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SLII Diploma in Insurance study materials
SLII Diploma in Insurance study resources

SLII Diploma in Insurance practice questions

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Question 1Insurance principles and practice

Under the principle of indemnity, what is the maximum amount an insurer will pay on a property claim following a total loss?

  1. The market value stated in the policy schedule at inception regardless of current value
  2. The insured's actual financial loss, subject to the sum insured and policy terms Correct answer.
  3. The full reinstatement cost of a brand-new replacement property
  4. An amount equal to the total premiums paid over the policy period

Explanation

Indemnity restores the insured to the financial position held immediately before the loss, so payment reflects the actual loss rather than profit. This amount is still capped by the sum insured and any policy limits or excesses. Paying more than the loss would breach indemnity and create moral hazard.

Question 2Insurance principles and practice

A proposal form asks an applicant whether they have ever been convicted of fraud. The applicant answers 'no' knowing this is false. Which principle is most directly engaged?

  1. Utmost good faith, because the insurer was misled on a material fact Correct answer.
  2. Proximate cause, because the fraud caused the loss
  3. Contribution, because other insurers may share the loss
  4. Subrogation, because the insurer may recover from a third party

Explanation

Utmost good faith requires disclosure of material facts that would influence a prudent insurer's decision, and a deliberate false answer breaches this duty. Contribution, subrogation and proximate cause deal with sharing, recovery and causation of loss, not with pre-contract disclosure.

Question 3Insurance principles and practice

Which statement best describes insurable interest?

  1. The insured must benefit from the preservation of the subject matter and suffer financially from its loss Correct answer.
  2. The insured must own the property outright at the time of the loss
  3. The insured must be named as beneficiary in a will covering the subject matter
  4. The insured must hold a legal mortgage over the subject matter

Explanation

Insurable interest exists where a person stands in a legal or equitable relationship to the subject matter such that they benefit from its safety and are prejudiced by its loss. Ownership is one route to such an interest but is not required in every class of insurance.

Question 4Insurance principles and practice

An insured holds two policies covering the same property for the same period, each with a sum insured of 100,000. A loss of 60,000 occurs. Under contribution, how much will each insurer normally pay if both policies contain rateable proportion clauses?

  1. Each pays 15,000
  2. The first policy pays 60,000 and the second pays nothing
  3. Each pays 60,000, giving the insured a profit
  4. Each pays 30,000 Correct answer.

Explanation

Contribution requires insurers covering the same interest to share the loss rateably so the insured recovers the loss once, not twice. With equal sums insured, each insurer bears half of the 60,000 loss. Paying more than the loss would breach indemnity.

Question 5Insurance principles and practice

Which of the following is a characteristic of a warranty in insurance contract law?

  1. A statement that is merely persuasive and creates no obligation
  2. A promise that the insurer may waive only after a claim is made
  3. A promise or condition that must be complied with exactly, with breach traditionally allowing the insurer to repudiate Correct answer.
  4. A statement that only affects the premium calculation

Explanation

A warranty is a term of the contract that must be complied with strictly, and at common law breach entitled the insurer to repudiate liability even if the breach was unrelated to the loss. Modern regimes such as the UK Insurance Act 2015 have softened the harshest effects, but the strict nature of warranties remains their defining feature.

Question 6Insurance principles and practice

What is the primary purpose of subrogation?

  1. To share a loss between several insurers covering the same risk
  2. To permit the insurer to cancel cover mid-term without notice
  3. To allow the insurer to recover the claim cost from the party responsible for the loss Correct answer.
  4. To transfer the insured's policy to a new owner of the property

Explanation

Subrogation lets the insurer, having indemnified the insured, exercise the insured's rights of recovery against a negligent third party. It supports the principle of indemnity by preventing the insured from recovering twice. Sharing between insurers is contribution, not subrogation.

Question 7Insurance principles and practice

In liability insurance, what is meant by a 'claims made' policy?

  1. Cover responds only to incidents occurring during the policy period
  2. Cover responds only after the insured has paid the full claim personally
  3. Cover responds only to claims notified after the policy has expired
  4. Cover responds to claims first made against the insured during the policy period, regardless of when the incident occurred Correct answer.

Explanation

A claims made policy is triggered by the making of the claim during the period of cover, so the date of the incident is not decisive. This contrasts with occurrence-based cover, which is triggered by the date of the event. Professional indemnity cover is commonly written on a claims made basis.

