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III IC-22 practice questions

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Question 1Insurance principles and practice (IC-22 syllabus area)

Under the principle of indemnity, what is the maximum amount an insurer will pay for a loss under a fire policy covering a building?

  1. The actual amount of the loss, subject to the sum insured Correct answer.
  2. The replacement cost of a new building of the same type
  3. The full sum insured regardless of the actual loss
  4. Twice the sum insured as a goodwill payment

Explanation

Indemnity restores the insured to the same financial position as before the loss, no better. Payment is therefore limited to the actual loss, and in any case cannot exceed the sum insured stated in the policy. Paying the full sum insured when the loss is smaller would breach indemnity and encourage over-insurance.

Question 2Insurance principles and practice (IC-22 syllabus area)

A proposal form contains a statement that the proposer has never suffered a fire loss, when in fact a claim was paid two years earlier. Which principle does this statement primarily engage?

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

Explanation

Utmost good faith requires the proposer to disclose material facts fully and honestly, both in answers to questions and by voluntary disclosure. A false denial of a previous fire loss is a material misrepresentation that could allow the insurer to avoid the contract. The other principles deal with recovery after a loss, not with pre-contract disclosure.

Question 3Insurance principles and practice (IC-22 syllabus area)

Which of the following best describes insurable interest?

  1. The interest rate used to discount future claim reserves
  2. The proportion of a risk retained by the insurer under a facultative arrangement
  3. The insurer's financial capacity to pay claims as shown in its solvency return
  4. A legal or equitable relationship to the subject matter such that the insured benefits from its safety and is prejudiced by its loss Correct answer.

Explanation

Insurable interest is the pecuniary relationship the insured must have with the subject matter, so that its continued existence benefits the insured and its loss causes detriment. Without it the contract would be a wager. The other options describe solvency, reserving and reinsurance concepts unrelated to the doctrine.

Question 4Insurance principles and practice (IC-22 syllabus area)

An insured holds two fire policies on the same building, each with a sum insured of the full value, and suffers a total loss. What does the principle of contribution allow?

  1. Only the policy issued first in time responds, and the second is void
  2. Recovery is limited to half the loss because two policies exist
  3. The insured may recover the full sum from each insurer and keep both payments
  4. The insured recovers the loss once, with the insurers sharing it in proportion to their independent liability Correct answer.

Explanation

Contribution prevents the insured from profiting from double insurance by allowing recovery of the loss only once. The insurers then share the loss, commonly in proportion to their independent liability or by rateable proportion depending on the policy wording. The insured cannot collect twice, and the second policy is not void merely because another exists.

Question 5Insurance principles and practice (IC-22 syllabus area)

After paying a claim for water damage caused by a contractor's negligence, an insurer pursues the contractor in the insured's name. Which doctrine supports this action?

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

Explanation

Subrogation gives the insurer the right, after indemnifying the insured, to stand in the insured's shoes and recover from the party legally responsible for the loss. It supports indemnity by preventing the insured from recovering twice. Salvage and abandonment concern the disposal of damaged property, and average concerns under-insurance.

Question 6Insurance principles and practice (IC-22 syllabus area)

A fire is caused by an earthquake, and the resulting collapse of a wall crushes stock. Under the doctrine of proximate cause, which event is treated as the cause of the stock loss?

  1. The collapse of the wall, because it directly destroyed the stock
  2. The earthquake, because it set in motion the chain of events Correct answer.
  3. The insurer's decision to decline the claim
  4. The stock's own susceptibility to damage

Explanation

Proximate cause is the dominant, effective cause that sets the chain of events in motion, not necessarily the last event in time. If the earthquake is the proximate cause and earthquake is excluded, the loss is excluded even though the immediate damage came from the falling wall. The doctrine prevents the insured from selecting a later, covered event to defeat an exclusion.

Question 7Insurance principles and practice (IC-22 syllabus area)

Which statement correctly distinguishes a warranty from a representation in a non-marine policy?

