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III IC-11 practice questions

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Question 1Principles of Insurance

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

  1. The insurer pays the full policy limit whenever a covered peril causes any damage.
  2. The insured may recover from multiple insurers in full under each separate policy.
  3. The insured receives a fixed sum agreed at inception regardless of the actual loss amount.
  4. The insured is restored to approximately the same financial position held before the loss, no better and no worse. Correct answer.

Explanation

Indemnity means the insured is placed back in the financial position occupied before the loss, subject to policy limits and deductibles. It prevents profit from loss and is the reason actual cash value and replacement cost provisions exist. Agreed-value and valued policies are limited exceptions rather than the general rule.

Question 2Principles of Insurance

An applicant fails to disclose a material fact that would have changed the insurer's decision to accept the risk. Which principle gives the insurer a remedy?

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

Explanation

Insurance contracts are contracts of utmost good faith, which requires both parties to disclose material facts honestly. A material non-disclosure or misrepresentation can allow the insurer to avoid the contract or reduce a claim. The other principles address recovery rights and causation rather than pre-contract disclosure.

Question 3Principles of Insurance

Which situation best illustrates the principle of insurable interest?

  1. A person buys life insurance on the life of a distant stranger with no relationship or financial tie.
  2. A company insures a competitor's warehouse that it neither owns nor depends upon.
  3. A driver insures a vehicle that was sold and transferred last year.
  4. A bank insures a building on which it holds a mortgage securing a loan. Correct answer.

Explanation

Insurable interest requires a financial relationship such that the insured benefits from the continued existence of the subject matter or suffers loss from its damage. A mortgagee has a clear pecuniary interest in the mortgaged property. Speculative or unrelated interests do not qualify.

Question 4Principles of Insurance

What is the primary purpose of the principle of subrogation?

  1. To transfer the insured's rights of recovery against a negligent third party to the insurer after payment. Correct answer.
  2. To allow the insured to collect twice for the same loss.
  3. To guarantee that premiums are refunded when no claim is made.
  4. To require the insurer to defend any third party sued by the insured.

Explanation

Subrogation lets the insurer stand in the insured's shoes and pursue a negligent third party after indemnifying the insured. This supports indemnity by preventing the insured from recovering twice and by allocating cost to the party at fault. It does not create a duty to defend third parties.

Question 5Principles of Insurance

An insured holds two property policies covering the same building. Both contain a rateable proportion clause. How is a loss shared?

  1. The loss is apportioned between the insurers in proportion to the limits each provides. Correct answer.
  2. The insured chooses one insurer, which then pays the whole loss.
  3. The insurer that issued the later policy pays the entire loss.
  4. Each insurer pays its full policy limit independently.

Explanation

The principle of contribution requires insurers covering the same interest to share the loss so the insured does not profit. Under rateable proportion clauses, each insurer pays its share based on the proportion of total coverage it provides. The insured cannot select one insurer to bear the whole burden.

Question 6Principles of Insurance

Which term describes the immediate or effective cause of a loss, as opposed to the remote cause?

  1. Speculative cause
  2. Intervening cause
  3. Concurrent cause
  4. Proximate cause Correct answer.

Explanation

Proximate cause is the dominant, effective cause that sets the loss in motion without which the loss would not have occurred. Insurers assess claims by identifying the proximate cause and checking whether it is an insured peril. Remote or incidental circumstances are not treated as the operative cause.

Question 7Principles of Insurance

Which statement accurately describes the role of a deductible in an insurance policy?

  1. It is a refund of premium paid when the policy expires.
  2. It is the amount of each loss the insured bears before the insurer responds. Correct answer.
  3. It is the maximum amount the insurer will ever pay under the policy.
  4. It is a penalty charged when a claim is reported late.

Explanation

A deductible is the first portion of each loss retained by the insured, and the insurer pays the excess above it. Deductibles reduce small claims and moral hazard and lower premium. They are not a maximum limit or a late-reporting penalty.

Question 8Principles of Insurance

In life insurance underwriting, which factor is most directly used to classify a proposed insured into a standard or substandard risk?