Question 8Insurance principles and practice

Which term describes the amount the insured must bear on each claim before the insurer pays?

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

Explanation

The excess (or deductible) is the first portion of each loss that the insured absorbs, reducing the number of small claims and aligning incentives. The premium is the price of cover and the sum insured is the maximum limit. Average is a technique for scaling down claims where the sum insured is inadequate.

Question 9Insurance principles and practice

A fire starts in a neighbouring building and spreads to the insured's factory. Which doctrine is used to determine that fire is the proximate cause of the damage?

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

Explanation

Proximate cause identifies the dominant, effective cause of a loss, disregarding minor or remote factors. Where fire is the operative cause, a fire policy responds even if the flames reached the property indirectly. The other doctrines govern disclosure, interest and sharing between insurers.

Question 10Insurance principles and practice

A commercial property policy contains an average (under-insurance) condition. The property is worth 200,000, the sum insured is 100,000, and a loss of 40,000 occurs. Applying average, what will the insurer pay before any excess?

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

Explanation

Average scales the claim by the ratio of sum insured to the value at risk: 100,000 divided by 200,000 equals one half, so the insurer pays half of the 40,000 loss. The insured bears the remaining 20,000 as the consequence of under-insurance. This encourages accurate sums insured.

Question 11Insurance principles and practice

An insurer pays a total loss claim for a stolen vehicle and then recovers the value from the negligent third party who caused the theft. What is this right called?

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

Explanation

Subrogation allows the insurer, after indemnifying the insured, to pursue the insured's legal rights of recovery against the responsible third party. The recovery is limited to the amount paid out. Salvage and abandonment concern the remains of damaged property, and contribution concerns co-insurers.

Question 12Insurance principles and practice

Which of the following best explains why insurers use a 'duty of fair presentation' rather than relying solely on the proposal form?

  1. It guarantees that all claims will be paid in full
  2. It transfers all risk assessment to the broker
  3. It removes the need for any underwriting questions
  4. It places a positive duty on the insured to disclose material circumstances, supported by reasonable search by the insurer Correct answer.

Explanation

Modern fair presentation regimes require the insured to disclose material circumstances and to conduct a reasonable search for information, while the insurer must ask clear questions and act with good faith. Proposal forms remain useful but do not exhaust the disclosure obligation. The duty does not guarantee claims payment or shift risk assessment entirely to brokers.

Question 13Insurance principles and practice

An insured deliberately sets fire to their own warehouse to claim the insurance money. Which principle most directly allows the insurer to refuse the claim?

  1. Contribution, because other insurers may be involved
  2. Indemnity, because the loss is too large
  3. Insurable interest, because the insured still owns the building
  4. Utmost good faith and the requirement that loss be fortuitous, because deliberate acts by the insured are not insured perils Correct answer.

Explanation

Insurance covers fortuitous losses, and deliberate damage by the insured is contrary to the good faith basis of the contract. Insurers may also rely on fraud and public policy to avoid payment. Ownership and the size of the loss are not the decisive issues.

Question 14Insurance principles and practice

What distinguishes a 'condition precedent to liability' from an ordinary policy condition?

  1. It must be satisfied before the insurer becomes liable to pay a claim Correct answer.
  2. It is always written in the schedule rather than the policy wording
  3. It applies only to marine policies
  4. It can be varied by the broker without the insurer's consent

Explanation

A condition precedent to liability must be fulfilled before the insurer's obligation to pay arises, so breach can defeat a claim even if the loss is otherwise covered. Ordinary conditions may give the insurer other remedies such as cancellation. The classification is not confined to marine insurance or to schedule wording.

Question 15Insurance principles and practice

An insured's building is damaged by an explosion following a gas leak. The policy covers fire but excludes explosion. How is the claim most likely to be treated?

  1. Covered, because the gas leak was accidental
  2. Excluded, because the dominant and effective cause was explosion Correct answer.
  3. Covered, because fire was the ultimate cause
  4. Excluded, because gas leaks are always uninsurable

Explanation

Where the dominant and effective cause of damage falls within an exclusion, the claim is excluded even if a covered peril played some part. Courts look at the proximate, not merely sequential, cause. The accidental nature of the leak does not override the exclusion.

Question 16Insurance principles and practice

Which statement correctly describes the role of a loss adjuster?

