AAii 303 Legal Principles of Insurance study materials

AAii 303 Legal Principles of Insurance practice questions

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Question 1Legal Principles of Insurance

Under the doctrine of insurable interest, when must a person generally have an insurable interest in the subject matter of a property insurance contract?

Only at the time the policy is formed
Only at the time the claim is submitted
At any point during the policy period
At the time the policy is formed and at the time of loss Correct answer.

Explanation

In property insurance the insured must have an insurable interest both when the contract is made and when the loss occurs, because the purpose is indemnity and the interest must exist at the moment of loss. A purely past interest would allow recovery without actual loss.

Question 2Legal Principles of Insurance

Which principle requires that an insured be restored to approximately the same financial position after a loss as before it, and not profit from the loss?

Contribution
Indemnity Correct answer.
Utmost good faith
Subrogation

Explanation

Indemnity is the principle that the insured should be placed in the same pecuniary position as before the loss, no better and no worse. It underpins limits such as actual cash value and prevents profit from insurance.

Question 3Legal Principles of Insurance

In marine and similar insurance, the principle of utmost good faith historically obliges each party to disclose material facts. Which statement best describes a material fact in this context?

A fact that would influence a prudent insurer's decision on whether to accept the risk or on the premium Correct answer.
A fact already known to the insurer's underwriting department
A fact that arises only after the policy has been issued
Any fact the insurer might find generally interesting

Explanation

A material fact is one that would influence a prudent insurer in deciding whether to take the risk and on what terms, including premium. The test is objective and looks to the reasonable underwriter, not to mere curiosity.

Question 4Legal Principles of Insurance

An insurer pays an insured's covered loss and then sues the negligent third party who caused it. Which principle permits the insurer to do this in the insured's name?

Subrogation Correct answer.
Average clause
Contribution
Reinstatement

Explanation

Subrogation transfers to the insurer, once it has indemnified the insured, the insured's rights of recovery against the party responsible for the loss. It prevents the insured from recovering twice and places the burden on the wrongdoer.

Question 5Legal Principles of Insurance

An insured holds two fire policies covering the same property and the same interest, each with a pro rata clause. How does the principle of contribution generally operate when a loss occurs?

Each insurer pays a proportionate share so that total recovery does not exceed the loss Correct answer.
The insured may claim the full amount from either insurer and keep both payments
The insurers pay nothing until the insured assigns both policies to them
The insured must claim only from the insurer whose policy was issued first

Explanation

Contribution requires insurers covering the same interest to share the loss, commonly in proportion to the sums insured, so the insured is indemnified once only. The insured cannot recover more than the actual loss across all policies.

Question 6Legal Principles of Insurance

Which of the following is the clearest example of a duty of disclosure owed by an applicant for insurance?

Paying the first premium on time
Reading the policy wording after the policy is delivered
Disclosing a recent conviction for arson when applying for property cover Correct answer.
Noting the applicant's current residential address

Explanation

A recent arson conviction is a material fact that a prudent insurer would weigh heavily in accepting or rating a property risk, so it must be disclosed. Address and premium timing are administrative matters, not material risk facts.

Question 7Legal Principles of Insurance

A fire policy contains an average (co-insurance) clause. The property is insured for 60,000 but its value at the time of loss is 100,000, and a loss of 30,000 occurs. Applying a straight average clause, what does the insurer pay?

30,000
12,000
18,000 Correct answer.
10,000

Explanation

Under a straight average clause the insurer pays the loss multiplied by the ratio of sum insured to value: 30,000 × (60,000/100,000) = 18,000. The insured bears the shortfall because the property was underinsured.

Question 8Legal Principles of Insurance

Which term describes the insurer's right to refuse a claim or avoid the contract where the insured failed to disclose a material fact before cover began?

Reinstatement
Estoppel
Avoidance ab initio Correct answer.
Waiver

Explanation

Breach of the duty of disclosure can entitle the insurer to avoid the contract ab initio, treating it as though it never existed and returning premiums where appropriate. This is a remedy for pre-contractual non-disclosure or misrepresentation.

