to recover the amount paid, because the insured was negligent
  3. The insurer loses all rights because negligence voids the policy automatically
  4. The insurer may deduct the claim from future premiums as a form of recovery

Explanation

Subrogation allows the insurer to pursue third parties who caused the loss; it does not give the insurer a right of action against its own insured. Negligence by the insured is generally covered unless the policy excludes it.

Question 43Principles of Insurance (insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

A policy covers damage by flood but excludes damage by subsidence. Heavy rain causes a river to flood, and the floodwater erodes the foundations, causing the building to subside. Which proximate cause analysis is most appropriate?

  1. Both causes operate equally, so the claim must be shared equally between them
  2. Neither cause applies, because the policy is ambiguous and must be voided
  3. Subsidence is the proximate cause, because it occurred last in time
  4. Flood is the proximate cause, because subsidence was a consequence of the flood and not an independent cause Correct answer.

Explanation

The proximate cause is the efficient cause that set the chain of events in motion, which here is the flood. Subsidence following from the flood is a consequence rather than an independent, intervening cause.

Question 44Principles of Insurance (insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

An insured takes out two policies on the same stock, each containing a rateable contribution clause. The insured recovers the full loss from Insurer X and signs no waiver. What is Insurer X's position?

  1. It may avoid its policy because the insured failed to disclose the other policy
  2. It may recover the whole amount from the insured as unjust enrichment
  3. It must bear the whole loss because it settled first and cannot recover anything
  4. It may claim a rateable contribution from Insurer Y for the share Y should have borne Correct answer.

Explanation

Where two policies cover the same interest, the insurer that pays more than its share may claim contribution from the other insurer. The insured's recovery is limited to the actual loss, and non-disclosure of the other policy is not automatically a ground of avoidance.

Question 45Principles of Insurance (insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

An insured property is destroyed by an earthquake, which the policy excludes. The earthquake also ruptures a gas main, and the escaping gas ignites, burning the ruins. Which factor is decisive in determining whether the fire damage is covered?

  1. Whether the insurer can recover the loss from the gas supplier by subrogation
  2. Whether the sum insured was adequate to cover the full value of the property
  3. Whether the fire is an independent new cause or merely a consequence of the excluded earthquake Correct answer.
  4. Whether the insured had disclosed the proximity of the gas main at proposal

Explanation

Where an excluded peril is followed by a covered peril, the question is whether the later event is a new and independent cause or merely part of the excluded chain. If the fire is a direct consequence of the earthquake, the exclusion is likely to prevail.

Question 46Principles of Insurance (insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

An insurer discovers that a policyholder innocently failed to disclose a fact that was material but which the proposer genuinely believed to be unimportant. Which statement reflects the traditional legal position?

  1. The insurer cannot avoid the policy, because innocent non-disclosure is always excused
  2. The insurer may avoid the policy, because the test of materiality is objective and does not depend on the proposer's belief Correct answer.
  3. The insurer must prove that the proposer intended to defraud before taking any action
  4. The insurer may only reduce the claim in proportion to the undisclosed fact

Explanation

Materiality is judged objectively by what a prudent insurer would consider relevant, so an honest belief that a fact is unimportant does not cure non-disclosure. The traditional remedy of avoidance is available even where there is no fraudulent intent.

Question 47Principles of Insurance (insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

An insured holds a policy on machinery with a sum insured of ₹10,00,000. A loss of ₹4,00,000 occurs, and the actual value of the machinery is ₹10,00,000, but a second policy with the same insurer covers the same machinery for ₹5,00,000. How does contribution apply?

  1. Contribution applies only if the two policies are held with different insurers
  2. Contribution does not apply between policies issued by the same insurer, which simply pays the loss up to the sum insured Correct answer.
  3. The insured must elect which policy to claim under, and the other lapses
  4. The insured may recover ₹9,00,000 because two policies were issued

Explanation

Contribution operates between different insurers covering the same interest; where the same insurer issues both policies, it simply meets the loss within the limits of cover. The insured cannot recover more than the actual loss in any event.

Question 48Principles of Insurance (insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

A cargo owner insures goods for a voyage. At the time the policy is effected, the goods have not yet been shipped and the owner has no property in them. The goods are later shipped, and are lost at sea. Which statement is correct?

  1. The claim is valid only if the insurer waives the requirement of insurable interest
  2. The claim is invalid, because a policy cannot be effected before the goods are shipped
  3. The claim is valid, because insurable interest existed at the time of the loss even though not at inception Correct answer.
  4. The claim is invalid, because insurable interest must exist at both inception and loss

Explanation

In marine insurance, the insured need only have an insurable interest at the time of the loss, so a policy may validly be effected before the goods are acquired or shipped. No waiver by the insurer is required.

Question 49Principles of Insurance (insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

Which of the following best explains why an insurer is entitled to avoid a policy for breach of utmost good faith rather than merely to claim damages?

  1. Because the insurer was induced to accept a risk it would otherwise have declined or rated differently Correct answer.
  2. Because avoidance is a statutory penalty imposed for all breaches of contract
  3. Because the insurer has suffered a measurable financial loss equal to the claim
  4. Because the insured has already paid a premium that must be refunded in full

Explanation

Avoidance restores the insurer to the position it would have occupied had the true facts been disclosed, since it was induced to accept a risk it might otherwise have refused. The remedy is not a penalty for breach of contract generally, nor does it depend on proving a quantified loss.

Question 50Principles of Insurance (insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

Under the principle of indemnity, which measure correctly states what a fire policy holder can recover when the sum insured is less than the value of the property destroyed?

  1. The full market value of the property at the date of loss
  2. The amount of the premium paid, plus interest
  3. The loss actually suffered, without any restriction
  4. The sum insured, subject to the condition of average Correct answer.

Explanation

Indemnity aims to place the insured in the same financial position as before the loss, but never better off. Where the sum insured is below the property's value the policy is under-insured, and the condition of average scales the claim down in proportion to the shortfall. Recovery is therefore limited to the sum insured after applying average, not the full value or the full loss.