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Insurance Commission Licensure Exam - Non-Life study materials
Insurance Commission Licensure Exam - Non-Life study resources

Insurance Commission Licensure Exam - Non-Life practice questions

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Question 1Insurance Principles and Concepts (risk, insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

Which principle requires the insured to disclose all material facts about the risk before a non-life policy is issued, even if the insurer does not ask specific questions?

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

Explanation

Utmost good faith obliges both parties, especially the applicant, to volunteer every fact that would influence a prudent underwriter's decision. It goes beyond ordinary contract law because the insurer cannot inspect the risk itself and must rely on the applicant's candor.

Question 2Insurance Principles and Concepts (risk, insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

A fire insurance policy is issued on a building worth PHP 5,000,000 for a sum insured of PHP 5,000,000. After a total loss the insurer pays the full sum insured. Which principle is being applied?

  1. Subrogation
  2. Contribution
  3. Indemnity Correct answer.
  4. Insurable interest

Explanation

Indemnity means the insured is restored to the same financial position as before the loss, no better and no worse. Paying the actual value of the destroyed property, up to the sum insured, is the practical expression of that principle in property insurance.

Question 3Insurance Principles and Concepts (risk, insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

Which statement best describes the insurable interest required in non-life insurance at the time of loss?

  1. The insured must hold a mortgage over the property.
  2. The insured must have a lawful pecuniary relationship to the subject matter that would be harmed by its loss. Correct answer.
  3. The insured must be named as beneficiary under a trust deed.
  4. The insured must own the property in every case.

Explanation

Insurable interest exists where a person stands to suffer a financial disadvantage from the destruction or damage of the subject matter. Ownership is the commonest example but is not the only one; a bailee, tenant, or mortgagee can also have an interest.

Question 4Insurance Principles and Concepts (risk, insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

After paying a fire claim caused by a negligent contractor, the insurer sues the contractor to recover the amount paid. This right is known as:

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

Explanation

Subrogation transfers to the insurer, once it has indemnified the insured, the insured's legal right to pursue the party responsible for the loss. It prevents the insured from recovering twice and places the burden on the party at fault.

Question 5Insurance Principles and Concepts (risk, insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

Two property policies with the same scope cover the same building, and neither contains an escape clause. How is the loss shared between them?

  1. The insured chooses one insurer to pay in full.
  2. The loss is paid by the insurer with the higher sum insured alone.
  3. Each insurer pays its rateable proportion of the loss. Correct answer.
  4. Only the policy issued first in time responds.

Explanation

Contribution requires each insurer to bear its rateable share, usually calculated by reference to the sums insured, so that the insured receives one indemnity and no more. The principle prevents double recovery from overlapping policies.

Question 6Insurance Principles and Concepts (risk, insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

In non-life insurance, the proximate cause of a loss is best described as:

  1. The cause named in the policy schedule.
  2. The last event in the chain before the damage occurred.
  3. The cause most convenient for the insured to prove.
  4. The dominant, effective cause that sets the loss in motion without a new intervening force. Correct answer.

Explanation

Proximate cause is the active, efficient cause that produces the loss in an unbroken sequence. The law does not simply look at the final event; it identifies the dominant cause, which determines whether the peril is covered.

Question 7Insurance Principles and Concepts (risk, insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

Which of the following is a peril rather than a hazard in non-life insurance terminology?

  1. Fire Correct answer.
  2. Loose electrical wiring
  3. Poor housekeeping
  4. Storage of flammable paint

Explanation

A peril is the event that causes loss, such as fire, flood, or collision, while a hazard is a condition that increases the chance of that event or its severity. Wiring, housekeeping, and flammable storage are conditions, not events.

Question 8Insurance Principles and Concepts (risk, insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

A building is insured for PHP 4,000,000 against a replacement cost of PHP 8,000,000, and a PHP 800,000 partial loss occurs. Under a standard average (coinsurance) clause, how much is payable?

  1. PHP 400,000 Correct answer.
  2. PHP 800,000
  3. PHP 200,000
  4. PHP 100,000

Explanation

Under the average clause the payout is the loss multiplied by the ratio of sum insured to value, here 4,000,000 divided by 8,000,000, which is one half. Half of the 800,000 loss is therefore 400,000, leaving the insured to bear the balance for underinsurance.

