2023 Updated Verified Pass L4M3 Exam - Real Questions and Answers
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Obtaining the CIPS L4M3 certification demonstrates to employers and clients that an individual has a comprehensive understanding of commercial contracting practices, which can contribute to increased efficiency, risk management, and better-informed business decisions. CIPS Commercial Contracting certification offers a significant career advantage in a competitive job market and can lead to new career opportunities and increased earning potential.
CIPS L4M3: CIPS Commercial Contracting is an advanced level exam that focuses on the principles and practices of commercial contracting. L4M3 exam is designed for procurement professionals who are involved in managing contracts with suppliers and vendors. L4M3 exam covers a wide range of topics, including contract negotiation, contract drafting, contract management, and contract performance evaluation.
NEW QUESTION # 94
Which of the following shall help the purchaser control the selection of tier 2 suppliers?
- A. Subcontracting clause
- B. Warranty clause
- C. Insurance clause
- D. Guarantee clause
Answer: A
Explanation:
When a party takes on a contractual obligation, they are legally required to perform the obligation.
That same contracting party is still entitled to subcontract out the work to another service provider, unless the contract:
- is a contract for personal services, such an employment contract
- contains an express term preventing subcontracting out the work, or an implied term Subcontracting clauses are written to control whether the contractor is entitled to subcontract, and how purchaser shall control that subcontracting process.
Reference:
- Subcontracting clauses (delegation of contractual obligations to third parties)
- CIPS study guide page 153-157
LO 3, AC 3.2
NEW QUESTION # 95
Which of the following statement is true about one-off contract?
- A. One-off contracts can be used for services and works
- B. Ad-hoc purchase is not a type of one-off purchase
- C. One-off contracts only apply to low-value, low-risk purchase
- D. Suppliers have many opportunities to improve the quality during the performance of one-off contract
Answer: A
Explanation:
One-off contract is the type of contract that relates to a single purchase. One-off contracts can be used for goods, services or works. One-off contract can be simple (such as buying a small number of office stationeries) or complex (such as a construction project or buying an aircraft).
A one-off contract lasts "until completion of the obligations of the parties". The performance is unlikely to be improved during contract performance since the duration is relatively shorter than framework agreement or call-off contract.
Ad-hoc purchase is an item bought for a single and non-recurring use or purpose. Ad-hoc purchase is a type of one-off contract.
Reference:
LO 1, AC 1.3
NEW QUESTION # 96
Which of the following is always automatically considered as a contract?
- A. Performance management framework
- B. Framework arrangement
- C. Framework agreement
- D. Call-off
Answer: D
Explanation:
- A call off or a term contract is one which exists for a fixed period of time, rather than for a specific purpose
- A formal framework agreement does have some legal standing but it is not a contract, primarily because there is no consideration involved, but it is an overarching (or umbrella) agreement under which contracts can be created (this holds true in English law but may not be right in other jurisdiction)
- A framework arrangement is a rather loose set-up, without any legal standing. It usually occurs when an organisation has decided for itself to limit the number of suppliers it is willing to work with and, through a purely internal process, sets up an approved list of such suppliers.
- A performance management framework including KPIs and targets, the assessment scheme and incentives, disincentives, bonuses and penalties. It is a schedule to a contract and only legally binding if it is referred from contract clauses.
Reference:
LO 1, AC 1.3
NEW QUESTION # 97
Which of the following are likely to be implied terms in a contract? Select TWO that apply:
- A. Contract clause
- B. Legal precedence
- C. Contract appendix
- D. Definition & interpretation
- E. Statute
Answer: B,E
Explanation:
An implied term is a term which the courts imply into a contract because it has not been expressly included by the parties. This may be because the parties did not consider it, did not think that any problem would arise in relation to it or simply omitted to include it.