  1. A representation is always written into the policy, whereas a warranty is only spoken at inception
  2. A warranty is a promise or condition that must be complied with exactly, whereas a representation is a statement of fact that need only be substantially true Correct answer.
  3. A warranty need only be substantially true, whereas a representation must be complied with exactly
  4. Both are identical in law and differ only in the heading used in the policy

Explanation

A warranty is a term of the contract that must be complied with strictly, and breach may discharge the insurer from liability. A representation is a statement made before the contract that induces it and need only be substantially true. The two concepts differ in legal effect, not merely in labelling.

Question 8Insurance principles and practice (IC-22 syllabus area)

A property policy contains an average (under-insurance) condition. The property is worth 100,000, the sum insured is 60,000, and a loss of 30,000 occurs. Applying the standard proportional formula, what does the insurer pay?

  1. 18,000 Correct answer.
  2. 10,000
  3. 30,000
  4. 60,000

Explanation

Under the average condition the insurer pays the loss multiplied by the ratio of sum insured to value: 30,000 x (60,000 / 100,000) = 18,000. The insured bears the shortfall as a penalty for under-insurance. The sum insured is only the upper limit, not the amount payable for a partial loss.

Question 9Insurance principles and practice (IC-22 syllabus area)

Which of the following is the clearest example of a moral hazard?

  1. An insured who deliberately sets fire to unsaleable stock to claim the sum insured Correct answer.
  2. A driver with limited night-time visibility
  3. A coastal warehouse exposed to storm surge
  4. A factory storing flammable solvents next to a furnace

Explanation

Moral hazard arises from the attitude or conduct of the insured, such as dishonesty or carelessness, rather than from the physical characteristics of the risk. Deliberately causing a loss to obtain a claim payment is a classic moral hazard. The other options describe physical hazards or exposures inherent in the property or activity.

Question 10Insurance principles and practice (IC-22 syllabus area)

An insurer wishes to decline a renewal because the risk no longer meets its underwriting criteria. In the context of the insurance contract, this is best described as an exercise of which feature?

  1. The rule of proximate cause
  2. The doctrine of subrogation
  3. The freedom of contract, subject to policy terms and regulatory requirements on notice Correct answer.
  4. The principle of indemnity

Explanation

Insurance is a contract, and at renewal the insurer may generally choose whether to offer terms, subject to the policy wording and any regulatory rules on notice of non-renewal. Indemnity, subrogation and proximate cause govern how claims are measured and caused, not whether cover is offered. The insurer is not obliged to renew merely because the previous year was accepted.

Question 11Insurance principles and practice (IC-22 syllabus area)

What is the main purpose of a deductible (excess) in a property policy?

  1. To provide cover for losses below the deductible amount
  2. To transfer a small, predictable portion of each loss to the insured and reduce administrative claims costs Correct answer.
  3. To convert the policy into a valued policy
  4. To increase the sum insured automatically each year

Explanation

A deductible leaves the insured to bear a fixed first amount of each loss, which removes small claims, reduces handling costs and encourages loss prevention. It is a form of co-insurance by the insured at the bottom of each loss. It does not increase the sum insured or create cover for the deducted amount.

Question 12Insurance principles and practice (IC-22 syllabus area)

A policy is described as a 'valued policy'. What does this mean for a claim?

  1. The sum insured is agreed at inception as the value of the subject matter and is not disputed at claim time Correct answer.
  2. The insurer pays the market value at the date of loss
  3. The policy value is reduced each year by a fixed percentage
  4. The insurer pays only the depreciated value of the property

Explanation

In a valued policy the parties agree the value of the subject matter when the contract is made, and that agreed sum is the measure of indemnity for a total loss. This avoids later disputes over value, which is useful for items such as works of art. An unvalued policy instead requires the value to be proved at the time of loss.

Question 13Insurance principles and practice (IC-22 syllabus area)

Which of the following losses would normally be excluded from a standard fire policy by the operation of an exclusion rather than by the sum insured?

  1. Loss caused by a fire started by a faulty electrical socket
  2. Loss caused by a lightning strike igniting a roof
  3. Loss caused by a fire spreading from a neighbouring property
  4. Loss caused by the insured's own deliberate act of arson Correct answer.

