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III IC-47 / A-1 practice questions

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Question 1Principles and Practice of Insurance

The principle of indemnity underpins most property and liability covers. Its primary aim is to:

  1. restore the insured to the pre-loss financial position and no further Correct answer.
  2. leave the insured better off than before the loss so deterrence is rewarded
  3. provide a guaranteed profit margin to the insurer on every total loss
  4. pay the full new-for-old cost of every damaged item in all circumstances

Explanation

Indemnity puts the insured back, in money terms, in the position occupied immediately before the loss, and denies any profit from the event. This is why market value rather than replacement cost is the default measure and why subrogation and salvage rights exist. Agreed-value and reinstatement covers are recognised exceptions that must be expressly written into the contract.

Question 2Principles and Practice of Insurance

In life insurance, insurable interest must exist:

  1. at the time a claim is notified and settled
  2. at the date of the insured person's death
  3. continuously throughout the whole policy term
  4. at the time the policy is effected Correct answer.

Explanation

Life cover requires insurable interest only when the contract is formed, because the purpose is to prevent wagering on a life; the interest need not continue afterwards. Property insurance is the reverse: the insured must have an interest at the time of the loss, so a policy on a building sold mid-term responds only if the buyer holds cover.

Question 3Principles and Practice of Insurance

An applicant for insurance omits to mention a previous declined application that the insurer would treat as material. The duty breached is best described as:

  1. the doctrine of proximate cause applied to claims handling
  2. the duty of utmost good faith, requiring disclosure of material facts Correct answer.
  3. the principle of contribution between two concurrent policies
  4. the duty to mitigate loss once an insured event has occurred

Explanation

Insurance is a contract of utmost good faith (uberrimae fidei), so the proposer must volunteer every fact a prudent underwriter would regard as influencing acceptance, rating or terms. Declined or special-terms applications are classic material facts. Non-disclosure or misrepresentation gives the insurer remedies that depend on whether the conduct was innocent, negligent or deliberate.

Question 4Principles and Practice of Insurance

Lightning at an industrial plant disables the sprinkler pump; hours later an electrical fault starts a fire that spreads unchecked and destroys the warehouse. The policy covers fire but excludes lightning damage. The proximate cause is:

  1. the electrical fault, because it ignited the fire
  2. the sprinkler failure, because it let fire spread
  3. the fire, because it was the final event in the chain
  4. the lightning, because it began an unbroken chain Correct answer.

Explanation

Proximate cause is the dominant and effective cause that sets in motion an unbroken sequence of events leading to the loss, without a new intervening cause breaking the chain. Here the lightning is the initiating and dominant cause, so the lightning exclusion governs and the whole loss falls outside cover despite fire contributing. If fire had been the dominant cause, with lightning merely coincidental, the claim would be paid.

Question 5Principles and Practice of Insurance

An insurer pays an insured's 60,000 property claim caused by a third party's negligence. The insured then sues that third party and recovers 60,000. The insurer is entitled to:

  1. the 60,000 only if the policy includes a contribution clause
  2. half the sum, because the insured commenced the court proceedings
  3. the 60,000, having indemnified the insured and acquired its rights Correct answer.
  4. nothing, because the insured's own action extinguishes those rights

Explanation

Subrogation transfers to the paying insurer the insured's right of action against the responsible party, up to the amount it has paid out. The insured holds any recovery to that extent for the insurer and cannot be indemnified twice. Any surplus above the insurer's outlay remains with the insured for uninsured losses such as an excess.

Question 6Principles and Practice of Insurance

Two fire policies with rateable-proportion 'other insurance' clauses cover the same building and interest, with sums insured of 200,000 and 300,000. Both are in force when a 100,000 loss occurs. The loss is shared as:

  1. 40,000 and 60,000, rateably in proportion to the sums insured Correct answer.
  2. 100,000 from the larger policy, the smaller one being excess
  3. 50,000 each, because both policies respond equally to the loss
  4. nothing, because the two policies cancel one another out

Explanation

Contribution applies where two or more policies cover the same interest, subject matter and peril and are all in force at the time of loss. Under a rateable-proportion clause each insurer pays its share of the loss in the ratio of its sum insured to the total insured, so 200,000:300,000 produces 40,000 and 60,000. The insured recovers the full 100,000 but cannot recover more than once.