Question 9Insurance Principles and Concepts (risk, insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

An insured conceals that the building has been served a demolition order when applying for property cover. The policy is later issued and a loss occurs. What is the insurer's strongest ground?

  1. The insurer may only cancel prospectively with no effect on the claim.
  2. The insurer must pay but may increase the next premium.
  3. The policy is automatically void because all concealment voids contracts.
  4. The policy is voidable for non-disclosure of a material fact. Correct answer.

Explanation

A demolition order is plainly material because it affects the risk and the insurer's willingness to accept it. Non-disclosure of a material fact renders the contract voidable at the insurer's option, allowing it to avoid liability and return the premium.

Question 10Insurance Principles and Concepts (risk, insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

A marine cargo policy covers 'perils of the sea'. The vessel sinks in calm weather because the cargo was badly stowed and shifted. Which analysis of proximate cause is most defensible?

  1. Bad stowage is the proximate cause because it was the operative cause of the sinking. Correct answer.
  2. The sea is the proximate cause because the cargo ended up in the water.
  3. Causation is irrelevant if the cargo was insured for its full value.
  4. The loss is covered because all water-related losses are perils of the sea.

Explanation

A peril of the sea requires a fortuitous accident of the sea, not a loss attributable to the ordinary action of seawater or the cargo's own condition. Where defective stowage is the dominant cause, that cause governs coverage and the sea is merely the medium of the loss.

Question 11Insurance Principles and Concepts (risk, insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

A factory owner insures plant for PHP 10,000,000. A fire destroys machinery with a sound value of PHP 2,000,000 and salvage realized is PHP 200,000. Ignoring deductibles, what indemnity is payable?

  1. PHP 1,800,000 Correct answer.
  2. PHP 2,000,000
  3. PHP 2,200,000
  4. PHP 1,000,000

Explanation

Indemnity equals the loss less any salvage recovered, because the insured must not profit from the claim. The sound value destroyed is 2,000,000 and, after crediting the 200,000 salvage, the net indemnity is 1,800,000.

Question 12Insurance Principles and Concepts (risk, insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

A lender holds a mortgage over an insured building and is named as loss payee. If the borrower's policy pays a fire claim, what is the lender's position?

  1. The lender has an insurable interest to the extent of the outstanding loan. Correct answer.
  2. The lender has no insurable interest because it does not occupy the building.
  3. The lender's interest arises only after foreclosure.
  4. The lender's interest is limited to the value of the land alone.

Explanation

A mortgagee has a pecuniary interest in the preservation of the mortgaged property because destruction impairs its security. That interest is measured by the outstanding debt, not by ownership or occupation.

Question 13Insurance Principles and Concepts (risk, insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

Insurer A covers a warehouse for PHP 6,000,000 and Insurer B covers the same warehouse for PHP 4,000,000, both on identical terms. A PHP 500,000 loss occurs. Ignoring other clauses, how much does Insurer A pay under rateable contribution?

  1. PHP 250,000
  2. PHP 300,000 Correct answer.
  3. PHP 200,000
  4. PHP 500,000

Explanation

Rateable contribution allocates the loss in proportion to the sums insured. Insurer A carries 6,000,000 of the 10,000,000 total, or sixty percent, so it pays sixty percent of the 500,000 loss, which is 300,000.

Question 14Insurance Principles and Concepts (risk, insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

After settling a total loss on a vehicle, an insurer learns the insured had already recovered the full value from the at-fault driver. What is the insurer's position?

  1. The insurer can only adjust future premiums.
  2. The insurer must share the recovery with the at-fault driver.
  3. The insurer has no remedy because the claim is already paid.
  4. The insurer may recover the payment from the insured as the insured has been over-indemnified. Correct answer.

Explanation

Indemnity and subrogation together prevent the insured from recovering more than the actual loss. If the insured has already been made whole by the third party, retaining the insurer's payment would be double recovery, so the insurer may reclaim it.

Question 15Insurance Principles and Concepts (risk, insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

An insured deliberately burns down a stockroom to claim the insurance money. How does the principle of indemnity apply?