Question 9Legal Principles of Insurance

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

It is any cause that contributed in any minor way to the loss
It is the cause chosen by the insured when submitting the claim
It is the dominant, effective cause that sets in motion the chain of events leading to the loss Correct answer.
It is the last event in time before the loss

Explanation

Proximate cause is the dominant and effective cause of the loss, not necessarily the last in time. Courts look to the cause that is most closely and substantially connected to the loss.

Question 10Legal Principles of Insurance

A property policy excludes loss caused by war but covers fire. A fire starts as a direct result of hostilities and destroys the building. Applying proximate cause, how should the claim be treated?

Excluded, because all fires are excluded under the policy
Covered, because the immediate physical event was fire
Covered, because fire is a named peril regardless of origin
Excluded, because the dominant effective cause is the excluded war peril Correct answer.

Explanation

Where the dominant and effective cause of the loss is an excluded peril such as war, the exclusion applies even if the physical damage was by fire. Proximate cause looks to the effective originating cause, not the final physical mechanism.

Question 11Legal Principles of Insurance

What is the essential purpose of the principle of subrogation in insurance law?

To allow the insurer to profit from third-party recoveries
To transfer the insured's policy to the third party
To cancel the policy after a claim is paid
To prevent the insured from recovering twice and to place the burden on the party at fault Correct answer.

Explanation

Subrogation supports indemnity by ensuring the insured does not recover more than the loss while allowing the insurer to pursue the responsible third party. It shifts the ultimate cost to the wrongdoer.

Question 12Legal Principles of Insurance

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

An informal estimate of the premium
A marketing description of the policy
A non-binding statement of intent by the insurer
A promise by the insured that is a condition of the contract, breach of which may entitle the insurer to avoid liability Correct answer.

Explanation

A warranty is a contractual promise by the insured that forms a condition of the contract, and its breach can allow the insurer to avoid liability or the contract. This distinguishes it from mere representations.

Question 13Legal Principles of Insurance

An insured warrants that a burglar alarm will be maintained in working order, but it is switched off during a burglary. What is the likely legal effect of breaching such a warranty?

The insurer must still pay because the alarm is only a minor detail
The insurer may decline liability for the loss connected to the breach Correct answer.
The policy is automatically voided for all future claims regardless of connection
The insured must pay a fixed statutory penalty

Explanation

Breach of a warranty can entitle the insurer to decline liability, particularly where the loss is connected to the breached promise. Modern reform often limits this to losses causally linked to the breach.

Question 14Legal Principles of Insurance

Which statement accurately distinguishes a representation from a warranty in insurance contracting?

Both are identical in legal effect
A representation must always be written, while a warranty must always be oral
A representation is a promise forming part of the contract, while a warranty is a pre-contract statement
A representation is a pre-contract statement of fact, while a warranty is a contractual promise Correct answer.

Explanation

A representation is a statement of fact made before the contract that induces the insurer to enter it, whereas a warranty is a promise incorporated into the contract. Their remedies and consequences differ accordingly.

Question 15Legal Principles of Insurance

What does the principle of indemnity generally prohibit in property insurance?

The insured recovering more than the actual financial loss suffered Correct answer.
The insured insuring the same property with one insurer
The insurer charging a premium for the risk
The insurer inspecting the property before issuing cover

Explanation

Indemnity ensures the insured is compensated for the actual loss and does not profit from it. Recovering more than the loss would breach the principle and invite moral hazard.

Question 16Legal Principles of Insurance

Which of the following is a recognised method of providing indemnity for a damaged building under a property policy?

Reinstatement by repair or rebuilding Correct answer.
Transferring the policy to a third party
Payment of a fixed sum unrelated to the loss
Issuing a new policy with a higher limit

Explanation

Reinstatement, meaning repair or rebuilding, is a recognised way to indemnify an insured for damage to property. Other methods include cash payment, repair, or replacement.