Question 7Principles and Practice of Insurance

An insurer earns 2,000,000 in premiums, incurs 1,300,000 in losses and 420,000 in underwriting expenses. Its combined ratio is:

  1. 93%
  2. 79%
  3. 108%
  4. 86% Correct answer.

Explanation

The loss ratio is 1,300,000 divided by 2,000,000, or 65%, and the expense ratio is 420,000 divided by 2,000,000, or 21%. Adding them gives a combined ratio of 86%, which indicates an underwriting profit of 14 points before any investment income. A combined ratio below 100% means the insurer is profitable on underwriting alone.

Question 8Principles and Practice of Insurance

Under one agreement, a ceding insurer automatically cedes 30% of every risk falling within a defined class, and the reinsurer must accept each one. This arrangement is a:

  1. quota share treaty Correct answer.
  2. facultative reinsurance placement
  3. retrocession agreement
  4. surplus share treaty

Explanation

A quota share treaty is an obligatory agreement under which the ceded insurer passes a fixed percentage of every risk in the defined class and the reinsurer must accept it, sharing premiums and losses in the same proportion. Facultative business is offered and accepted risk by risk, and surplus share treaties cede only the amount of each risk above a retained line.

Question 9Principles and Practice of Insurance

A fine art policy is written as a valued policy with an agreed value of 150,000. A total loss occurs when the market value of the work is 90,000. The insurer's liability is:

  1. 120,000, being the average of the agreed and market values
  2. 150,000, because the parties fixed the value in advance Correct answer.
  3. 90,000, because indemnity limits recovery to market value
  4. the market value only if the insured proves the higher figure

Explanation

A valued policy is an express exception to strict indemnity: the sum agreed at inception is conclusive evidence of the value of the subject matter in the absence of fraud, so a total loss pays the full agreed amount even if values have since fallen. Insurers use this where value is hard to establish, such as fine art, antiques or marine hulls. Unvalued policies instead measure the loss by market value at the time of loss.

Question 10Principles and Practice of Insurance

Which statement best explains why expanding a pool with many independent, similarly exposed units improves an insurer's solvency position?

  1. it guarantees actual losses will equal expected losses every year
  2. it narrows the relative spread of losses around expected value Correct answer.
  3. it removes the need for reinsurance and for capital reserves entirely
  4. it eliminates any possibility of a catastrophic loss occurring

Explanation

By the law of large numbers, as the number of independent exposure units grows, the standard deviation of average loss per unit falls relative to the expected loss. The insurer can therefore meet a chosen solvency confidence level with less capital per unit of premium, which is the core economic benefit of pooling. It does not abolish risk, make any single year predictable, or remove the need for reinsurance against accumulation and catastrophe events.

Question 11Principles and Practice of Insurance

The doctrine of uberrimae fidei in insurance requires that:

  1. the insurer must pay every claim in full even where a policy exclusion applies
  2. the broker warrants the truth of every answer in the proposal form
  3. the insured must have the policy wording checked by an independent lawyer
  4. the insured discloses all facts material to the risk before cover begins Correct answer.

Explanation

Uberrimae fidei, or utmost good faith, places a positive duty on the proposer to volunteer every circumstance that a prudent insurer would regard as material to accepting the risk or fixing the premium. The duty continues until cover is arranged and is matched by the insurer's duty to disclose material terms. It is not satisfied merely by answering the printed questions truthfully.

Question 12Principles and Practice of Insurance

In property insurance, insurable interest must exist:

  1. at both inception and the time of loss Correct answer.
  2. at the time of proposal only
  3. only when the premium is paid
  4. only at the time the claim is made

Explanation

For property insurance, the insured must have an insurable interest when the contract is formed and must also stand to suffer a pecuniary loss when the damage occurs. This prevents the policy from becoming a wager. Indemnity then limits recovery to the actual loss suffered.

Question 13Principles and Practice of Insurance

The main purpose of a policy excess (deductible) is to:

  1. remove small claims and share losses Correct answer.
  2. satisfy a legal requirement in every class
  3. transfer the whole risk back to the insured
  4. increase the premium charged for the cover

Explanation

An excess, also called a deductible, is the first part of each loss that the insured bears. It removes the administrative cost of handling small claims and gives the insured a direct financial incentive to prevent losses. Insurers reflect the retained amount in a lower premium.

Question 14Principles and Practice of Insurance

A building valued at 100,000 is insured for 60,000 under a policy containing an 80% average (coinsurance) condition. A fire causes damage of 20,000. Ignoring any excess, how much will the insurer pay?

