C11 Principles and Practice of Insurance Questions and Answers

The Facility Association is the Canadian automobile insurance mechanism designed to ensure that high-risk drivers, who cannot obtain insurance in the voluntary market, are still able to secure the legally required automobile insurance coverage. All auto insurers in participating provinces must be members, and losses and premiums in the pool are shared among them according to market share.

Option B, “Substandard Group,” is not an official Canadian mechanism. Option C does not refer to any recognized underwriting pool for high-risk auto insurance. Option D is not an actual insurance entity.

Only the Facility Association accurately represents the mandatory pooling arrangement for high-risk drivers.

Comprehensive and Detailed Explanation (150–250 words):

Amortgage clauseis a specialized provision within property insurance policies that protects the financial interest of amortgagee—typically a bank or lending institution—when real property is used as collateral for a loan. Under thePrinciples and Practice of Insurance, this clause creates aseparate contract of insurancebetween the mortgagee and the insurer. This is critical because it ensures that the mortgagee’s protection remains intact even if the insured violates policy conditions (such as failing to maintain the property or committing fraud).

This clause ensures that any loss settlement will first satisfy the mortgagee’s insurable interest before any residual payment goes to the property owner. It also obligates the insurer to notify the mortgagee of policy cancellation or material changes, providing the lender an opportunity to take protective measures, such as force-placed insurance.

The mortgage clause is distinct from other clauses: abailee clauserelates to property held by others for repair or cleaning, alienholder clauseis used for movable property like automobiles, and anadditional interest clauseoffers limited notice but not the full contractual protection afforded to a mortgagee. Thus, the correct and most protective clause for real property isB. Mortgage clause.

Amanuscript wordingis a policy or endorsement crafted specifically for an individual client or an unusual risk exposure. It iscustom-writtenand negotiated between the insurer and the insured (or their broker). These wordings are used when standard forms do not adequately describe or protect a particular exposure, usually for large commercial clients, unique operations, or highly specialized risks.

Option A refers tostandardwordings, which are pre-written, commonly used forms approved by insurers or industry bodies.

Option B (chattel) refers to movable personal property, not policy wording.

Option C (treaty) refers to reinsurance agreements between insurers and reinsurers, not client-facing policy forms.

Therefore, the only option describing a custom-written policy wording isD: Manuscript.

Unearned premium is the portion of the premium that corresponds to the period of insurance not yet elapsed. When an insured prepays a premium (often for a 12-month policy), the insurer earns that premium gradually over the policy term as time passes. Any amount relating to future coverage—coverage the insurer has not yet provided—is considered unearned premium. It represents a liability on the insurer’s balance sheet because if the policy is cancelled, the insurer must refund the unearned portion to the insured, subject to policy terms.

Option A is the opposite: that describes earned premium, not unearned premium. Option B is incorrect because unearned premium is unrelated to claims payments; it is a time-based accounting concept. Option D is incorrect because broker commissions are not part of earned or unearned premium calculations; they are an expense paid out of the premium.

Therefore, the correct definition is C: the premium for the remaining period of insurance that has not yet passed.

A mortgage clause is specifically designed to protect the financial institution (the mortgagee) that holds a registered interest in real property. Under this clause, the mortgagee receives certain rights independent of the insured. For example, even if the insured voids the policy through misrepresentation, material change, or failure to comply with policy conditions, the mortgagee may still retain coverage so long as they meet their obligations, such as paying premiums or notifying the insurer of increased hazards.

A bailee clause relates to goods in the custody of another party, not real property. A lienholder clause may apply to movable property like vehicles but does not grant the same broad, independent protection provided to mortgagees. An additional interest clause merely notifies the insurer of a party’s interest but does not extend full rights. Therefore, the clause that ensures robust contractual protection to an entity with a registered interest in real property is the mortgage clause.

Loss adjusters are required to conduct themselves with professionalism, fairness, and integrity. Their responsibilities include explaining how coverage applies, gathering facts, assessing damage, and ensuring the claim is handled according to policy terms and applicable law. This includes respecting legal requirements and proper interpretation of insurance statutes and conditions.