Question 17Legal Principles of Insurance

An insured deliberately sets fire to the insured property to claim the insurance money. What is the likely legal consequence under the principle of indemnity and public policy?

The claim is paid at half value as a compromise
The claim must be paid because the policy covers fire
The insurer may repudiate the claim and the insured forfeits the right to recover Correct answer.
The insurer must pay but may later recover from the insured's family

Explanation

Deliberate damage by the insured is contrary to indemnity and public policy, so the insurer may repudiate the claim. Insurance cannot be used as a means of profiting from one's own wrongful act.

Question 18Legal Principles of Insurance

Which principle prevents an insured from remaining silent about a fact that a reasonable underwriter would regard as increasing the risk?

Contribution
Utmost good faith Correct answer.
Proximate cause
Subrogation

Explanation

Utmost good faith imposes a duty on the applicant to disclose material facts that affect the risk, including those that increase it. Silence on such facts can amount to non-disclosure.

Question 19Legal Principles of Insurance

Which of the following best describes the role of an insurable interest requirement in preventing moral hazard?

It requires the insured to own the property outright in all cases
It replaces the need for a duty of disclosure
It guarantees the insurer a minimum profit on every policy
It ensures the insured has a legitimate financial stake that would be adversely affected by the loss Correct answer.

Explanation

Insurable interest requires a legitimate relationship to the subject matter such that the insured benefits from its preservation and is prejudiced by its loss. This discourages insuring property in which one has no stake.

Question 20Legal Principles of Insurance

A tenant insures a building owned by the landlord against fire. Which statement best reflects the insurable interest position?

The tenant may have an insurable interest limited to the tenant's own exposure, such as liability or use interest Correct answer.
The tenant's interest is void because only owners may insure property
The tenant has no insurable interest because the tenant does not own the building
The tenant automatically acquires the landlord's full interest

Explanation

Insurable interest is not confined to ownership; a tenant may have an interest in property through possession, use, or potential liability. The interest is limited to the extent of the tenant's exposure.

Question 21Legal Principles of Insurance

Which of the following is the best definition of a condition precedent in an insurance policy?

A promise made by the insurer to the insured's beneficiary
A clause that increases the premium automatically
A statement that has no legal effect
A term that must be satisfied before the insurer's liability arises Correct answer.

Explanation

A condition precedent is a term that must be fulfilled before the insurer's obligation to pay arises, such as giving notice of loss within a stated period. Failure may allow the insurer to decline the claim.

Question 22Legal Principles of Insurance

A policy requires the insured to notify the insurer of a loss within 30 days. The insured notifies after 90 days, causing the insurer genuine prejudice in investigating the claim. What is the most likely legal outcome?

The insured is automatically entitled to double the claim
The insurer may decline the claim because the condition precedent was breached and prejudice resulted Correct answer.
The policy is void from inception in all cases
The insurer must pay because late notice is never material

Explanation

Where prompt notice is a condition precedent and the delay causes actual prejudice to the insurer's investigation, the insurer may decline liability. Modern law often requires prejudice before such a breach defeats the claim.

Question 23Legal Principles of Insurance

Which of the following best describes the principle of contribution between insurers?

The insured's right to claim from any insurer at any time
The insured's obligation to disclose material facts
The right of an insurer that has paid to recover a proportionate share from other insurers covering the same interest Correct answer.
The insurer's right to recover from a negligent third party

Explanation

Contribution allows an insurer that has paid a loss to obtain proportionate contributions from other insurers that cover the same interest, preventing over-indemnification. It operates between insurers, not between the insured and the insurer.

Question 24Legal Principles of Insurance

Which term refers to the insured's failure to take reasonable care to prevent a loss, which may be relevant to coverage under certain policy conditions?

Subrogation
Indemnity
Negligence Correct answer.
Contribution

Explanation

Negligence describes a failure to exercise reasonable care, and some policy conditions require the insured to take reasonable steps to prevent or mitigate loss. The consequences depend on the wording and the law.