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

Explanation

The average condition compares the sum insured with the amount that should have been insured. Here the required sum is 80% of 100,000, or 80,000, and the insured carried only 60,000. The claim is therefore reduced to 20,000 multiplied by 60,000/80,000, which equals 15,000.

Question 15Principles and Practice of Insurance

Which statement describes facultative reinsurance?

  1. each risk is offered separately and may be declined Correct answer.
  2. it applies automatically to every policy written
  3. the reinsurer must accept every risk in a defined class
  4. the ceding insurer keeps no share of any ceded risk

Explanation

Facultative reinsurance is negotiated risk by risk: the ceding insurer offers a particular risk and the reinsurer is free to accept or decline it. This differs from treaty reinsurance, under which the reinsurer is bound in advance to accept risks falling within the treaty's definition. Facultative cover is useful for large or unusual risks.

Question 16Principles and Practice of Insurance

An insurer collects 4,000,000 in premiums and pays 2,400,000 in claims. What is its loss ratio?

  1. 167%
  2. 50%
  3. 40%
  4. 60% Correct answer.

Explanation

The loss ratio is incurred losses divided by earned premiums. Here 2,400,000 divided by 4,000,000 equals 0.60, or 60%. It measures claims cost only and excludes underwriting expenses, so it differs from the combined ratio.

Question 17Principles and Practice of Insurance

Under a marine hull policy, a constructive total loss occurs when:

  1. the cost of repairing the damage exceeds the insured value Correct answer.
  2. the vessel sinks in deep water and cannot be raised
  3. the cargo is damaged by seawater
  4. the vessel is sold by its owner for scrap

Explanation

A constructive total loss arises when the vessel is not an actual total loss but the cost of repairing the damage would exceed the insured or repaired value. The insured may then abandon the vessel to the insurer and claim a total loss. The test is economic rather than physical.

Question 18Principles and Practice of Insurance

Which situation illustrates a morale hazard rather than a moral hazard?

  1. An applicant conceals a serious illness in order to obtain life cover.
  2. An insured deliberately sets fire to stock to obtain the insurance money.
  3. An insured is less careful about security because insurance pays for theft. Correct answer.
  4. A claimant exaggerates the value of the items that were stolen.

Explanation

Morale hazard arises from indifference or carelessness because insurance exists, such as leaving premises unlocked knowing a theft claim will be paid. Moral hazard involves dishonesty, such as deliberately causing a loss or concealing information. The distinction matters because insurers respond with different controls.

Question 19Principles and Practice of Insurance

Under the traditional common-law approach, which statement correctly describes a warranty in an insurance policy?

  1. breach of warranty lets the insurer avoid liability from the date of breach Correct answer.
  2. a warranty is a statement by the insurer about the scope of cover
  3. a warranty is a statement of belief that need only be substantially true
  4. a warranty is a minor term whose breach only gives rise to damages

Explanation

A warranty is a term that the insured promises to comply with, and breach discharges the insurer from liability from the date of breach, even if the breach is not connected with the loss. This strict common-law consequence is why policy warranties should be distinguished from representations. Modern insurance law in some jurisdictions has modified the rule.

Question 20Principles and Practice of Insurance

Which loss would be treated as general average in a marine cargo policy?

  1. Cargo jettisoned to refloat a grounded ship and save the voyage Correct answer.
  2. Loss of a sailor's personal effects during a severe storm
  3. Damage to a single consignment caused by careless handling during loading operations
  4. Rust damage to steel coils from normal sea transit

Explanation

General average is a voluntary sacrifice of part of the adventure for the common safety of ship and cargo. Cargo jettisoned to refloat a grounded vessel is the classic example, and the loss is shared proportionately among the parties saved. Particular average, by contrast, falls on the individual interest alone.

Question 21Principles and Practice of Insurance

Which of the following is a pure risk that is normally suitable for insurance?

  1. Buying shares that may fall in value
  2. Gambling on the result of a sporting event
  3. Launching a product that may fail commercially
  4. A factory fire that damages stock Correct answer.

Explanation

Pure risks involve only the possibility of loss or no loss, with no chance of gain, and are the traditional subject matter of insurance. Fire damage to stock is a pure risk. Investment, product-launch and gambling risks are speculative because they offer a chance of gain as well as loss.