Explanation

Deliberate acts by the insured to cause loss are excluded because they are contrary to the requirement of good faith and would defeat the purpose of insurance. Accidental fires from faulty wiring, lightning and spreading fires are ordinary insured perils. The sum insured limits the amount payable but does not determine whether the peril is covered.

Question 14Insurance principles and practice (IC-22 syllabus area)

An insured's stock is insured for 80,000 but is worth 100,000, and the policy contains a 10% co-insurance clause. A loss of 40,000 occurs. Under a typical co-insurance clause requiring insurance of at least the stated percentage of value, what is the effect?

  1. A penalty applies because the sum insured is below 90,000, so the claim is reduced proportionately Correct answer.
  2. The insurer pays 100,000 to restore the insured's position
  3. The full 40,000 is paid because the loss is below the sum insured
  4. The policy is void and no payment is made

Explanation

A co-insurance clause requires the insured to carry insurance of at least a stated percentage of value, here 90,000. Because the sum insured of 80,000 falls short, the claim is reduced in the same proportion as the shortfall, so the insured bears part of the loss. The policy is not void, and the payment cannot exceed the loss or the sum insured.

Question 15Insurance principles and practice (IC-22 syllabus area)

Which statement best describes the role of a reinsurer in relation to the original insured?

  1. The reinsurer contracts with the ceding insurer and generally has no direct contractual relationship with the original insured Correct answer.
  2. The reinsurer replaces the original insurer for all purposes after the treaty is signed
  3. The reinsurer contracts directly with the original insured and pays claims to that insured
  4. The reinsurer only handles claims below the deductible

Explanation

Reinsurance is a contract between the ceding insurer and the reinsurer, and privity of contract means the original insured normally has no direct claim against the reinsurer. The ceding insurer remains liable to its insured for the full claim. Reinsurance protects the insurer's solvency and capacity, not the insured's direct rights.

Question 16Insurance principles and practice (IC-22 syllabus area)

A broker collects a premium from the insured and fails to remit it to the insurer before a loss occurs. In most legal systems, what is the key issue for the insured?

  1. Whether the insured had already paid the premium to the broker, which may affect cover depending on the law and policy terms Correct answer.
  2. Whether the broker holds a professional indemnity policy
  3. Whether the insurer has reinsured the risk
  4. Whether the loss exceeds the sum insured

Explanation

Where premium payment is a condition of cover, the question is whether payment to the intermediary counts as payment to the insurer. The answer depends on statute, agency law and the policy wording, and can determine whether cover was in force at the time of loss. The broker's own insurance does not resolve the insured's position against the insurer.

Question 17Insurance principles and practice (IC-22 syllabus area)

Which of the following is the best example of a 'material fact' that a proposer for household contents insurance should disclose?

  1. That the house has been flooded twice in the last three years Correct answer.
  2. The name of the proposer's favourite television programme
  3. The number of books on the shelves
  4. The colour of the curtains in the living room

Explanation

A material fact is one that would influence a prudent insurer's decision on whether to accept the risk, or on what terms and premium. A history of repeated flooding clearly affects the assessment of a household risk. Trivial details about decor or lifestyle do not influence underwriting and need not be disclosed.

Question 18Insurance principles and practice (IC-22 syllabus area)

An insured deliberately exaggerates the value of stolen goods in a claim. What is the likely consequence under the principle of utmost good faith?

  1. The insurer can only recover the difference from the police
  2. The claim may be reduced or rejected, and the insurer may have remedies for fraudulent claiming Correct answer.
  3. The insurer must pay the exaggerated amount because the claim form was signed
  4. The policy is automatically extended to cover the exaggeration

Explanation

A fraudulent claim breaches the duty of good faith and typically entitles the insurer to reject the claim and, in many jurisdictions, to recover sums already paid on it. The insured cannot rely on having signed the form to enforce an inflated amount. The exact remedies depend on the applicable law and policy terms.

Question 19Insurance principles and practice (IC-22 syllabus area)

What does the term 'salvage' refer to in property claims handling?