The courts are very reluctant to imply terms into contracts and will only do so in the following circumstances:
- terms implied under statute
- terms implied under common law
- terms implied because of custom or usage
- terms implied due to previous dealings
- terms implied 'in fact' or to reflect the parties' intentions
Reference:
- Contracts: Express and Implied Terms
- CIPS study guide page 32
LO 1, AC 1.2
NEW QUESTION # 98
MWB operates serviced offices in central London. Rock entered a contractual licence with MWB to occupy office space in Marble Arch and had accumulated licence fees in arrears. The original licence agreement contained a 'No Oral Modification' clause that said: 'All variations to this licence must be agreed, set out in writing and signed on behalf of both parties before they take effect'.
After 6 months, Rock director re-negotiated to extend payment period over phone call and MWB credit controller agreed his proposal. Is this agreement considered as an effective variation to the original licence agreement?
- A. No, because Rock director assumed that the variation was effective and convinced credit controller to believe it
- B. Yes, because the credit controller had agreed with Rock director's proposal
- C. Modification' clause, must have intended to dispense with the clause
- D. No, because the mechanism for variation has been set out in the original contract
- E. Yes, because parties who agree to altering the original contract orally despite a 'No Oral.
Answer: D
Explanation:
The license can be amended during its lifespan. However, in this case, it already has a clause allowing for mechanism of variation which sets out who can authorise changes and prohibits any oral variation. Therefore, the agreement between Rock's director and MWB credit controller is not an effective variation to the license.
Reference:
LO 1, AC 1.1
NEW QUESTION # 99
Which of the following regulates barriers to the provision of services between countries?
- A. CISG
- B. ADA
- C. Incoterms
- D. GATS
Answer: D
Explanation:
- The General Agreement on Trade in Services (GATS) is a treaty of the World Trade Organization (WTO) that entered into force in January 1995 as a result of the Uruguay Round negotiations. The treaty was created to extend the multilateral trading system to service sector, in the same way the General Agreement on Tariffs and Trade (GATT) provides such a system for merchandise trade.
- CISG is the Vienna Convention on Contracts for the International Sale of Goods. This is a voluntary treaty under United Nations Commission on International Trade Law (UNCITRAL). The purpose of the Vienna Convention is to set out a framework for international transactions based on a uniform approach. It establishes substantive rules that regulate the duties and obligations of both parties, including the delivery of goods, contract formation, and remedies for breach of contract.
- The Incoterms or International Commercial Terms are a series of pre-defined commercial terms published by the International Chamber of Commerce (ICC) relating to international commercial law. They are widely used in international commercial transactions or procurement processes and their use is encouraged by trade councils, courts and international lawyers. A series of three-letter trade terms related to common contractual sales practices, the Incoterms rules are intended primarily to clearly communicate the tasks, costs, and risks associated with the global or international transportation and delivery of goods. Incoterms inform sales contracts defining respective obligations, costs, and risks involved in the delivery of goods from the seller to the buyer, but they do not themselves conclude a contract, determine the price payable, currency or credit terms, govern contract law or define where title to goods transfers.
- ADA is Anti-Dumping Agreement (Implementation of Article VI of the GATT).
LO 1, AC 1.3
NEW QUESTION # 100
Which of the following are NOT covered by CISG? Select TWO that apply:
- A. Liability of the seller for death or personal injury
- B. Remedies for breach of contracts
- C. Liability to pay damages
- D. Contract validity
- E. Transfer of risks
Answer: A,D
Explanation:
United Nations Convention on Contracts for the International Sale of Goods (Vienna Convention or CISG) Vienna Convention was prepared by by the United Nations Commission on International Trade Law (UNCITRAL) and adopted by a diplomatic conference on 11 April 1980. The Convention was welcomed by several countries from different geographic areas, with different legal and political systems. As of 20 August 2020, the Convention has93 Contracting States. The Convention has proved the effectiveness of an uniform text on international trade law.
What CISG covers, and what it does not
In the 6 first articles of the Convention, the authors set up the boundaries of its application.
