CHAPTER 5

UNDERWRITING PRACTICES

1. What is underwriting, and what are its primary objectives?

- Underwriting refers to the principles and practices insurers use to conduct their business soundly.
Its objectives include generating premium income, expanding the insurer's organization, maintaining
quality through proper risk selection, and controlling claims processing.

2. What is the significance of the operative or insuring clause in an insurance policy?

- The operative clause outlines the perils covered under the policy and the circumstances in which
the insurer becomes liable for payment to the insured. It also specifies exclusions and conditions,
setting the essence of the contract.

3. What are express conditions in an insurance policy?

- Express conditions are those explicitly printed or endorsed on the policy. They regulate the
contract's operation and include obligations for both the insurer and the insured, such as notification
of loss, submission of claims, and compliance with terms.

4. How do specified perils and all risks insurance policies differ?

- Specified perils policies list specific perils covered, while all risks policies cover any risks not
explicitly excluded. Both types include exclusions, but all risks policies typically offer broader
coverage.

5. What are some reasons for exclusions in insurance policies?

- Exclusions serve various purposes, including limiting coverage to typical risks, excluding catastrophic
losses, defining coverage scope, avoiding duplication, managing uninsurable risks, and protecting
against intentional or inevitable losses.

6. What is the purpose of a deductible or excess in insurance policies?

- Deductibles or excesses help mitigate small claims, reduce administrative costs, lessen the impact
of larger losses, and encourage risk improvement. They may also be offered with discounts in
premiums.

7. How do "franchise" and "excess" clauses differ in insurance policies?

- Franchise clauses are rare and originate from marine insurance, while excess clauses are more
common. Franchise clauses require the full loss amount to exceed a limit before payment, whereas
excess clauses pay only the portion exceeding the limit.

8. What are implied conditions in insurance contracts?

- Implied conditions apply to all contracts, regardless of being specifically mentioned in the policy.
They include requirements such as insurable interest, existence of the subject matter, adequate
description, and good faith.

9. How do insurance policies handle fraudulent claims?

- Insurance policies typically forfeit benefits if claims are found to be fraudulent or supported by false
declarations. Insurers have the right to investigate claims and withhold payments if fraud is detected.

10. What is the purpose of the "limitation" condition in insurance policies?

- The limitation condition limits the insurer's liability for a loss to a specific timeframe, typically
twelve months from the date of loss. It protects insurers from prolonged claim processing and
encourages timely resolution.
11. How does the "right of entry" condition benefit insurers?
- The "right of entry" condition allows insurers to enter premises where a loss occurred, take
possession of property, and assess damage. It helps insurers determine the cause and extent of loss,
protect salvage, and minimize further damage.

12. Why are separate covers provided for different items of property in insurance policies?
- Separate covers ensure each item of property is individually insured, preventing underinsurance
and ensuring fair premium contributions based on each item's value.

13. What is the purpose of the contribution condition in insurance policies?

- The contribution condition ensures fair distribution of liability among multiple insurers covering the
same property. It specifies that each insurer pays a rateable proportion of the loss based on their
policy's sum insured.

14. How does the subrogation condition benefit insurers?

- The subrogation condition allows insurers to recover costs from third parties responsible for the
loss, transferring the insured's rights and remedies to the insurer. This helps insurers recover their
expenses and reduce losses.

15. What legal implications do conditions in insurance policies have?

- Conditions in insurance policies have legal sanction and regulate the contract's operation. Breaching
these conditions can affect the insurer's liability, even if there's no direct causal connection between
the breach and the loss.
16. What are the primary objectives of underwriting practices in insurance?
- The primary objectives include producing a large volume of premium income, expanding the
insurer's organization, maintaining quality through proper risk selection, and controlling claims
processing.

17. What is the significance of the operative or insuring clause in an insurance policy?
- The operative clause outlines the perils covered under the policy and the circumstances in which
the insurer becomes liable for payment to the insured. It also specifies exclusions and conditions,
setting the essence of the contract.

18. How do specified perils and all risks insurance policies differ?
- Specified perils policies list specific perils covered, while all risks policies cover any risks not
explicitly excluded. Both types include exclusions, but all risks policies typically offer broader
coverage.

