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III IC-102 practice questions

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Question 1Principles of Insurance

In insurance terminology, what is the fundamental mechanism by which an insurer accepts the financial consequences of a specified risk from a policyholder?

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

Explanation

Insurance works primarily through risk transfer, where the policyholder shifts the financial burden of a defined loss exposure to the insurer in exchange for a premium. Retention and avoidance describe ways the insured handles risk without insurance, while financing is a broader category that includes insurance but is not the transfer mechanism itself.

Question 2Principles of Insurance

Which feature distinguishes a pure risk from a speculative risk?

  1. Pure risk involves only the chance of loss or no loss, while speculative risk includes the possibility of gain Correct answer.
  2. Pure risk is always insured commercially, while speculative risk is never insurable
  3. Pure risk is measured in currency, while speculative risk cannot be quantified
  4. Pure risk arises only from natural perils, while speculative risk arises only from human action

Explanation

Pure risk presents only two outcomes: loss or no loss, with no possibility of profit, which is why it is the traditional subject of insurance. Speculative risk, such as investing in a new venture, carries the chance of gain as well as loss and is generally not insurable.

Question 3Principles of Insurance

An applicant completes a proposal form and the insurer issues a policy. In insurance contract law, what is the completed proposal form generally treated as?

  1. The acceptance
  2. The consideration
  3. The waiver
  4. The offer Correct answer.

Explanation

The proposal form submitted by the applicant is normally regarded as the offer to contract, and the insurer's issuance of the policy constitutes acceptance. Consideration is the premium paid in exchange for the insurer's promise to indemnify.

Question 4Principles of Insurance

A material fact in insurance is best described as one that would influence which decision of a prudent insurer?

  1. Whether to accept the risk and on what terms Correct answer.
  2. Which agent to pay commission to
  3. Which reinsurer to appoint
  4. How to invest the premium income

Explanation

A fact is material if a prudent insurer would want to know it when deciding whether to accept the risk, what premium to charge, or what conditions to impose. Reinsurance, investment, and commission decisions are internal matters unrelated to the duty of disclosure.

Question 5Principles of Insurance

Which principle prevents an insured from recovering more than the actual financial loss suffered on a property claim?

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

Explanation

The principle of indemnity restores the insured to the same financial position as before the loss, no better and no worse, so recovery cannot exceed the actual loss. Subrogation and contribution are supporting principles that help enforce indemnity but do not themselves define the limit of recovery.

Question 6Principles of Insurance

An insured holds two property policies covering the same loss, each with a rateable share clause. The loss is 60,000 and each policy carries a sum insured of 30,000. Under contribution, how is the loss shared?

  1. The insured bears 30,000 and the insurers pay 15,000 each
  2. Each insurer pays 30,000 Correct answer.
  3. Each insurer pays 60,000
  4. The first policy pays 60,000 and the second pays nothing

Explanation

Contribution requires insurers covering the same interest to share the loss so the insured does not profit. Where the sums insured are equal, the loss is divided equally, so each insurer pays 30,000.

Question 7Principles of Insurance

After paying a fire claim caused by a negligent contractor, an insurer pursues the contractor for the amount paid. Which principle allows this?

  1. Subrogation Correct answer.
  2. Proximate cause
  3. Insurable interest
  4. Contribution

Explanation

Subrogation gives the insurer the right, after indemnifying the insured, to take over the insured's legal rights of recovery against the party responsible for the loss. This prevents the insured from recovering twice and places the cost on the party at fault.

Question 8Principles of Insurance

Which statement correctly describes insurable interest in life insurance?

  1. It is not required for life insurance at all
  2. It must exist at the time of the insured's death
  3. It must exist at the time the policy is taken out Correct answer.
  4. It must exist both at inception and at death

Explanation

For life insurance, insurable interest must exist when the policy is effected, because the contract is not one of indemnity and the interest need not continue. Property insurance, by contrast, requires insurable interest at the time of loss.

Question 9Principles of Insurance

Which of the following best states the principle of proximate cause?

