CII Insurance Law (M05) Practice Test 2025 – Complete Exam Prep

For an insurance contract to be considered valid, the existence of an insurable interest is a fundamental requirement. Insurable interest refers to the policyholder’s stake in the insured asset or person; they must stand to suffer a financial loss or detriment if the insured event occurs. This principle serves to prevent moral hazard, where individuals might take out insurance on things they are not directly invested in, thereby creating an incentive to cause harm.

In an insurance context, the absence of an insurable interest could render the contract void, as it undermines the contract's legitimacy and the insured's actual risk in the situation. This requirement ensures that both the insurer and the insured have a bona fide stake in the agreement, reinforcing the ethical and financial basis of the insurance mechanism.

The other options, while relevant to various aspects of insurance agreements, do not represent the core principle required for the validity of the contract itself. Clear terms on cancellations are important for contractual clarity but are not intrinsically necessary for a contract to be valid. Standardized premium rates can vary widely based on different factors and are not a requirement for validity. Finally, while agreement on payout amounts is vital for the expectations of both parties, it becomes important only after the contract's validity has been established through