Question 22Principles and Practice of Insurance

The doctrine of proximate cause is used in insurance to:

  1. identify the dominant and effective cause of a loss Correct answer.
  2. calculate the premium rate for each individual policyholder
  3. measure the market value of damaged property at the date of loss
  4. decide whether an insurer should use facultative or treaty reinsurance

Explanation

Proximate cause is the dominant, effective or efficient cause that sets the loss in motion, even if other events follow. It determines whether a loss falls within the insured perils or an exclusion. It is not a valuation, rating or reinsurance method.

Question 23Principles and Practice of Insurance

In liability insurance, the insured's insurable interest arises because:

  1. a legal liability may impose a financial loss on the insured Correct answer.
  2. the insured owns the property that may be physically damaged
  3. the insured hopes to profit from a third party's misfortune
  4. the insurer has agreed to meet every claim without a policy limit

Explanation

Liability insurance protects the insured against the financial consequences of being legally liable to another person. The insurable interest is the exposure to that legal liability, not ownership of property. A hope of profit or an unlimited insurer promise does not create insurable interest.

Question 24Principles and Practice of Insurance

An applicant for household insurance states that the house has a monitored alarm when it does not. The insurer would have charged a higher premium had it known the truth. The statement is best described as:

  1. a material misrepresentation that may allow the insurer to avoid the policy Correct answer.
  2. a representation that is actionable only if the applicant intended to defraud
  3. a concealed fact that is irrelevant because the alarm did not cause the insured loss
  4. a breach of warranty that automatically avoids the policy from inception

Explanation

A representation is a statement of fact made during negotiations, and it is material if it would influence a prudent insurer's decision or terms. A false statement about an alarm that affects premium is material. The insurer may have remedies for misrepresentation, which can include avoiding the policy, depending on the applicable law and the applicant's state of mind.

Question 25Principles and Practice of Insurance

For the principle of contribution to operate between two insurance policies, which condition must be satisfied?

  1. Both policies must have been issued by the same insurer
  2. Both policies cover the same interest, peril and subject matter Correct answer.
  3. Each policy must contain a valued-policy clause
  4. The insured must have paid the same premium under each policy

Explanation

Contribution requires that the same insured has the same interest in the same subject matter against the same peril under two or more policies. The policies need not be from the same insurer, carry equal premiums or be valued. Contribution prevents the insured from recovering more than the loss.

Question 26Principles and Practice of Insurance

A ten-year-old machine is totally destroyed. Its replacement cost is 80,000 and its market value immediately before the loss is 30,000. Under a policy that pays on an indemnity basis, what is the starting measure of the loss?

  1. 80,000, because the machine must be replaced new
  2. 30,000, the machine's value immediately before loss Correct answer.
  3. 50,000, being the average of replacement cost and market value
  4. The full sum insured, regardless of the machine's value

Explanation

Indemnity aims to place the insured in the same financial position as before the loss, no better and no worse. For a destroyed machine, the starting measure is its market value immediately before the loss, so depreciation is taken into account. New-for-old replacement would over-indemnify unless a reinstatement or replacement basis has been agreed.

Question 27Principles and Practice of Insurance

An insurer offers a health product at a single community rate. It finds that high-risk applicants buy the policy in large numbers while low-risk people do not. This is an example of:

  1. morale hazard
  2. proximate cause
  3. adverse selection Correct answer.
  4. moral hazard

Explanation

Adverse selection occurs when applicants who know they are higher risk are more likely to buy or retain cover, leaving the insurer with a worse-than-average pool. It arises from information asymmetry before the contract. Moral and morale hazards concern behaviour after cover, while proximate cause concerns causation of a loss.

Question 28Principles and Practice of Insurance

A per-risk excess of loss reinsurance covers 80% of each loss in excess of a retention of 400,000, subject to a limit of 1,000,000. The ceding insurer suffers a loss of 700,000. How much does the reinsurer pay?

  1. 560,000
  2. 240,000 Correct answer.
  3. 300,000
  4. 700,000

Explanation

The ceding insurer retains the first 400,000, leaving 300,000 in the layer. The reinsurer pays 80% of that excess, which is 0.80 × 300,000 = 240,000. The 1,000,000 limit is not exhausted.

Question 29Principles and Practice of Insurance

A professional indemnity policy is written on a claims-made basis with a retroactive date of 1 January 2020. A claim is first made against the insured in 2024 for advice given in 2019, and the 2024 policy contains the same retroactive date. Is the claim covered?

