Practice Free C11 Principles and Practice of Insurance Exam Questions Answers With Explanation

Interim covers—also called binders or cover notes—are legal proof of temporary coverage. Because they function as contracts, any additional terms the insurer wishes to impose must be clearly written and communicated to the insured at the time coverage is bound. Courts consistently require that policy terms be in writing to be enforceable, especially when modifying or restricting standard coverage.

Option B is incorrect because verbal instructions can lead to disputes and are not enforceable under contract law or statutory requirements. Option C is incorrect because statutory conditions apply automatically but do not add insurer-specific terms. Option D is unrelated—interim covers exist precisely to provide immediate insurance before the policy is issued.

Therefore, if the insurer wants additional conditions or limitations to apply, they must be set down in writing as part of the interim contract, making A the correct answer.

Insurable interest exists when someone would suffer a financial loss if a person or property were damaged, lost, or deceased. Employers have a legitimate, recognized insurable interest in the lives of key employees, as their death or disability could result in financial loss—for example, reduced productivity, training costs, or loss of specialized expertise. Therefore, A represents a valid and legally recognized insurable interest.

Option B involves investment income earned by insurers—this is not an insurable interest but a financial outcome of operations. Option C reflects a business motive but not an insurable interest because an underwriter does not stand to personally lose financially if a policyholder dies or property is damaged. Option D is generally invalid unless the employee can demonstrate a direct financial dependency, which is typically not the case.

Thus, the only clear example of insurable interest is A: the employer’s interest in the life of an employee.

In contract law,considerationrefers to the exchange of something of value between parties. It is a necessary element for forming a legally binding insurance contract. In insurance, the insurer promises to indemnify the insured in exchange for thepremium—this exchange constitutes consideration.

OptionAis the only scenario demonstrating a clearbargained-for exchange. Jennifer gives up a painting of value, and Shania provides monetary payment. Even though the price is reduced, consideration still exists because each party is giving something of legal value.

Option B shows no exchange—only contemplation of future pricing.

Option C shows no contract formed, because the offer was not accepted.

Option D is a return/refund scenario, not an exchange forming a new contract.

Thus,Ais the best example of consideration.

The agency or production department within an insurance company is responsible for generating new business, managing distribution channels, working with brokers and agents, and promoting the insurer’s products. These functions align directly with sales and marketing departments found in other industries. Their goals include increasing premium volume, maintaining relationships with intermediaries, and ensuring the insurer’s products reach the marketplace effectively.

Option B is incorrect because finance and production refer to cost control and manufacturing, neither of which parallels insurance distribution. Option C does not align because administration and HR handle internal operations, not customer acquisition. Option D deals with internal systems and support functions, unrelated to the business-production role of generating and selling insurance.

Therefore, the insurer’s agency or production department corresponds to A: Sales and marketing.

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.

A company chooses provincial incorporation when it intends to operate only within that specific province. This minimizes regulatory complexity because only the provincial Superintendent of Insurance regulates its operations. If Maritime Insurance plans to conduct business exclusively in Nova Scotia, incorporation under the Nova Scotia Insurance Act is simpler, less expensive, and avoids federal-level compliance requirements.

Option A is incorrect because capitalization is required under both federal and provincial laws. Option C may create confusion about naming conflicts, but name disputes do not determine the appropriate jurisdiction of incorporation. Option D is incorrect because selling insurance nationally requires federal licensing; a provincially incorporated insurer cannot operate beyond its home province unless licensed separately in each province—an inefficient approach.

Thus, the insurer would choose Nova Scotia incorporation only if it intends to operate solely within Nova Scotia, making B correct.

Pollution exposures—especially from oil refinery operations—arehigh-severity, high-complexity risks. Standard property and liability policiestypically exclude pollution, except for sudden and accidental events. Pollution arising from new drilling methods is considered aspecialized environmental liabilityand often requirescustomized financial transfer mechanisms.