  1. The last peril in a chain of events is always the proximate cause
  2. The dominant, effective cause of a loss determines whether the policy responds Correct answer.
  3. The cause nearest in time to the loss always governs
  4. Only the first peril in a sequence can be considered

Explanation

Proximate cause is the efficient, dominant cause that sets the chain of events in motion without which the loss would not have occurred. It is not necessarily the cause closest in time, so courts look at substance rather than mere sequence.

Question 10Principles of Insurance

A property policy excludes war but covers fire. A fire is started by a bomb dropped during an armed conflict. Applying proximate cause, how would the loss most likely be treated?

  1. Covered, because the last event was fire
  2. Covered, because fire is a named peril regardless of origin
  3. Excluded, because the insured failed to disclose the conflict
  4. Excluded, because the dominant cause is war Correct answer.

Explanation

Where an excluded peril such as war is the dominant and effective cause that sets the fire in motion, the exclusion applies even if fire is a covered peril. Proximate cause looks to the efficient cause rather than the final physical event.

Question 11Principles of Insurance

What is the primary purpose of the principle of utmost good faith in insurance contracts?

  1. To prevent insurers from charging differential premiums
  2. To guarantee that claims are always paid in full
  3. To make the policy wording binding only on the insured
  4. To require each party to disclose material information fully and honestly Correct answer.

Explanation

Utmost good faith obliges both parties, especially the applicant, to disclose material facts and avoid misrepresentation, because the insurer relies on the applicant's knowledge of the risk. It does not guarantee claim payment or restrict legitimate rating.

Question 12Principles of Insurance

An insured deliberately conceals a serious medical condition when applying for life cover and dies of an unrelated cause shortly afterwards. What is the insurer's usual position?

  1. It may only cancel cover from the date of death
  2. It must pay because the death was unrelated to the concealed condition
  3. It must pay but may increase the premium retrospectively
  4. It may avoid the policy because of the non-disclosure of a material fact Correct answer.

Explanation

Deliberate non-disclosure of a material fact breaches utmost good faith and generally entitles the insurer to avoid the contract from inception, regardless of whether the concealed fact caused the loss. The remedy addresses the integrity of the underwriting decision.

Question 13Principles of Insurance

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

  1. Premium
  2. Sum insured
  3. Average clause
  4. Excess Correct answer.

Explanation

An excess, also called a deductible, is the first portion of each loss that the insured absorbs, and the insurer pays the balance up to the sum insured. The sum insured is the maximum limit of cover, not the retained amount.

Question 14Principles of Insurance

A property is insured for 60,000 but its value at the time of loss is 80,000. A loss of 16,000 occurs and the policy contains a rateable average condition. Ignoring any excess, what will the insurer pay?

  1. 10,667
  2. 16,000
  3. 12,000 Correct answer.
  4. 8,000

Explanation

Under average, the insurer pays the loss multiplied by the ratio of sum insured to value: 16,000 x (60,000 / 80,000) = 12,000. The insured bears the remainder as a penalty for underinsurance.

Question 15Principles of Insurance

How does a valued policy differ from an unvalued policy?

  1. A valued policy fixes the amount payable in advance, while an unvalued policy pays the actual loss up to the sum insured Correct answer.
  2. A valued policy covers only total loss, while an unvalued policy covers partial loss
  3. A valued policy requires no insurable interest, while an unvalued policy does
  4. A valued policy pays the market value at loss, while an unvalued policy pays an agreed figure

Explanation

In a valued policy the parties agree the value of the subject matter at inception, and that agreed sum is the measure of recovery for a total loss. An unvalued policy instead indemnifies the actual loss proved, subject to the sum insured.

Question 16Principles of Insurance

Which of the following is generally regarded as an insurable interest in property insurance?

  1. A person who once considered buying the property
  2. A person who merely admires the property
  3. A person who owns the property Correct answer.
  4. A person who lives near the property

Explanation

Insurable interest requires a lawful relationship such that the insured benefits from the property's continued existence or suffers loss from its damage. Ownership is the clearest example, whereas admiration, proximity, or a past intention creates no financial interest.