  1. The address of the insurance agent
  2. The insured's choice of premium payment frequency
  3. The insured's medical history and current health status Correct answer.
  4. The name of the nominated beneficiary

Explanation

Life underwriting assesses mortality risk, and medical history and current health are central to that assessment. Conditions that raise mortality may lead to a substandard rating or exclusion. Payment frequency, beneficiary identity and agent location do not measure mortality risk.

Question 9Principles of Insurance

A fire starts in a neighbouring building and heat causes a sprinkler head in the insured's premises to activate, damaging stock. Which peril is the proximate cause of the water damage?

  1. The insured's failure to maintain the system
  2. The sprinkler malfunction
  3. The stock's own susceptibility to moisture
  4. The fire in the neighbouring building Correct answer.

Explanation

Where fire is the dominant and effective cause that sets the sequence in motion, fire is treated as the proximate cause even though water caused the physical damage. The sprinkler operated as intended in response to the fire. Correctly identifying the proximate cause determines whether the fire peril responds.

Question 10Principles of Insurance

An insured deliberately sets fire to their own insured warehouse to claim the money. How does the principle of indemnity apply?

  1. The claim is payable because fire is an insured peril.
  2. No indemnity is due because the insured cannot benefit from their own deliberate act. Correct answer.
  3. The claim is payable but reduced by the amount of the deductible.
  4. The claim is payable only if the insurer cannot prove intent.

Explanation

Indemnity restores loss but never rewards deliberate wrongdoing, and public policy prevents an insured from profiting from their own intentional act. Deliberate damage by or with the connivance of the insured is excluded. The peril being nominally covered does not override this.

Question 11Principles of Insurance

Which statement about the doctrine of utmost good faith is correct?

  1. It applies only to the insurer, which must disclose all internal underwriting rules.
  2. It ends once the policy is issued and does not affect claims.
  3. It applies only to marine insurance.
  4. It requires the applicant to volunteer material facts even without being asked. Correct answer.

Explanation

Utmost good faith imposes a duty of disclosure on the applicant to reveal material facts that a prudent insurer would consider relevant, whether or not a question is asked. The duty also continues in relation to claims, where fraud or exaggeration can affect the outcome. It is not confined to marine business or to one party.

Question 12Principles of Insurance

A homeowner insures a house for 200,000 when its actual cash value is 400,000, and the policy contains an average (under-insurance) clause. A loss of 40,000 occurs. What amount is typically payable before any deductible?

  1. 10,000
  2. 40,000
  3. 20,000 Correct answer.
  4. 0

Explanation

Under an average clause the insurer pays the same proportion of the loss as the sum insured bears to the value at risk. Here the ratio is 200,000 to 400,000, or one half, so half of the 40,000 loss is payable. This enforces the indemnity principle where the insured has under-insured.

Question 13Principles of Insurance

Which of the following best explains why insurers apply the principle of contribution rather than allowing the insured to recover fully from each policy?

  1. To remove the need for any policy conditions.
  2. To prevent the insured from profiting and to allocate the loss fairly among insurers. Correct answer.
  3. To allow the largest insurer to avoid paying any share.
  4. To ensure the insured receives more than the actual loss.

Explanation

Contribution supports indemnity by ensuring the insured recovers no more than the loss while spreading the burden among insurers covering the same interest. It prevents arbitrary selection of one insurer to bear the whole cost. It does not increase recovery or eliminate conditions.

Question 14Principles of Insurance

An insured has a policy with a 500 excess (deductible). A covered loss of 1,800 occurs. What does the insurer pay, assuming no other deductions?

  1. 2,300
  2. 1,300 Correct answer.
  3. 1,800
  4. 500

Explanation

The deductible is deducted from the loss, so the insurer pays the loss less the excess: 1,800 minus 500 equals 1,300. The insured retains the first 500 of the loss. The deductible is not added to the payment.

Question 15Principles of Insurance

Which statement about insurable interest in life insurance is correct?

  1. It must exist only at the time of the insured's death.
  2. It must exist at the time the policy is taken out. Correct answer.
  3. It is never required in life insurance.
  4. It must exist both at inception and at death in every case.

Explanation

For life insurance, insurable interest is generally required when the contract is formed, because the policy is not a contract of indemnity and the sum assured is payable on death regardless of financial loss. The interest need not continue at the date of death. This differs from property insurance, where interest is typically required at the time of loss.