  1. They sell policies to retail customers
  2. They investigate and quantify claims, often on larger or more complex losses Correct answer.
  3. They set the premium rates for the insurer
  4. They underwrite new risks on behalf of the insurer

Explanation

Loss adjusters are appointed by insurers to investigate the circumstances of a claim, verify the amount of loss and advise on settlement. They do not underwrite, sell or rate policies. Their work supports accurate and fair claims handling.

Question 17Insurance principles and practice

An insured fails to disclose a previous declined application for similar cover. The insurer would have charged a higher premium had it known. What is the most likely outcome under a proportionate remedies regime?

  1. The claim is automatically void and all premium is returned
  2. The claim is paid in full because the omission was not deliberate
  3. The insurer must cancel the policy but pay the claim in full
  4. The insurer may reduce the claim payment proportionately to reflect what it would have charged Correct answer.

Explanation

Where a breach of fair presentation is not deliberate, proportionate remedies allow the insurer to place itself in the position it would have occupied had the risk been presented correctly, often by reducing the claim. Avoidance is reserved for deliberate or reckless breaches. Full payment would ignore the materiality of the omission.

Question 18Insurance principles and practice

Which of the following best illustrates the concept of 'moral hazard'?

  1. A high-value jewellery collection kept in a bank vault
  2. An insured who becomes careless about security because they know insurance will pay Correct answer.
  3. A driver with ten years of claim-free experience
  4. A property located in a flood zone

Explanation

Moral hazard arises where the existence of insurance changes behaviour, increasing the likelihood or size of a loss. Physical hazards relate to the tangible characteristics of the risk, such as location or construction. Carelessness induced by cover is the classic moral hazard example.

Question 19Insurance principles and practice

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

  1. To give the insurer rights over the residual value of damaged property after paying a total loss Correct answer.
  2. To transfer the policy to a new owner
  3. To allow the insured to keep damaged property and claim the full sum insured
  4. To require the insured to repair damaged property at their own cost

Explanation

When an insurer pays a total loss, it may take over the damaged property or its scrap value, which is known as salvage. This reduces the net cost of the claim and supports indemnity. Transfer of a policy to a new owner is assignment, not salvage.

Question 20Insurance principles and practice

Which of the following statements about reinsurance is correct?

  1. Reinsurance transfers part of an insurer's risk to another insurer, and the original insured has no direct claim against the reinsurer Correct answer.
  2. Reinsurance is a contract between the original insured and a second insurer
  3. Reinsurance eliminates the need for the insurer to hold capital
  4. Reinsurance is only available to life insurers

Explanation

Reinsurance is a contract between insurers under which the reinsurer indemnifies the ceding insurer for part of its risk. The original insured's contract remains with the ceding insurer, who alone is liable to them. Reinsurance supports capital management but does not remove the need for capital.

Question 21Insurance principles and practice

An insured takes out a policy on a painting worth 500,000 but insures it for 500,000, then sells the painting without transferring the policy. The painting is later destroyed. What is the insurer's likely position?

  1. Liable in full because the premium was paid
  2. Not liable because the insured no longer has insurable interest at the time of loss Correct answer.
  3. Liable only if the buyer also had a policy
  4. Liable for half the value because of average

Explanation

For property insurance, insurable interest must exist at the time of the loss as well as when the policy was taken out. Once the painting is sold, the seller no longer suffers financial loss from its destruction. The buyer would need their own cover or a valid assignment.

Question 22Insurance principles and practice

Which of the following is the most accurate description of an 'occurrence' policy trigger?

  1. Cover responds only to deliberate acts by the insured
  2. Cover responds only when the claim is first made during the policy period
  3. Cover responds to injury or damage that takes place during the policy period, whenever the claim is later made Correct answer.
  4. Cover responds only after a court judgment is obtained

Explanation

Occurrence-based cover is triggered by the event that causes injury or damage occurring within the period of insurance, regardless of when the claim is notified. Claims made cover is triggered by the making of the claim. The distinction matters greatly for long-tail exposures such as asbestos or construction defects.

Question 23Insurance principles and practice

A policy contains a 'basis of contract' clause stating that the answers in the proposal are the basis of the contract. What is the primary legal effect of such a clause?

  1. It removes the insurer's duty to act in good faith
  2. It prevents the insured from cancelling the policy
  3. It limits the policy to a maximum of one year
  4. It converts the answers into warranties that must be strictly accurate Correct answer.