First is about where it applies. According to UNCITRAL, the Convention applies to contracts of sale of goods between parties whose places of business are in different States and either both of those States are Contracting States or the rules of private international law lead to the law of a Contracting State. A few States have availed themselves of the authorisation in article 95 to declare that they would apply the Convention only in the former and not in the latter of these two situations. As the Convention becomes more widely adopted, the practical significance of such a declaration will diminish. Finally, the Convention may also apply as the law applicable to the contract if so chosen by the parties. In that case, the operation of the Convention will be subject to any limits on contractual stipulations set by the otherwise applicable law.
Second, the Convention has a list of goods that are not subject to its application in Article 2. Article 3 clarifies the differences between manufacturing contracts and sale contract.
Third, Article 4 and 5 clearly states what CISG does not covers, including grounds for contract invalidity and liabilities to death or injury of person caused by the the goods Finally, the Convention respects the contractual freedom of the trading parties. Trading parties may select this convention as governing law or select other instrument, such as UPICC or domestic laws.
Reference:
- Governing law in International Contracts - Would you choose CISG or UPICC (Part 1)
- CIPS study guide page 49-52
LO 1, AC 1.2
NEW QUESTION # 101
Which of the following are likely to be advantages of using invitation to tender? Select TWO that apply:
- A. Reducing risks of bribery and corruption
- B. Short turnaround times
- C. Driving forward planning culture
- D. Quick implementation
- E. Lower administration costs
Answer: A,C
Explanation:
Advantages of using invitation to tender may be as below:
No Nepotism: Tenders or bids are evaluated on the basis of certain predetermined criteria, such as price, quality and value for money. In other words, the firm offering the highest quality product or service at the lowest price point would win the contract. As most tender documents are opened and evaluated in a public process, I think that there remains little room for nepotism or favoritism of any kind.
Value for Money: From the perspective of the client, tenders offer the greatest value for the amount of money spent. This is due to the fact that the client can choose from a wide pool of potential suppliers to select the ones that can produce the highest quality product or service at the lowest price point. This allows the company, establishment or organization to save money without having to compromise on quality. Therefore, despite being quite time consuming, tendering is, in my opinion, a profitable long-term process from an organization's point of view.
Encourages Competition: The process of tendering helps promote a competitive market. This is because a number of potential contractors, firms or suppliers get a chance to bid for every project. And because selection depends on quality and price, every bidder tries to reduce operational inefficiencies and redundancies as much as possible in order to lower expenses and improve quality. This entire process encourages healthy competition in the market and prevents complacency and laziness, which in turn provides a boost to innovation and new ideas.
Easier Entry: The system of tendering makes it easier and simpler for new firms to enter the market or even a particular industry. This is due to the fact that contracts under this system are awarded on the basis of predetermined, objective criteria. As a result, even a firm that is a new entrant to the market, having no connections or contacts in the industry, can win a prestigious and lucrative contract by providing the highest value for the client's money. This process therefore helps new firms to quickly get a foothold in the market or industry, thus significantly lowering the traditional barriers to entry.
Reference:
- Characteristics and Benefits of the Tendering Process
- CIPS study guide page 6-8
LO 1, AC 1.1
NEW QUESTION # 102
Which of the following is a true statement on express and implied terms?
- A. Express terms always take precedent over implied terms
- B. Implied terms may derive from oral negotiations
- C. Express terms must always be in writing
- D. Express terms must be prepared by the party with expert knowledge
Answer: B
Explanation:
Express terms are the terms of the agreement which are expressly agreed between the parties. Ideally, they will be written down in a contract between the parties but where the contract is agreed verbally, they will be the terms discussed and agreed between the parties.
Implied terms are terms implied into the contract by the courts. They are not expressly set out in the contract but are taken to be as effective as if they were and as if they had been included from day one of the contract. The express terms and any implied terms together create the legally binding obligations on the parties.