Question 17Principles of Insurance

What is the main function of a warranty in an insurance policy?

  1. A promise by the insured that a specified state of affairs exists or will be maintained Correct answer.
  2. A description of the claims procedure
  3. A promise by the insurer to renew the policy indefinitely
  4. A statement of the premium payable

Explanation

A warranty is a contractual promise by the insured concerning a fact or condition that must be strictly complied with, and breach can discharge the insurer's liability. It is a substantive condition, not a procedural or pricing statement.

Question 18Principles of Insurance

Which statement best describes a representation in insurance law?

  1. A statement of fact made by the applicant that induces the insurer to enter the contract Correct answer.
  2. A promise that a future condition will always be fulfilled
  3. A formal document issued after a loss
  4. A clause limiting the insurer's liability

Explanation

A representation is a statement made during negotiations that induces the insurer to enter the contract and, if untrue, may give grounds for avoidance. It differs from a warranty, which is a promise forming part of the contract.

Question 19Principles of Insurance

Which of the following best describes the role of the Financial Ombudsman Service in the United Kingdom insurance market?

  1. It grants authorisation for insurers to trade
  2. It prosecutes insurance fraud in the criminal courts
  3. It resolves disputes between consumers and financial firms, including insurers, on a fair and reasonable basis Correct answer.
  4. It sets the premium rates that insurers must charge

Explanation

The Financial Ombudsman Service provides an independent dispute resolution mechanism for eligible complainants against financial firms, deciding cases on what is fair and reasonable. Authorisation and prudential regulation are handled by the regulators, not the ombudsman.

Question 20Principles of Insurance

What is the purpose of a policy exclusion in an insurance contract?

  1. To increase the sum insured automatically
  2. To replace the need for a proposal form
  3. To guarantee that all losses are paid in full
  4. To specify perils or circumstances for which the insurer will not provide cover Correct answer.

Explanation

Exclusions define the boundaries of cover by removing specified perils, property, or circumstances from the insurer's liability, allowing the risk to be priced accurately. They do not expand cover or replace underwriting documents.

Question 21Principles of Insurance

A marine policy covers 'perils of the sea' but expressly excludes losses caused by the ordinary action of wind and waves. A cargo is damaged in a severe but not exceptional storm. Which statement best reflects how the exclusion is likely to apply?

  1. The exclusion applies only to total losses
  2. The exclusion may remove cover because ordinary weather action is a normal risk the insured is expected to bear Correct answer.
  3. The exclusion applies only if the ship sinks
  4. The exclusion is void because perils of the sea are also covered

Explanation

Exclusions for ordinary action of wind and waves carve out normal, foreseeable wear from the broader cover of perils of the sea, leaving exceptional sea perils insured. Where the loss arises from ordinary weather, the exclusion is likely to defeat the claim.

Question 22Principles of Insurance

Which of the following is a characteristic of a contract of insurance that distinguishes it from an ordinary commercial sale?

  1. It cannot be enforced in court
  2. It never requires consideration
  3. It is always formed orally
  4. It is a contract of utmost good faith requiring disclosure of material facts Correct answer.

Explanation

Insurance is a contract uberrimae fidei, imposing a duty of utmost good faith and disclosure that goes beyond the ordinary caveat emptor of commercial sales. Insurance contracts are enforceable and do require consideration, namely the premium.

Question 23Principles of Insurance

An insured has a household policy with a 250 excess. A burst pipe causes damage of 1,400. Ignoring any other conditions, what amount will the insurer pay?

  1. 1,650
  2. 250
  3. 1,150 Correct answer.
  4. 1,400

Explanation

The excess is deducted from the loss before payment, so the insurer pays 1,400 minus 250, which equals 1,150. The insured bears the first 250 of the loss.

Question 24Principles of Insurance

Which statement correctly describes a condition precedent in an insurance policy?