  1. The discount given for a claims-free year
  2. The residual value of damaged property that remains after a loss and may be sold or retained Correct answer.
  3. The amount the insurer recovers from a negligent third party
  4. The right of the insured to abandon damaged property to the insurer

Explanation

Salvage is the remaining value of damaged property after a loss, which the insurer may sell to reduce the net cost of the claim. Where the insurer pays a total loss, it may take the salvage. Abandonment and subrogation are distinct concepts, and a no-claim discount is a pricing feature.

Question 20Insurance principles and practice (IC-22 syllabus area)

Which of the following best explains why insurers use a 'sum insured' rather than simply agreeing to pay 'all losses'?

  1. To avoid the need for any proposal form
  2. To transfer the risk of under-insurance entirely to the insurer
  3. To fix the maximum liability of the insurer and provide a basis for calculating premium Correct answer.
  4. To ensure that the insured always receives new-for-old replacement

Explanation

The sum insured caps the insurer's liability for any one loss and is a key input to the premium calculation, reflecting the amount of risk transferred. It does not guarantee new-for-old settlement or remove the need for underwriting information. Under-insurance remains the insured's responsibility where average or co-insurance applies.

Question 21Insurance principles and practice (IC-22 syllabus area)

An insured operates a warehouse and asks for cover against 'all risks'. Which statement most accurately reflects what such cover means in practice?

  1. It covers only fire and lightning
  2. It covers all risks except those specifically excluded, so the exclusions define the real scope of cover Correct answer.
  3. It covers every conceivable cause of loss without exception
  4. It covers only losses caused by the insured's negligence

Explanation

An 'all risks' wording reverses the usual approach by covering all perils unless they are expressly excluded, so the exclusion list becomes the practical limit of cover. It is never literally unlimited, because standard exclusions such as wear and tear, war and deliberate acts remain. The insured must still read the exclusions to understand what is not covered.

Question 22Insurance principles and practice (IC-22 syllabus area)

A policy contains a 'condition precedent to liability' requiring the insured to maintain a sprinkler system in working order. What is the effect of breaching such a condition?

  1. The breach has no effect unless the insurer can prove arson
  2. The policy automatically converts into a valued policy
  3. The insurer may decline a claim to which the breach is relevant, because the condition must be met before liability arises Correct answer.
  4. The insurer must pay the claim and then increase the next premium

Explanation

A condition precedent to liability must be satisfied before the insurer's obligation to pay arises, so a relevant breach can entitle the insurer to decline the claim. The insurer does not simply pay and re-rate. The breach need not amount to arson; it is enough that the condition was not met.

Question 23Insurance principles and practice (IC-22 syllabus area)

Which of the following best describes 'utmost good faith' as it applies to the insurer as well as the insured?

  1. The insurer may keep material information about the policy wording secret until a claim arises
  2. The insurer may avoid the policy for any inaccuracy, however trivial
  3. The insurer must pay every claim submitted without investigation
  4. The insurer must deal fairly and disclose material matters, and cannot rely on its own misrepresentation Correct answer.

Explanation

The duty of utmost good faith is reciprocal: the insurer must also act fairly, disclose material matters and not take advantage of its own misrepresentation or non-disclosure. It does not require payment of every claim without investigation, nor does it allow avoidance for trivial inaccuracies that are not material. The duty supports a fair balance between the parties.

Question 24Insurance principles and practice (IC-22 syllabus area)

In a liability insurance context, what is the significance of a 'claims-made' policy compared with an 'occurrence' policy?

  1. A claims-made policy responds only to incidents that occur during the policy period
  2. A claims-made policy responds to claims first made during the policy period, regardless of when the incident occurred, subject to any retroactive date Correct answer.
  3. A claims-made policy covers only claims notified after the policy expires
  4. A claims-made policy is identical to an occurrence policy in all respects

Explanation

Under a claims-made policy, cover is triggered by the making of the claim during the policy period, even if the underlying incident happened earlier. A retroactive date may limit how far back the cover reaches. An occurrence policy, by contrast, responds to incidents occurring during the period regardless of when the claim is made.