Question 16Principles of Insurance

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

  1. A building located in an earthquake zone
  2. A vehicle with worn brake linings
  3. An insured who becomes careless about security because insurance will cover the loss Correct answer.
  4. A warehouse storing flammable solvents

Explanation

Moral hazard arises from the attitude or behaviour of the insured, such as carelessness or dishonesty, that increases the likelihood or size of a loss. Physical hazards are tangible conditions of the risk itself. Location, storage of flammables and worn parts are physical hazards.

Question 17Principles of Insurance

Which statement best distinguishes a warranty from a representation in an insurance contract?

  1. Both terms mean exactly the same thing in insurance law.
  2. A warranty is a statement made during negotiations, while a representation is a binding promise in the policy.
  3. A representation must always be written into the policy to have any effect.
  4. A warranty is a promise forming part of the contract whose breach may entitle the insurer to repudiate, while a representation is a statement inducing the contract. Correct answer.

Explanation

A warranty is a contractual promise or condition that the insured will do or not do something, or that a state of affairs exists, and its breach can allow the insurer to repudiate liability. A representation is a statement of fact made before the contract that induces the insurer to enter it. The two have different legal consequences.

Question 18Principles of Insurance

A policy excludes loss caused by "wear and tear". An insured claims for damage where ordinary deterioration weakened a roof, which then collapsed under heavy rain. Which reasoning best applies?

  1. The exclusion for wear and tear may apply if deterioration is the proximate cause, but not if an insured peril is the effective cause. Correct answer.
  2. The claim is automatically payable because rain is an insured peril.
  3. The insured may choose which cause to rely on to secure payment.
  4. Exclusions never affect claims where any insured peril is involved.

Explanation

Causation determines the outcome: if wear and tear is the dominant cause, the exclusion applies, but if an insured peril such as storm is the effective cause, the claim may succeed. Insurers examine the sequence of events rather than merely the final trigger. The insured cannot simply elect a favourable cause.

Question 19Principles of Insurance

What does the term "average" mean in property insurance?

  1. The insured averages the value of several properties into one sum.
  2. The insured bears a proportionate reduction in the claim for under-insurance. Correct answer.
  3. The insurer averages losses across all policyholders to set the deductible.
  4. The insurer averages the premiums over the policy period.

Explanation

An average condition applies a proportional reduction where the sum insured is less than the value at risk, so the insured shares the shortfall. It is a mechanism to enforce indemnity and discourage under-insurance. It does not concern premium averaging or deductibles.

Question 20Principles of Insurance

Which statement about the principle of subrogation is correct?

  1. Subrogation allows the insurer to recover from the insured's own family members in every case.
  2. The insurer's right arises only after it has indemnified the insured, and it cannot recover more than it paid. Correct answer.
  3. The insurer may pursue the third party before paying the insured's claim.
  4. The insured must always sue the third party personally before any payment is made.

Explanation

Subrogation is a post-payment right: the insurer must first indemnify the insured, then it may step into the insured's shoes against the responsible third party. Recovery is limited to the amount paid, preserving indemnity. The insured generally retains the right to pursue any uninsured portion of the loss.

Question 21Principles of Insurance

An insured's building is damaged by a storm, and the same storm also causes a nearby river to flood the premises. The policy covers storm but excludes flood. Which approach best reflects sound causation analysis?

  1. Any excluded peril present in the chain of events automatically defeats the entire claim.
  2. The insurer must identify the dominant and effective cause; if flood is the proximate cause, the exclusion applies. Correct answer.
  3. Because two perils operated, the insured may recover under whichever is more convenient.
  4. Concurrent causation is irrelevant because only the first peril in time matters.

Explanation

Where multiple perils combine, insurers assess which is the dominant and effective cause. If the excluded peril is the proximate cause, the exclusion applies; if the insured peril is dominant, the claim may be payable. A blanket rule that any excluded peril defeats the claim is too crude and ignores concurrent causation principles.

Question 22Principles of Insurance

Which statement about the duty of disclosure and the remedy for breach is most accurate?

