Chapter Based Questions

Question 1

Chapter 1:
What are the four main ways for an insured to control exposure to the risks they face?

Answer 1

Avoid the risk, reduce it, transfer it and manage retained risk.

Question 2

Chapter 1:
What is latency?

Answer 2

The delay between the start of a chain of events and its end, or the delay between the cause of liability and the claim being made.

Question 3

Chapter 1:
What is risk management?

Answer 3

Risk management is the identification, analysis and economic control of those risks that can threaten the assets or earning capacity of an enterprise.

Question 4

Chapter 1:
Why does the underwriter want a detailed business description?

Answer 4

A detailed business description is required because only claims arising out of the business as described will be the subject of indemnity, and underwriters must be happy with the exposures as presented.

Question 5

Chapter 1:
Why is the underwriter interested in the historical claims record?

Answer 5

The underwriter is interested in the historical claims record because the assessment of trends over time forms the main basis for underwriting the risk.

Question 6

Chapter 1:
When are claims triangulations most useful for underwriters?

Answer 6

Claims triangulations are best suited to whole account analysis and for the largest cases where a high volume of observations of a homogeneous nature means that reliable conclusions can be drawn and accurate trends identified.

Question 7

Chapter 1:
What is the purpose of a loss control survey?

Answer 7

Loss control surveys have two main purposes: firstly to evaluate the physical risk and inform the underwriter of any unusual features, and secondly to inform the underwriter of the insured’s attitude to loss control measures.

Question 8

Chapter 2:
What trigger events are used in liability policies?

Answer 8

The trigger events used in liability policies are:
causation, occurrence, occurrence reported, manifestation, losses discovered and claims made.

Question 9

Chapter 2:
What are the variants by which costs cover is provided?

Answer 9

Costs cover is provided either as:
* costs in addition to the limits; or
* costs within the limit of indemnity.

Question 10

Chapter 2:
What are the principal conditions that you would expect to find in a liability policy?

Answer 10

The principal conditions include:
* reasonable care;
* reporting circumstances that could give rise to liability;
* claims handling;
* the insurer’s right to pay the limit and relinquish control of the claim;
* adjustment of premium; and
* arbitration/disputes

Question 11

Chapter 2:
What four elements are considered when assessing the claims experience?

Answer 11

Frequency, severity, latency and catastrophe are the four elements considered when assessing the claims experience.

Question 12

Chapter 2:
What mechanisms does the liability market use to provide for limits of indemnity that are too large for one insurer?

Answer 12

The options available when the limit of indemnity is too large for one insurer are coinsurance, reinsurance and a layered programme

Question 13

Chapter 2:
What is a layered programme?

Answer 13

A layered programme is one in which one insurer takes the primary layer and then different insurers take the cover for layers in excess of, or over, the primary insurance

Question 14

Chapter 2:
Why do insurers use excesses and/or co-insurance?

Answer 14

Insurers use excesses and co-insurance to make the insured participate in the risk and to encourage better risk management by them.

Question 15

Chapter 3:
What is forum shopping?

Answer 15

Forum shopping is the selection by the claimant of a jurisdiction for their suit that is more advantageous for them than the natural or expected jurisdiction for their action

Question 16

Chapter 3:
What are the causes behind the high awards of damages in the USA?

Answer 16

Amounts of awards in the USA are influenced by the following factors:
* The state in which the action is brought.
* heard before a jury, which tends to increase awards.
* The contingent fee system, whereby the lawyer representing a successful litigant obtains a percentage of the award, encouraging demands for higher damages.
* Medical costs are very high in the USA and in the absence of a federal social security system a claim for medical expenses arises in every case of injury.
* Punitive damages may be awarded against a defendant, generally for substantial sums, and may exceed many times the actual general damages awarded.
* Many states have workmen’s compensation laws which limit the liability of employers to employees, with the result that the manufacturer incurs a liability which would usually fall on the employer in the other countries.
* Successful defendants in the USA, unlike their counterparts in Europe, are unable to recover their costs.
* Insurers are held to owe an onerous duty towards policyholders in claim settlements and courts will readily make an award against an insurer whose conduct of a claim is held to have resulted in damages against the policyholder in excess of the indemnity limit (e.g. bad faith claims).

Question 17

Chapter 3:
What is a class action?