Question 25Insurance principles and practice (IC-22 syllabus area)

A householder insures a building for 200,000 and later sells it, assigning the policy to the buyer. What is the usual position on assignment of a property policy?

  1. Assignment generally requires the insurer's consent because the contract is personal to the insured and the risk may change Correct answer.
  2. The policy automatically transfers to the buyer with no conditions
  3. Assignment is prohibited in all jurisdictions and the policy lapses on sale
  4. Property policies are freely assignable without insurer consent in all cases

Explanation

Insurance contracts are personal, and assignment generally requires the insurer's consent because the buyer's circumstances may present a different risk. Some jurisdictions permit assignment of fire policies on transfer of the property, often subject to notice and conditions. The policy does not simply follow the property automatically in every case.

Question 26Insurance principles and practice (IC-22 syllabus area)

Which insurance principle restores an insured who has suffered a loss to the same financial position as before the loss, without allowing profit from it?

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

Explanation

Indemnity is the principle that the insured should be placed in the same financial position after a loss as before it, no better and no worse. It explains why sums insured, deductibles and average clauses exist. The other principles are separate doctrines that operate alongside indemnity rather than defining it.

Question 27Insurance principles and practice (IC-22 syllabus area)

An insured insures a building worth 500,000 for 250,000 with no average or co-insurance condition. A fire causes damage of 100,000. What will the insurer normally pay?

  1. 50,000, because the policy is only 50% insured
  2. 100,000, because the loss is below the sum insured Correct answer.
  3. Nothing, because the property was under-insured
  4. 250,000, the full sum insured

Explanation

Where the policy has no average or co-insurance clause, the insurer pays the actual loss up to the sum insured, even if the sum insured is below the property's value. Under-insurance only reduces the payment where a condition such as average applies. Here the loss of 100,000 is well within the 250,000 sum insured.

Question 28Insurance principles and practice (IC-22 syllabus area)

Which term describes the situation where the same risk is insured by two or more policies covering the same interest, allowing each insurer to share the loss?

  1. Double insurance Correct answer.
  2. Reinsurance
  3. Over-insurance
  4. Co-insurance

Explanation

Double insurance exists where more than one policy covers the same insured interest against the same peril, and the insured cannot recover more than the loss in total. The insurers apportion the loss through contribution. Reinsurance and co-insurance describe different arrangements.

Question 29Insurance principles and practice (IC-22 syllabus area)

A proposer for life insurance deliberately fails to disclose a diagnosed heart condition. The insurer issues the policy and the insured dies of an unrelated cause two years later. Which statement best reflects the usual legal position in most common law jurisdictions?

  1. The insurer must pay because the death was unrelated to the condition
  2. The insurer may avoid the policy because the non-disclosure was material and induced the contract Correct answer.
  3. The insurer may only reduce the payout in proportion to the undeclared risk
  4. The insurer must pay because two years have elapsed since inception

Explanation

Non-disclosure of a material fact that would have influenced the insurer's decision allows the insurer to avoid the contract, regardless of whether the concealed condition caused the loss. Materiality and inducement are the tests, not causation. Some jurisdictions impose time limits or proportionate remedies by statute, but the general principle remains avoidance for fraudulent or material non-disclosure.

Question 30Insurance principles and practice (IC-22 syllabus area)

What is the primary function of a warranty in an insurance contract?

  1. To describe the risk in general terms so the insurer can decide whether to accept it
  2. To define a promise by the insured that must be complied with exactly, breach of which may entitle the insurer to avoid liability Correct answer.
  3. To set out the procedure for making a claim
  4. To limit the insurer's liability to the sum insured

Explanation

A warranty is a promise by the insured that a particular state of affairs exists or will be maintained, and strict compliance is required. Breach of a warranty generally discharges the insurer from liability for the period of breach, even if the breach is unrelated to the loss. This distinguishes it from a representation, which is a statement made before the contract.

Question 31Insurance principles and practice (IC-22 syllabus area)

An insurer pays a claim for storm damage to a factory, and the loss was partly caused by a contractor's negligence. Which principle allows the insurer to pursue the contractor for the amount paid?

