Insurance Fundamentals & Principles — Practice

Question 1

Which principle requires a policyholder to have a genuine financial stake in the insured subject?

Accepted Answer

Insurable Interest.

Question 2

In which year was IRDAI established?

Accepted Answer

1999.

Question 3

Which principle limits compensation to the actual financial loss suffered?

Accepted Answer

Indemnity.

Question 4

Distinguish subrogation from contribution.

Accepted Answer

Subrogation transfers the insured's right to recover loss from an at-fault third party to the insurer, once the insurer has paid the claim. Contribution distributes a claim proportionately across multiple insurers covering the same risk, when more than one policy covers the same loss.

Question 5

Why is life insurance considered an exception to the principle of indemnity?

Accepted Answer

Indemnity requires compensation limited to actual calculable loss, but a human life has no calculable market value. Life insurance instead pays a fixed sum assured regardless of financial loss, making it a 'benefit' contract rather than a strict indemnity contract.

Question 6

What does the principle of utmost good faith require, and what can happen if it is violated?

Accepted Answer

It requires both parties, especially the insured, to honestly disclose all material facts relevant to the risk at the time of proposing the contract. Non-disclosure of a material fact can void the policy.

Question 7

A building is damaged by a fire that weakens its structure, and it later collapses during a subsequent storm. The policy covers fire damage but excludes storm damage. How would proximate cause analysis approach this claim?

Accepted Answer

Proximate cause asks which cause was DOMINANT and effective in producing the loss, not simply which happened first or last. If the fire is judged to have been the dominant cause that critically weakened the structure (with the storm merely triggering an already-inevitable collapse), the claim would likely be assessed as fire-caused and covered. If the storm is judged to be an independent, dominant cause of the actual collapse, the claim could be treated as excluded storm damage. The determination depends on the specific facts of which cause actually dominated the loss chain.

Question 8

Explain why a person can hold multiple life insurance policies on their own life and receive full payment from each on death, while this would not be possible for multiple property policies on the same asset.

Accepted Answer

Life insurance operates outside strict indemnity — since life has no calculable market value, each life policy is an independent contract to pay a fixed sum assured, unconstrained by any 'actual loss' ceiling. Multiple property policies on the same asset, by contrast, are subject to indemnity and contribution — the total payout across all policies is capped at the actual loss, distributed proportionately, precisely to prevent the policyholder profiting beyond what they actually lost.

Practice — Insurance Fundamentals & Principles

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