  1. No, because claims-made policies never cover professional advice
  2. Yes, because claims-made policies cover every act whenever it occurred
  3. Yes, because the claim was first notified during the 2024 policy period
  4. No, because the act occurred before the retroactive date Correct answer.

Explanation

A claims-made policy responds to claims first made or notified during the policy period, but only for acts occurring on or after the retroactive date. Advice given in 2019 predates the 1 January 2020 retroactive date, so the claim is excluded. The notification date alone does not create cover for earlier acts.

Question 30Principles and Practice of Insurance

A liability policy requires the insured to notify the insurer of any claim 'immediately'. The insured delays six months without reasonable excuse, and the insurer is prejudiced because evidence is lost. At common law, what is the likely position?

  1. The policy is automatically void from its inception because the insured breached utmost good faith
  2. The insurer may decline indemnity if the clause is a condition precedent and prejudice is shown Correct answer.
  3. The insurer must pay but may recover the amount from the insured's broker
  4. The insured must be paid because notification is only a procedural formality

Explanation

A notification clause may be a condition precedent to liability, in which case compliance is required before the insurer's duty to indemnify arises. Where the insured breaches such a condition and the insurer suffers prejudice, the insurer may refuse the claim. The policy is not automatically void from inception, and the broker is not liable merely because the insured delayed.

Question 31Principles and Practice of Insurance

The principle of indemnity in insurance provides that, after a loss, the insured should be:

  1. restored to the pre-loss financial position without profit Correct answer.
  2. allowed to recover more than the loss because premiums have been paid
  3. paid the full sum insured even when the actual loss is smaller than that sum
  4. placed in a better financial position than before the loss

Explanation

Indemnity restores the insured to the financial position held before the loss and prevents profit from insurance. Property and liability policies apply this principle, while fixed-benefit life policies are a recognized exception. The aim is compensation, not enrichment.

Question 32Principles and Practice of Insurance

After settling a property claim caused by a third party's negligence, an insurer may exercise subrogation rights. This means the insurer may:

  1. take ownership of all undamaged property at the premises
  2. require the insured to repay the claim to the insurer
  3. cancel the insured's policy immediately without giving any notice
  4. stand in the insured's place to recover from the third party Correct answer.

Explanation

Subrogation lets the insurer step into the insured's legal shoes after payment and recover from the responsible third party. It supports indemnity by preventing the insured from recovering twice and by placing the burden on the wrongdoer.

Question 33Principles and Practice of Insurance

A cover note issued by an insurer or broker is best described as:

  1. an endorsement that changes the terms of an existing policy
  2. the final policy wording that replaces all earlier documents
  3. temporary evidence of cover pending issue of the policy Correct answer.
  4. a certificate confirming that reinsurance has been arranged

Explanation

A cover note is interim evidence that insurance is in force, usually from a stated date until the formal policy is issued. It can bind the insurer even though full policy wording has not yet been produced.

Question 34Principles and Practice of Insurance

An applicant for commercial fire insurance does not disclose that the building is used to store flammable solvents. The insurer would most likely be able to:

  1. avoid the policy only if a fire actually occurs
  2. increase the premium automatically and pay any claim in full
  3. avoid the policy and decline the claim for that material non-disclosure Correct answer.
  4. take no action because the use of the building is not relevant to fire risk

Explanation

Flammable solvent storage is a material fact because it substantially affects fire risk and a prudent insurer's decision. Non-disclosure of a material fact breaches utmost good faith and allows the insurer to avoid the policy and decline the claim.

Question 35Principles and Practice of Insurance

A valued policy is one in which:

  1. the insured may choose any value after the loss has occurred
  2. the policy value is reduced automatically in proportion to the premium paid
  3. the sum insured is agreed by the parties as the subject matter's value Correct answer.
  4. the insurer pays the full market value at the date of loss even if it exceeds the sum insured

Explanation

In a valued policy the parties agree the value of the subject matter in advance, and that agreed value is generally conclusive when a loss occurs. This avoids later disputes about market value and is common in marine and fine art insurance.

Question 36Principles and Practice of Insurance

Under a 40% quota share reinsurance treaty, the ceding insurer retains 60% of each risk. A risk with a sum insured of 500,000 suffers a loss of 100,000. How much of the loss is borne by the reinsurer?