Answer 17

A class action is one brought by a group of claimants, who all have the same cause of action and have banded together. They establish the principle of liability and then the remainder of the claimants only need to negotiate quantum, rather than having to prove causation or liability on each individual case.

Question 18

Chapter 3:
What is the difference between admitted and non-admitted policies?

Answer 18

An admitted policy is an insurance policy which is issued by an insurance company licensed to carry business in the country where the insured or the risk is domiciled. A non-admitted policy is an insurance policy which is issued by an insurance company in
a country in which it is not licensed to carry out business, or in a country outside of the risk domicile

Question 19

Chapter 3:
What is a DIC/DIL cover?

Answer 19

DIC/DIL cover is a policy or extension to a policy that operates when the cover offered by such a policy is wider or its limit of indemnity is higher than a subordinate policy.

Question 20

Chapter 3:
What is an umbrella policy?

Answer 20

An umbrella policy is a multi-class liability policy that provides top-up cover over scheduled underlying policies and stand-alone cover where no underlying policy is
in force.

Question 21

Chapter 3:
List five common exclusions under a reverse DIC clause.

Answer 21

Any five from the following:
* Coverage trigger.
* Defence costs or legal costs.
* Pure financial loss.
* Punitive damages.
* Cross liability.
* Product recall and product guarantee.
* Damage to property in care custody and control.
* Environmental damages.
* Aviation products and activities.
* Employment related practices.
* Nuclear, aviation, watercraft, automobile and offshore risks.
* Compulsory insurance.
* Employers’ liability/worker’s compensation.

Question 22

Chapter 4:
What four potential changes over the latency period should an employers’ liability underwriter try to take into account when calculating a premium?

Answer 22

The employers’ liability underwriter should try to take into account changes in:
* the law and social attitudes;
* scientific and medical knowledge;
* industry/trade ‘best practice’; and
* economic factors, e.g. inflation and investment returns.

Question 23

Chapter 4:
Why is employers’ liability insurance mandatory?

Answer 23

Employers’ liability insurance is mandatory because, in the absence of insurance, many small employers could go bankrupt or be wound up when required to pay out large sums as compensation following an injury to an employee. An employee claiming compensation would rank only as an ordinary creditor against a bankrupt uninsured employer and thus might receive only a small part of their entitlement.

Question 24

Chapter 4:
What are the three categories of employee for whom employers’ liability insurance is compulsory?

Answer 24

Employers’ liability insurance is compulsory in respect of an employee who:
* is ordinarily resident in the UK;
* is not ordinarily resident in the UK but who has been employed on an offshore installation for a continuous period of not less than seven days; or
* though not ordinarily resident in Great Britain, is present in Great Britain in the course of employment for a continuous period of not less than 14 days.

Question 25

Chapter 4:
What are the four main duties imposed on employers by UK safety legislation?

Answer 25

UK safety legislation imposes on employers the duty to:
* identify all potential hazards to health;
* evaluate them;
* eliminate them wherever possible; and
* devise work practices that minimise those hazards that cannot be eliminated.

Question 26

Chapter 4:
What are the three main options open to the HSC/HSE to supplement existing arrangements?

Answer 26

The HSC/HSE can supplement existing arrangements through issuing:
* regulations;
* approved codes of practice (ACOPs); and
* guidance notes.

Question 27

Chapter 4:
What are the main elements of an employer’s duty of care?

Answer 27

The main elements of an employer’s duty of care include:
* the duty to employ competent employees;
* the duty to provide and/or maintain:
– a safe place of work,
– safe and suitable plant,
– a safe system of work; and
* compliance with statutory duty

Question 28

Chapter 4:
What are the five main steps involved in carrying out a health and safety risk assessment?

Answer 28

• Step 1: Look for hazards
• Step 2: Decide who might be harmed,
• Step 3: Evaluate the risks and decide whether the existing precautions are adequate
• Step 4: Record the findings: all records should be kept for 40 years or the statutory period, whichever is the longer.
• Step 5: Update the assessment and findings on a regular basis,

Question 29

Chapter 4:
What are the three main forms of rehabilitation?

Answer 29

The three main forms of rehabilitation are:
* medical;
* vocational; or
* qualitative.

Question 30

Chapter 5:
What is usually included in an EL schedule?

Answer 30

An EL policy schedule usually includes details of the insurer, the insured, the business, the period of insurance, the premium and adjustment provisions

Question 31

Chapter 5:
What is the limit of indemnity?