Question 25Legal Principles of Insurance

Which statement best reflects the effect of a fraudulent claim on an insurance contract?

The insurer must pay the genuine part of the claim in all circumstances
The policy is unaffected because fraud concerns only criminal law
The insurer may forfeit the entire claim and, in many jurisdictions, avoid the policy Correct answer.
The insured is entitled to a warning before any investigation

Explanation

Fraudulent claims are treated as a serious breach of good faith, allowing the insurer to refuse the whole claim and, depending on the jurisdiction, avoid the policy. The insured's attempt to obtain more than indemnity undermines the contract.

Question 26Legal Principles of Insurance

An insurer seeks to avoid a policy for non-disclosure of a material fact. Which statement correctly describes the test of materiality applied in insurance law?

A fact is material if a prudent insurer would be influenced by it when deciding whether to accept the risk or what premium to charge. Correct answer.
A fact is material only if the insurer can prove it would have declined the risk outright.
A fact is material if it appears anywhere in the applicant's previous claims history.
A fact is material only if the applicant subjectively believed it was important to the insurer.

Explanation

Materiality is assessed objectively by reference to the judgment of a prudent or reasonable insurer: the fact must be one that would influence that hypothetical underwriter in accepting the risk or fixing the terms. The applicant's own view of importance is not the test, and the insurer need not show it would have refused the risk altogether.

Question 27Legal Principles of Insurance

Under the principle of indemnity, how is the measure of loss for a destroyed commercial building normally calculated where the policy is silent on valuation?

The market value of the building immediately before the loss Correct answer.
The outstanding mortgage balance secured on the building
The original purchase price paid by the insured
The full new-for-old reconstruction cost regardless of depreciation

Explanation

Indemnity restores the insured to the financial position held immediately before the loss, which for a building is generally its market value at the time of loss, reflecting age and condition. New-for-old replacement is a separate basis that must be expressly agreed, and neither historic cost nor debt outstanding measures the actual loss.

Question 28Legal Principles of Insurance

Which doctrine holds that where the insured has already recovered the full loss from a third party, the insurer need not pay under the policy?

Doctrine of uberrimae fidei
Doctrine of indemnity preventing double recovery Correct answer.
Doctrine of frustration
Doctrine of merger

Explanation

Because insurance is a contract of indemnity, the insured may not recover more than the actual loss; if a third party has already made the insured whole, the insurer's liability is extinguished to that extent. This avoids the insured profiting from the loss and underpins both subrogation and contribution.

Question 29Legal Principles of Insurance

Two insurers cover the same property loss on a rateable proportion basis. Insurer A covers 60,000 and Insurer B covers 40,000, and the loss is 50,000. What does contribution require?

Insurer A pays 30,000 and Insurer B pays 20,000 Correct answer.
Insurer A pays the whole 50,000 because it issued the larger policy
Insurer B pays the whole 50,000 because it issued the later policy
Each insurer pays 25,000 regardless of the sum insured

Explanation

Contribution apportions the loss between insurers in proportion to the amounts they respectively insure, so A bears 60/100 of 50,000 (30,000) and B bears 40/100 (20,000). Each insurer remains liable only for its rateable share, and the total paid equals the loss.

Question 30Legal Principles of Insurance

An insured assigns the benefit of a fire policy to a buyer of the insured premises without the insurer's consent, and the policy contains a condition against assignment. What is the usual legal effect?

The assignment binds the insurer because the policy follows the property
The assignment transfers the insurer's liabilities to the buyer
The assignment automatically voids the premium already paid
The assignment is ineffective against the insurer unless consent is given as required Correct answer.

Explanation

Insurance policies are personal contracts, and assignment of the benefit generally requires the insurer's consent where the policy so provides, because the insurer underwrote the particular insured. Without that consent the assignment does not bind the insurer, though the original insured's rights are unaffected.

Question 31Legal Principles of Insurance

What is the effect of a 'without prejudice' reservation made by an insurer while investigating a claim?