  1. A clause that automatically renews the policy
  2. A promise that the insurer will never avoid the contract
  3. A statement of the premium due date
  4. A requirement the insured must satisfy before the insurer's liability arises Correct answer.

Explanation

A condition precedent must be fulfilled before the insurer's obligation to pay arises, such as notifying a claim promptly or providing proof of loss. Failure can entitle the insurer to decline the claim even where cover would otherwise exist.

Question 25Principles of Insurance

A fire policy excludes loss caused by the insured's own deliberate act. Lightning strikes the building, starting a fire that spreads to a neighbouring insured property. Which statement best explains the insurer's liability for damage to the insured property?

  1. The insurer is liable because lightning is the proximate cause, and the exclusion for deliberate acts does not apply Correct answer.
  2. The insurer is liable only for the neighbour's property, not the insured's
  3. The insurer is not liable because fire is excluded
  4. The insurer is liable only if the insured can prove negligence

Explanation

Lightning is the efficient cause of the loss and is a covered peril, so the policy responds; the exclusion for deliberate acts is irrelevant because no deliberate act occurred. Proximate cause analysis identifies the dominant peril rather than the mechanism of spread.

Question 26Principles of Insurance

An insurer agrees to indemnify an insured against loss arising from a specified event. In insurance terminology, what is the event that triggers the insurer's liability called?

  1. The hazard
  2. The risk
  3. The peril Correct answer.
  4. The exposure

Explanation

A peril is the actual cause of loss, such as fire, theft, or a collision, and it is the event the policy insures against. Hazard, risk, and exposure describe different concepts: a hazard increases the chance of loss, risk is the uncertainty of loss, and exposure is the state of being subject to loss.

Question 27Principles of Insurance

Which statement best expresses the principle of indemnity as applied to property insurance?

  1. The insurer must always pay the full sum insured regardless of the actual loss
  2. The policy pays a fixed benefit agreed at inception regardless of the loss suffered
  3. The insured should be restored to the same financial position as before the loss, no better and no worse Correct answer.
  4. The insured may profit from a loss provided the premium was paid in full

Explanation

Indemnity means the insured is compensated for the actual financial loss and is placed in the same position as before the event, without profit. Sum insured is a ceiling, not an automatic payment, and fixed-benefit policies are an exception found mainly in life and personal accident insurance.

Question 28Principles of Insurance

In insurance, which term describes a condition that increases either the likelihood of a loss or its potential severity?

  1. Peril
  2. Subrogation
  3. Proximate cause
  4. Hazard Correct answer.

Explanation

A hazard is a circumstance that raises the chance of a loss occurring or makes a loss worse if it does occur. Peril is the cause of loss, proximate cause is the dominant cause in a chain of events, and subrogation is the insurer's right of recovery.

Question 29Principles of Insurance

An insurance broker places a client's cover with an insurer. In the law of agency, which party does the broker normally represent when placing the business?

  1. The client Correct answer.
  2. Both the client and the insurer equally
  3. The insurer
  4. Neither party, as the broker acts only as an intermediary

Explanation

A broker is normally the agent of the insured, advising on needs and placing cover with an insurer on the client's behalf. An agent who acts for the insurer is typically an insurance agent or intermediary appointed by that insurer.

Question 30Principles of Insurance

Which statement correctly distinguishes a warranty from a representation in insurance contract law?

  1. A warranty need only be substantially true, while a representation must be complied with exactly
  2. A representation is part of the contract and a warranty is only a pre-contractual statement
  3. Both warranties and representations are pre-contractual statements with no contractual effect
  4. A warranty is a term of the contract that must be complied with exactly, whereas a representation is a statement made before the contract that need only be substantially true Correct answer.

Explanation

A warranty becomes a term of the policy and, at common law, must be complied with strictly, while a representation is a pre-contractual statement that must be substantially true and not misleading. The distinction matters because breach of warranty can discharge the insurer from liability from the date of breach.

Question 31Principles of Insurance

An insured suffers a loss caused by two events, one insured and one excluded, and neither can be separated. How does the principle of proximate cause usually resolve the claim?