Answer 31

The limit of indemnity is the maximum amount of the liability for which the insurer will indemnify the insured for the damages and costs arising in respect of any one claim against the insured or a series of claims against the insured arising out of any one
occurrence. The amount the insurer will pay will not exceed the limit of indemnity shown in the schedule.

Question 32

Chapter 5:
What is covered under an extension for court attendance costs?

Answer 32

An extension for court attendance costs provides cover for directors, partners or employees if they have to attend court as witnesses at the request of insurers in connection with a claim. Compensation will be paid at a rate per day

Question 33

Chapter 5:
Why is it difficult for insurers to impose policy exclusions? What can they do as an alternative?

Answer 33

The Employers’ Liability (Compulsory Insurance) Act 1969 does not allow insurers to use policy conditions to avoid handling claims. Instead, they can apply effective underwriting conditions, e.g. by imposing exclusions regarding what sort of work the policy will and will not cover.

Question 34

Chapter 5:
Why is injury to an employee that is sustained while travelling in a vehicle excluded under an employers’ liability policy?

Answer 34

Cover for an employee injured while travelling in a vehicle is excluded because it is covered under the insured’s motor policy, as per the Motor Vehicles (Compulsory Insurance) Regulations 1992.

Question 35

Chapter 5:
What is silicosis?

Answer 35

Silicosis is a disease that results from the inhalation of silica sand in mines and quarries.

Question 36

Chapter 5:
What are the key health problems that can arise from operational activities in the workplace?

Answer 36

The health issues caused by operational activities in the workplace include work-related musculoskeletal disorder, hand arm vibration syndrome (HAVS), noise-induced hearing loss and stress.

Question 37

Chapter 5:
What is the advantage of rating on wages?

Answer 37

The advantage of rating on wages is that premiums in the long term automatically keep roughly in line with the inflationary rise in awards. Consequently, it is the most accurate means of rating the real exposure.

Question 38

Chapter 6:
Why is there an erosion of Crown and Government immunities?

Answer 38

Crown and Government immunities are being eroded because many governments, following privatisation, have passed on areas of activity into the public sector.
Examples being public utilities, the rail network and care homes for the elderly.

Question 39

Chapter 6:
Which Act affecting liability to third parties included amendments to the Health and Safety at Work Act etc.1974 and what were the amendments?

Answer 39

Consumer Protection Act 1987 amended the Health and Safety at Work etc. Act. The
amendments were:
* the duties were now to include all substances and fairground equipment;
* safety information had to be available and kept up to date;
* the legislation covers not only dealing with substances but also when an article is
being set, used, cleaned or maintained by a person at work; and
* a prosecution under the 1974 Act may be used as evidence in a civil action.

Question 40

Chapter 6:
Who is most likely to be affected with serious implications following the Environment Act 1995?

Answer 40

The implications of the Environment Act 1995 are most like to fall on:
* owners of land;
* banks and lending institutions;
* former owners and operators of sites; and
* local authorities involved in administering the act.

Question 41

Chapter 6:
What are the key principles of the EU Liability for Defective Products Rights Directive 1985? Which Act was the UK’s response?

Answer 41

The key principles of the EU Liability for Defective Products Rights Directive are:
* strict liability:
* liability linked to a cause;
* liability limited in time;
* legal liability disclaimer;
* relative liability/knowledge; and
* joint/several liability.

Question 42

Chapter 6:
Why are tour operators not just an office risk and what additional liabilities have been imposed?

Answer 42

Tour operators are now legally liable for the proper execution of all parts of the holiday package, even where independent subcontractors are used. This includes liability for injury or damage to property.

Question 43

Chapter 6:
Why is it important to have a clear and precise business description on the proposal form?

Answer 43

A clear and precise business description allows the underwriter to understand the risk presented and establish what additional questions may be required, in order to appreciate the complexity of the risk.

Question 44

Chapter 6:
Apart from warehouse people, removers and storage depots, and pawnbrokers, who else may have third party property within their care, custody or control?

Answer 44

Third party property may be controlled by:
* estate and letting agents;
* auctioneers and valuers;
* jewellery or other shops involved in repairs; and
* hirers of halls or other venues.

Question 45

Chapter 6:
What are the various rating bases for public liability insurance?

Answer 45

The rating basis for public liability insurance are:
* turnover;
* wage roll;
* number of beds;
* number of pupils/students;
* seating capacity; and
* square footage.