It waives the insurer's right to rely on policy conditions
It preserves the insurer's position so that settlement discussions do not amount to an admission of liability Correct answer.
It admits liability for the claim in full
It transfers the claim to a reinsurer

Explanation

A without prejudice reservation protects the insurer's right to deny or reduce the claim later, so that negotiations or interim payments are not treated as an admission of liability. It does not waive policy defences or concede the claim.

Question 32Legal Principles of Insurance

An insured's factory is damaged by an explosion that occurred while contractors were welding negligently. The insurer pays the claim. Which statement best describes the insurer's position against the contractors?

The insurer has no remedy because the insured, not the insurer, suffered the loss.
The insurer may pursue the contractors in the insured's name for the sum paid, subject to the insured's rights being preserved. Correct answer.
The insurer may recover twice the amount paid as a penalty.
The insurer must wait until the insured sues the contractors personally.

Explanation

Subrogation allows the insurer, after indemnifying the insured, to step into the insured's shoes and enforce the insured's rights against the negligent third party, recovering no more than it paid. The insured must not prejudice those rights, for example by releasing the wrongdoer.

Question 33Legal Principles of Insurance

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

A term the insured must satisfy before the insurer's obligation to pay arises Correct answer.
A term that fixes the premium payable at inception
A term that limits the policy period to one year
A term that merely describes the risk in general terms

Explanation

A condition precedent to liability is a requirement, such as prompt notification or provision of proofs, that must be fulfilled before the insurer becomes liable to pay. Breach may entitle the insurer to decline the claim even where the loss is otherwise covered.

Question 34Legal Principles of Insurance

An insured omits to disclose a pending criminal prosecution for arson when applying for property cover. The insurer later discovers this. Which ground most directly supports avoidance of the policy?

Non-disclosure of a material fact relevant to moral hazard Correct answer.
Breach of warranty as to housekeeping
Failure of proximate cause
Absence of insurable interest

Explanation

A pending arson prosecution is plainly material to the moral hazard the insurer is assessing, and silence about it breaches the duty of disclosure, allowing the insurer to avoid the contract. The other doctrines address different issues and do not fit these facts.

Question 35Legal Principles of Insurance

What distinguishes a 'mere representation' from a 'term of the contract' in insurance?

A representation induces the contract but is not part of it, whereas a term is incorporated into the contract Correct answer.
A representation is always written, while a term may be oral
A term is made before the contract and has no legal effect afterwards
A representation is enforceable as a warranty in every case

Explanation

A representation is a statement made during negotiations that induces the insurer to enter the contract but does not itself form part of the agreement, whereas a term is incorporated and its breach carries contractual consequences. A representation becomes a warranty only if the policy expressly incorporates it.

Question 36Legal Principles of Insurance

An insured holds a valued policy on a painting for 200,000. The painting is totally destroyed and its market value at the time of loss is 150,000. What is the insured entitled to recover, absent fraud?

150,000, because indemnity overrides the agreed value
Nothing, because the agreed value exceeds the market value
200,000, because the value was agreed at inception and is conclusive between the parties Correct answer.
175,000, being the average of the two figures

Explanation

In a valued policy the parties agree the value of the subject matter at inception, and that agreed value is conclusive of the measure of indemnity in the absence of fraud, so the insured recovers the sum insured. This is an exception to the ordinary market-value measure.

Question 37Legal Principles of Insurance

Which statement best explains the doctrine of 'utmost good faith' as it applies to the insurer as well as the insured?

It applies only to marine insurance and has no wider effect
It imposes reciprocal duties of fair dealing, including disclosure of material facts and fair handling of claims Correct answer.
It allows the insurer to avoid a policy for any inaccuracy, however trivial
It requires the insurer to pay every claim promptly without investigation

Explanation

Utmost good faith is reciprocal: the insured must disclose material facts and not misrepresent, while the insurer must deal with the risk and claims fairly and disclose matters material to the cover. It does not license avoidance for trivial inaccuracies or dispense with claims investigation.