  1. Any non-disclosure, however trivial, automatically voids the policy.
  2. Only material non-disclosure or misrepresentation that would influence a prudent insurer's decision gives grounds for avoidance or other remedy. Correct answer.
  3. The insurer must prove the insured acted dishonestly in every case before any remedy is available.
  4. The duty of disclosure applies only to facts the insurer specifically asks about.

Explanation

The test of materiality is whether a prudent insurer would be influenced in accepting the risk or setting terms. Trivial or immaterial matters do not justify avoidance. Remedies and their scope may depend on statute and whether the breach was deliberate, but materiality is the threshold.

Question 23Principles of Insurance

An insured holds a valued policy on a work of art for 100,000. The item is totally destroyed and its market value at the time of loss is 70,000. What is the general position at common law for a valued policy?

  1. The insurer pays 100,000 because the parties agreed the value in advance, absent fraud or relevant statutory reform. Correct answer.
  2. The insurer pays 70,000 because indemnity always prevails.
  3. The insurer pays 85,000 as a compromise between the two figures.
  4. The insurer pays nothing because the value has fallen.

Explanation

In a valued policy the parties agree the insured value in advance, and that agreed value is generally conclusive between them in the absence of fraud, subject to any statutory reform. This is a recognised exception to strict indemnity. The fall in market value does not automatically reduce the agreed sum.

Question 24Principles of Insurance

Which statement best explains the relationship between indemnity and betterment in property claims?

  1. Betterment allows the insured to upgrade damaged property at the insurer's expense.
  2. Betterment applies only to liability insurance.
  3. Indemnity requires deduction for betterment where repair or replacement leaves the insured with an asset in a better condition than before the loss. Correct answer.
  4. Betterment is a principle that requires insurers to pay new-for-old in every claim.

Explanation

Betterment recognises that paying for new replacement of old property can leave the insured better off than before the loss, which conflicts with indemnity. Insurers may therefore make a deduction for depreciation or betterment. It is not a right to upgrade at the insurer's cost.

Question 25Principles of Insurance

Which statement about the principle of insurable interest in property insurance at the time of loss is correct?

  1. Insurable interest is irrelevant once the premium has been paid.
  2. Insurable interest is required only for commercial property.
  3. The insured must have had an interest at inception only, regardless of later sale.
  4. The insured must have an insurable interest at the time of the loss to recover. Correct answer.

Explanation

Property insurance is a contract of indemnity, so the insured must suffer actual financial loss at the time of the loss, which requires an insurable interest then. If the property has been sold before the loss, the former owner has no recoverable interest. The requirement is not limited to commercial property.

Question 26Principles of Insurance

Which term describes the amount an insurer will pay before any deductible, excess, or co-insurance applies to a claim?

  1. The net loss
  2. The sum insured
  3. The gross loss Correct answer.
  4. The salvage value

Explanation

The gross loss is the full value of the damage measured before any policy adjustment such as a deductible, excess, or co-insurance share is applied. The net loss is what remains after those adjustments, and salvage value is what the damaged property may still fetch.

Question 27Principles of Insurance

Which statement correctly describes how a co-insurance clause operates in a commercial property policy?

  1. It penalises underinsurance by reducing the claim in proportion to the shortfall against a required percentage of value Correct answer.
  2. It requires the insured to share every loss equally with the insurer
  3. It reduces the premium whenever the insured reports a loss below the limit
  4. It transfers the entire loss to the insured when the property is insured for less than its value

Explanation

A co-insurance clause obliges the insured to insure to a stated percentage of the property's value at risk. If the sum insured falls short of that requirement, the claim is reduced in the same proportion as the shortfall.

Question 28Principles of Insurance

An insurer calculates the premium for a marine cargo policy based on the value of the goods, the voyage, and the packing used. Which of these is a physical hazard?

  1. The route and length of the voyage
  2. The nature of the packing and stowage Correct answer.
  3. The declared value of the goods
  4. The insured's claims history

Explanation

Physical hazards are tangible conditions of the risk itself, such as the quality of packing and stowage, which affect the likelihood of damage. Value, route, and claims history are underwriting factors but are not physical hazards in the same sense.

Question 29Principles of Insurance

Which statement best distinguishes a condition precedent from a condition subsequent in an insurance contract?

