How good were your principles?

Q1 True or false?A professional indemnity (PI) policy is:a) A type of liability policy - Trueb) An agreed value policy - Falsec) A claims arising policy - Falsed) A claims made policy - Truee) A reinstatement policy - FalseThis is proving to be a high risk area for insurance intermediaries. The average practitioner does not know enough about the PI policy, what it covers and what it excludes.

Q2 Insurable interest: True or false?a) Was mainly addressed in the Marine Insurance Act [1906]-FalseThe Life Assurance Act [1774]b) Cannot arise by statute - FalseFor example: Married Woman's Property Act [1882]c) Can arise by statue and common law - Trued) For a motor insurance policy it must exist at inception - TrueBut it must also exist at the time of a claim.This is an area of increasing risk as insurers apply their rights more frequently.

Q3 A material fact: True or false?a) Is not a fact that lessens the risk - Trueb) Is governed by the doctrine of contra preferentum - FalseThere is an argument that the use of latin maxims is outdated. Whatever the arguments, as long as the courts rely on them, so should practitionersc) Was clearly defined in the Marine Assurance Act [1906] - TrueBut it must be remembered that case law has amended and clarified the position on a regular basis since then and that also the ABI statement of principles improves the situation slightly for certain classes of customerd) Is a fact which 'induces' the underwriter to offer terms - TrueThis is an area of substantial risk as insurers seek ways to avoid claims.

Q4 VainHope Ltd is a firm of insurance brokers acting for Legit Ltd and arranging a public liability policy for Legit with the Gouty Legg Insurance Company: which answer is correct? a) VainHope Ltd has a duty of disclosure to Gouty Leggb) Legit Ltd has a duty of disclosure to VainHope Ltdc) Gouty Legg has a duty of disclosure to Legitd) VainHope Ltd has a duty of disclosure to Gouty Legg and Legit Ltd.c) is the correct answer. Only the parties to an insurance contract have a duty of disclosure. A broker has a duty of care to a customer (and possibly to an insurer) which would normally include the passing of information to an insurer.A broker may also (unwisely many would say) contract with the customer to pass all material facts to the insurer on behalf of the insured. This creates a contractual rather than common law or statutory duty of disclosure.

Q5 VainHope Ltd is firm of insurance brokers. Shuffle & Grope is a firm of surveyors that introduces its clients to VainHope Ltd for general insurance advice. Shuffle & Grope only introduces clients and occasionally helps elderly tenants to complete claim forms. True or false? a) Shuffle & Grope is conducting a regulated activity - TrueAny assistance to the insured could be regulated activity. If in doubt contact the FSA helplineb) Shuffle & Grope is exempt from authorisation as surveyors are members of a recognised and designated professional body - False.The Royal Institution of Chartered Surveyors (RICS) is not a designated professional body. You can obtain a list of such bodies from the FSA websitec) Assisting an insured in presenting claims is a regulated activity - Trued) Assisting an insurer or insured with a claim is a regulated activity - Falsee) Shuffle & Grope will have to apply for authorisation with the FSA - False.Shuffle and Grope has a number of options:

Q6 John Doe is riding his mountain bike in the Lake District. He falls and breaks his leg. Unfortunately, the place in which he lies before rescue is cold and wet and he subsequently develops pneumonia and dies in hospital. John has a personal accident policy with Gouty Legg Insurance. It turns down the claim as there is no cover provided for death by sickness, only for death by accident. As claims manager for the broker, what do you tell John Doe's executors?a) Gouty Legg Insurance is correct - the proximate cause of death is sickness.b) Mountain biking is always excluded from personal accident policiesc) Gouty Legg is incorrect - the proximate cause is the accident of falling off the bike.c) is the correct answer. The proximate cause was indeed the accident.This is an area of high risk if practitioner knowledge of the subject is low and advice is being given on insurance arrangements or the settlement of claims.

Q7 You are an insurance broker advising Clampett Industries about the insurance of its factory building. You have advised the insured about basis of cover (reinstatement) and how to calculate the sum insured. The insured suggests £4.3m and asks you to give your opinion on whether or not this figure is adequate. Which of the following responses would be regarded as good market practice? a) Look at last year's sum assured and add a percentage to cover inflationb) Tell the client that you are sorry but you are not an expert on property valuation and cannot therefore give advice on this aspect of the coverc) Give the client a copy of the Property Valuation Guide provide by the RICS and recommend that he refers to thisd) Tell the client that, based on your years of experience, adding a percentage to cover inflation seems fineThe correct answer is b). An insurance broker should not give advice or opinions outside his sphere of competence. Some brokers and insurers do contract to provide a valuation for reinstatement purposes, but they generally employ competent valuers to do this. This is an area of high risk

Q8 You are a broker acting for two brothers who own a nightclub. They disclose to you that there have been three attempted break-ins at the club over the past 12 months, but no damage was sustained. You are insuring for theft with a new insurer, to include a £300 excess. Should your client disclose the incidents? What is your advice? a) As no claim was made the incidents are not materialb) As no loss was suffered the incidents are not materialc) Only a court can decide what is material. It is prudent to disclose the incidentsd) As the incidents were less than the excess they are not material.c) is the correct answer. Who knows what an insurer might claim as material these days. If there is a dispute, it is a higher authority that will decide and that can be a very expensive and time consuming process.Better to tell the insurer all. What is worrying is the number of readers who are emailing us with an answer other than c).This is an area of high risk. Brokers should not make decisions on what is material and what is not. Let the underwriter do that.