Question 46

Chapter 7:
Why does the operative clause of a public liability policy refer to ‘accidental’?

Answer 46

The operative clause of a public liability policy refers to ‘accidental’ because its intention is to cover only unexpected events; it is not intended to cover inevitable events or gradually operating causes.

Question 47

Chapter 7:
To what extent does a public liability policy cover legal liability for damage to property?

Answer 47

A public liability policy covers legal liability for accidental loss of or damage to material property. It is only intended to cover physical or material property. There is no cover for indirect economic loss (which does not arise from physical damage) or cover for
intangibles such as goodwill, copyrights, trademarks and design rights

Question 48

Chapter 7:
What is the difference between occurrence and claims made wordings?

Answer 48

With occurrence wordings, the accident or event causing injury or damage must occur during the period of insurance. With a claims made wording, the date of the negligent act is irrelevant, the claim must be made on the insured during the period of insurance.

Question 49

Chapter 7:
What is covered under a financial loss extension to a standard general or contractors’ liability policy?

Answer 49

The financial loss extension covers accidental financial loss that is not occasioned by physical loss or damage to material property.

Question 50

Chapter 7:
What are the general components of a public and products liability policy?

Answer 50

The general components of a public and products liability policy are:
* operative clause;
* disputes clause;
* exclusions;
* conditions;
* extensions and
* definitions

Question 51

Chapter 7:
What is the difference between:
a. ‘indemnify the insured’; and
b. ‘pay on behalf’?

Answer 51

a. ‘Indemnify the insured’ means that once liability has been established under the policy the insurer will pay the insured the compensation agreed to discharge their
liability to a third party.

b. ‘Pay on behalf’ is usually a US form. Here the insurer will offer a defence for liability before an indemnity is confirmed under the policy. If on subsequent investigation they are found liable, then the insurer pays direct to the third party.

Question 52

Chapter 7:
What exclusions to a public and products liability policy are made because they are more properly covered by a more specific policy?

Answer 52

Exclusions made because they are more properly covered elsewhere are:
* injury to employees;
* ownership, possession or use of motor vehicles, aircraft or watercraft;
* advice given for a fee;
* damage to the property in the insured’s care, custody or control; and
* aircraft products;
* offshore activities;
* product recall; and
* directors’ and officers’ liability.

Question 53

Chapter 7:
Under English law, is there liability in negligence where there is no physical damage?

Answer 53

No.

Question 54

Chapter 7:
For what does the advertising injury extension provide an indemnity?

Answer 54

Subject to certain exclusions, the advertising injury extension provides for injury committed in the course of the insured advertising their goods, products or services. This injury is by either oral or written publication or the misappropriation of advertising
ideas or style of doing business or violation of a person’s right of privacy.

Question 55

Chapter 8:
What is the definition of ‘sudden and accidental’ pollution cover as provided by a third party liability policy?

Answer 55

‘Sudden and accidental’ pollution is pollution that arises from a sudden, identifiable, unintended and unexpected incident, which takes place in its entirety at a specific time and place during the period of insurance

Question 56

Chapter 8:
What is the difference between first and third party cover under a cyber liability policy?

Answer 56

First party cover represents damage to the insured’s website from an intentional virus attack, which causes the network or computer programs and any data thereupon to be damaged.

Third party cover provides cover for errors and omissions, infringement of intellectual
property rights, defamation, right of privacy and transmission of a virus.

Question 57

Chapter 8:
Will an insurer usually allow an insured to declare on the packaging of their products or in their advertising material that they buy product recall insurance?

Answer 57

A specific policy condition will normally prohibit the disclosure of the insurance’s existence in any advertising material or other information. The likelihood of a recall happening increases if (business) customers are aware that there is a policy in place
to cover third party recalls.

Question 58

Chapter 8:
Which is the most common trigger on a product guarantee policy?

Answer 58

Claims made.

Question 59

Chapter 8:
Is extended warranty a liability policy?

Answer 59

No.

Question 60

Chapter 8:
Which are the three main aspects of uncertainty in relation to emerging risks?

Answer 60

Adverse health effect, size of exposure, legal developments.

Question 61

Chapter 8:
Why would an insurer not usually be prepared to insure liability arising out of climate change liability?