  1. The insured recovers the sum insured because the policy was in force.
  2. The insured recovers nothing because indemnity cannot be claimed for a loss the insured intentionally caused. Correct answer.
  3. The insured recovers half the sum insured as a compromise.
  4. The insured recovers only the salvage value.

Explanation

Indemnity restores accidental loss, and the insured cannot benefit from his own deliberate wrongdoing. Intentional destruction by the insured is outside the scope of cover and defeats the claim entirely.

Question 16Insurance Principles and Concepts (risk, insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

Which duty does the principle of utmost good faith place on the insurer, as distinct from the insured?

  1. To inspect every risk physically before acceptance.
  2. To disclose material facts within its knowledge and to deal with the insured's claim fairly. Correct answer.
  3. To guarantee that no claim will ever be disputed.
  4. To pay every claim within twenty-four hours.

Explanation

Utmost good faith is reciprocal: the insurer must not misrepresent cover and must handle claims in good faith, including disclosing facts material to the contract. It does not, however, require physical inspection or guarantee outcomes.

Question 17Insurance Principles and Concepts (risk, insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

A typhoon causes a landslide that crushes an insured building. The policy covers typhoon but excludes landslide. Which proximate cause analysis supports coverage?

  1. The typhoon is the proximate cause because it set the landslide in motion without a new independent cause. Correct answer.
  2. Neither cause is proximate because two events occurred.
  3. The landslide is the proximate cause because it directly crushed the building.
  4. Coverage depends on which event happened last in time.

Explanation

Where an insured peril operates and the resulting damage follows in an unbroken sequence, the insured peril is the proximate cause even if the immediate physical agent is excluded. The landslide was not an independent intervening force but a direct consequence of the typhoon.

Question 18Insurance Principles and Concepts (risk, insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

An insured takes out a policy on a cargo shipment and, before the voyage begins, sells the entire cargo and transfers the risk to the buyer. What happens to the seller's insurable interest?

  1. It ceases when the risk passes, so the seller can no longer claim under the policy. Correct answer.
  2. It transfers automatically to the buyer without any assignment.
  3. It converts into a contingent interest enforceable by the seller.
  4. It continues until the policy expires.

Explanation

Insurable interest must exist when the loss occurs, and a seller who has parted with both property and risk no longer stands to lose. The policy does not automatically follow the goods, so the buyer needs the cover assigned or a new policy.

Question 19Insurance Principles and Concepts (risk, insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

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

  1. A representation must be literally true, while a warranty need not be.
  2. A representation is always written into the policy schedule.
  3. A warranty is a statement made during negotiations that need only be substantially true.
  4. A warranty is a promise or condition forming part of the policy, and breach may entitle the insurer to avoid liability. Correct answer.

Explanation

A warranty is incorporated into the contract as a condition, and its breach can discharge the insurer from liability even if the breach is unrelated to the loss. A representation is a pre-contractual statement inducing the insurer to issue the policy.

Question 20Insurance Principles and Concepts (risk, insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

An insured holds two fire policies on the same stock, one containing a rateable proportion clause and the other an escape clause. A loss occurs. How do the clauses interact?

  1. The escape clause insurer pays nothing and the rateable clause insurer pays in full.
  2. Both insurers pay the full sum insured, giving the insured a profit.
  3. The insured must choose one policy and abandon the other.
  4. The escape clause insurer is treated as liable for its rateable share, and both insurers then contribute proportionally. Correct answer.

Explanation

An escape clause releases an insurer only if other insurance exists, so the policy with the rateable clause is treated as providing that other insurance. The escape insurer is then regarded as liable for its rateable share so that contribution operates fairly between them.

Question 21Insurance Principles and Concepts (risk, insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

A policy covers 'accidental damage' but excludes 'damage caused by wear and tear'. A pipe bursts because of gradual corrosion, flooding the insured premises. Which reasoning is most consistent with proximate cause doctrine?

  1. Corrosion is the proximate cause as the underlying operative cause, so the exclusion applies. Correct answer.
  2. The bursting of the pipe is the proximate cause, so the whole loss is covered.
  3. The exclusion applies only if the insurer proves the insured knew of the corrosion.
  4. The loss is covered because water damage is always accidental.