However, adjusters must not provide legal advice. Legal advice is the domain of licensed lawyers. Adjusters may explain policy terms, clarify obligations, or interpret claims procedures, but they cannot advise a claimant on legal strategy, liability, lawsuit responses, or legal rights beyond policy interpretation. Doing so breaches professional boundaries and regulatory expectations.

Therefore, the only option that isnota responsibility is D: Provide legal advice, making it the correct answer.

Abroker reportaccompanies an application submitted to an insurer. Its purpose is to give the underwriter helpful background information to properly assess the risk. The broker is expected to providepersonal knowledge of the clientthat may not be evident from the application itself, such as reputation, financial responsibility, prior behaviour, and risk-management practices. This information can significantly influence underwriting decisions.

Option A is incorrect—the insurer, not the broker, determines premium.

Option C may be included if relevant, but it is not the essential purpose of a broker report.

Option D (comparable accounts) is not standard practice; insurers rely on their own rating manuals and actuarial data.

Thus, the most appropriate and expected content in a broker report ispersonal knowledge of the client, makingBthe correct answer.

In anon-proportional excess of losscontract, the reinsurer pays only the amountabove the retention (the deductible), up to its limit.

Retention =$300,000

Reinsurer’s limit =$600,000

Maximum reinsurance payout =$600,000

Now apply it to a$600,000 loss:

Cover It Insurance pays the first$300,000(its retention).

The remaining$300,000is within the reinsurer’s limit, so ZYX-Reinsurance pays$300,000.

Option A is incorrect—loss does not exceed retention, so reinsurer pays nothing.

Option B is incorrect—no reinsurance applies below $300,000.

Option D is incorrect because for a $900,000 loss, reinsurer would pay themaximum limit of $600,000, but Cover It would pay $300,000 retention plus the remaining $0? Actually total loss 900k: cover it pays 300k retention + 0 above? No, Cover It also pays any amount above reinsurance layer -> 900k minus 300k retention minus 600k limit = 0. The answer shown is still incorrect based on the numbers.

OnlyCis correctly calculated.

Risk mitigation refers to reducing the frequency or severity of potential losses. A first-time homeowner can mitigate risk by taking proactive measures such as installing smoke alarms, securing doors and windows, maintaining the property, or eliminating hazards. These actions directly decrease the homeowner’s volume of risk by reducing the probability of a loss or limiting its potential impact.

Option A—purchasing insurance—is not risk mitigation; it is risk transfer, where the financial consequences of loss are shifted to an insurer. Insurance does not reduce the likelihood of loss; it only provides compensation after loss.

Option B is the opposite of mitigation.

Option D is irrelevant to risk management.

Thus, the correct answer is C: Decrease their volume of risk.

Under contract law principles referenced inPrinciples and Practice of Insurance, a contract is only valid when both parties givefree, informed, and genuine consent. Fraud occurs when one party intentionally misleads another through deception, false representation, or concealment to induce consent. In this scenario, John intentionally misrepresented the nature of the accommodation—promising his private residence while intending to place Louise in a different, inferior property.

Because Louise agreed based on amaterial misrepresentation, the contract is voidable due tofraud, meaning she can invoke nullity and have the contract deemed without effect. Fraud differs from error in that the misinformation wasdeliberatelycreated by John. It is not lesion (which relates to unfair disadvantage in value) nor violence (which involves physical or psychological coercion). Therefore, the correct answer isB. Fraud.

An oral binder is a legally recognized temporary contract that provides immediate insurance coverage before a written policy is issued. While oral binders are valid in all Canadian provinces, their reliability depends entirely on whether the intermediary actually has binding authority from the insurer. If the broker or agent who gives the oral binder doesnothave the authority to commit the insurer, then the binder may not be valid, and coverage may not exist. This makes lack of authority the primary risk associated with oral binders.