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

Explanation

Subrogation gives the insurer the right, after paying a claim, to stand in the insured's shoes and recover the loss from the party responsible. It prevents the insured from recovering twice and supports the principle of indemnity. Contribution and proximate cause deal with different questions.

Question 32Insurance principles and practice (IC-22 syllabus area)

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

  1. The last event in time before the loss occurred
  2. The cause agreed between the parties after the loss
  3. The dominant, effective cause of the loss that sets the chain of events in motion Correct answer.
  4. The cause nearest to the insured's premises

Explanation

Proximate cause is the dominant and effective cause that sets in motion the chain of events leading to the loss, even if other events follow. It determines whether a loss falls within the insured perils. The last event in time is not necessarily the proximate cause.

Question 33Insurance principles and practice (IC-22 syllabus area)

Which statement best explains why insurers require a proposer to disclose all material facts?

  1. The insured must prove the information is accurate before cover starts
  2. The insurer is legally required to verify every fact independently
  3. The law assumes all proposers are dishonest
  4. The insurer needs the information to assess and price the risk, and the insured knows facts the insurer cannot readily discover Correct answer.

Explanation

The duty of utmost good faith rests on the fact that the proposer knows or should know facts about the risk that the insurer cannot easily discover. Disclosure allows the insurer to decide whether to accept the risk, on what terms and at what premium. It is not a requirement for the insurer to verify every fact.

Question 34Insurance principles and practice (IC-22 syllabus area)

A commercial property policy covers 'fire, lightning and explosion'. A fire starts after a lightning strike damages wiring. Which peril is the proximate cause of the loss?

  1. Lightning, because it set the chain of events in motion Correct answer.
  2. Neither peril, because the loss was inevitable
  3. Explosion, because electrical faults are always treated as explosion
  4. Fire, because it was the final event before the damage

Explanation

The proximate cause is the dominant and effective cause that initiated the chain of events. If lightning struck and the resulting fire damaged property, lightning is the proximate cause even though fire followed. The final event in time is not automatically the proximate cause.

Question 35Insurance principles and practice (IC-22 syllabus area)

Which statement best describes the purpose of the principle of contribution between insurers?

  1. To ensure that each insurer covering the same interest pays only its fair share of the loss Correct answer.
  2. To transfer all liability to the insurer that issued the first policy
  3. To allow the insured to recover the full loss from each insurer in turn
  4. To prevent the insured from buying more than one policy

Explanation

Contribution allows insurers that cover the same interest against the same peril to share the loss rateably, so no insurer bears more than its proper share. It works with indemnity, because the insured cannot recover more than the loss. It does not prevent multiple policies.

Question 36Insurance principles and practice (IC-22 syllabus area)

An insured's shop is burgled and stock worth 20,000 is stolen. The policy has a 1,000 deductible (excess). What amount will the insurer pay, assuming no other conditions apply?

  1. 19,000 Correct answer.
  2. 21,000
  3. 20,000
  4. 1,000

Explanation

A deductible is deducted from the loss before the insurer pays, so the insured bears the first 1,000. The insurer therefore pays 20,000 less 1,000, which is 19,000. The deductible is not added to the loss.

Question 37Insurance principles and practice (IC-22 syllabus area)

Which statement best explains the purpose of a 'condition precedent to liability' in a liability policy?

  1. The condition limits the sum insured for each claim
  2. The condition only applies after the insurer has paid the claim
  3. The insured must satisfy the condition before the insurer is obliged to indemnify, such as giving prompt notice of a claim Correct answer.
  4. The insurer must satisfy the condition before the policy starts

Explanation

A condition precedent to liability must be fulfilled by the insured before the insurer's obligation to pay arises. Typical examples include notifying claims promptly or cooperating in the defence. Failure can entitle the insurer to decline liability, although many jurisdictions require the breach to be connected to the loss.

Question 38Insurance principles and practice (IC-22 syllabus area)

An insured's liability policy is written on a 'claims-made' basis. A negligent act occurs in year one, but the claim is first made against the insured in year three. Which policy responds?