  1. A condition precedent is always written, while a condition subsequent may be oral
  2. A condition precedent must be satisfied before the insurer's liability arises, while a condition subsequent may bring existing liability to an end Correct answer.
  3. A condition precedent concerns premium payment, while a condition subsequent concerns claim notification
  4. A condition precedent applies only to life policies, while a condition subsequent applies only to property policies

Explanation

A condition precedent is a requirement the insured must meet for cover to attach, such as maintaining a warranty or disclosing a material fact. A condition subsequent operates after cover has attached and can terminate the insurer's continuing liability, for example where the insured breaches a term during the policy period.

Question 30Principles of Insurance

Which statement best explains the purpose of the principle of proximate cause in insurance claims?

  1. It identifies the last event before a loss occurs
  2. It identifies the first event in a chain of events leading to a loss
  3. It identifies every cause contributing to a loss so that each can be excluded
  4. It identifies the dominant and effective cause of a loss for the purpose of applying exclusions Correct answer.

Explanation

Proximate cause is the dominant, effective, or efficient cause of a loss, determined by weighing the chain of events rather than simply picking the first or last. It is used to decide whether an insured peril or an excluded peril is the operative cause.

Question 31Principles of Insurance

An insured's stock is insured under a policy containing a 10% co-insurance clause requiring insurance to at least 80% of value. The stock is valued at 100,000 and insured for 60,000. A loss of 20,000 occurs. Ignoring any deductible, what does the insurer pay?

  1. 16,000
  2. 20,000
  3. 12,000
  4. 15,000 Correct answer.

Explanation

The required amount is 80% of 100,000, which is 80,000. The sum insured of 60,000 is three-quarters of that requirement, so the insurer pays three-quarters of the 20,000 loss, which is 15,000.

Question 32Principles of Insurance

Which statement accurately describes the effect of a policy excess (deductible) on the insured's position?

  1. It leaves the insured to bear the first portion of each loss up to the stated amount Correct answer.
  2. It applies only to total losses and not to partial losses
  3. It increases the premium because the insurer bears more risk
  4. It is refunded to the insured at the end of each policy year

Explanation

An excess or deductible is the amount the insured must absorb on each claim before the insurer pays. It reduces small claims and administrative cost and is reflected in a lower premium rather than a higher one.

Question 33Principles of Insurance

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

  1. A warranty is a promise that a particular state of affairs exists or will be maintained, and breach may entitle the insurer to terminate liability Correct answer.
  2. A warranty is a condition that only applies after a loss has occurred
  3. A warranty is an exclusion that removes cover for a named peril
  4. A warranty is a statement of opinion that need only be substantially true

Explanation

A warranty is a term of the contract by which the insured promises that something is or will be as stated. Breach of a warranty may allow the insurer to treat liability as discharged, subject to any applicable statutory reform.

Question 34Principles of Insurance

An insured's factory is insured against fire. A fire occurs and, while firefighters are working, water damages the stock. The policy covers fire and excludes water damage. How is the claim for the water-damaged stock most likely treated?

  1. It is excluded because the stock was not itself burnt
  2. It is covered only if the insured can prove negligence by the fire brigade
  3. It is covered because fire is the proximate cause of the damage Correct answer.
  4. It is excluded because water was the immediate physical cause of the damage

Explanation

Where fire is the dominant and effective cause of the damage, water used to extinguish it is treated as part of the fire peril, so the proximate cause is fire. The immediate physical agent does not override the operative cause.

Question 35Principles of Insurance

Which statement about the principle of indemnity in property insurance is correct?

  1. It aims to restore the insured to the same financial position as before the loss, no better and no worse Correct answer.
  2. It applies only where the insured has taken out a valued policy
  3. It entitles the insured to recover the full replacement cost of new property for old property destroyed
  4. It allows the insured to profit where the sum insured exceeds the value of the property

Explanation

Indemnity places the insured in the same financial position as before the loss, subject to the sum insured and policy terms. The insured should neither gain nor lose from the event.

Question 36Principles of Insurance

Which statement about the duty of disclosure in insurance is most accurate?