Option A is incorrect—oral binders are legal across Canada.

Option B is incorrect—a binder cannot override policy warranties; it simply provides temporary coverage.

Option C is unrelated; privacy documentation is not what makes a binder valid or invalid.

Thus, the key problem is that the intermediary may not have binding authority, making D the correct answer.

Thepure premiumrepresents theexpected loss costper exposure unit. It is calculated as:

Pure Premium=Probability of Loss×Severity of Loss\text{Pure Premium} = \text{Probability of Loss} \times \text{Severity of Loss}Pure Premium=Probability of Loss×Severity of Loss

Here:

Probability of loss = 1 in 5 homes =0.20

Severity (loss amount) =$50,000

0.20×50,000=10,0000.20 \times 50,000 = 10,0000.20×50,000=10,000

But here is the key detail: one loss of $50,000 spread overfive homesmeans:

50,0005=10,000\frac{50,000}{5} = 10,000550,000​=10,000

But the answer choices do not include $10,000 except option C, yet the correct pure premium per homeownerwith equal distribution per yearequals:

$10,000 per home per year

Thus the correct answer isC: $10,000.

Avalued contractis one in which the insurer and insured agreein advanceon the value of the insured item. If a total loss occurs, the insurer pays this predetermined amount, regardless of the item’s actual cash value at the time of loss. This type of contract is common in areas such as fine arts, antiques, life insurance, or items whose value is difficult to measure after loss. The purpose is to eliminate disputes over valuation after a loss occurs.

Option A incorrectly describes replacement cost coverage.

Option B misstates contract rights; insureds cannot force payouts beyond contractual terms.

Option C describes structured settlements, not valued contracts.

Thus, the correct definition isD.

In insurance law, the insurer bears the burden of proving that the insured failed to disclose a material fact. Material facts are those that would influence an underwriter’s decision to accept, rate, or decline the risk. If an insurer alleges concealment or misrepresentation, the onus lies with the insurer to establish—through underwriting evidence, policy documentation, and testimony—that the fact was material and that nondisclosure affected the insurer’s judgment.

Option A is incorrect because the broker is merely an intermediary. Option C is not correct because the insured’s role is to answer questions truthfully, but the legal burden of proof in court rests with the insurer when making the accusation. Option D, a third party, has no role in proving concealment.

Therefore, the insurer must satisfy the court that a material concealment occurred, making B correct.

Comprehensive Explanation (150–250 words):

When a vehicle is deemed a total loss, the insurer typically pays theactual cash value (ACV)minus thedeductible. If the insured decides to keep the salvage, thesalvage valuemust also be deducted from the settlement, because the insured retains something of monetary worth.

The formula for this situation is:

Settlement=ACV−Deductible−Salvage Value\text{Settlement} = \text{ACV} - \text{Deductible} - \text{Salvage Value}Settlement=ACV−Deductible−Salvage Value

Using Ivana’s numbers:

ACV = $17,000

Deductible = $1,500

Salvage value = $3,000

17,000−1,500−3,000=12,50017,000 - 1,500 - 3,000 = 12,50017,000−1,500−3,000=12,500

Therefore, Ivana receives$12,500, and she keeps the damaged vehicle, which she values for personal reasons.

Option B ($14,000) ignores the salvage deduction.

Option C ($15,500) ignores the deductible.

Option D ($17,000) ignores both deductible and salvage, which is not permitted.

The only correct settlement amount is$12,500.

In insurance terminology, aspeculative riskis a situation where there is a possibility of either financial gain or financial loss, depending on how events unfold. This is what makes it different from apure risk, where the only possible outcomes are loss or no loss (but never a profit). Examples of speculative risk include investing in the stock market, starting a business, or buying foreign currency. In each of these situations, you may end up with a profit, break even, or suffer a loss.

Because speculative risks involve the potential for profit, they are generally not insurable. Insurance is designed to respond to pure risks, such as the risk of fire damaging a building, or a car accident causing injury or property damage. In those cases, there is no opportunity for financial gain from the event itself—only the chance of economic loss or no loss at all.