  1. The policy in force in year three, provided the claim is notified within its terms Correct answer.
  2. The policy in force in year one, because that is when the act occurred
  3. Both policies, each paying half the claim
  4. Neither policy, because the act and the claim fall in different years

Explanation

A claims-made policy responds to claims first made against the insured during the policy period, regardless of when the negligent act occurred. Notification within the policy period or any extended reporting period is essential. An occurrence policy, by contrast, responds according to when the act occurred.

Question 39Insurance principles and practice (IC-22 syllabus area)

What is the main purpose of a 'salvage' clause in a property policy?

  1. To require the insured to sell damaged property before claiming
  2. To allow the insurer to take over damaged property after paying a total loss and to reduce the claim accordingly Correct answer.
  3. To increase the sum insured after a loss
  4. To exclude losses caused by salvors

Explanation

A salvage clause entitles the insurer, after paying a total loss, to take possession of the damaged property and realise its value. The proceeds reduce the net cost of the claim. Salvage is distinct from subrogation, which concerns recovery from third parties.

Question 40Insurance principles and practice (IC-22 syllabus area)

Which statement best explains why an insurer may include an 'average' clause in a property policy?

  1. To average the loss between several insurers
  2. To spread the deductible across several claims
  3. To make the insured bear a proportionate share of any loss where the sum insured is less than the value of the property Correct answer.
  4. To average the premium over the policy period

Explanation

An average clause reduces the claim in proportion to the under-insurance, encouraging the insured to insure for full value. The payment is calculated as the loss multiplied by the sum insured divided by the value at risk. It is a condition of the policy, not a premium or inter-insurer arrangement.

Question 41Insurance principles and practice (IC-22 syllabus area)

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

  1. An insured who deliberately starts a fire to claim the insurance
  2. A poorly maintained electrical installation in a warehouse Correct answer.
  3. An insured who exaggerates a claim after a fire
  4. An insured who conceals a previous conviction on a proposal

Explanation

A physical hazard is a tangible condition of the risk that increases the chance or severity of loss, such as defective wiring. Moral hazard concerns the attitude or honesty of the insured. Deliberate acts and dishonest statements are examples of moral hazard.

Question 42Insurance principles and practice (IC-22 syllabus area)

An insured's building is insured under a valued policy with an agreed value of 400,000. A total loss occurs and the market value at the time is 350,000. What will the insurer pay, absent fraud?

  1. 350,000, the market value
  2. Nothing until the value is renegotiated
  3. 400,000, the agreed value Correct answer.
  4. 375,000, the average of the two figures

Explanation

In a valued policy the sum insured is agreed in advance as the value of the subject matter, and that agreed value is conclusive in the absence of fraud. The insurer therefore pays the agreed value for a total loss, even if the market value has fallen. This differs from an unvalued policy, where the loss is measured at the time of loss.

Question 43Insurance principles and practice (IC-22 syllabus area)

Which statement best describes the role of an insurance broker in the placement of a risk?

  1. The broker guarantees the solvency of the insurer
  2. The broker is always the agent of the insurer for all purposes
  3. The broker has authority to bind the insurer to any risk without its consent
  4. The broker acts as agent of the insured in placing the risk, while the insurer may also rely on the broker for premium collection Correct answer.

Explanation

A broker typically acts for the insured when placing the risk, advising on cover and approaching insurers. However, the broker may also be treated as the insurer's agent for collecting premium, depending on the jurisdiction and the terms of the arrangement. The broker does not guarantee the insurer's solvency or have unlimited authority to bind.

Question 44Insurance principles and practice (IC-22 syllabus area)

Which of the following best explains the concept of 'insurable interest'?

  1. The insured must own the property outright
  2. The insured must insure for the full market value
  3. The insured must have a financial interest in the insurer
  4. The insured must stand in a relationship to the subject matter such that they benefit from its preservation or suffer loss from its damage Correct answer.

Explanation

Insurable interest requires a relationship between the insured and the subject matter such that the insured benefits from its continued existence or suffers financial loss from its damage. Ownership is one way to establish it, but other relationships, such as tenancy or liability, can also create it. The insured need not own the property outright or insure for full value.