  1. The insured must choose which cause to rely on before the claim is assessed
  2. The insurer never pays where any excluded cause is present
  3. The insurer pays if the dominant and effective cause is an insured peril Correct answer.
  4. The insurer pays half the loss because one cause is excluded

Explanation

Proximate cause looks for the dominant, effective cause of the loss, and the claim succeeds if that cause is an insured peril. Where causes operate concurrently and neither dominates, the modern approach may still allow recovery if an insured peril is a proximate cause, but a simple equal split is not the rule.

Question 32Principles of Insurance

An insured's factory is insured against fire. A fire starts, and the fire brigade's water damages stock that was not touched by the flames. How is the water damage treated under a fire policy?

  1. It is recoverable only if the insured bought a separate water damage extension
  2. It is recoverable as damage proximately caused by the fire Correct answer.
  3. It is treated as an uninsured peril because water is not named in the policy
  4. It is excluded because only direct flame damage is covered

Explanation

Fire policies cover damage caused by fire, and damage from water used to extinguish a fire is generally regarded as proximately caused by the fire. The loss flows directly from the insured peril, so it falls within the indemnity unless a specific exclusion applies.

Question 33Principles of Insurance

Which of the following best describes moral hazard in insurance?

  1. The risk that a physical feature of the property, such as its construction, causes a loss
  2. The risk that changes in the law make a policy wording obsolete
  3. The risk that the insurer misjudges the premium and makes an underwriting loss
  4. The risk that an insured's attitude or behaviour, such as carelessness or dishonesty, increases the chance or size of a claim Correct answer.

Explanation

Moral hazard arises from the insured's conduct or character, for example leaving property unsecured or exaggerating a claim, because insurance may reduce the incentive to be careful. Physical features of the risk are physical hazards, while underwriting and legal change are different categories of risk.

Question 34Principles of Insurance

A proposal form asks whether the applicant has ever been convicted of arson. The applicant answers 'no' although convicted five years earlier. The insurer issues a policy and later discovers the truth. What is the insurer's usual remedy?

  1. Increase the premium by ten per cent and continue cover automatically
  2. Pay any claim but report the insured to the police
  3. Reduce the sum insured in proportion to the premium paid
  4. Rescind the policy and treat it as if it had never existed, subject to the applicable consumer protection rules Correct answer.

Explanation

A false answer to a material question breaches the duty of utmost good faith and gives the insurer the right to rescind the contract, subject to any statutory consumer protections such as proportionate remedies for negligent misrepresentation. Rescission avoids the policy from the outset rather than adjusting it automatically.

Question 35Principles of Insurance

Which of the following is an example of a condition precedent to the insurer's liability under a liability policy?

  1. The insured must pay the premium by direct debit
  2. The insured must renew the policy annually
  3. The insured must notify the insurer of any incident that may give rise to a claim within the period stated in the policy Correct answer.
  4. The insured must display a warning sign at the premises

Explanation

A condition precedent must be satisfied before the insurer's liability arises, and prompt notification of incidents is a common example in liability policies. Paying by a particular method, displaying signs, or renewing annually may be contractual terms but are not typically conditions precedent to liability.

Question 36Principles of Insurance

A property policy contains an average clause. The property is insured for 80,000, its value at the time of loss is 100,000, and the loss is 20,000. Applying the average clause, how much does the insurer pay?

  1. 20,000
  2. 100,000
  3. 80,000
  4. 16,000 Correct answer.

Explanation

The average clause reduces the claim in the proportion that the sum insured bears to the value at risk: 80,000 divided by 100,000 equals 0.8, and 0.8 multiplied by the 20,000 loss gives 16,000. The insured bears the remaining 4,000 as underinsurance.

Question 37Principles of Insurance

Which statement best describes the role of the Financial Conduct Authority (FCA) in the United Kingdom insurance market?

  1. It pays compensation to policyholders when an insurer becomes insolvent
  2. It acts as the final appeal body for complaints about insurance advice
  3. It sets the premium rates that insurers may charge for motor cover
  4. It regulates the conduct of insurers and intermediaries to protect consumers and ensure market integrity Correct answer.