The types of express terms to be found in a contract are many and varied and will depend on the type of contract. Any term written into the contract is an express term and may refer to price, time scales, warranties and indemnities, limitations on liability, conditions precedent and so on.
An implied term is a term which the courts imply into a contract because it has not been expressly included by the parties. This may be because the parties did not consider it, did not think that any problem would arise in relation to it or simply omitted to include it.
The courts are very reluctant to imply terms into contracts and will only do so in the following circumstances:
1. terms implied under statute
2. terms implied under common law
3. terms implied because of custom or usage
4. terms implied due to previous dealings
5. terms implied 'in fact' or to reflect the parties' intentions
Reference:
- CIPS study guide page 126-132
- Contracts: Express and Implied Terms
LO 3, AC 3.1
NEW QUESTION # 103
Which of the following should be taken to avoid the conflicts between orally negotiated terms before the conclusion of contract and the final written contract?
- A. Finding signs of misrepresentation of the other contracting party
- B. Avoiding long negotiation
- C. Prevailing orally negotiated terms over the final written contract
- D. Embedding a term excluding all prior oral discussions that are not mentioned in the final written contract
Answer: D
Explanation:
When a written contract is based on oral negotiation, to avoid the conflicts between orally negotiated terms and final written contract, the contract should include an express term that specifically excludes all prior oral discussion. However, orally negotiated terms can be used to interpret the final contract.
This practice (excluding prior discussion) is so common in international commercial contract that UNIDROIT Principles of International Commercial Contracts have an article (2.1.17) dealing with this.
Reference:
LO 3, AC 3.1
NEW QUESTION # 104
Which of the following are the conditions for revocation of offer to be valid?
1. The offeree has not received the offer yet
2. Revocation of offer must be communicated with the offeree
3. Revocation of offer must be sent via email
4. Offeree has not accepted the offer yet
- A. 1 and 4 only
- B. 2 and 3 only
- C. 1 and 3 only
- D. 2 and 4 only
Answer: D
Explanation:
A revocation of offer is the withdrawal of a previous offer to engage in some sort of legally binding contract. The previous offer had to have been such that it would have immediately become legally binding if the other party had formally agreed to it.
A core ruling defining revocation of offers was established by Payne v. Cave. This case established that neither party is bound to an agreement until an offer has been made by one and formally accepted by the other.
If an offer has been made, the offering party has a right to withdraw it up to formal acceptance by the offeree. Revocation basically serves as formal, legally verifiable notice that a withdrawal was made, and it's valid so long as it is communicated to the offeree before they accept.
The case of Byrne v. Van Tienhoven supports this by establishing that the withdrawal of an offer by telegram is only valid if the telegram is received before the offer is accepted. The case of Dickinson v. Dodds further establishes that the party making the offer can communicate the revocation through a third party.
Reference:
- What Is a Revocation of Offer?
- CIPS study guide page 31
LO 1, AC 1.2
NEW QUESTION # 105
If service level agreement is used as a schedule that makes up the contract, it will be most likely to be a part of...?
- A. Specifications
- B. Pricing arrangement
- C. Exclusion of liabilities
- D. Performance management framework
Answer: D
Explanation:
If a service level agreement is used as a schedule to a contract, it will generally have the following contents:
- Service definitions. If the service information is provided by the specification, SLA should only refer to the specification to avoid any inconsistencies.
- Details on how to measure KPIs, who will measure KPIs
- Minimum requirements or targets
- Remedies if the minimum requirements are not met
...
Since SLA often lists out the KPI targets, consequences for not meeting the KPI targets and remedies to situation of poor performance, it is a part of performance management.
Reference:
LO 2, AC 2.2
NEW QUESTION # 106
CMS Corp goes into a gainshare agreement with the contractor, EIP Ltd. Both parties agree that the final fee will be calculated on target cost - target fee basis. Which of the following will affect the final fee payable in this gainshare agreement? Select TWO that apply:
- A. Actual cost
- B. Accrual expense
- C. Supplier share
- D. Purchaser goodwill
- E. Final price
Answer: A,C
Explanation:
An incentive contract is a sub-segment of a fixed-price or cost-reimbursement contract when there are specific cost or time commitments that are desired for a project. The standard incentive contract will allow for a fixed price to be paid for work to be completed by a specific deadline and at a specific cost.
