63. A professional liability policy is claims-made. The firm
lets coverage lapse and a claim is made later for earlier services.
What is the main risk?
A. The claim
may not be covered
B. Claims-made is the same as occurrence
C. Coverage is automatic forever
D. Bonding replaces insurance
Ans A
Why?
Correct answer: 👉 A. The claim may not be covered
🔹 Why A is correct
A claims-made policy only provides coverage if:
1. The claim is made, and
2. The policy is active at that time
👉 If the firm lets the policy lapse, then even if the work was done earlier while insured, a later claim will not be covered.
🔹 Key concept: Claims-made policy
· Coverage is triggered by when the claim is made, not when the work occurred
· If no active policy exists when the claim arises → no coverage
🔹 Example
· Engineering work done: 2022 (policy active)
· Policy lapses: 2024
· Claim filed: 2025
❌ No coverage — because there is no active policy in 2025
🔹 Why others are wrong
· B. Claims-made is not the same as occurrence
· C. Coverage is not automatic forever
· D. Bonding is unrelated (it guarantees performance, not liability coverage)
🔹 Practical takeaway (important for you as an engineer)
When stopping practice or switching insurers, you must consider:
· Tail coverage (extended reporting period)
· Maintaining continuous coverage
Otherwise, you expose yourself to uninsured liability for past work.
What does option B mean?
Correct answer: 👉 A. The claim may not be covered
🔹 Why A is correct
A claims-made policy only provides coverage if:
1. The claim is made, and
2. The policy is active at that time
👉 If the firm lets the policy lapse, then even if the work was done earlier while insured, a later claim will not be covered.
🔹 Key concept: Claims-made policy
· Coverage is triggered by when the claim is made, not when the work occurred
· If no active policy exists when the claim arises → no coverage
🔹 Example
· Engineering work done: 2022 (policy active)
· Policy lapses: 2024
· Claim filed: 2025
❌ No coverage — because there is no active policy in 2025
🔹 Why others are wrong
· B. Claims-made is not the same as occurrence
· C. Coverage is not automatic forever
· D. Bonding is unrelated (it guarantees performance, not liability coverage)
🔹 Practical takeaway (important for you as an engineer)
When stopping practice or switching insurers, you must consider:
· Tail coverage (extended reporting period)
· Maintaining continuous coverage
Otherwise, you expose yourself to uninsured liability for past work.
Why option (D)
is incorrect?
Option D: “Bonding replaces insurance” is incorrect because bonding and insurance serve completely different purposes.
🔹 What is bonding?
Surety bond
A bond (surety bond) is a guarantee of performance:
· Ensures a contractor/engineer fulfills contractual obligations
· If they fail, the surety pays the client and then seeks recovery from the professional
👉 It protects the client (project owner)
🔹 What is professional liability insurance?
Professional liability insurance
· Covers errors, negligence, or omissions
· Pays for legal defense and damages
· Protects the engineer/firm
🔹 Key difference (very important)
|
Feature |
Bonding |
Insurance |
|
Purpose |
Guarantees performance |
Covers negligence/errors |
|
Who is protected |
Client (owner) |
Engineer/firm |
|
Repayment |
You must repay surety |
No repayment (insurer bears loss) |
|
Replaces insurance? |
❌ No |
— |
🔹 Why D is wrong in this question
The question is about claims-made insurance risk.
Option D suggests:
“Bonding replaces insurance”
👉 This is incorrect because:
· Even if you have a bond, it does not cover professional liability claims
· It cannot substitute for an expired or lapsed insurance policy
🔹 Simple analogy
· Insurance = “I made a mistake, insurer helps me”
· Bond = “If I fail, someone pays—but I owe them back”
✔️ Final takeaway
Option D is wrong because:
Bonding does not replace insurance—it serves a completely different risk function.
64. An insurer defends a consultant under a reservation of
rights.
What issue may arise?
A. Conflict
between insurer and insured
B. Lien priority
C. Patent validity
D. Labour certification
Correct answer: 👉 A. Conflict between insurer and insured
🔹 Key concept: Reservation of rights
A reservation of rights means:
· The insurer provides a defence, but
· Reserves the right to later deny coverage
👉 In other words, they are saying:
“We’ll defend you for now, but we may not pay the claim in the end.”
🔹 Why this creates a problem
This situation can create a conflict of interest:
· The insurer may try to steer the case toward a finding that avoids coverage
· The insured (consultant) wants a defence that fully protects them, even if it confirms coverage
👉 Their interests are not fully aligned
🔹 Example
· Claim alleges both:
o Negligence (covered)
o Intentional misconduct (often not covered)
The insurer might:
· Defend the case
· But prefer an outcome that proves intentional conduct → so they can deny coverage later
🔹 Why other options are wrong
· B. Lien priority → relates to creditor rights, not insurance defence
· C. Patent validity → intellectual property issue
· D. Labour certification → employment/immigration issue
None relate to insurance defence strategy.
✔️ Final takeaway
A reservation of rights introduces:
⚠️ A potential conflict between insurer and insured
This is a classic NPPE exam concept—watch for it.
65. After paying a loss, an insurer sues the party actually
responsible.
This is called:
A. Estoppel
B. Subrogation
C. Contribution
D. Set-off
Correct answer: 👉 B. Subrogation
🔹 Key concept: Subrogation
Subrogation means:
After paying a claim, the insurer steps into the shoes of the insured and sues the party responsible for the loss.
🔹 How it works
1. You suffer a loss (e.g., property damage due to someone else’s negligence)
2. Your insurer pays you
3. The insurer then goes after the at-fault party to recover that money
👉 This prevents the insured from being paid twice and shifts liability to the true wrongdoer.
🔹 Example (engineering context)
· A contractor damages your design work or structure
· Your insurer pays for the loss
· The insurer then sues the contractor to recover costs
🔹 Why others are wrong
· A. Estoppel → prevents someone from going back on a representation
· C. Contribution → sharing loss between multiple insurers
· D. Set-off → offsetting mutual debts
✔️ Final takeaway
Subrogation = insurer pays first, then recovers from the responsible party.
66. An insured fails to disclose a material fact when
applying for coverage.
What issue is engaged?
A. Material
non-disclosure
B. Human rights discrimination
C. Criminal intent only
D. Builder’s lien
Correct answer: 👉 A. Material non-disclosure
🔹 Key concept: Material non-disclosure
Material non-disclosure occurs when:
The insured fails to disclose an important (material) fact that would influence the insurer’s decision to provide coverage or set premiums.
🔹 Why it matters
Insurance contracts are based on utmost good faith (uberrimae fidei):
· The insurer relies on the applicant’s full and honest disclosure
· A material fact is anything that would affect:
o Risk assessment
o Premium calculation
o Decision to insure
👉 If such a fact is not disclosed:
· The insurer may void the policy
· Or deny a claim
🔹 Example
· An engineering firm applies for professional liability insurance
· Fails to disclose:
o Prior claims
o Known design issues
· A claim later arises related to that undisclosed risk
👉 Insurer may deny coverage due to material non-disclosure
🔹 Why other options are wrong
· B. Human rights discrimination → unrelated to insurance disclosure
· C. Criminal intent only → not required; non-disclosure can be innocent or negligent
· D. Builder’s lien → relates to construction payment rights
✔️ Final takeaway
Failing to disclose a material fact engages material non-disclosure, which can invalidate coverage.