Explanation

A basis of contract clause turns the answers given in the proposal into warranties, so any inaccuracy can entitle the insurer to avoid liability. This is a powerful drafting device and is treated restrictively by courts and by modern consumer protection regimes. It does not affect the insurer's own good faith duty, policy duration or cancellation rights.

Question 24Insurance principles and practice

An insured suffers a loss caused by two independent perils, one insured and one excluded, where neither can be shown to be dominant. How do courts generally approach such a case?

  1. They always find for the insurer because an exclusion applies
  2. They split the loss equally between insurer and insured by law
  3. They consider whether the insured peril can be regarded as the proximate cause; if the causes are truly concurrent and equal, the exclusion may defeat the claim Correct answer.
  4. They always find for the insured because a covered peril exists

Explanation

The proximate cause test asks which peril was dominant and effective. Where an excluded peril is genuinely concurrent and of equal effect, the exclusion may prevent recovery, though outcomes depend on wording and authority. There is no automatic statutory 50/50 split.

Question 25Insurance principles and practice

An insurer wishes to rely on a breach of a claims notification condition to decline a claim. Which factor is most relevant to whether it may do so?

  1. Whether the insured paid the premium by direct debit
  2. Whether the insured has other policies with the same insurer
  3. Whether the policy was sold through a broker
  4. Whether the late notification caused prejudice to the insurer's ability to investigate the claim Correct answer.

Explanation

Modern insurance contract law generally requires that a breach of a term going to notification must be connected to the loss and must have caused prejudice before the insurer can rely on it. Prejudice typically means the insurer lost the opportunity to investigate or mitigate. Payment method, distribution channel and other policies are not the key tests.

Question 26Insurance principles and practice

An insurer accepts a risk at standard rates after the proposer fully and accurately answers every question on the proposal form and volunteers a material fact about a previous fire. Which principle is most directly demonstrated by the insurer's decision?

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

Explanation

Utmost good faith requires each party to disclose material information honestly and without concealment so the other can assess the risk. The proposer's full disclosure and the insurer's fair acceptance of the risk show that principle in action. Indemnity, contribution and proximate cause concern the measure of loss, sharing between insurers and causation, not pre-contract disclosure.

Question 27Insurance principles and practice

A householder insures their home contents for 60,000 when the true replacement value is 120,000. The policy contains a condition of average. A fire causes 30,000 of damage. Assuming no other conditions apply, what will the insurer pay?

  1. 0, because the property was substantially under-insured
  2. 30,000, because the claim is below the sum insured
  3. 60,000, because the sum insured is the maximum payable
  4. 15,000, because the sum insured is half the value at risk Correct answer.

Explanation

Under average the claim is reduced in the same proportion as the sum insured bears to the value at risk: 60,000/120,000 = 50%, so 50% of 30,000 is paid. This penalises under-insurance and preserves premium equity among policyholders. Average reduces the claim rather than voiding cover or capping it at the sum insured.

Question 28Insurance principles and practice

Which statement best describes the principle of indemnity as applied to a commercial property policy?

  1. The insurer must pay the full sum insured whenever a partial loss occurs
  2. The insured may recover more than the loss where the peril was particularly serious
  3. The insured is entitled to a brand-new replacement of every damaged item regardless of age
  4. The insured should be placed in the same financial position after a loss as before it, no better and no worse Correct answer.

Explanation

Indemnity restores the insured to their pre-loss financial position, allowing for depreciation and policy limits, so they neither profit nor lose from the event. New-for-old or agreed-value arrangements are exceptions that must be expressly granted. Paying the full sum insured for a partial loss would over-indemnify.

Question 29Insurance principles and practice

A proposal form asks whether the proposer has ever been convicted of a fraud offence. The proposer answers 'no' although they have an unspent conviction. The insurer would have declined the risk had it known. What is the most likely consequence?

  1. The insurer may avoid the policy and refuse the claim for misrepresentation of a material fact Correct answer.
  2. The insurer must pay the claim but may increase the premium retrospectively
  3. The policy remains valid because convictions are spent after a fixed period
  4. The policy is valid because the insurer failed to verify the answer

Explanation

A false answer to a clear question about a material fact is a misrepresentation that induced the insurer to accept a risk it would otherwise have declined. The insurer may therefore avoid the policy and reject the claim. It is not the insurer's duty to verify answers, and spent convictions are a separate legal concept.

Question 30Insurance principles and practice

Which of the following is a material fact that a proposer for motor insurance should disclose?