Explanation

The FCA is the conduct regulator, setting rules on fair treatment of customers, disclosure, and market behaviour for insurers and intermediaries. Compensation for insolvency is handled by the Financial Services Compensation Scheme, and complaints are decided by the Financial Ombudsman Service.

Question 38Principles of Insurance

An insured takes out a policy on a valuable painting and, without telling the insurer, later sells the painting and assigns the policy to the buyer. What is the usual position at common law?

  1. The policy is void and the seller must return all premiums
  2. The policy transfers automatically to the buyer with all rights intact
  3. The buyer may enforce the policy but only for half the sum insured
  4. The assignment is ineffective without the insurer's consent because insurance is a personal contract Correct answer.

Explanation

Insurance is a personal contract, so assigning the subject matter does not automatically assign the policy; the insurer's consent is generally required. Statutory exceptions exist for certain classes, but the general common law rule protects the insurer's assessment of the risk.

Question 39Principles of Insurance

Which statement correctly describes the principle of subrogation?

  1. After indemnifying the insured, the insurer may exercise the insured's rights of recovery against a third party who caused the loss Correct answer.
  2. The insurer takes over the insured's business and assets after a large loss
  3. The insurer may recover from the insured any profit made on the claim
  4. The insured may recover the loss twice, once from the insurer and once from the third party

Explanation

Subrogation allows the insurer, having paid the claim, to stand in the insured's shoes and pursue a negligent third party for the loss. It supports indemnity by preventing the insured from recovering twice and by allocating the cost to the party at fault.

Question 40Principles of Insurance

A commercial property policy contains a coinsurance clause requiring the insured to insure for at least 90 per cent of value. The insured insures for 70 per cent. What is the effect if a partial loss occurs?

  1. The claim is reduced in the proportion that the sum insured bears to the required 90 per cent of value Correct answer.
  2. The policy is void and no claim is payable
  3. The insurer pays the loss but cancels the policy from inception
  4. The claim is paid in full because coinsurance applies only to total losses

Explanation

A coinsurance clause imposes a minimum percentage of value that must be insured and reduces partial claims if the requirement is not met. The reduction reflects the shortfall against the agreed percentage, encouraging the insured to maintain adequate limits.

Question 41Principles of Insurance

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

  1. A general economic downturn reducing property values
  2. A change in building regulations affecting fire safety
  3. An old electrical wiring system in a warehouse Correct answer.
  4. An insured's history of fraudulent claims

Explanation

Physical hazards are tangible conditions of the risk, such as defective wiring, poor housekeeping, or combustible storage. Claims history is a moral hazard indicator, while regulatory and economic changes are outside the physical condition of the property.

Question 42Principles of Insurance

What is the primary purpose of a deductible or excess in an insurance policy?

  1. To replace the need for a sum insured
  2. To eliminate small claims and give the insured a financial incentive to prevent loss Correct answer.
  3. To increase the insurer's liability for every claim
  4. To transfer the entire risk back to the insured

Explanation

An excess or deductible requires the insured to bear a fixed first part of each loss, which removes the administrative cost of small claims and encourages loss prevention. It does not replace the sum insured or transfer the whole risk.

Question 43Principles of Insurance

Which statement correctly describes a valued policy?

  1. The sum insured is a maximum limit and the claim is measured by the actual value at the time of loss
  2. The policy pays the market value of the property at the date of loss regardless of the sum insured
  3. The sum insured is agreed at inception as the value of the subject matter, and that amount is paid on a total loss without further proof of value Correct answer.
  4. The policy pays only the amount of the premium if a loss occurs

Explanation

In a valued policy the parties agree the value of the subject matter when the contract is made, and that agreed value is conclusive in the event of a total loss. This avoids later disputes over value, which is why valued policies are common for fine art and marine hulls.

Question 44Principles of Insurance

An insured fails to disclose that a previous insurer declined their property cover for subsidence. The new insurer would have declined or imposed a subsidence exclusion had it known. What is the status of the duty of disclosure?