There are two major types of incentive contracts: Cost-plus-incentive fee and Fixed-price incentive (firm target) contracts. Both types have the same formula for calculating final fee and final price.
The target fee is the amount that will be paid if the actual costs (which can be proven) match the target costs The actual fee will be adjusted in proportion to the difference between the target cost and the actual cost. The usual calculation is:
Target fee + ((target cost - actual cost) x Supplier share) = final fee The final price then becomes:
Actual cost + final fee = final price
Reference:
LO 3, AC 3.3
NEW QUESTION # 107
Cleveland Insurance (Cleveland) offers a range of insurance services. The main software used in the call centre is a customer relationship management (CRM) system. Cleveland perceived an urgent need to replace the existing CRM system to deal with the increasing number of customers and services.
Urgent Digital Ltd (Digital) is one of the bidders of Cleveland's ITT for designing, building and managing the new CRM system. Its bid team is led by Hank Irvine, its technical director. Hank realises that winning the Cleveland contract (valued at approximately £50M) will enhance his career. During discussions with Cleveland, Hank offers certain assurances regarding timescales for the project. He has not carried out any investigations into the viability of the timescales. Hank has little idea whether the timescales can be met.
Cleveland decides that Digital's bid meets with its requirements, especially given the assurances in timescale offered by Hank, and decides to proceed with it, subject to a formal contract. Eventually, a formal contract is signed by both parties. The initial assurances given by Hank about the timing of the project are never going to be achieved and are at best grossly exaggerated.
Cleveland brought the case to the court and sought rescission of contract with Digital. Is Cleveland's claim appropriate in this case?
- A. Yes, because Cleveland needs to seek rescission first before claiming for damages
- B. Yes, because both parties agreed with rescission of their contract
- C. No, because the work had been carried out which could not be returned
- D. No, because the contract does not include any provision on rescission
Answer: C
Explanation:
Hank's pre-contractual assurances may amount to misrepresentation. Remedies for misrepresentation could be rescission of contract or damages. Rescission will be impossible in the following instance:
- Where the innocent party has affirmed the contract; that is, acted in a way confirming that they wish it to continue
- Where the claim has not been brought within a reasonable time (this is a point of general law)
- Where restitution (returning to the pre-contractual position) is impossible (e.g. because the goods have been consumed or have deteriorated)
- Where there has been intervention of innocent third-party (e.g., if the goods have been sold on) In this case, the subject of contract is designing, building and managing the new CRM system which is impossible to be restituted. Therefore, the contract cannot be rescinded.
Reference:
LO 1, AC 1.2
NEW QUESTION # 108
Which of the following are likely to feature within an outcome-specification?
1. Dimension
2. Performance requirement
3. Input material
4. Product function
- A. 3 and 4 only
- B. 1 and 3 only
- C. 2 and 4 only
- D. 1 and 2 only
Answer: C
Explanation:
There are two main types of specification: performance specification and conformance specification (sometimes called prescriptive or technical specifications).
Performance specifications have following features:
- Focus on outputs
- Set out result to be achieved
- The 'what', not the 'how'
- Give supplier flexibility to present solutions that the buyer may not have considered Reference:
LO 1, AC 1.1
NEW QUESTION # 109
Which of the following is used to detail the complex matter that may be verbiage to the main document?
- A. Subcontracting
- B. Contract variation
- C. Standard terms and conditions
- D. Schedule
Answer: D
Explanation:
Without further explanation, a schedule may be deemed to form an integral part of the obligations of either or both parties. Obviously, the scope or binding nature of such schedule depends on the way it is referred to in the obligatory language of the main agreement. Accordingly, merely attaching the general terms and conditions of sale without explaining to which part of the sale they apply or which provisions apply does not subject a sale pursuant to the body text of the agreement to those general terms and conditions.
