CAIB 3 Insurance Exam Prep
Practice Test

A. Bid Bond

B. Performance Bond ✓

C. Labour and Material Payment Bond

D. Fidelity Bond

Correct — B. A Performance Bond guarantees that the contractor will fulfill the terms of the contract. If the contractor defaults, the surety company steps in to ensure project completion, protecting the project owner from financial loss due to non-performance.

A. The insured's right to pursue the negligent third party ✓

B. The insured's policy renewal rights

C. The right to cancel the insured's policy

D. The insured's obligation to pay future premiums

Correct — A. Subrogation allows the insurer, after paying the insured's loss, to step into the shoes of the insured and pursue any third party that caused the loss. This prevents the insured from recovering twice for the same loss and holds negligent parties accountable.

A. The mean value of all cargo on board

B. A partial loss of cargo or ship ✓

C. The average premium charged across voyages

D. The average temperature during transit

Correct — B. In marine insurance, 'average' is a term of art meaning a partial loss, as opposed to a total loss. There are two types: particular average (a partial loss borne by one interest) and general average (a loss shared proportionally among all cargo interests).

A. To guarantee the contractor completes the project on time

B. To ensure subcontractors and suppliers are paid by the contractor ✓

C. To protect the project owner from cost overruns

D. To cover the contractor's equipment against damage

Correct — B. A Labour and Material Payment Bond protects subcontractors, workers, and material suppliers by guaranteeing they will be paid even if the principal contractor fails to meet those financial obligations. It prevents mechanics' liens from being placed on the project owner's property.

A. Only claims reported while the policy is in force

B. Incidents that occur during the policy period regardless of when the claim is reported ✓

C. Only claims arising from products manufactured during the policy period

D. Incidents reported within 30 days of policy expiry

Correct — B. An occurrence-based CGL policy triggers coverage based on when the incident occurred, not when the claim is filed. This means that as long as the event happened during the active policy period, coverage applies even if the claim is submitted years later.

A. Performance Bond

B. Bid Bond ✓

C. Completion Bond

D. Maintenance Bond

Correct — B. A Bid Bond accompanies a contractor's tender submission and guarantees that if the contractor is awarded the project, they will execute the formal contract. If they refuse, the surety compensates the project owner for the difference between the winning bid and the next acceptable bid.

A. Vicarious liability

B. Contributory negligence

C. The Rule in Rylands v Fletcher ✓

D. Res ipsa loquitur

Correct — C. The Rule in Rylands v Fletcher imposes strict liability on a landowner who accumulates something likely to do mischief if it escapes. The person is liable for all natural consequences of the escape without the claimant needing to prove negligence.

A. The total number of bonds the contractor has outstanding

B. The maximum dollar value of projects the surety will bond for a contractor ✓

C. The contractor's credit rating with financial institutions

D. The amount of premium the contractor pays for surety bonds

Correct — B. Bonding capacity is the maximum aggregate amount of contracts that a surety will support for a given contractor at any one time. It is determined by assessing the contractor's character, capital, and capacity, and reflects the surety's confidence in the contractor's ability to perform.