Explanation

Where gradual deterioration is the operative cause that produced the failure, the wear and tear exclusion applies even though a sudden event such as a burst pipe appears to be the immediate trigger. Courts look to the dominant cause rather than the final physical event.

Question 22Insurance Principles and Concepts (risk, insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

An insured assigns the benefit of a fire policy to a buyer of the insured building without notifying the insurer, and the policy prohibits assignment without consent. A loss then occurs. What is the likely outcome?

  1. The insurer must pay the buyer because the premium was fully earned.
  2. The original insured must claim and hold the proceeds on trust for the buyer.
  3. The buyer can claim because insurable interest passed with the property.
  4. The assignment is ineffective against the insurer, so the buyer has no claim under the policy. Correct answer.

Explanation

A policy is a personal contract, and assignment of the benefit generally requires the insurer's consent or compliance with policy terms. Since insurable interest passed to the buyer but the assignment was ineffective, the buyer cannot enforce the policy and needs fresh cover.

Question 23Insurance Principles and Concepts (risk, insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

An insured's factory is destroyed by fire. Because of the shutdown, the insured also loses anticipated profits for six months. A standard fire policy on the building alone will:

  1. Pay the profits up to the sum insured on the building.
  2. Pay the profits only if the fire was caused by negligence.
  3. Pay the profits as part of the fire loss because they flow from the fire.
  4. Not pay the profits, because consequential loss requires separate business interruption cover. Correct answer.

Explanation

Indemnity under a property policy extends to direct physical damage, not to consequential financial loss such as lost profits. Remote consequences require specific business interruption insurance and are not covered by a building policy.

Question 24Insurance Principles and Concepts (risk, insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

A vessel is insured against 'perils of the sea'. Heavy weather causes the cargo to shift, and the master jettisons part of it to save the ship. Which statement about proximate cause and general average is most accurate?

  1. The loss is covered only if the cargo owner consented to the jettison.
  2. The jettison is a voluntary act and therefore never covered.
  3. Only the shipowner can claim, because the master acted on the owner's orders.
  4. The loss is treated as caused by the peril of the sea, and the insured may recover its general average contribution. Correct answer.

Explanation

A sacrifice deliberately made to preserve the adventure from a common peril is a general average act, and the peril of the sea remains the proximate cause. The party whose goods were sacrificed can recover, and the other parties contribute to the loss.

Question 25Insurance Principles and Concepts (risk, insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

Which of the following best explains why the principle of indemnity limits recovery to the actual loss rather than the sum insured?

  1. To guarantee that premiums remain constant over the policy period.
  2. To prevent the insured from profiting from loss and thereby reduce moral hazard. Correct answer.
  3. To ensure the insurer always retains part of the premium.
  4. To allow the insurer to avoid paying small claims.

Explanation

Indemnity exists to restore, not enrich, the insured, because a profit motive would encourage deliberate loss or exaggeration. By capping recovery at the actual loss, the principle reduces moral hazard and keeps insurance a mechanism of risk transfer rather than gain.

Question 26Insurance Principles and Concepts (risk, insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

Which principle requires an insured to disclose all material facts about the risk to the insurer, even if the insurer does not ask for them?

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

Explanation

The principle of utmost good faith (uberrimae fidei) imposes a duty on both parties, but especially the insured, to volunteer all material facts that could influence the insurer's decision to accept the risk or set the premium. This goes beyond the ordinary duty to answer questions truthfully. Indemnity, subrogation, and contribution are separate principles governing the amount and recovery of claims.

Question 27Insurance Principles and Concepts (risk, insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

A fire insurance policy is issued to a homeowner. Which party must have an insurable interest in the property at the time of the loss for the claim to be payable?

  1. The insurer
  2. The mortgagee
  3. The insurance agent
  4. The insured Correct answer.

Explanation

Insurable interest is the legal or equitable relationship that makes a person benefit from the preservation of the subject matter or suffer loss from its destruction. In property insurance, the insured must have insurable interest at the time of loss. The insurer, mortgagee, and agent may have their own interests, but the policy responds to the insured's interest.

Question 28Insurance Principles and Concepts (risk, insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

Under the principle of indemnity, what is the maximum amount an insurer will pay for a partial loss under a fire policy, assuming no policy limits or deductibles apply?