Subcontracting is the practice of assigning, or outsourcing, part of the obligations and tasks under a contract to another party known as a subcontractor.
Reference:
- Schedules, annexes and exhibits
- CIPS study guide page 22-26
LO 1, AC 1.1
NEW QUESTION # 110
Which of the following is regulated by standard ISO 14001?
- A. Quality management systems
- B. Environmental management
- C. Energy management
- D. Information security management
Answer: B
Explanation:
ISO has about 22,000 international standards covering a vast range of aspects of product or service quality. Below are some of the most common ISO standards:
- ISO 9001: Quality management system
- ISO 27001: Information security management
- ISO 5001: Energy management
- ISO 14001: Environmental management
Reference:
- ISO 14001:2015 Environmental management systems - Requirements with guidance for use
- CIPS study guide page 86
LO 2, AC 2.1
NEW QUESTION # 111
Which of the following is likely to reduce risks of different rules regarding when offers and acceptance become effective between legal systems?
- A. Time lapse
- B. Deemed receipt protocol
- C. Withdrawal protocol
- D. Letter of intent
Answer: B
Explanation:
Regarding rule of offer and acceptance, there are some differences among legal system around the world. For example, mailbox rule is generally applied in common law countries such as UK, US, Australia,.. while it is ignored in civil law countries. To clarify on rule of offer and acceptance in international trade, offerors may use expressed terms in their offers. These terms known as deemed receipt protocol.
Reference:
LO 1, AC 1.2
NEW QUESTION # 112
Which of the following is the reason why liquidated damage clauses are embedded into a contract?
- A. Because liquidated damages are the only remedy
- B. To penalise the supplier for their wrongdoing
- C. Because compensation will be awarded immediately
- D. To avoid argument on correct measure of damage
Answer: D
Explanation:
Liquidated damages are an amount of money, agreed upon by the parties at the time of the contract signing, that establishes the damages that can be recovered in the event a party breaches the contract. The amount is supposed to reflect the best estimate of actual damages when the parties sign the contract. These usually apply to a specific type of breach, and in construction, it is frequently the failure to complete work on time.
Liquidated damages clauses are usually written as some sort of formula, for example:
Total Contract Price - [(X amount of $ per day) x (number of days late)] Including a liquidated damages clause can provide many benefits, the most important of which is predictability. When setting a predetermined amount of damages, it allows both parties a chance to negotiate and settle on a number they both feel is fair and reasonable.
From the owner's perspective, this acts like a cheap form of insurance against your contractors. In the event of a breach, the owner can immediately calculate the damages without going through the trouble of proving actual damages. Proving actual damages can be a complicated, lengthy, and costly process.
From a contractor perspective, this allows them to analyze the level of risk involved, and schedule appropriately. It also allows them the opportunity to limit the damage claims of the owner.
Reference:
- Construction Contract Clauses: What Is a Liquidated Damages Clause?
- CIPS study guide page 158-159
LO 3, AC 3.2
NEW QUESTION # 113
GPP, the employer, and Prosolia UK, the contractor, entered into five EPC contracts for the development of five different solar power generation plants in the United Kingdom. Four out of the five developments failed to be commissioned by the relevant due dates, with the delays ranging from 44 to 285 days.
Among other claims, GPP, acting through its two investment vehicles, claimed liquidated damages of £500 per day in all four contracts for Prosolia UK's failure to achieve completion of the plants by the due date. The liquidated damages claimed amounted to £1,804,221 across the four delayed contracts.
Prosolia, alongside various other defences, raised the defence that the liquidated damages provision in each contract was a penalty, and therefore unenforceable against it. Is Prosolia contractually obliged to make the payment to the plaintiff?