19. What are some reasons for exclusions in insurance policies?

- Exclusions serve various purposes, including limiting coverage to typical risks, excluding catastrophic
losses, defining coverage scope, avoiding duplication, managing uninsurable risks, and protecting
against intentional or inevitable losses.

20. What is the purpose of a deductible or excess in insurance policies?

- Deductibles or excesses help mitigate small claims, reduce administrative costs, lessen the impact
of larger losses, and encourage risk improvement. They may also be offered with discounts in
premiums.
Sure, here are 20 important questions along with their answers based on the provided text:

1. What is the purpose of the arbitration condition in insurance policies?

 Answer: The purpose of the arbitration condition is to resolve disputes regarding the quantum to
be paid under the policy through arbitration, independently of other questions.

2. How does the arbitration procedure differ from litigation in insurance disputes?
Answer: The arbitration procedure is less expensive and private compared to litigation, which helps
avoid undue publicity for insurers.

3. What is the significance of express conditions in insurance policies?

Answer: Express conditions regulate the operation of the insurance contract, ensuring clarity and
setting expectations for both parties.

4. Define "condition precedent to liability" in insurance terminology.

Answer: A condition precedent to liability is a requirement that must be fulfilled by the insured to
recover a particular claim, even though the policy remains valid.

5. Give an example of a condition subsequent to the contract in insurance.

Answer: An example of a condition subsequent is when the policy ceases if there is a material
alteration in the risk after the contract has come into force.

6. How are warranties different from conditions in insurance policies?

Answer: Warranties are specific promises made by the insured regarding the truth or fulfillment of
certain conditions, and they must be strictly complied with, similar to conditions.

7. Explain the concept of "implied warranties" in marine insurance.

Answer: Implied warranties are not explicitly stated in the policy but are automatically included in
the contract, such as the seaworthiness of the vessel or the lawfulness of the adventure insured.

8. What is the purpose of the Escalation Clause in fire insurance policies?

Answer: The Escalation Clause allows for automatic regular increases in the sum insured
throughout the policy period, providing coverage for inflation and increasing replacement costs.

9. How does the Pair and Set Clause limit the insurer's liability in marine cargo insurance?
Answer: The Pair and Set Clause limits the insurer's liability to the insured value of the lost or
damaged part of a pair or set, regardless of any special value they may have as part of the set.

10. What is the significance of the Cutting Clause in insurance policies covering pipes or similar items
of length?
Answer: The Cutting Clause limits the insurer's liability to the insured value of the damaged part
that needs to be cut off, reducing the insurer's obligation to cover the entire length of the damaged
item.

11. How does the Label Clause affect insurance coverage for tinned or bottled goods?
Answer: The Label Clause excludes coverage for damage to labels on tinned or bottled goods
unless the goods themselves are damaged at the same time, limiting the scope of the insurer's
liability.

12. Explain the purpose of the Air Freight clause in engineering insurance policies.
Answer: The Air Freight clause indemnifies the insured for air freight costs incurred in connection
with indemnifiable losses under the policy, providing additional coverage for transportation
expenses.
13. What is the legal significance of a warranty in insurance law?
Answer: A warranty in insurance law is a condition precedent to the contract that must be strictly
and literally complied with, and a breach of warranty allows the insurer to avoid liability from the
date of the breach.

14. How do representations differ from warranties in insurance contracts?

Answer: Representations are statements made by the insured before or at the time of concluding
the contract, which need to be substantially true and made in good faith, while warranties are
specific promises that must be strictly complied with.

15. What is the effect of the Agreed Bank Clause in insurance policies?
Answer: The Agreed Bank Clause designates the bank as the recipient of claim payments,
simplifying the claims process, and protects the bank's interest in cases of breach or alteration of the
insured property.

16. Give an example of an implied warranty in marine insurance.

Answer: An example of an implied warranty in marine insurance is the warranty of seaworthiness,
which implies that the vessel must be reasonably fit to encounter the ordinary perils of the sea at the
commencement of the voyage.

17. How does the Temporary Removal Clause provide coverage in fire insurance policies?
Answer: The Temporary Removal Clause extends coverage to stocks temporarily removed to other
premises for specific purposes, such as fabrication or processing, ensuring continuity of coverage for
the insured property.