  1. The colour of the vehicle
  2. The proposer's annual mileage estimate for a pleasure-only policy
  3. The proposer's preferred repairer
  4. A medical condition that impairs the driver's vision Correct answer.

Explanation

A material fact is one that would influence a prudent insurer's decision on acceptance, terms or premium. A condition affecting the driver's ability to drive safely clearly meets that test. Cosmetic details and service preferences do not affect the risk assessment.

Question 31Insurance principles and practice

An insured holds two property policies covering the same building against fire, with sums insured of 100,000 and 200,000. A fire causes 90,000 of damage and both policies contain a rateable contribution clause. How will the loss be shared?

  1. The first insurer pays 90,000 and the second pays nothing
  2. The insurers share the loss in proportion to their independent liabilities, 30,000 and 60,000 Correct answer.
  3. Each insurer pays 45,000 regardless of sums insured
  4. The insured receives 90,000 from each insurer, totalling 180,000

Explanation

Contribution requires insurers covering the same interest against the same peril to share the loss so the insured does not recover more than the indemnity. Under a rateable clause the shares follow the proportion each sum insured bears to the total, here one third and two thirds. The insured recovers 90,000 in total, no more.

Question 32Insurance principles and practice

Which statement correctly describes the doctrine of proximate cause in insurance claims?

  1. It is the cause chosen by the insured when submitting the claim
  2. It is the cause with the greatest financial value in the claim
  3. It is the dominant and effective cause of the loss, without which the loss would not have happened Correct answer.
  4. It is the last event in the chain before the damage occurs

Explanation

Proximate cause is the dominant, effective cause that sets in motion the chain of events leading to the loss. It is a matter of substance rather than mere sequence, so the last event is not necessarily proximate. Identifying it determines whether an insured peril triggered the policy.

Question 33Insurance principles and practice

A policy covers 'fire' but excludes 'damage caused by smoke from a fire originating outside the insured premises'. A fire in a neighbouring unit produces smoke that enters and damages stock. Which factor is most important in deciding whether the claim is payable?

  1. Whether the insured had previously made a claim for smoke damage
  2. Whether the stock was adequately insured
  3. Whether the proximate cause of the damage is the fire or the excluded smoke peril as defined in the policy Correct answer.
  4. Whether the neighbouring unit was insured

Explanation

Where a policy expressly excludes a defined peril, the question is whether the loss was proximately caused by that excluded peril or by an insured peril. The precise wording of the exclusion and the causal chain determine the outcome. The insurance position of the neighbour and the insured's claims history do not decide causation.

Question 34Insurance principles and practice

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

  1. A clause that limits the insurer's liability to the sum insured
  2. A promise by the insured that a stated state of affairs exists or will be met, breach of which can entitle the insurer to treat the contract as discharged Correct answer.
  3. A statement in the proposal that is merely an opinion
  4. A promise by the insurer to pay all claims within a fixed period

Explanation

A warranty is a promise by the insured that something is or will be done, and under traditional insurance law its breach discharges the insurer from liability even if the breach is unconnected with the loss. Modern regimes may modify this, but the core meaning remains a promissory term. It is not a payment timetable, an opinion or a limit of liability.

Question 35Insurance principles and practice

An insured's shop is burgled and stock is stolen. The insurer pays the claim and later recovers part of the value from the thief. To whom does the recovery belong?

  1. The insurer, up to the amount it paid, because subrogation transfers the insured's rights of recovery Correct answer.
  2. The insured, because they suffered the loss
  3. The police, because they recovered the property
  4. It is shared equally between insurer and insured regardless of the amount paid

Explanation

Subrogation places the insurer in the insured's shoes after paying a claim, allowing it to pursue third parties who caused the loss. The insurer keeps recoveries up to the amount it paid, with any surplus going to the insured. The insured cannot recover twice for the same loss.

Question 36Insurance principles and practice

What is the main purpose of an insurable interest requirement?

  1. To prevent insurers from selling policies to companies
  2. To require the insured to disclose all previous claims
  3. To ensure the insured benefits from the preservation of the subject matter and does not gain from its loss Correct answer.
  4. To ensure the insurer makes a profit on every policy

Explanation

Insurable interest requires a financial relationship with the subject matter such that the insured benefits from its continued existence and suffers loss if it is destroyed. This distinguishes insurance from gambling and reduces moral hazard. It does not concern insurer profitability or disclosure of claims history.

Question 37Insurance principles and practice

A company insures a factory that it has agreed to buy, but completion of the sale is delayed and the company has not yet taken ownership. Which statement best reflects the insurable interest position?