  1. The replacement cost of the property
  2. The actual amount of the loss Correct answer.
  3. The full sum insured
  4. The market value of the property

Explanation

Indemnity means the insured is restored to the financial position held immediately before the loss, no better and no worse. For a partial loss, the measure is the actual loss suffered, subject to the sum insured. Paying the full sum insured for a partial loss would over-indemnify the insured and violate the principle.

Question 29Insurance Principles and Concepts (risk, insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

An insured's warehouse is damaged by fire. The insurer pays the claim and then discovers that a neighboring factory negligently caused the fire. Which principle allows the insurer to recover the amount paid from the negligent factory?

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

Explanation

Subrogation gives the insurer the right to step into the insured's shoes and pursue any third party who is legally liable for the loss, after the insurer has paid the claim. This prevents the insured from recovering twice and places the ultimate burden on the party at fault. Contribution, proximate cause, and utmost good faith address different aspects of insurance.

Question 30Insurance Principles and Concepts (risk, insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

An insured has two fire policies on the same building: Policy A for PHP 2,000,000 and Policy B for PHP 3,000,000. A loss of PHP 1,000,000 occurs. If both policies contain a rateable proportion clause and no other insurance clause, how much will each insurer pay?

  1. A pays PHP 200,000; B pays PHP 800,000
  2. A pays PHP 500,000; B pays PHP 500,000
  3. A pays PHP 400,000; B pays PHP 600,000 Correct answer.
  4. A pays PHP 1,000,000; B pays nothing

Explanation

Under contribution with rateable proportion clauses, each insurer pays a share of the loss in proportion to its sum insured relative to the total insurance. Total insurance is PHP 5,000,000. A's share is 2/5 of PHP 1,000,000 = PHP 400,000; B's share is 3/5 of PHP 1,000,000 = PHP 600,000. This prevents over-indemnity and equitably distributes the burden.

Question 31Insurance Principles and Concepts (risk, insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

An insured's building is damaged when a typhoon causes a wall to collapse. The policy covers typhoon but excludes collapse. Applying the proximate cause rule, will the insurer pay?

  1. Yes, but only if the insured proves the wall was well maintained
  2. No, because the loss was not fortuitous
  3. No, because the collapse exclusion applies directly
  4. Yes, because the typhoon is the dominant and effective cause of the loss Correct answer.

Explanation

Proximate cause is the dominant, effective, and operative cause of a loss, not necessarily the last event in the chain. If typhoon (a covered peril) set in motion the chain of events leading to the collapse, the loss is attributed to the typhoon even if collapse is an excluded peril. The exclusion would apply only if collapse were the independent proximate cause.

Question 32Insurance Principles and Concepts (risk, insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

An insured fails to disclose that the building's electrical wiring is defective and poses a serious fire risk. The insurer would have declined the risk or charged a higher premium had it known. The policy is later avoided. Which principle supports the insurer's action?

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

Explanation

Utmost good faith requires the insured to disclose all material facts that would influence a prudent insurer's decision. Non-disclosure of a serious fire risk is a breach of this duty, allowing the insurer to avoid the policy from the outset. The other principles concern the measure of loss or recovery rights, not the validity of the contract.

Question 33Insurance Principles and Concepts (risk, insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

A marine cargo policy covers 'perils of the sea'. The ship sinks in calm weather because the cargo was improperly stowed, making the vessel unstable. The insurer denies the claim. What is the best reason for the denial?

  1. The loss was not fortuitous
  2. The policy was void for lack of utmost good faith
  3. The loss was caused by an excluded peril, not a peril of the sea Correct answer.
  4. The insured did not have insurable interest

Explanation

A peril of the sea is a fortuitous accident or casualty of the seas, such as a storm or collision, not ordinary wear and tear or the internal condition of the cargo. Here, the proximate cause is improper stowage, which is not a peril of the sea. Therefore, the loss falls outside the policy coverage.

Question 34Insurance Principles and Concepts (risk, insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

A factory owner insures plant for PHP 10,000,000. A fire destroys machinery with a sound value of PHP 2,000,000 and salvage value of PHP 200,000. What is the maximum indemnity payable, assuming no average or other policy conditions?