  1. Disclosure obligations apply only to commercial insureds, not to private individuals
  2. The insured must disclose every fact material to the risk that a prudent insurer would want to know, whether or not asked Correct answer.
  3. The insured must disclose only facts the insurer specifically asks about in the proposal form
  4. The insurer must investigate every fact before accepting the risk, so disclosure is unnecessary

Explanation

The duty of disclosure requires the insured to volunteer material facts that a prudent insurer would consider relevant to accepting or rating the risk, even if no question is asked. The insurer's own underwriting does not remove the insured's duty.

Question 37Principles of Insurance

Which statement best explains why an insurer may avoid a policy for non-disclosure or misrepresentation?

  1. Because the insured failed to pay the premium on time
  2. Because the policy contains an arbitration clause
  3. Because the insured has made a claim in the first year of cover
  4. Because the insurer was induced to enter the contract by information that was withheld or misstated Correct answer.

Explanation

Avoidance is a remedy for being induced to enter the contract by a failure to disclose a material fact or by a material misrepresentation. The effect is to treat the contract as if it had not existed, subject to statutory qualifications.

Question 38Principles of Insurance

Which statement about insurable interest in property insurance is correct?

  1. It is not required in property insurance because indemnity performs the same function
  2. It must exist at the time the policy is taken out and need not exist at the time of loss
  3. It must exist at the time of loss, and the insured must stand to suffer financial loss from the damage Correct answer.
  4. It is satisfied by mere possession of the property regardless of any legal or financial relationship

Explanation

In property insurance the insured must have an insurable interest at the time of loss, meaning a legal or equitable relationship such that damage causes financial detriment. Without it, the contract would be a wager.

Question 39Principles of Insurance

Which statement best explains the doctrine of subrogation?

  1. The insured assigns the policy to a third party without the insurer's consent
  2. The insurer steps into the insured's legal rights against a third party who caused the loss, after paying the claim Correct answer.
  3. The insured must pursue the third party before the insurer pays anything
  4. The insurer recovers the premium from the insured after a loss

Explanation

Subrogation allows the insurer, having indemnified the insured, to exercise the insured's rights of recovery against the responsible third party. It supports indemnity by preventing the insured from recovering twice.

Question 40Principles of Insurance

An insured holds two property policies covering the same building for the same period. A loss occurs and both policies are valid. How does the principle of contribution apply?

  1. The insured may recover the full loss from either insurer and keep both payments
  2. Each insurer contributes its rateable share so that the insured is indemnified once only Correct answer.
  3. The insured must claim from both insurers and return any surplus to the government
  4. Only the policy issued first in time responds to the loss

Explanation

Contribution requires insurers covering the same interest against the same peril to share the loss rateably, so the insured recovers the loss once. It reinforces indemnity and prevents double recovery.

Question 41Principles of Insurance

Which statement best distinguishes an agent from a broker in insurance distribution?

  1. Both act exclusively for the insured and differ only in the size of the client base
  2. An agent represents the insured, while a broker represents the insurer
  3. Both act exclusively for the insurer and differ only in the commission paid
  4. An agent acts for the insurer, while a broker acts for the insured Correct answer.

Explanation

An agent is appointed to act on behalf of the insurer, and the insurer is generally bound by the agent's acts within authority. A broker is the insured's representative and owes duties to the client rather than to the insurer.

Question 42Principles of Insurance

An insured fails to notify the insurer of a claim within the period required by the policy. Which statement best describes the likely legal position?

  1. The insurer may rely on the breach only if it has suffered prejudice, or may waive the requirement by its conduct Correct answer.
  2. The insured must pay a fixed penalty equal to the claim amount
  3. The insurer is automatically discharged from all liability with no possibility of waiver
  4. The insured's claim is automatically paid because notification is a mere formality

Explanation

Notice requirements are conditions of the policy, and the insurer's response depends on the wording and on whether it has been prejudiced or has waived the breach. Insurers may also be estopped from relying on a breach if they deal with the claim without reserving rights.

Question 43Principles of Insurance

Which statement about the principle of utmost good faith is correct?

  1. It applies only to marine insurance and has no relevance to other classes
  2. It imposes duties of fairness and disclosure on both parties, although the insured's duty is the more prominent Correct answer.
  3. It is satisfied once the premium has been paid
  4. It applies only to the insured and imposes no duty on the insurer

Explanation

Utmost good faith is a mutual duty, although it is most often invoked against the insured because the insurer relies on the insured's disclosure. The insurer also owes duties of good faith in handling claims and exercising contractual rights.