  1. The company may have an insurable interest because it is financially interested in the property's preservation under the contract Correct answer.
  2. Only the seller can insure the factory because they hold the title
  3. The company can insure the factory only if it is named as loss payee on the seller's policy
  4. The company has no insurable interest until legal title passes

Explanation

Insurable interest arises from a financial relationship with the property, and a binding contract to purchase can create that interest before legal title passes. The buyer stands to lose if the property is damaged before completion. Legal ownership is not the only route to insurable interest.

Question 38Insurance principles and practice

Which of the following statements about a policy excess is correct?

  1. The excess is a sum the insurer pays on top of the claim
  2. The excess is a discount applied to the premium at renewal
  3. The excess is the first part of each claim that the insured bears Correct answer.
  4. The excess replaces the sum insured as the payment ceiling

Explanation

An excess is the amount the insured must bear on each claim before the insurer pays, and it reduces the premium because it removes small claims from the insurer. It is not added to the claim and does not change the sum insured. It is a deductible, not a discount.

Question 39Insurance principles and practice

A motor policy provides a 250 excess for accidental damage and a 500 excess for theft claims. The insured's car is stolen and recovered damaged, with a repair cost of 3,000. Which excess applies?

  1. No excess, because the car was recovered
  2. 750, because both excesses are added
  3. 500, because the claim arises from theft Correct answer.
  4. 250, because the damage is accidental damage

Explanation

The excess is determined by the peril that triggered the claim, so a theft loss attracts the theft excess even if the vehicle is later recovered damaged. The accidental damage excess applies only where the operative peril is accidental damage. Excesses are not normally aggregated in this way.

Question 40Insurance principles and practice

What is the function of a 'condition' in an insurance policy?

  1. To set out obligations and rules that govern the contract, such as claims notification and premium payment Correct answer.
  2. To calculate the insurer's solvency margin
  3. To state the address of the insured property
  4. To describe the perils that are covered

Explanation

Conditions are the terms that regulate the contract and the conduct of the parties, including duties on the insured such as notifying claims promptly or paying premium. They differ from insuring clauses, which define the perils covered. Address details and solvency rules belong elsewhere.

Question 41Insurance principles and practice

A commercial combined policy contains a condition requiring the insured to maintain fire extinguishers in working order. A fire destroys stock and the extinguishers were empty. Which factor is most relevant to whether the insurer can reduce or reject the claim?

  1. Whether other policyholders in the area have similar conditions
  2. Whether the insured had paid the premium by instalments
  3. Whether the breach of condition caused or contributed to the loss and the precise wording of the condition Correct answer.
  4. Whether the stock was valued at replacement cost

Explanation

The effect of a breach depends on the wording of the condition and, increasingly, on whether the breach was connected with the loss. A condition precedent to liability, or a clause requiring causation, may allow the insurer to decline where the failure contributed to the damage. Premium arrangements and valuation bases do not determine the effect of the breach.

Question 42Insurance principles and practice

Which of the following best describes the role of a broker in the insurance market?

  1. The broker acts for the client, advising on needs and placing cover with insurers Correct answer.
  2. The broker sets premium rates for the insurers it uses
  3. The broker acts for the insurer and binds cover on the insurer's behalf
  4. The broker settles claims as the insurer's appointed representative

Explanation

A broker is the agent of the client, advising on risk and placing cover with insurers in the market. An agent, by contrast, typically acts for the insurer and may bind cover. Brokers do not set insurers' rates or act as claims setters for the insurer.

Question 43Insurance principles and practice

A small business asks its broker to arrange cover for a new warehouse. The broker places the risk with an insurer but fails to tell the client that the policy excludes flood, although the client had specifically said flood cover was essential. Which statement best describes the broker's position?

  1. The broker's only duty is to collect the premium
  2. The broker has no responsibility because the insurer wrote the policy wording
  3. The broker may be liable in negligence for failing to follow the client's instructions or to explain the cover placed Correct answer.
  4. The broker is protected because the client signed the proposal form

Explanation

A broker owes the client a duty to exercise reasonable skill and care, which includes following clear instructions and explaining the scope of cover. Failing to secure or highlight essential flood cover may amount to negligence. Signature on a proposal does not relieve the broker of that professional duty.

Question 44Insurance principles and practice

Which statement about the Financial Ombudsman Service is correct?