18. What is the purpose of the Designation of Property Clause in insurance policies?
Answer: The Designation of Property Clause accepts the insured's designation of property as
stated in their books for the purpose of determining coverage, reducing the potential for disputes
over the classification of insured property.

19. Explain the significance of the Institute Replacement Clause in engineering insurance policies.
Answer: The Institute Replacement Clause limits the insurer's liability to the cost of repairing or
replacing the damaged part of machinery or equipment insured, ensuring that the insurer pays for
the actual cost of restoration.

20. How does the Omission to Insure Additions, Alterations, and Extensions Clause benefit the
insured?
Answer: The Omission to Insure Clause extends coverage to new additions, alterations, or
extensions to the insured property during the policy period, provided they are reported to the
insurer and appropriate additional premiums are paid, ensuring continuous coverage for evolving
risks.

Sure! Here are 10 important questions along with their answers derived from the provided text:

1. What is the purpose of the Escalation Clause in insurance policies?

- Answer: The Escalation Clause ensures automatic regular increases in the sum insured, which is
fixed at the inception of the policy.

2. What does the Customs Duty extension indemnify the insured for?
 - Answer: The Customs Duty extension indemnifies the insured for additional custom duty incurred
over and above the custom duty amount taken into account in arriving at the sum insured of the
affected item.

3. What is the significance of the Condition of Partial Average in insurance policies?

- Answer: The Condition of Partial Average declares that the policy is issued as a First Loss Insurance
up to a certain percentage of the insured's total stocks. It provides for special provision for
application of pro-rata average when the total value of stocks at risk exceeds the total value declared
for insurance purposes.

4. How is the hazard distinguished from peril in insurance terminology?

- Answer: Hazard refers to conditions or features that create or increase the chance of loss arising
from a given peril, while peril is a loss-producing event like fire or theft.

5. What are examples of physical hazards in various classes of insurance?

- Answer: Examples include the construction of buildings, occupation of buildings, nature of
property stored, process of manufacture, situation, age and tonnage of vessels, voyage undertaken,
and method of packing.

6. How do insurers deal with proposals involving bad physical hazard?

- Answer: Insurers may impose warranties, incorporate clauses, conduct surveys before acceptance,
load premiums, restrict cover, impose excess clauses, or decline the risk altogether.

7. What is moral hazard in insurance, and how does it differ from physical hazard?
- Answer: Moral hazard arises from human nature, individual and collective, and from general
economic and social conditions. It differs from physical hazard, which arises from material features of
the subject matter of insurance.

8. What are examples of moral hazard?

- Answer: Examples include fraud, carelessness, difficult insured behavior, industrial relations
issues, and general economic conditions affecting behavior.

9. How do insurers deal with moral hazard?

- Answer: Moral hazard cannot be assessed in the same way as physical hazard. Insurers may
impose restrictive warranties, incorporate clauses, or decline the risk altogether if moral hazard is
severe.

10. What measures can be taken to mitigate physical hazards in insurance underwriting?
- Answer: Measures include the installation of sprinklers and fire extinguishing appliances in fire
insurance, improvements in security measures in burglary insurance, and better supervision or audit
systems in fidelity guarantee insurance.
1. What is the primary objective of underwriting practices in insurance?
a) Maximizing claims payout
b) Minimizing premium income
c) Expanding the insurer's organization
d) Avoiding proper risk selection
e) Controlling claims processing

Answer: c) Expanding the insurer's organization

2. What does the operative clause specify in an insurance policy?

 a) Exclusions only
b) Premium payment terms
c) Perils covered and liability circumstances
d) Policy renewal conditions
e) Insurer's contact information

Answer: c) Perils covered and liability circumstances

3. How do specified perils and all risks insurance policies differ?

a) All risks policies have more exclusions
b) Specified perils policies cover more risks
c) All risks policies list specific perils covered
d) Specified perils policies offer broader coverage
e) Both types have the same coverage options

Answer: c) All risks policies list specific perils covered

4. What is the purpose of exclusions in insurance policies?

a) To increase coverage scope
b) To eliminate all risks
c) To broaden coverage options
d) To limit coverage to typical risks
e) To encourage more claims