Question 44Principles of Insurance

Which statement best explains the concept of betterment in property claims?

  1. It is the improvement in the insured's position when new property replaces old, which indemnity seeks to prevent Correct answer.
  2. It is the reduction in the claim caused by the policy excess
  3. It is the increase in the sum insured at renewal to reflect inflation
  4. It is the increase in premium following a large claim

Explanation

Betterment arises when a claim payment leaves the insured with property of greater value than before the loss, for example new for old. Indemnity principles require a deduction for depreciation so that the insured does not improve their position.

Question 45Principles of Insurance

Which statement about a valued policy is correct?

  1. The insured must prove the actual value of the property at the time of loss
  2. The insurer may reduce the agreed sum after a loss if the market value has fallen
  3. The policy pays only the market value at the time of loss, regardless of the sum insured
  4. The sum agreed in the policy is conclusive evidence of the value of the subject matter in the absence of fraud Correct answer.

Explanation

In a valued policy the parties agree the value of the subject matter in advance, and that value is treated as conclusive in the absence of fraud. This removes the need to prove the value after a loss, although the sum insured still limits recovery.

Question 46Principles of Insurance

Which statement best describes how the principle of indemnity applies to liability insurance?

  1. The insured is paid a fixed sum whenever a claim is made against them
  2. The insurer pays the claimant an amount unrelated to the insured's legal liability
  3. The insured is indemnified against the legal liability established, up to the limit of indemnity Correct answer.
  4. The insured receives the limit of indemnity regardless of the actual damages awarded

Explanation

In liability insurance the indemnity is measured by the legal liability of the insured to the third party, subject to the policy limit. The insured is restored to the position they would have occupied had the liability not arisen.

Question 47Principles of Insurance

An insured insures a building for 500,000 when its actual cash value is 250,000. A total loss occurs. Assuming no average clause and no valued policy, what is the insurer's liability?

  1. Nothing, because the property was over-insured
  2. 250,000, because indemnity limits recovery to the actual loss Correct answer.
  3. 500,000, because that is the sum insured
  4. 375,000, because the sum insured is averaged with the value

Explanation

Indemnity limits recovery to the actual loss suffered, even where the sum insured is higher. The insured cannot recover more than the value of the property destroyed, since that would be profit.

Question 48Principles of Insurance

Which statement about the doctrine of estoppel in insurance is correct?

  1. It prevents the insured from ever changing insurers
  2. It prevents the insurer from cancelling a policy for any reason
  3. It prevents a party from asserting a right where their earlier conduct induced the other party to act to their detriment Correct answer.
  4. It requires the insurer to pay every claim that is notified

Explanation

Estoppel operates where one party's representation or conduct leads the other to act to their detriment, preventing the first party from later denying the position. In insurance it can prevent an insurer from relying on a breach it has effectively waived.

Question 49Principles of Insurance

Which statement correctly describes the role of the Financial Ombudsman Service in insurance disputes?

  1. It replaces the courts and its decisions are binding on the insurer but not on the insured
  2. It provides an alternative dispute resolution route for eligible complaints, and its decisions are binding on the insurer if accepted by the complainant Correct answer.
  3. It acts as the regulator of insurers and imposes fines for misconduct
  4. It only handles disputes between insurers and reinsurers

Explanation

The Financial Ombudsman Service offers an alternative to litigation for eligible complaints and can make awards that bind the insurer if the complainant accepts. It is a dispute resolution body rather than the prudential regulator.

Question 50Principles of Insurance

Which statement best explains the effect of a policy condition requiring the insured to take reasonable precautions to prevent loss?

  1. It has no legal effect because the insurer bears the risk
  2. It is breached only where the insured acts dishonestly
  3. It requires the insured to act as a prudent uninsured would, and breach may affect the claim depending on the wording Correct answer.
  4. It transfers all responsibility for loss prevention to the insurer

Explanation

A reasonable precautions condition requires the insured to behave as a prudent uninsured person would to avoid loss. Its effect depends on the precise wording, and the insurer must generally show a lack of reasonable care rather than mere negligence by an employee.