  1. PHP 10,000,000
  2. PHP 1,800,000 Correct answer.
  3. PHP 2,000,000
  4. PHP 200,000

Explanation

The principle of indemnity limits recovery to the actual loss, which is the sound value less salvage. Sound value is PHP 2,000,000; salvage is PHP 200,000; thus the loss is PHP 1,800,000. The sum insured is the maximum, not the measure of loss.

Question 35Insurance Principles and Concepts (risk, insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

A lender holds a mortgage over an insured building and is named as loss payee. If the borrower's policy pays a fire claim, what is the lender's right under the loss payable clause?

  1. The lender is entitled to receive payment to the extent of its insurable interest Correct answer.
  2. The lender must share the proceeds equally with the borrower
  3. The lender receives the entire claim proceeds regardless of the borrower's interest
  4. The lender has no rights because it is not the named insured

Explanation

A loss payee clause protects the mortgagee's insurable interest as a creditor. The lender is entitled to receive so much of the claim as equals its outstanding loan balance, because that is the extent of its insurable interest. Any surplus goes to the borrower.

Question 36Insurance Principles and Concepts (risk, insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

An insured deliberately burns down a stockroom to claim insurance money. How does the principle of indemnity apply to the claim?

  1. The insurer must pay only the salvage value
  2. The insurer must pay because the loss occurred
  3. The insurer must pay but can recover the amount from the insured later
  4. The insurer is entitled to deny the claim entirely because the insured cannot benefit from his own wrong Correct answer.

Explanation

Indemnity restores the insured to the pre-loss position but never allows profit from intentional loss. Deliberate destruction by the insured is a breach of the policy and of the indemnity principle, so the insurer may deny the claim. Public policy also prevents an insured from benefiting from his own criminal act.

Question 37Insurance Principles and Concepts (risk, insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

An insured takes out a policy on a cargo shipment and, before the voyage begins, sells the entire cargo and transfers the risk to the buyer. The ship later sinks. What is the status of the insured's claim?

  1. The insured cannot claim because insurable interest was lost before the loss Correct answer.
  2. The insured can claim but must share the proceeds with the buyer
  3. The insurer must pay and then seek contribution from the buyer
  4. The insured can claim because the policy was valid at inception

Explanation

For a claim to be valid, the insured must have insurable interest at the time of the loss. If the insured sold the cargo and transferred the risk before the loss, the insured no longer suffers any financial loss. Therefore, the claim fails for lack of insurable interest at the time of loss.

Question 38Insurance Principles and Concepts (risk, insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

An insured holds two fire policies on the same stock, one containing a rateable proportion clause and the other an escape clause. A loss occurs. How do the clauses interact to determine the insurer's liability?

  1. Both clauses are void as conflicting
  2. The rateable proportion clause prevails, so the insurer pays its proportionate share Correct answer.
  3. The escape clause prevails, so the insurer pays nothing
  4. The insured can choose which policy to claim under, and the other insurer pays nothing

Explanation

When a rateable proportion clause and an escape clause conflict, the rateable proportion clause generally prevails to prevent the insured from being deprived of indemnity. The insurer with the rateable clause pays its proportionate share, and the escape clause is often read down or treated as inoperative in these circumstances. This preserves the insured's right to indemnity.

Question 39Insurance Principles and Concepts (risk, insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

Under the doctrine of proximate cause in a non-life policy, which event is treated as the proximate cause of a loss?

  1. The last event in time before the damage, whatever its nature
  2. The event that the insured finds easiest to prove with documentary evidence
  3. The dominant, effective cause that sets in motion the chain of events leading to the loss without a new intervening force Correct answer.
  4. The earliest event in the sequence, regardless of how remote it is from the damage

Explanation

Proximate cause is the dominant and effective cause that operates to bring about the loss, not merely the nearest event in time. Courts look for the cause that sets the chain of events in motion without a fresh, independent force breaking it. This determines whether a loss falls within the perils insured against.

Question 40Insurance Principles and Concepts (risk, insurable interest, indemnity, utmost good faith, subrogation, contribution, proximate cause)

An insured holds a fire policy on stock with a sum insured of PHP 1,000,000 and suffers a fire loss of PHP 400,000. The property's actual value at the time of loss was PHP 2,000,000, and the policy contains an average (underinsurance) clause. Applying the principle of indemnity, what amount is payable?