Answer: d) To limit coverage to typical risks

5. Why are deductibles or excesses included in insurance policies?

a) To encourage larger claims
b) To reduce administrative costs
c) To discourage risk improvement
d) To increase premium income
e) To discourage premium payments

Answer: b) To reduce administrative costs

6. What are the primary objectives of underwriting practices in insurance?

a) Minimizing premium income
b) Maximizing claims payout
c) Expanding the insurer's organization
d) Avoiding proper risk selection
e) Ignoring claims processing

Answer: c) Expanding the insurer's organization

7. What information does the operative clause specify in an insurance policy?

a) Exclusions only
b) Premium payment terms
c) Perils covered and liability circumstances
d) Policy renewal conditions
e) Insurer's contact information
 Answer: c) Perils covered and liability circumstances

8. How do specified perils and all risks insurance policies differ?

a) All risks policies have more exclusions
b) Specified perils policies cover more risks
c) All risks policies list specific perils covered
d) Specified perils policies offer broader coverage
e) Both types have the same coverage options

Answer: c) All risks policies list specific perils covered

9. What is the primary purpose of exclusions in insurance policies?

a) To increase coverage scope
b) To eliminate all risks
c) To broaden coverage options
d) To limit coverage to typical risks
e) To encourage more claims

Answer: d) To limit coverage to typical risks

10. Why are deductibles or excesses included in insurance policies?

a) To encourage larger claims
b) To reduce administrative costs
c) To discourage risk improvement
d) To increase premium income
e) To discourage premium payments

Answer: b) To reduce administrative costs

11. What is the purpose of express conditions in insurance policies?
a) To regulate the operation of the contract
b) To limit coverage to specific perils
c) To increase administrative costs
d) To discourage risk selection
e) To eliminate claims processing

Answer: a) To regulate the operation of the contract

12. How do specified perils and all risks insurance policies differ?
a) All risks policies have fewer exclusions
b) Specified perils policies cover more risks
c) All risks policies list specific perils covered
d) Specified perils policies offer narrower coverage
e) Both types exclude coverage options

Answer: d) Specified perils policies offer narrower coverage

13. What is the primary purpose of exclusions in insurance policies?

a) To increase coverage scope
b) To eliminate all risks
c) To broaden coverage options
d) To limit coverage to typical risks
 e) To encourage more claims

Answer: d) To limit coverage to typical risks

14. Why are deductibles or excesses included in insurance policies?

a) To encourage larger claims
b) To reduce administrative costs
c) To discourage risk improvement
d) To increase premium income
e) To discourage premium payments

Answer: b) To reduce administrative costs

15. What is the purpose of express conditions in insurance policies?

a) To regulate the operation of the contract
b) To limit coverage to specific perils
c) To increase administrative costs
d) To discourage risk selection
e) To eliminate claims processing

Answer: a) To regulate the operation of the contract

16. How do specified perils and all risks insurance policies differ?
a) All risks policies have fewer exclusions
b) Specified perils policies cover more risks
c) All risks policies list specific perils covered
d) Specified perils policies offer narrower coverage
e) Both types exclude coverage options

Answer: d) Specified perils policies offer narrower coverage

17. What is the primary purpose of exclusions in insurance policies?

a) To increase coverage scope
b) To eliminate all risks
c) To broaden coverage options
d) To limit coverage to typical risks
e) To encourage more claims

Answer: d) To limit coverage to typical risks

18. Why are deductibles or excesses included in insurance policies?

a) To encourage larger claims
b) To reduce administrative costs
c) To discourage risk improvement
d) To increase premium income
e) To discourage premium payments

Answer: b) To reduce administrative costs

19. What is the purpose of express conditions in insurance policies?

a) To regulate the operation of the contract
 b) To limit coverage to specific perils
c) To increase administrative costs
d) To discourage risk selection
e) To eliminate claims processing

Answer: a) To regulate the operation of the contract

20. How do specified perils and all risks insurance policies differ?
a) All risks policies have fewer exclusions
b) Specified perils policies cover more risks
c) All risks policies list specific perils covered
d) Specified perils policies offer narrower coverage
e) Both types exclude coverage options