- A. No, the clause must be treated as a penalty clause which is unenforceable in UK
- B. Yes, the clause is a genuine estimate of possible losses that GPP may have suffered and therefore, it is enforceable.
- C. No, the amount claimed is too excessive and it may put Prosolia into insolvency. The clause must be void
- D. Yes, the amount is a reward to the employer as they have supervised and monitored the projects
Answer: B
Explanation:
A liquidated damages clause specifies a predetermined amount of money that must be paid as damages for failure to perform under a contract. The amount of the liquidated damages is supposed to be the parties' best estimate at the time they sign the contract of the damages that would be caused by a breach. If a breach occurs and the liquidated damages clause is enforceable, the parties do not calculate the actual damages (i.e., how much money a party actually lost as a result of the breach). Instead, the breaching party pays the predetermined sum provided by the liquidated damages provision.
To be enforceable, a liquidated damages clause should meet the following criteria.
Damages are difficult to estimate. A court will be more likely to enforce a liquidated damages provision if the damages that will be incurred as a result of a breach of the contract are difficult to estimate when the contract is entered into. In certain situations, injuries are easy to prove. For example, if a breach will result in the loss of sales, it is easy to determine the actual damages by calculating lost profits. Others are more difficult, like the harm caused by breach of a confidentiality agreement or theft of trade secrets. To be enforceable, the damages should be either uncertain or difficult to quantify at the time the contract is entered into.
The amount is reasonable and not a penalty. If the amount of the liquidated damages is grossly disproportionate to the actual harm incurred, a court will likely find it is a penalty or punishment and will not enforce the provision. When making this analysis, courts usually consider what was reasonable at the time the contract was entered into as opposed to when the breach occurred. There have been cases, however, where courts will decide the reasonableness of the damage estimate based on the actual harm at the time of the breach.
The scenario is excerpted and edited based on a real world case law. In that case, the court held that GPP was entitled to liquidated damages under all four of the EPC contracts, ruling that the provisions did not amount to unenforceable penalties in each of the contracts.
Reference:
- CIPS study guide page 158-159
- Liquidated damages in energy projects
- What Is a Liquidated Damages Provision?
LO 3, AC 3.2
NEW QUESTION # 114
Which of the following statement is true about insurance?
- A. An insurance policy can be mechanism of substance to back up indemnity
- B. The supplier must always pay the insurance premium for goods-in-transit
- C. An insurance policy transfers the legal liabilities from the insured to the insurer
- D. Professional indemnity insurance provides the insured business with financial protection against the liabilities caused by or arising out of the products supplied
Answer: A
Explanation:
An insurance policy transfers a risk from one party to another in exchange for payment, it does not transfer the liabilities from the insured to insurer.
Insurance policies are taken out as a form of protection against a specific risk or unfortunate occurrence. If one party indemnifies another to protect that other party in the event of a risk occurring then the indemnity itself is merely a statement of intent. There also need to be some mechanism of substance to back up that indemnity. This BACK UP is the insurance policy which can be relied upon to meet the indemnity being given. In fact, most indemnity provisions are backed up by insurance coverage.
Professional indemnity or liability insurance offers such coverage to professional advice or service providing individuals and companies ensuring protection against any legal costs and damages awarded as a result of claims relating to negligence. Whereas more general forms of liability insurance focus on direct forms of harm such as sustaining injuries, professional indemnity insurance provides a far more detailed and comprehensive form of coverage. The cover protects a firm or individual's liability relating to any financial loss caused by errors or omissions in the service provided as well as any alleged failure to perform on behalf of a client.
Goods in transit insurance does what it says on the tin, protecting any goods your business delivers or transports from place to place. The responsibility to pay the insurance premium is negotiable, it may belong to the supplier or the buyer.
Reference:
- Is that Covered? Insurance and Indemnity Clauses
- Professional Indemnity Insurance
- Goods in transit insurance
- CIPS study guide page 150-153
LO 3, AC 3.2
NEW QUESTION # 115
......
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