Anon-insurance loss-financing transfer agreement(also called a contractual risk transfer or financial risk transfer mechanism) allows the company to shift the financial consequences of pollution losses to another entity or through non-traditional insurance structures (e.g., environmental impairment liability contracts, captive agreements, or specialized financial instruments). This is the most appropriate and realistic way to transfer complex pollution exposures.

Option A (retain the risk) is unsafe due to catastrophic loss potential.

Option B (surety bond) guarantees performance, not pollution losses.

Option D is incorrect because standard policiesdo not coverthis exposure.

Thus the best option isC.

PIPEDAis the federal Canadian privacy legislation governing how private-sector organizations—including insurance companies, brokers, and adjusters—collect, use, and disclosepersonal informationduring commercial activities. Its full and correct name is:

Personal Information Protection and Electronic Documents Act

PIPEDA sets out requirements for informed consent, accuracy, safeguarding of data, client access rights, and limitations on secondary use of personal information. Insurance operations rely heavily on personal data, so compliance is mandatory.

Options A, B, and C are fictitious and have no connection to Canadian insurance regulation or privacy law.

Thus, the correct answer isD.

Binding authority is the authority an insurer grants to a broker or agent, allowing the intermediary to bind coverage on the insurer’s behalf before the insurer has formally reviewed the application. When an intermediary has binding authority, they can confirm that coverage is in force immediately, subject to the terms granted by the insurer. This is crucial for situations requiring quick coverage, such as real estate closings, automobile purchases, or commercial contract deadlines.

Option A is incorrect because a cover note is thedocumentissued after binding coverage—not the binding authority itself. Option B is incorrect because binding authority has nothing to do with permission to contact clients. Option D is completely unrelated, as reinsurance agreements occur between insurers, not insureds.

Therefore, the correct description of binding authority is permission granted to an intermediary to bind coverage on behalf of the insurer, which is option C.

With a guaranteed replacement cost policy, the insurer agrees to pay the full cost of replacing the damaged or destroyed property (subject to conditions), even if that amount approaches or, in some forms, exceeds the stated limit. Here, the total replacement cost of the loss is $500,000.

However, some furniture is salvageable and valued at $4,000. Since Dominika elects to keep this salvage, she is effectively retaining part of the value of the damaged property. To maintain the principle of indemnity and avoid overpayment, the insurer deducts the salvage value from the total amount they would otherwise pay.

Step-by-step:

Replacement cost of loss: $500,000

Less salvage value retained by insured: $4,000

Subtotal: $496,000

Less deductible: $1,000

Net settlement: $495,000

Therefore, Dominika will recover $495,000, making Option A correct.

Insurers must ensure they collect enough premium to cover potential losses while remaining competitive. One of the most important methods is maintaining a good spread of risk—diversifying exposures across different geographical areas, classes of business, and types of insureds. This spreads the impact of losses, reducing the chance that a single catastrophic event or concentration of similar risks will threaten the insurer’s financial stability.

Option B, specialization, increases dependence on a narrow market segment and may elevate risk volatility. Option C is unrealistic because insurers cannot rely solely on “superior risks,” nor can they guarantee such a selection. Option D—concentrating business in one location—is dangerous because natural disasters, economic downturns, or localized events could cause severe aggregated losses.

Thus, insurers most effectively manage loss volatility through A: a good spread of risk.

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.

When two insurers cover the same property, theprinciple of contributionapplies. Each insurer pays a proportion of the loss based on its share of the total insurance in force. Here:

Total insurance = $300,000 + $100,000 = $400,000

Insurer A’s share = 300,000 / 400,000 =75%

Insurer B’s share = 100,000 / 400,000 =25%

Loss = $80,000

Insurer A pays 75% × 80,000 =$60,000

Insurer B pays 25% × 80,000 =$20,000

Thus,Cis 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.

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.

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.

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.

A telephone adjuster (often called an inside adjuster) handles claims that can be resolved quickly without requiring in-person investigation. Their main role is to efficiently process a high volume of straightforward claims, such as small auto physical-damage losses, minor property losses, and simple theft claims.