  1. It hears complaints about insurers and can make awards, but its decisions are not binding on the complainant Correct answer.
  2. It replaces the courts for all insurance disputes
  3. It sets the premiums that insurers may charge
  4. It regulates the solvency of insurers

Explanation

The Financial Ombudsman Service resolves complaints between consumers and financial firms and can make awards, but the complainant is free to go to court instead; the firm is bound if the complainant accepts the decision. It does not set premiums, replace the courts generally or regulate solvency, which is a prudential regulator's function.

Question 45Insurance principles and practice

An insurer is considering an application for commercial property cover and wants to assess the risk. Which of the following is the most relevant underwriting factor?

  1. The number of employees in the insured's sales team
  2. The insured's marketing budget
  3. The construction, age and occupancy of the building and its fire protection Correct answer.
  4. The insured's choice of bank

Explanation

Property underwriting focuses on physical and occupancy hazards that affect the likelihood and severity of loss, such as construction, age, use and fire protection. These determine the rate and terms. Marketing budgets, sales staffing and banking arrangements do not bear directly on the property risk.

Question 46Insurance principles and practice

A commercial property policy has a sum insured of 500,000 and a coinsurance clause requiring at least 80% of the value at risk to be insured. The property is worth 800,000 and is insured for 500,000. A loss of 200,000 occurs. What is the effect of the coinsurance clause?

  1. The full 200,000 is paid because the loss is below the sum insured
  2. The claim is reduced because the sum insured is below the required 640,000, so a penalty applies to the loss Correct answer.
  3. The policy is void and no payment is made
  4. The sum insured is automatically increased to 640,000

Explanation

An 80% coinsurance clause requires the insured to carry at least 640,000 (80% of 800,000). Insuring only 500,000 breaches that requirement, so the insurer applies a proportional penalty to the loss rather than paying in full. The policy is not void and the sum insured is not increased automatically.

Question 47Insurance principles and practice

Which of the following best explains why insurers include a 'reasonable precautions' condition in liability policies?

  1. To require the insured to take reasonable steps to prevent injury or damage and to comply with statutory duties Correct answer.
  2. To ensure the insured buys cover from more than one insurer
  3. To allow the insurer to cancel cover at any time without notice
  4. To transfer the cost of all third-party claims to the insured

Explanation

A reasonable precautions condition obliges the insured to act responsibly, maintain safe premises and comply with the law, helping to reduce avoidable claims. It does not give the insurer an unrestricted right to cancel, nor does it transfer all third-party costs to the insured. Multiple insurance is a separate matter.

Question 48Insurance principles and practice

A customer slips on a wet floor in a supermarket and is injured. The supermarket's public liability policy has a limit of 2,000,000 for any one occurrence. Which statement best describes how the policy responds?

  1. The policy pays only if the supermarket admits negligence in writing
  2. The policy pays the supermarket's lost profits while the floor is closed
  3. The policy pays the customer's proven damages and claimant's costs up to the limit, subject to the policy terms Correct answer.
  4. The policy pays the customer directly without any need for the supermarket to notify a claim

Explanation

Public liability cover indemnifies the insured against legal liability for injury to third parties, including damages and claimant's costs, up to the limit of indemnity. Lost profits of the insured are not third-party liability and would need business interruption cover. The insured must notify the claim and must not admit liability without the insurer's consent.

Question 49Insurance principles and practice

Which of the following statements about the principle of contribution is correct?

  1. It allows an insurer to recover from the insured any amount paid in excess of the premium
  2. It requires the insured to contribute to a reserve fund each year
  3. It allows insurers covering the same interest against the same peril to share the cost of a loss so the insured is not over-indemnified Correct answer.
  4. It applies only to life insurance policies

Explanation

Contribution operates between insurers that cover the same insured interest against the same peril, so that the loss is shared and the insured recovers no more than the indemnity. It is a right between insurers, not a charge on the insured. It does not apply to life policies, which are benefit policies rather than indemnity policies.

Question 50Insurance principles and practice

An insured takes out a buildings policy that covers 'accidental damage' and separately a policy covering only 'fire'. A fire causes 50,000 of damage. Which principle determines how the two insurers share the claim?

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

Explanation

Both policies cover the same interest against the same peril of fire, so contribution governs how the insurers share the loss. Subrogation concerns recovery from third parties, proximate cause identifies the operative peril, and utmost good faith concerns disclosure. Contribution prevents over-indemnity where cover overlaps.