  1. PHP 400,000, because the loss is below the sum insured
  2. PHP 1,000,000, because that is the limit stated in the policy
  3. PHP 0, because underinsurance voids the policy
  4. PHP 200,000, because the sum insured is half the value at risk Correct answer.

Explanation

An average clause scales the payment by the ratio of the sum insured to the value at risk, so the insured bears a share of the loss. Here the ratio is 1,000,000 to 2,000,000, or one half, so the insurer pays half of the PHP 400,000 loss. This preserves indemnity by preventing recovery as if the property had been fully insured.

Question 41Insurance Contract Law and Policy Interpretation (offer and acceptance, warranties, representations, conditions, exclusions, voidable policies)

Under the Insurance Code, when does a contract of insurance ordinarily take effect if the policy is issued before the first premium is paid?

  1. Upon delivery of the policy to the insured, even if no premium has been paid and no credit term was agreed
  2. Upon approval of the application by the insurer's underwriter, regardless of premium payment
  3. Upon the payment of the first premium, unless the parties agreed in writing to a credit term or the policy expressly provides otherwise Correct answer.
  4. Upon the signing of the application by the insured, regardless of any premium arrangement

Explanation

The Insurance Code provides that an insurance policy is not valid and binding until the premium is paid, subject to the exception where the parties agree to a credit term or the policy provides for payment in installments. Delivery or underwriting approval alone does not make the contract effective without premium.

Question 42Insurance Contract Law and Policy Interpretation (offer and acceptance, warranties, representations, conditions, exclusions, voidable policies)

An applicant fills out an insurance application and submits it to the insurer. In contract-law terms, the application generally constitutes which of the following?

  1. An acceptance of the insurer's standing offer to insure
  2. A warranty binding the insurer immediately
  3. An offer that the insurer may accept or reject Correct answer.
  4. A counteroffer that revokes any prior negotiations

Explanation

The completed application is treated as the offer made by the prospective insured, which the insurer accepts by issuing the policy or approving the risk. Until acceptance, no contract arises. The insurer's issuance of the policy completes the agreement.

Question 43Insurance Contract Law and Policy Interpretation (offer and acceptance, warranties, representations, conditions, exclusions, voidable policies)

A policy contains a clause stating that the insured warrants the truth of all statements in the application, but no clause making an immaterial breach a ground for avoidance. If a statement is untrue but was made without fraudulent intent and is not material to the risk, what is the general effect under the Insurance Code?

  1. The insured forfeits all premiums paid regardless of materiality
  2. The policy is automatically void because any breach of warranty avoids coverage
  3. The insurer must return the premium and may treat the policy as never issued in all cases
  4. The immaterial breach of warranty does not avoid the policy in the absence of an express provision making it a ground for avoidance Correct answer.

Explanation

Under Sections 74-76, a material breach of warranty can justify rescission without fraudulent intent. An immaterial breach ordinarily does not avoid the policy unless the policy expressly makes it a ground for avoidance. Since no such provision applies here, the stated breach does not avoid the policy.

Question 44Insurance Contract Law and Policy Interpretation (offer and acceptance, warranties, representations, conditions, exclusions, voidable policies)

Which of the following best describes the effect of a breach of a promissory warranty in a non-life policy?

  1. It converts the policy into a valued policy
  2. It has no effect unless the insurer can prove fraud
  3. It merely reduces the claim by the amount of any unpaid premium
  4. It entitles the insurer to avoid the policy from the time of breach, even without proof of fraud Correct answer.

Explanation

A promissory warranty is a condition that the insured promises to fulfill; a material breach allows the insurer to avoid liability from the time of the breach. Fraud need not be shown because the warranty is a contractual condition, not a mere representation.

Question 45Insurance Contract Law and Policy Interpretation (offer and acceptance, warranties, representations, conditions, exclusions, voidable policies)

An insured conceals from the insurer a fact that would have caused the insurer to decline the risk or charge a higher premium. Under the Insurance Code, this concealment generally gives the insurer what right?

