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1. John has a fire insurance policy for his house, which is worth $500,000. He also has a
mortgage on the house for $300,000. One day, a fire destroys his house and he claims the
full amount of $500,000 from his insurer. The insurer pays him $500,000 and then sues
the mortgagee for $300,000. This is an example of:
a) Indemnity
b) Insurable interest
c) Subrogation*
d) Contribution
Rationale: Subrogation is the right of the insurer to recover from a third party who is
responsible or partly responsible for the loss. In this case, the insurer has paid John more
than his loss, since he still owes $300,000 to the mortgagee. Therefore, the insurer
can subrogate against the mortgagee and recover $300,000.
2. Mary has a life insurance policy on her husband, Tom, who dies in a car accident. She
receives $100,000 from the insurer as the death benefit. She also sues the driver who
caused the accident and receives $50,000 as compensation. This is an example of:
a) Indemnity*
b) Insurable interest
c) Subrogation
d) Contribution
Rationale: Indemnity is the principle that the insured should not profit from insurance
but should be restored to the same financial position as before the loss. In this case, Mary
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