Question 38Legal Principles of Insurance

A policy excludes liability for damage caused by 'wear and tear'. An insured claims for a collapsed roof that failed because of long-term corrosion. How should the claim be treated?

The claim falls within the wear and tear exclusion because corrosion is the proximate cause of the collapse Correct answer.
The claim is payable because collapse is an insured peril regardless of cause
The claim is payable only if the insured can prove the collapse was sudden
The claim is payable because exclusions are construed against the insurer in every case

Explanation

Where an excluded process such as wear and tear is the proximate cause of the damage, the exclusion applies even if the immediate event, here the collapse, is otherwise an insured peril. The insured cannot circumvent the exclusion by pointing to the final physical event.

Question 39Legal Principles of Insurance

What is the primary legal function of an insurable interest requirement at the time of loss in indemnity insurance?

To guarantee that the insurer makes a profit on the policy
To prevent the insured from assigning the policy
To ensure the insured suffers a loss that the indemnity may lawfully make good Correct answer.
To fix the premium rate for the policy term

Explanation

Insurable interest ensures the insured has a legal or equitable relationship to the subject matter such that he or she benefits from its preservation and is prejudiced by its loss. This supports the indemnity principle and guards against wagering contracts and moral hazard.

Question 40Legal Principles of Insurance

A bailee insures goods held for customers under a policy covering 'goods in trust'. A fire destroys the goods. Which statement best reflects the bailee's position?

The bailee cannot claim because it does not own the goods
The bailee may claim the full value and keep the proceeds
The bailee must transfer the policy to the owners before claiming
The bailee may claim to the extent of its liability to the owners, holding any recovery for them Correct answer.

Explanation

A bailee has insurable interest in goods in its custody to the extent of its responsibility for them, so it may insure and claim, but any recovery is held for the owners to that extent. The bailee cannot retain more than its own interest.

Question 41Legal Principles of Insurance

Which statement best describes the effect of the 'average' (co-insurance) clause where the sum insured is less than the value of the property at the time of loss?

The insurer pays the full loss up to the sum insured
The insurer avoids the policy for underinsurance
The insurer reduces the claim in the proportion that the sum insured bears to the value at risk Correct answer.
The insurer pays nothing because the policy is void

Explanation

An average clause makes the insured its own insurer for the shortfall, so the claim is reduced by the ratio of the sum insured to the value of the property at the time of loss. The policy remains valid; only the amount payable is scaled down.

Question 42Legal Principles of Insurance

An insured fails to disclose that the building is used for storing fireworks, and a fire later destroys it. The insurer would have charged double the premium had it known. What remedy is most consistent with a proportionate-remedy approach to non-disclosure?

Avoid the policy entirely and refund the premium
Refuse the claim entirely because fireworks are dangerous
Pay the claim in full because the fire was accidental
Reduce the claim in proportion to the premium shortfall Correct answer.

Explanation

A proportionate-remedy regime responds to innocent or negligent non-disclosure by adjusting the claim to reflect what the insurer would have done had it known the facts, for example reducing payment by the ratio of premium charged to premium that would have been charged. Avoidance is reserved for more serious cases such as deliberate or reckless non-disclosure.

Question 43Legal Principles of Insurance

Which of the following best describes a 'policy condition' that is a condition subsequent?

A requirement fulfilled before cover attaches
A clause fixing the jurisdiction for disputes
A term that, if breached after cover has begun, may entitle the insurer to terminate or refuse the claim Correct answer.
A statement describing the insured property

Explanation

A condition subsequent operates after the contract has come into force: breach may allow the insurer to terminate or decline the claim, depending on its wording and any statutory controls. It differs from a condition precedent, which must be satisfied before liability arises.

Question 44Legal Principles of Insurance

An insured suffers a total loss of stock and later sells the salvage without informing the insurer. What is the likely consequence?