Because these claims do not require field investigations, telephone adjusters focus on gathering information by phone, confirming coverage, arranging payments, and closing files promptly.

Option B is incorrect—telephone adjusters do not take instructions from staff adjusters; they operate independently within their own authority levels.

Option C is incorrect—they do not process paperwork for independent adjusters.

Option D is incorrect—they are not intermediaries; they serve the insurer directly.

The correct function is A: processing a large volume of claims.

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.

A general agent is an individual or business entity that receives broad authority from an insurer to operate on its behalf within a designated geographic territory. This authority typically includes the power to manage the insurer’s business, appoint sub-agents, oversee production, and settle certain types of claims within their delegated limits. In the traditional agency system in Canada, general agents act as intermediaries between the insurer and local agents, ensuring proper distribution of policies and adherence to underwriting rules.

This role is distinct from analysts, who do not hold managerial or appointment authority, and from wholesalers, whose function is typically limited to distributing insurance products to brokers rather than supervising an insurer’s operations. Operating agents may have administrative duties but do not hold the broad binding and claim-settlement authority that defines a general agent. Thus, the only option that correctly matches the described authority structure is General agent.

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.

Intermediaries—such as brokers and agents—play an essential role in helping consumers navigate insurance products. One of their primary functions is toidentify the client’s needs, assess exposures, and recommend suitable insurance solutions. This includes advising on appropriate limits, optional coverages, deductibles, and risk management considerations. This consultative role is fundamental to the value they provide.

Option A is incorrect because brokers representmultiple insurersbutnot all insurers; agents often represent only one. Option B is incorrect—intermediaries do not have unlimited liability; their liability relates to negligence or errors in service. Option D is incorrect—reinsurance arrangements are made between insurers and reinsurers, not individual clients. Therefore, the correct reason a policyholder uses an intermediary isC.

Whenever coverage is boundorally, the broker must follow up withwritten confirmationto both:

theinsured, to confirm the accuracy of information provided, and

theinsurer, to notify them of all disclosed underwriting details.

This written documentation protects all parties by ensuring the insurer is fully aware of material facts—such as the presence of a swimming pool—and prevents disputes like this one.

Option A is unnecessary and not industry practice.

Option C refers to a notice after issuance, but the dispute occurred at binding, so this is too late.

Option D is incorrect; the insurer does not verify every detail directly with insureds—this is the broker’s responsibility.

Thus, the broker should have completed written confirmation, makingBthe correct answer.

Spacecraft liability is anextremely specialized, high-severity, low-frequency riskrequiring underwriting expertise not found in standard insurers. TheLloyd’s marketis internationally known for insuring unique, complex, and unusual risks—from satellites and spacecraft to aviation and marine exposures. Lloyd’s operates as a marketplace of syndicates, allowing multiple underwriters to participate in a single risk, making it ideal for large and unusual exposures.

A health/life insurer (B) is irrelevant; they do not underwrite commercial liability exposures.

A captive insurer (C) could theoretically insure such a risk but requires the client tocreate and fundtheir own insurance company—impractical unless they are very large and sophisticated.

Government insurers (D) generally insure auto, workers' comp, or agricultural risks—not spacecraft.

Thus the best recommendation isA: Lloyd’s Insurance Market.

Statutory conditions exist in property insurance legislation across Canadian provinces to ensure that insurers and insureds operate withclarity, transparency, and fairness. These conditions outline important duties such as:

Requirements for notice of loss

Duties after a loss

Conditions for voiding coverage

Fraud provisions

Replacement and salvage rules

Their main purpose is toclarify the intent of the policy and give certainty to the terms and obligationsof both parties. Because statutory conditions are mandated by law, they ensure uniform standards across all insurers and prevent inconsistent or unclear policy interpretations.

Option B is only a small subset of what statutory conditions address.

Option C is incorrect—privacy legislation like PIPEDA is separate from insurance statutory conditions.

Option D is incorrect; statutory conditions do not alter legal burden-of-proof standards.

Thus, the best answer isA.