  1. No right, because the insurer had a duty to investigate the risk independently
  2. The right to increase the premium retroactively without rescinding
  3. The right to rescind the contract because concealment of a material fact is equivalent to a false representation Correct answer.
  4. The right to deny only claims arising after the concealment is discovered

Explanation

Concealment of a material fact, whether intentional or not, entitles the insurer to rescind the contract, since the insurer was deprived of information needed to evaluate the risk. The insured has a duty of good faith to disclose material facts.

Question 46Insurance Contract Law and Policy Interpretation (offer and acceptance, warranties, representations, conditions, exclusions, voidable policies)

A fire policy excludes loss caused by "enemy action." During a declared war, a fire is started by a military incendiary device. Which principle most directly determines whether the exclusion applies?

  1. The principle of indemnity, because the insured must be restored to the same financial position
  2. The principle of contribution, because multiple insurers share the loss
  3. The principle of subrogation, because the insurer steps into the insured's shoes
  4. The principle of proximate cause, because the excluded peril must be the dominant and effective cause of the loss Correct answer.

Explanation

Exclusions are applied through proximate cause: the insurer must show that the excluded peril was the efficient, dominant cause of the loss. If enemy action proximately caused the fire, the exclusion bars recovery regardless of the immediate physical cause.

Question 47Insurance Contract Law and Policy Interpretation (offer and acceptance, warranties, representations, conditions, exclusions, voidable policies)

An insurer issues a policy with a condition requiring the insured to give written notice of loss "immediately." The insured gives notice 20 days after the loss without explanation. What is the most accurate statement of the insurer's position?

  1. The insurer must pay because notice conditions are directory rather than mandatory
  2. The insurer may deny the claim only if the delay materially prejudiced its ability to investigate Correct answer.
  3. The insurer must pay but may recover the premium for the unexpired term
  4. The insurer may deny the claim automatically because any delay breaches the condition

Explanation

Notice conditions are generally construed to require notice within a reasonable time, and breach allows denial only where the insurer was materially prejudiced in investigating or defending the claim. A mere delay without prejudice does not automatically defeat coverage.

Question 48Insurance Contract Law and Policy Interpretation (offer and acceptance, warranties, representations, conditions, exclusions, voidable policies)

A policy provides that coverage is void if the insured "intentionally conceals or misrepresents any material fact" in the application. The insurer discovers the misrepresentation two years after issuance. Which statement is correct?

  1. The insurer may only cancel prospectively and must pay all claims
  2. The insurer must prove the misrepresentation caused the specific loss to rescind
  3. The insurer may rescind the policy because a material misrepresentation in the application is a ground for avoidance Correct answer.
  4. The insurer is barred from rescinding after one year in all cases

Explanation

A material misrepresentation in the application, whether innocent or fraudulent, is a ground for rescission because it vitiates the insurer's consent. The insurer need not show that the misrepresentation caused the particular loss; materiality to the risk is the test.

Question 49Insurance Contract Law and Policy Interpretation (offer and acceptance, warranties, representations, conditions, exclusions, voidable policies)

An insured under a property policy transfers ownership of the insured building to a third party without notifying the insurer. The policy contains a standard "assignment" condition. What is the usual effect?

  1. The policy automatically transfers to the new owner because it runs with the property
  2. The transfer is void unless the insurer consents, because insurance is a personal contract Correct answer.
  3. The insurer must return all premiums because the risk has ended
  4. The policy remains valid but only for the original insured's remaining interest

Explanation

Insurance is generally a personal contract, so assignment of the policy requires the insurer's consent; a transfer without consent is ineffective. The transferee of the property does not automatically acquire the policy rights.

Question 50Insurance Contract Law and Policy Interpretation (offer and acceptance, warranties, representations, conditions, exclusions, voidable policies)

A policy includes an "entire contract" clause. Which statement best explains its effect?

  1. The insurer may add terms unilaterally after issuance
  2. Only the policy document is binding, and the application is disregarded entirely
  3. The policy and the application together constitute the entire agreement, and no prior oral promises modify it Correct answer.
  4. Oral representations by the agent are enforceable if the insured relied on them

Explanation

An entire contract clause makes the policy, together with the application, the complete agreement and excludes prior or collateral oral understandings. It protects the insurer from claims based on agents' oral promises.