The insurer must pay the full loss and ignore the salvage
No consequence, because the insured owns the salvage
The policy is automatically void from inception
The insured may be accountable to the insurer for the salvage value, and the claim may be affected Correct answer.

Explanation

Salvage belongs beneficially to the insurer to the extent of its indemnity, so the insured must account for proceeds of salvage and must not prejudice the insurer's position. Disposing of salvage without notice may reduce the claim or found a defence, though it does not automatically void the policy ab initio.

Question 45Legal Principles of Insurance

Which statement correctly states the general rule on the burden of proving that a loss falls within an exclusion?

The court decides exclusions without reference to the parties' evidence
The insurer bears the burden of bringing the facts within an exclusion once the insured has shown a loss within the insuring clause Correct answer.
Exclusions are unenforceable unless printed in bold
The insured must disprove every exclusion in the policy

Explanation

The insured must establish that the loss falls within the insuring agreement, and the insurer then bears the burden of proving that an exclusion applies. This allocation reflects the insurer's reliance on the exception to liability.

Question 46Legal Principles of Insurance

A motor policy states that the insured must not admit liability or settle any claim without the insurer's consent. The insured admits fault to a third party. What is the most likely effect?

The admission is binding on the insurer in all circumstances
The insured may have breached a claims-control condition, entitling the insurer to decline indemnity for any prejudice suffered Correct answer.
The insurer is automatically discharged from all liability under the policy
The policy is void from inception

Explanation

Claims-control conditions protect the insurer's right to investigate and defend, so an unauthorised admission may entitle it to decline indemnity where it has suffered prejudice. The insurer is not automatically discharged, and the admission does not bind it.

Question 47Legal Principles of Insurance

Which statement best captures the principle that an insurer cannot recover from its own insured in subrogation?

Subrogation extinguishes the insured's own rights against all parties
An insurer may sue its insured whenever a loss occurs
Subrogation operates against third parties who caused the loss, not against the insured who has been indemnified Correct answer.
An insurer may recover from an insured who has been fully indemnified

Explanation

Subrogation is a right against third-party wrongdoers, derived from the insured's cause of action; it does not permit the insurer to claw back an indemnity from its own insured. Allowing recovery from the insured would undermine the very protection the policy provides.

Question 48Legal Principles of Insurance

A policy defines 'flood' as 'the overflowing of rivers or other watercourses'. Heavy rain causes water to accumulate on flat ground and enter a warehouse. Which interpretation is most consistent with orthodox principles of construction?

The loss is covered because the rain originated in the atmosphere
The loss is outside the definition because the water did not overflow a river or watercourse Correct answer.
The definition is void for uncertainty
The loss is covered because the insured believed flood included surface water

Explanation

Where a policy defines a peril by reference to a specific mechanism, the defined words are given their natural meaning in context, so surface water accumulation from rainfall does not satisfy a definition requiring overflow of a river or watercourse. The insured's subjective understanding is irrelevant to construction.

Question 49Legal Principles of Insurance

What is the legal nature of a 'deductible' or 'excess' in an insurance policy?

A warranty that the insured will prevent all losses
A sum the insured bears before the insurer's liability begins Correct answer.
A premium discount refunded at expiry
A penalty imposed on the insured for claiming

Explanation

A deductible or excess is the first layer of loss retained by the insured, so the insurer pays only the amount above it. It is a contractual allocation of risk, not a penalty, and it does not operate as a warranty.

Question 50Legal Principles of Insurance

An insured deliberately exaggerates the amount of a genuine claim by inflating invoices. Which statement best reflects the modern legal position on fraudulent claims?

The policy is void from inception in every case
The insured recovers the genuine portion of the claim because part of the loss was real
The insurer must pay the full claim and then prosecute the insured
The insured forfeits the entire claim, including the genuine element, as a result of the fraud Correct answer.

Explanation

A fraudulent claim is a breach of the duty of good faith that entitles the insurer to refuse the whole claim, including any genuine element, and to recover sums already paid on it. The policy is not automatically void ab initio, but the fraudulent claim is forfeited.