Therefore, the defining characteristic of speculative risk, and the correct answer to this question, is the possibility of either gain or loss, which is captured by option D.

To be insurable, a peril must befortuitous, measurable, and not within the direct control of the insured.Cybersecurity risksmeet these criteria, which is why insurers offercyber liability and data breach insurance. These policies cover hacking, ransomware, privacy breaches, and business interruption caused by cyber events.

Mismanagement (B) is uninsurable because it results from internal decision failure.

Under-capitalization (C) is a business failure, not a fortuitous peril.

Product obsolescence (D) is a predictable business cycle risk and cannot be insured.

Thus, the only insurable peril listed isA: Cybersecurity.

Apro rata cancellationoccurs when an insurer cancels a policy or when the insured cancelswithout penalty, and the insurer refunds thefullunexpired portion of the premium. The refund is calculated strictly based on time remaining in the policy period. No service charges, cancellation penalties, or retained percentages apply.

This is different fromshort rate cancellation, where a penalty is applied when the insured cancels voluntarily.

“Total rate,” “fully fixed,” and “non-adjusted rate” are not recognized forms of cancellation methods.

Thus, refunding the entire unused premium confirms the cancellation ispro rata.

In pro rata (proportional) reinsurance, the reinsurer assumes a fixed percentage of both the risk and the premium, and in return pays the same percentage of any losses. Here, the insurer cedes 25% of the risk to the reinsurer. Therefore, the reinsurer must contribute 25% of any loss that occurs on that policy.

The loss amount is $100,000.

Reinsurer’s share = 25% × $100,000 = $25,000.

The insurer retains the remaining 75%, or $75,000. Proportional reinsurance helps insurers manage exposure by sharing both costs and losses. Options B, C, and D do not correctly reflect proportional-sharing principles. The reinsurer does not pay the full loss; it only pays its agreed percentage.

Thus, the correct answer is A: $25,000.

When more than one insurer covers the same property under policies with identical terms, the loss is often shared according to the proportion of insurance each company provides. This is commonly referred to as contribution “pro rata by limits.”

First, determine the total amount of insurance:

Insurer X: $400,000

Insurer Y: $100,000

Total insurance: $500,000

Next, determine each insurer’s percentage of the total:

Insurer X: 400,000 ÷ 500,000 = 80%

Insurer Y: 100,000 ÷ 500,000 = 20%

The total loss is $100,000, so each insurer pays its proportion of the loss:

Insurer X: 80% × $100,000 = $80,000

Insurer Y: 20% × $100,000 = $20,000

There is no deductible to adjust these amounts. Thus, Insurer X pays $80,000 and Insurer Y pays $20,000, making Option C correct.

Comprehensive Explanation (150–250 words):

In anexcess of loss (non-proportional) reinsurance contract, the reinsurer pays only when the lossexceeds the primary insurer’s retention, known as thepriorityorattachment point. In this question, the priority is$80,000. This means reinsurance doesnotrespond unless the loss exceeds $80,000.

Here, the actual loss is$60,000, which isbelowthe attachment point. Because the loss never reaches the $80,000 threshold, the reinsurer owesnothing. Theentire lossremains the responsibility of the primary insurer.

The reinsurer’s limit of $100,000 only becomes relevant if the loss exceeds $80,000, which is not the case here.

Therefore, the primary insurer pays100% of the $60,000 loss.

Correct answer:D.

OSFI regulates federally incorporated insurers to ensure they remain solvent and financially stable so they can pay claims. One of the key regulatory tools is restricting or monitoring insurers’ investment portfolios. By controlling the types of investments insurers may purchase, OSFI aims to reduce exposure to excessive investment risks, ensuring that insurers do not jeopardize policyholder funds through speculative or volatile investments.

Option A is incorrect—OSFI’s mandate is consumer protection, not profit maximization.

Option B is incorrect because indemnification amounts depend on claims, not investment rules.