  1. It is immaterial because the previous decline concerned a different insurer
  2. It is immaterial because subsidence is always excluded
  3. The non-disclosure is material because it would have influenced a prudent insurer's decision Correct answer.
  4. It is material only if the insured actually knew the property was subsiding

Explanation

A fact is material if it would influence the judgement of a prudent insurer in fixing the premium or determining whether to accept the risk. A previous declinature for subsidence is a classic example of material information that must be disclosed.

Question 45Principles of Insurance

Which of the following best explains why insurance contracts are described as contracts of utmost good faith?

  1. The contract must be written in plain language
  2. The insurer must always pay claims within 24 hours
  3. Both parties must disclose all material facts and deal honestly, because the insurer relies on information held by the insured Correct answer.
  4. The insured must use a broker rather than deal directly with the insurer

Explanation

Utmost good faith imposes a duty on both parties, especially the insured, to disclose material facts and avoid misleading the other side, since the insurer cannot inspect every risk. Prompt payment, distribution channels, and plain language are separate regulatory or contractual matters.

Question 46Principles of Insurance

An insured's building is damaged by a fire that spread from a neighbouring property. The insured's policy contains a subrogation clause. Which statement best describes the insurer's position after paying the claim?

  1. The insurer may recover the full loss plus a profit from the neighbour
  2. The insured must pursue the neighbour personally and then repay the insurer
  3. The insurer may pursue the neighbour in the insured's name for the amount paid, but cannot recover more than it paid Correct answer.
  4. The insurer has no rights against the neighbour because the insured caused the fire

Explanation

Subrogation lets the insurer step into the insured's legal position and sue the responsible third party, but recovery is limited to the amount paid so that the insured is not prejudiced. The insured must cooperate, but the insurer controls the recovery action.

Question 47Principles of Insurance

In the event of a total loss under a fire policy, which principle limits the insured to the financial value of the property lost rather than the sum insured?

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

Explanation

Indemnity ensures the insured is compensated for the actual loss suffered, so the sum insured is a ceiling rather than an automatic payment. Contribution and subrogation are consequential principles that prevent double recovery, while utmost good faith governs disclosure.

Question 48Principles of Insurance

A policy covers 'accidental damage' but excludes 'damage caused by wear and tear'. An insured claims for a collapsed floor caused by long-term wood rot. How should the claim be treated?

  1. The claim is payable only if the insured can prove the exact date of the collapse
  2. The claim is excluded because wear and tear is the proximate cause of the collapse Correct answer.
  3. The claim is payable because the insured did not intend the collapse
  4. The claim is payable because a collapse is always accidental

Explanation

The exclusion applies where wear and tear is the dominant cause of the damage, and long-term rot leading to collapse is a typical example of gradual deterioration. The absence of intention does not convert gradual wear and tear into an accidental event.

Question 49Principles of Insurance

Which statement best describes the effect of a 'claims made' liability policy compared with an 'occurrence' policy?

  1. A claims made policy responds to claims first made against the insured during the policy period, regardless of when the incident occurred Correct answer.
  2. A claims made policy responds only to incidents that occur during the policy period
  3. An occurrence policy responds only to claims notified during the policy period
  4. Both types respond only to claims notified and incidents occurring in the same period

Explanation

Claims made cover is triggered by the making of the claim during the period, so the incident may have happened earlier, subject to any retroactive date. Occurrence cover is triggered by the incident occurring during the period, even if the claim is made later.

Question 50Principles of Insurance

An insured has a policy with a 500 policy excess and an additional 250 excess for escape of water. A burst pipe causes damage of 2,000. Ignoring any other conditions, how much does the insurer pay?

  1. 2,000
  2. 1,250 Correct answer.
  3. 1,500
  4. 1,750

Explanation

The policy excess of 500 and the additional escape of water excess of 250 both apply to the loss, so the insured bears 750. The insurer pays the remaining 1,250 of the 2,000 damage.