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 actual 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