  1. 20,000
  2. 40,000 Correct answer.
  3. 100,000
  4. 60,000

Explanation

A quota share treaty cedes a fixed percentage of every risk and premium. The reinsurer's share is 40% of the 100,000 loss, or 40,000; the cedant retains 60,000.

Question 37Principles and Practice of Insurance

Following a burst pipe in an insured building, the policyholder's duty to mitigate loss requires the policyholder to:

  1. leave the property untouched until a loss adjuster arrives
  2. take reasonable steps to prevent further damage after the burst Correct answer.
  3. abandon the property so the insurer can arrange all repairs
  4. replace every damaged item with new equivalents before notifying the insurer

Explanation

The duty to mitigate requires the insured to act as a prudent uninsured would and take reasonable steps to limit further damage. Failing to do so can reduce or prejudice the claim, but the insured need not replace everything or abandon the property.

Question 38Principles and Practice of Insurance

A reinsurance treaty is written on a 'losses occurring during' basis for the year 2023. A loss event occurs in November 2023 but the ceding insurer notifies the reinsurer in March 2024. Which statement is correct?

  1. It responds under the 2023 year because the event occurred in that year. Correct answer.
  2. The treaty responds only if the reinsurer agrees to extend cover retrospectively.
  3. The treaty does not respond because notification was given after the treaty year ended.
  4. The treaty responds under the 2024 year because notification was given in 2024.

Explanation

A losses-occurring treaty responds to events that happen during the treaty period, regardless of when they are notified. Notification conditions still apply, but reporting the loss in 2024 does not move it to the 2024 year.

Question 39Principles and Practice of Insurance

For the purposes of non-disclosure in insurance, a fact is usually considered material if:

  1. the applicant personally considers it important, whether or not the insurer would
  2. it relates only to facts expressly asked about in the proposal form
  3. a prudent insurer would be influenced by it in accepting or rating the risk Correct answer.
  4. it is known to the insurer's agent but not recorded in the policy

Explanation

Materiality is tested objectively: would a prudent insurer be influenced in accepting or rating the risk? The applicant's own view and the exact wording of proposal questions do not define materiality, because the duty can extend to facts not asked about.

Question 40Principles and Practice of Insurance

The law of large numbers supports insurance by:

  1. guaranteeing that no single loss can exceed the premium collected
  2. eliminating the need for reinsurance and reserves
  3. more reliable prediction of losses as similar exposures increase Correct answer.
  4. requiring every policyholder to pay the same premium

Explanation

The law of large numbers means that as a pool of similar independent risks grows, actual losses tend to approach the expected level. This improves pricing and solvency planning, but it does not eliminate catastrophic risk or the need for reserves.

Question 41Principles and Practice of Insurance

In life insurance, the policyholder's insurable interest in the life insured must normally exist:

  1. whenever the policyholder pays the premium, regardless of inception
  2. only when a death claim is submitted to the insurer
  3. at the time of the policy's issue and again at the time of death
  4. at the time the policy is issued, but not necessarily at death Correct answer.

Explanation

Life insurance is not a contract of indemnity, so the general rule is that insurable interest must exist when the contract is formed. It does not have to continue until the insured person dies. This allows a policy to remain valid if the relationship later changes.

Question 42Principles and Practice of Insurance

A cyclist takes out theft insurance and then stops using a heavy lock because the bicycle is now covered. In insurance terms, this changed behavior is best described as:

  1. morale hazard Correct answer.
  2. speculative risk
  3. moral hazard
  4. adverse selection

Explanation

Morale hazard is carelessness or reduced precaution arising from the existence of insurance. It differs from moral hazard, which involves dishonest conduct such as deliberately causing a loss. The cyclist is not acting dishonestly; the cover has made the loss more likely through indifference.

Question 43Principles and Practice of Insurance

Which policy document normally identifies the insured, the period of insurance, the sum insured and the premium?

  1. the recital clause
  2. the exclusion clause
  3. the schedule Correct answer.
  4. the condition precedent

Explanation

The schedule is the part of the policy that records the key particulars of the individual contract, including the parties, period, sums insured and premium. The operative clauses and exclusions then apply to those particulars.

Question 44Principles and Practice of Insurance

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

  1. A warranty must be exactly complied with; a representation must be substantially true. Correct answer.
  2. Both a warranty and a representation are judged only by whether the insurer would have charged a higher premium.
  3. A representation is written into the policy, while a warranty is only an oral statement.
  4. A warranty must be substantially true, while a representation must be exactly true.