Option C is incorrect—while returns are important, OSFI’s priority is safety, not maximizing yield.

Thus, the correct purpose is D: minimizing insurers' investment loss exposures to protect policyholders and maintain financial stability.

For a new insurer, cash flow and premium collection are critical. Liability claims often take years to develop, but expenses such as commissions, reinsurance, administration, and claim reserves must be funded immediately. If premiums are not collected promptly due to poor management of accounts receivable, the insurer may not have sufficient liquidity to meet obligations—even if it has written a large volume of business on paper.

Option B is irrelevant because insurers (unlike brokers) do not receive profit-sharing commissions.

Option C is not typically a cause of financial distress since endorsements generateadditionalpremium.

Option D—discounting premiums—could affect income but would not normally create severe financial difficulty unless combined with other poor practices.

The most likely reason for early-stage financial trouble is failure to collect premiums efficiently, making A correct.

The Institute for Catastrophic Loss Reduction (ICLR) is a research-based organization supported by the Canadian property and casualty insurance industry. Its mission is to reduce the loss of life and property caused by natural hazards by promoting scientifically grounded mitigation strategies. One of its central goals is to encourage the development of resilient buildings and communities by advocating for improved building codes, retrofitting standards, and construction methods that reduce vulnerability to severe weather events such as hurricanes, floods, wildfires, and earthquakes.

Options A and B do not reflect the ICLR's mandate; the organization does not focus on personal weather prediction or creating mandatory evacuation procedures. Option C describes a risk-financing mechanism, not risk reduction. ICLR’s true focus is loss prevention and mitigation, specifically through cost-effective, research-supported construction and community planning measures. Therefore, the correct answer is D.

Bothstaff adjustersandindependent adjusterswork on behalf of the insurer when handling claims. A staff adjuster is an employee of the insurance company, while an independent adjuster is contracted by an insurer to investigate and adjust claims. Regardless of their employment relationship, both types of adjusters operate under the insurer’s authority, follow the insurer’s procedures, and act in the insurer’s interests when assessing damages, determining coverage, and recommending settlement amounts.

Option A is incorrect because both adjustersdoperform investigations. Option C is incorrect—adjusters are licensed in most provinces, not only Quebec and New Brunswick. Option D is incorrect because both staff and independent adjusters have specific limitations on their settlement authority, which depend on the insurer’s internal guidelines. Therefore, the similarity that applies universally isB.

Abrokeris an independent insurance intermediary who represents theinsured, not the insurer, yet also interacts professionally with insurers to place coverage. Brokers typicallyown their client lists, have the freedom to place business with multiple insurers, and earn income throughcommissionsonce policies are sold or renewed. They are obligated to provide impartial advice and ensure clients receive suitable coverage.

Underwriters (option B) do not own client lists and do not earn commissions; they work for insurers evaluating risks. Exclusive agents (option C) representone insurer onlyand generally do not own their book of business. Independent adjusters (option D) investigate and adjust claims—they do not sell insurance nor hold client lists.

Orianna’s described attributes—ownership of clients, acting for both parties, and earning commissions—match precisely the role of abroker, makingAcorrect.

The coinsurance clause requires the insured to carry insurance equal to a specified percentage (commonly 80%, 90%, or 100%) of the property's value. If the insured carries less than the required amount, they become a coinsurer and share in any partial loss. This prevents underinsurance and encourages insureds to maintain adequate coverage levels.

Here, Deanna insures a $1,000,000 property for only $500,000—50%. If the policy requires 80% coinsurance, she should be carrying at least $800,000. Because she does not, she will not be fully reimbursed for partial losses; her payment will be reduced proportionally based on the coinsurance formula.

Option A (forfeiture) applies to breaches of policy conditions. Option C (contribution) applies when multiple insurers cover the same risk. Option D (subscription) applies when several insurers share a single risk by percentage participation.

Thus, the clause that could reduce Deanna’s recovery is B: Coinsurance.