Answer 61

The following are reasons why an insurer would not be prepared to insure liability
arising out of climate change:
* Climate protection and the question of who should pay for the cost of climate change are matters for politicians, not for compensation cases in civil courts. Climate change is a ‘fundamental risk’ which is by definition the responsibility of
society as a whole.
* High transaction costs makes it inefficient in economic terms to have such matters resolved by civil jurisdiction.
* If everyone is partially responsible, an equal balance provided by the community of insured cannot be realised, so a fundamental principle of insurance cannot be applied.
* Lack of unlawfulness in the activities performed by many industries as well as a lack in the evidence proving causality of individual losses.
* An incalculable risk is an uninsurable risk.

Question 62

Chapter 9:
What is a shadow director?

Answer 62

A shadow director is defined in the Companies Act 1985 as ‘a person in accordance with whose direction or instruction the directors are accustomed to act’ but ‘a person is not deemed to be a shadow director by reason only that the directors act on advice
given by him in a professional capacity’

Question 63

Chapter 9:
List five exclusions which are specific to a D&O policy.

Answer 63

Any five from the following:
* ‘improper personal gain’ and ‘fraud and dishonesty’;
* prior notifications;
* prior and pending litigation;
* severability clause;
* insured v. insured;
* pension fund trustees;
* pollution;
* outside directorships (need to be specifically agreed);
* bodily injury or damage to tangible property;
* computer date recognition; and
* jurisdiction clause

Question 64

Chapter 9:
Why is it more difficult to obtain D&O cover for a new company and what additional information is likely to be required by insurers?

Answer 64

It is more difficult to obtain D&O cover for a new company because there is no track record (audited accounts) showing how a company has performed/been managed in the past. The new company will need to provide copies of the business plans and further details of the background and previous experience of the directors concerned.

Question 65

Chapter 9:
What is the effect on a director of the Insolvency Act 1986?

Answer 65

The Insolvency Act 1986 permits the liquidator of an insolvent company to seek a personal contribution from any director who knew or ought to have known there was no reasonable prospect that the company would avoid going into insolvent liquidation,
and who failed to take reasonable steps to protect the company’s creditors. The director’s contribution will be towards the deficiency of assets in the liquidation.

Question 66

Chapter 9:
Give one reason why an insurer would not be prepared to implement the discovery clause extension in the policy wording.

Answer 66

One of the following two reasons:
* the insured is in the process of being taken over; or
* the insured has arranged D&O cover with an alternative supplier

Question 67

Chapter 10:
Why do insurers ask for information about the date when qualifications were obtained?

Answer 67

Examination success demonstrates the professional’s knowledge of the theory of their subject at a certain date. Insurers are also interested in the extent of the actual professional experience since qualification. (Many professional bodies now have continuing professional development (CPD) requirements to ensure that members keep their knowledge up to date.)

Question 68

Chapter 10:
What renewal procedure has to be followed and why?

Answer 68

At renewal, the insured will be asked to give details of any circumstances that are likely to give rise to a claim. This is because the policy is on a claims made basis and so it is important that insurers are aware of all potential claims.

Question 69

Chapter 10:
What level of skill is required of a professional person as defined in Bolam v. Friern Hospital Management Committee (1957)?

Answer 69

A professional person must exercise the ordinary skill of an ordinary competent person exercising that particular art

Question 70

Chapter 10:
‘Hedley Byrne is the classic case affecting professional indemnity.’ Why is this so?

Answer 70

The case of Hedley Byrne means that a professional person cannot escape liability for the consequences of their negligent advice to third parties simply because there is no contractual or fiduciary relationship. Where it is clear that they are being trusted or that
their skill or judgment is being relied on, they must exercise such care as the circumstances require.

Question 71

Chapter 10:
Why is PI cover on a claims made basis?

Answer 71

PI cover is on a claims made basis because insurers wish to control their exposure to the long-tail risk inherent in PI business.

Question 72

Chapter 10:
How are defence costs usually treated under a PI policy?

Answer 72

Defence costs are usually included within the limit of liability and are not paid in addition. However, for some professions where a minimum limit is required for PI by their regulatory body defence costs are in addition, e.g. solicitors.

Question 73

Chapter 10:
Why do PI policies contain a KC clause?

Answer 73

A professional person will not want their name associated with an action for professional negligence and are likely to do all they can to meet the wishes of a claimant in order to keep the case out of court. Therefore, there can sometimes be a conflict of interest between the insured – who wants to settle a claim – and their insurers – who believe that the case should be contested. The KC clause helps to
resolve this conflict.