Explanation

A representation is a statement made during negotiations and need only be substantially true; a remedy may arise if it is materially false. A warranty is a policy term that must be complied with exactly, although modern statutes may modify the consequences of breach.

Question 45Principles and Practice of Insurance

A building is insured for 300,000 when its full reinstatement value is 600,000. The policy is subject to average and a covered loss of 100,000 occurs. Ignoring any excess, what amount is payable?

  1. 150,000
  2. 50,000 Correct answer.
  3. 300,000
  4. 100,000

Explanation

The sum insured is half the full value, so the average condition reduces the loss by the same proportion. The insurer pays 100,000 × (300,000 / 600,000) = 50,000. The insured bears the remaining 50,000 as underinsurance.

Question 46Principles and Practice of Insurance

A policy has a policy excess of 500. A covered loss of 600 occurs. If the policy instead had a franchise of 500, how would payment differ?

  1. Both policies pay 100 because the loss exceeds 500.
  2. The excess policy pays 600; the franchise policy pays 100.
  3. The excess policy pays 100; the franchise policy pays 600. Correct answer.
  4. Both policies pay 600 because the loss exceeds 500.

Explanation

An excess is deducted from the loss, so the insurer pays 600 − 500 = 100. A franchise is not deducted once the loss exceeds the threshold; the insurer pays the full 600. The franchise therefore gives a larger payment for a loss just above the threshold.

Question 47Principles and Practice of Insurance

An insured sells a commercial building covered by a property policy. The policy states that assignment requires the insurer's written consent. The buyer takes an assignment of the policy without consent and later suffers a fire loss. What is the usual position?

  1. The assignment is ineffective against the insurer, so the buyer has no cover. Correct answer.
  2. The insurer must pay the buyer because the premium has already been paid.
  3. The insurer must pay the buyer, but may then recover the amount from the seller.
  4. The assignment is automatically valid because the policy follows the property.

Explanation

Property insurance is personal to the insured, and a policy condition commonly requires the insurer's consent before assignment. Without consent, the transfer is ineffective against the insurer, and the buyer cannot enforce the policy for a later loss. The seller may retain rights for losses occurring before the transfer, depending on the policy.

Question 48Principles and Practice of Insurance

An insurer's agent issues a cover note that falls outside the actual authority in the agency agreement but within the usual authority of an agent writing that class of business. The customer, unaware of the restriction, relies on the cover note. In relation to the insurer, the agent is most likely acting with:

  1. personal liability only, because the insurer did not authorize the note
  2. no authority, because the agency agreement is the only source of authority
  3. apparent or ostensible authority, so the insurer may be bound Correct answer.
  4. express authority, because a cover note was issued

Explanation

Apparent, or ostensible, authority arises where the insurer's conduct leads a third party to believe that the agent has authority to act. A restriction in the agency agreement that is unknown to the customer does not necessarily protect the insurer. The insurer may therefore be bound by the cover note.

Question 49Principles and Practice of Insurance

An insurer continues to negotiate and request further documents on a claim after learning that the insured missed a policy condition requiring notice within 30 days. The insurer does not reserve its rights. The insurer later seeks to deny the claim for late notice. The insured may rely on:

  1. contribution, because another insurance policy may respond
  2. subrogation, because the insurer has paid the claim
  3. waiver or estoppel, because the insurer's conduct may bar that defence Correct answer.
  4. average, because the claim is reduced for underinsurance

Explanation

Waiver occurs when an insurer knowingly gives up a policy right, and estoppel may prevent it from later asserting that right where the insured relied on its conduct. Continuing to handle a claim without reserving rights can therefore bar a late-notice defence. The other doctrines listed concern contribution between policies, recovery from third parties, or underinsurance.

Question 50Principles and Practice of Insurance

An exclusion in a policy is capable of two reasonable readings, and the insured's reading would allow cover. A court applying the contra proferentem rule will generally:

  1. ignore the exclusion completely and pay the claim
  2. construe the ambiguity against the drafter, favouring the insured Correct answer.
  3. apply the reading that gives the insurer the lowest exposure
  4. read the exclusion in the insurer's favour because the insurer drafted it

Explanation

Contra proferentem means that ambiguities in a document are construed against the party who drafted it. Because the insurer usually drafts the policy, an ambiguous exclusion is read in the insured's favour. The rule does not automatically delete the exclusion; it resolves the ambiguity against the drafter.