Question 45Insurance principles and practice (IC-22 syllabus area)

A policy excludes loss caused by 'wear and tear'. A machine fails because a worn bearing causes overheating and fire damage. Which statement best reflects how the exclusion is likely to apply?

  1. The claim is covered because wear and tear is never excluded
  2. The claim is excluded because the machine failed
  3. The whole claim is excluded because wear and tear was present
  4. The fire damage may be covered if fire is an insured peril and the wear and tear is not the proximate cause of the fire damage Correct answer.

Explanation

Exclusions are generally interpreted according to proximate cause. If wear and tear merely created a condition and a separate insured peril such as fire was the proximate cause of the damage, the fire damage may be recoverable. The worn part itself would not be covered, but the resulting fire damage may be.

Question 46Insurance principles and practice (IC-22 syllabus area)

Which statement best describes the effect of the 'principle of indemnity' on the payment of a claim under a property policy?

  1. The insured is compensated for the financial loss suffered, subject to the sum insured and policy conditions Correct answer.
  2. The insured receives an amount equal to the premium paid
  3. The insured receives the sum insured in every case
  4. The insured receives a new replacement regardless of the loss

Explanation

Indemnity means the insured is restored to the financial position held before the loss, subject to the sum insured, deductibles and other conditions. It does not guarantee a new replacement or payment of the full sum insured for every claim. The premium is not a measure of the loss.

Question 47Insurance principles and practice (IC-22 syllabus area)

An insured fails to maintain a sprinkler system as required by a policy condition. A fire occurs and the sprinkler would probably have limited the damage. Which statement best reflects the likely position of the insurer?

  1. The insurer must pay in full because the breach was not the cause of the fire
  2. The insurer must pay in full because the fire was an insured peril
  3. The insurer may reduce or decline the claim to the extent that the breach increased the loss Correct answer.
  4. The insurer may cancel the policy but must still pay the claim in full

Explanation

Where the insured breaches a condition requiring maintenance of protective measures, the insurer's remedy often depends on the effect of the breach. Many jurisdictions allow the insurer to reduce the claim by the amount by which the loss was increased, or to decline liability if the condition is a condition precedent. The breach need not cause the fire itself if it increased the damage.

Question 48Insurance principles and practice (IC-22 syllabus area)

Which of the following best describes 'reinstatement' of the sum insured after a claim?

  1. The deductible is refunded to the insured
  2. The sum insured is restored, often on payment of an additional premium, so that further losses remain covered Correct answer.
  3. The insurer replaces damaged property with new items
  4. The policy is cancelled and rewritten

Explanation

Reinstatement restores the sum insured after a loss so that the full amount is available again for subsequent losses. Insurers often require an additional premium for reinstatement. It is not the same as replacing damaged property or cancelling the policy.

Question 49Insurance principles and practice (IC-22 syllabus area)

Which statement best distinguishes a 'material fact' from an 'immaterial fact' in insurance proposal?

  1. A material fact is any fact discovered after the policy is issued
  2. A material fact is any fact the proposer considers important
  3. A material fact would influence a prudent insurer's decision on whether to accept the risk or on what terms Correct answer.
  4. A material fact is any fact recorded on the proposal form

Explanation

Materiality is tested objectively: a fact is material if it would influence a prudent insurer's decision to accept the risk or the terms and premium applied. The proposer's personal view or the mere presence of a fact on a form is not the test. Facts discovered after inception are irrelevant to the duty at proposal.

Question 50Insurance principles and practice (IC-22 syllabus area)

An insured holds two property policies covering the same building against fire, each with a sum insured of 300,000. A fire causes a loss of 120,000. Assuming both policies contain rateable contribution clauses and no other conditions, how will the loss be shared?

  1. Each insurer pays 60,000 Correct answer.
  2. The first insurer pays 120,000 and the second pays nothing
  3. Each insurer pays 300,000
  4. Each insurer pays 120,000

Explanation

Where two policies cover the same interest on the same terms, contribution applies rateably. With equal sums insured, each insurer bears half of the loss, so each pays 60,000. The insured cannot recover more than the 120,000 loss in total, because that would breach indemnity.