BCP - Basic Insurance Concepts and Principles Singapore Fundamental Principles of Insurance Questions and Answers — Questions and Answers
Question 1: Under Singapore's Insurance Act (Cap. 142), which of the following parties is presumed to have an insurable interest in the life of the person being insured?
- A business partner in a joint venture.
- A creditor in the life of their debtor.
- The insured person's child who is 25 years old and financially independent.
- The insured person's spouse. (Correct answer)
Correct answer: The insured person's spouse.
Section 57(1)(b) of the Singapore Insurance Act (Cap. 142) explicitly states that a person is presumed to have an insurable interest in the life of their spouse. While creditors and business partners may be able to prove an insurable interest, it is not automatically presumed by the Act. The presumption for a child only applies if they are under 18 years of age or are a dependant.
Question 2: An applicant for a fire insurance policy in Singapore failed to disclose that the premises were used for storing highly flammable chemicals, a fact that would have influenced the insurer's decision to accept the risk. This non-disclosure is a breach of which fundamental insurance principle?
- Indemnity
- Utmost Good Faith (Uberrima Fides) (Correct answer)
- Proximate Cause
- Subrogation
Correct answer: Utmost Good Faith (Uberrima Fides)
The principle of Utmost Good Faith, or Uberrima Fides, requires both the insured and the insurer to be transparent and disclose all material facts. In Singapore, this common law principle is strictly applied. The storage of flammable chemicals is a material fact that affects the risk, and its non-disclosure is a clear breach of this duty, which could allow the insurer to void the policy.
Question 3: Mr. Tan's provision shop was damaged by a fire which was the insured peril. However, subsequent water damage was caused by firefighters extinguishing the fire. According to the principle of Proximate Cause as applied in Singapore, what is the insurer's likely liability?
- The insurer is only liable for the fire damage, as water damage is a separate, uninsured peril.
- The insurer is liable for both the fire and water damage as the fire was the dominant and effective cause of the entire loss. (Correct answer)
- The insurer's liability is limited to 50% of the water damage as it was an indirect consequence.
- The insurer is not liable for any damage because there were two concurrent causes.
Correct answer: The insurer is liable for both the fire and water damage as the fire was the dominant and effective cause of the entire loss.
The principle of Proximate Cause states that the insurer is liable for losses where the insured peril is the dominant and effective cause, even if it is not the last event in time. In this scenario, the fire is the proximate cause of the loss. The water damage from firefighting is a direct and foreseeable consequence of the fire, creating an unbroken chain of causation. Therefore, the insurer is liable for both types of damage.
Question 4: A vehicle insured for S$80,000 is declared a total loss in an accident. The pre-accident market value was S$75,000 and the salvage value is S$5,000. Based on the principle of Indemnity, what is the maximum amount the insured is entitled to receive from the insurer?
- S$80,000, which is the sum insured.
- S$70,000, which is the market value less the salvage value.
- S$75,000, to be restored to their pre-loss financial position. (Correct answer)
- S$85,000, which includes the sum insured and the salvage value.
Correct answer: S$75,000, to be restored to their pre-loss financial position.
The principle of Indemnity aims to restore the insured to the same financial position they were in immediately before the loss, but not to provide a profit. Therefore, the compensation is based on the actual loss suffered, which is the market value of the vehicle just before the accident. The sum insured (S$80,000) is the maximum limit of liability, not the amount automatically paid. The insurer is entitled to the salvage after paying the claim.
Question 5: After an insurer pays for the damages to its policyholder's car caused by a negligent third party, the insurer attempts to recover the costs from that third party. This action is an exercise of which insurance principle?
- Contribution
- Insurable Interest
- Indemnity
- Subrogation (Correct answer)
Correct answer: Subrogation
Subrogation is the insurer's right to 'step into the shoes' of the insured after paying a claim, allowing the insurer to pursue the rights and remedies the insured has against a responsible third party. This prevents the insured from being compensated twice (by the insurer and the third party) and ensures the at-fault party is held responsible.
Question 6: A warehouse in Singapore is insured against fire with Company A for S$500,000 and with Company B for S$1,000,000 for the same risk. A fire causes a loss of S$300,000. Under the principle of Contribution, how much is Company B liable to pay?
- S$150,000
- S$300,000, with the right to recover from Company A.
- S$200,000 (Correct answer)
- S$100,000
Correct answer: S$200,000
The principle of Contribution applies when there is double insurance. Each insurer pays a rateable proportion of the loss. The total sum insured is S$1,500,000 (S$500,000 + S$1,000,000). Company B's proportion is (S$1,000,000 / S$1,500,000) or 2/3. Therefore, Company B is liable for 2/3 of the S$300,000 loss, which is S$200,000.
BCP - Basic Insurance Concepts and Principles Singapore Fundamental Principles of Insurance Questions and Answers
Under Singapore's Insurance Act (Cap. 142), which of the following parties is presumed to have an insurable interest in the life of the person being insured?