Answer: d) Specified perils policies offer narrower coverage

Certainly! Here are 20 optional questions along with their answers and five options for each:

1. What is the purpose of including an arbitration condition in insurance policies?

a) To ensure quick settlement of disputes
b) To avoid undue publicity for insurers
c) To resolve disputes through private arbitration
d) All of the above
e) None of the above
- Answer: d) All of the above

2. Which type of condition renders the insurance contract voidable from inception upon breach?
a) Condition subsequent to the contract
b) Condition precedent to the contract
c) Condition precedent of liability
d) Implied condition
e) Express condition
- Answer: b) Condition precedent to the contract

3. What is the legal significance of a warranty in insurance law?

a) It allows the insurer to avoid liability from the date of breach.
b) It gives the insured the right to repudiate the contract.
c) It renders the contract voidable only if the breach increases the risk.
d) It must be substantially true but need not be strictly complied with.
e) None of the above
- Answer: a) It allows the insurer to avoid liability from the date of breach.

4. How do warranties differ from representations in insurance contracts?

a) Warranties need not be strictly complied with.
b) Representations are promises made by the insurer.
c) Warranties affect the validity of the contract, while misrepresentations do not.
d) Representations must be literally true, while warranties need not be.
e) None of the above
- Answer: d) Representations must be literally true, while warranties need not be.

5. What is the purpose of the Escalation Clause in fire insurance policies?

a) To limit the insurer's liability for inflation-related losses
 b) To ensure automatic regular increases in the sum insured
c) To cover additional premium costs
d) To restrict coverage for specific types of losses
e) None of the above
- Answer: b) To ensure automatic regular increases in the sum insured

6. Which clause limits the insurer's liability for damage to part of a pair or set?
a) Escalation Clause
b) Pair and Set Clause
c) Cutting Clause
d) Label Clause
e) Agreed Bank Clause
- Answer: b) Pair and Set Clause

7. In marine cargo insurance, what does the Label Clause exclude coverage for?
a) Damage to labels on tinned or bottled goods
b) Damage to electronic equipment
c) Damage to perishable goods
d) Damage during loading and unloading
e) None of the above
- Answer: a) Damage to labels on tinned or bottled goods

8. What does the Air Freight clause in engineering insurance policies cover?
a) Additional premium costs
b) Transportation expenses incurred by the insured
c) Costs of repairing or replacing damaged parts
d) Losses due to theft or burglary
e) None of the above
- Answer: b) Transportation expenses incurred by the insured

9. What is the legal effect of the Agreed Bank Clause in insurance policies?
a) It designates the bank as the recipient of claim payments.
b) It limits the insurer's liability for breach or alteration of the insured property.
c) It ensures coverage for additional risks.
d) It allows the insurer to avoid liability for certain types of losses.
e) None of the above
- Answer: a) It designates the bank as the recipient of claim payments.

10. How does the Temporary Removal Clause provide coverage in fire insurance policies?
a) It extends coverage to temporary structures.
b) It covers losses during transportation.
c) It protects against losses while the property is temporarily relocated.
d) It limits coverage for specific types of perils.
e) None of the above
- Answer: c) It protects against losses while the property is temporarily relocated.

11. Which type of clause allows for automatic regular increases in the sum insured in fire insurance
policies?
a) Pair and Set Clause
b) Label Clause
c) Escalation Clause
 d) Agreed Bank Clause
e) None of the above
- Answer: c) Escalation Clause

12. What does the Cutting Clause limit in insurance policies covering pipes or similar items of length?
a) The insurer's liability for transportation costs
b) The scope of coverage for damaged parts
c) The insured's ability to claim losses
d) The insurer's obligation to cover the entire length of the damaged item
e) None of the above
- Answer: b) The scope of coverage for damaged parts

13. In marine cargo insurance, what does the Label Clause typically apply to?
a) Damage to electronic equipment
b) Damage to perishable goods
c) Damage during loading and unloading
d) Damage to labels on tinned or bottled goods
e) None of the above
- Answer: d) Damage to labels on tinned or bottled goods

14. What is the primary purpose of the Air Freight clause in engineering insurance policies?
a) To cover additional premium costs
b) To limit the insurer's liability for transportation expenses
c) To indemnify the insured for air freight costs incurred
d) To restrict coverage for specific types of losses
e) None of the above
- Answer: c) To indemnify the insured for air freight costs incurred

15. How does the Temporary Removal Clause benefit the insured in fire insurance policies?
a) It extends coverage to temporary structures.
b) It covers losses during transportation.
c) It protects against losses while the property is temporarily relocated.
d) It limits coverage for specific types of perils.
e) None of the above
- Answer: c) It protects against losses while the property is temporarily relocated.

16. What is the primary purpose of the Escalation Clause in fire insurance policies?
a) To limit the insurer's liability for inflation-related losses
b) To ensure automatic regular increases in the sum insured
c) To cover additional premium costs
d) To restrict coverage for specific types of losses
e) None of the above
- Answer: b) To ensure automatic regular increases in the sum insured

17. Which clause limits the insurer's liability for damage to part of a pair or set?
a) Escalation Clause
b) Pair and Set Clause
c) Cutting Clause
d) Label Clause
e) Agreed Bank Clause
- Answer: b) Pair and Set Clause
18. In marine cargo insurance, what does the Label Clause exclude coverage for?
a) Damage to labels on tinned or bottled goods
b) Damage to electronic equipment
c) Damage to perishable goods
d) Damage during loading and unloading
e) None of the above
- Answer: a) Damage to labels on tinned or bottled goods

19. What does the Air Freight clause in engineering insurance policies cover?
a) Additional premium costs

Certainly! Here are 10 optional questions along with 5 options and their respective answers:

1. Which clause provides for automatic increases in the sum insured in insurance policies?
- A) Inventory and Valuation Clause
- B) Condition of Partial Average
- C) Customs Duty Extension
- D) Escalation Clause
- E) Key and Records Clause
- Answer: D) Escalation Clause

2. What does the Customs Duty extension indemnify the insured for?
- A) Additional freight charges
- B) Additional custom duty incurred
- C) Additional warehouse fees
- D) Additional insurance premiums
- E) Additional inspection costs
- Answer: B) Additional custom duty incurred

3. Which clause provides for special provision for application of pro-rata average in insurance
policies?
- A) Inventory and Valuation Clause
- B) Condition of Partial Average
- C) Customs Duty Extension
- D) Escalation Clause
- E) Key and Records Clause
- Answer: B) Condition of Partial Average

4. What is the term used to refer to conditions or features that create or increase the chance of loss
arising from a given peril?
- A) Risk
- B) Peril
- C) Hazard
- D) Indemnity
- E) Coverage
- Answer: C) Hazard

5. Which of the following is an example of a physical hazard in marine insurance?

- A) Industrial Relations
- B) General economic conditions
 - C) Cargo packing method
- D) Nature of cargo
- E) Personal accident risk
- Answer: D) Nature of cargo

6. How do insurers typically deal with proposals involving bad physical hazard?
- A) Imposing warranties
- B) Incorporating clauses
- C) Conducting surveys before acceptance
- D) All of the above
- E) None of the above
- Answer: D) All of the above

7. What is moral hazard in insurance?

- A) Loss-producing event
- B) Condition or feature increasing the chance of loss
- C) Risk arising from human nature or economic conditions
- D) Type of peril
- E) Clause in insurance policy
- Answer: C) Risk arising from human nature or economic conditions

8. Which of the following is an example of moral hazard?

- A) Nature of cargo
- B) Age of the insured
- C) Method of packing
- D) Careless attitude towards insured property
- E) Number of storeys in a building
- Answer: D) Careless attitude towards insured property

9. How do insurers typically deal with moral hazard?

- A) Imposing warranties
- B) Incorporating clauses
- C) Conducting surveys before acceptance
- D) All of the above
- E) None of the above
- Answer: E) None of the above

10. What measures can be taken to mitigate physical hazards in insurance underwriting?
- A) Installation of sprinklers and fire extinguishing appliances
- B) Better supervision or audit systems
- C) Improved security measures
- D) All of the above
- E) None of the above
- Answer: D) All of the above