IIQE Paper 2 General Insurance Examination Quiz 01 Advanced

Fidelity Guarantee Insurance indemnifies employers against financial losses resulting from dishonest acts by their employees. The question describes a scenario where an employee’s actions led to a financial shortfall due to unauthorized transactions. This directly aligns with the core purpose of fidelity guarantee insurance, which is to cover losses arising from fraud or dishonesty by insured staff. Options B, C, and D describe different types of insurance or concepts not directly applicable to this specific situation. Professional Indemnity covers negligence in providing professional services, Public Liability covers injury or damage to third parties, and a Performance Bond guarantees the completion of a contract.

This question tests the understanding of how insurers manage risk through policy endorsements. When an insurer identifies a specific, elevated risk associated with a particular aspect of a policy, such as a pre-existing back condition in personal accident insurance, they can use an exclusion clause. This clause specifically carves out coverage for that identified risk, while the rest of the policy remains in force for other covered events. This is a common underwriting practice to ensure the policy accurately reflects the assessed risk and premium. Option B is incorrect because a general exclusion would apply to all policyholders, not a specific risk for one insured. Option C is incorrect as a market exclusion is a standard exclusion applied by most insurers in the market, not tailored to an individual’s specific risk. Option D is incorrect because while fraud can invalidate a policy, it’s a separate legal principle and not a method of underwriting specific risks.

The scenario describes a situation where an insured party, after experiencing a fire loss, fails to take reasonable steps to protect the damaged property from further deterioration, such as preventing water damage to electrical components. This directly contravenes the insured’s duty to minimize loss, which is a common law obligation and often explicitly stated in policy conditions. Failing to take such reasonable care can lead to the insurer reducing the claim amount or even denying it, as the additional damage is a result of the insured’s inaction rather than the original insured peril. The other options are less relevant: while cooperation is a duty, the primary breach here is the failure to mitigate damage; admitting liability to a third party is a separate issue related to prejudicing the insurer’s rights; and disclosing other insurances is for contribution purposes, not directly related to the preservation of damaged goods.

This question tests the understanding of exclusions in a Professional Indemnity (PI) policy. PI policies are designed to cover financial losses arising from professional negligence. However, they typically exclude liability stemming from dishonest or fraudulent acts by the insured professional. This is because the policy is intended to cover errors in judgment or execution, not intentional wrongdoing. While other options might be covered under different types of insurance or have specific endorsements, dishonesty is a fundamental exclusion in PI insurance.

This question tests the understanding of the Insurance Claims Complaints Bureau (ICCB) in Hong Kong, a key dispute resolution mechanism for insurance policyholders. The ICCB scheme is designed to provide an accessible and cost-effective avenue for resolving complaints against insurers. It is crucial to understand its scope, operational principles, and limitations. Specifically, the ICCB handles complaints related to both general and long-term insurance, not just personal lines. The service is free for complainants, ensuring accessibility. While the ICCB makes recommendations, its decisions are not legally binding on the insurer, and either party can reject the outcome, effectively acting as an appeal mechanism against the ICCB’s recommendation. The monetary limit for claims handled by the ICCB is a specific regulatory figure, which is subject to change but is a critical detail for exam candidates.

Average adjusters are specialists in marine insurance, particularly in complex General Average (GA) claims. Their expertise is crucial due to the intricate legal requirements, the large number of potentially involved parties (like numerous cargo owners), and the extended timelines often required for settlement. While Lloyd’s Agents and Loss Adjusters are also involved in claims, their roles differ. Lloyd’s Agents often act as survey agents for marine underwriters, and Loss Adjusters are more commonly used in non-marine general insurance claims where insurers’ own staff may not handle them directly. Arbitration clauses, while a method of dispute resolution, are distinct from the specialized role of an average adjuster in calculating and apportioning claims.

This question tests the understanding of how an excess works in motor insurance. An excess is the amount the policyholder must pay towards a claim before the insurer covers the rest. In this scenario, the damage is HK$12,000 and the voluntary excess is HK$2,000. Therefore, the insured is responsible for the first HK$2,000 of the claim, and the insurer will pay the remaining HK$10,000. The question asks how much the insurer will pay, which is the total claim minus the excess.

This question tests the understanding of ‘System of Check’ in fidelity guarantee insurance, which is crucial for internal discipline and control within an employer’s operations. The correct answer highlights the proactive measures an employer takes to prevent losses from employee dishonesty. Option B is incorrect because while reporting is part of a system, it’s not the primary focus of the ‘System of Check’ itself, which is about preventative controls. Option C is incorrect as it describes a consequence of a breach, not the preventative system. Option D is too general and doesn’t specifically address the internal controls aspect of the ‘System of Check’ in fidelity insurance.

A voluntary excess, also known as a ‘self-insured retention’ or ‘excess requested by the insured’, is an amount that the policyholder agrees to bear themselves in exchange for a reduction in the insurance premium. This is a common practice, particularly in motor insurance, where a higher voluntary excess can lead to a lower premium. It is distinct from any compulsory excess that might apply to certain types of claims or circumstances.

This question tests the understanding of exclusions in engineering insurance, specifically Boiler Explosion Insurance. The provided text states that risks normally insurable by other policies, such as fire and extra perils, are excluded from Boiler Explosion Insurance. This is because these risks are typically covered under a separate fire insurance policy. Therefore, a claim for damage caused by a fire that also leads to a boiler explosion would likely be handled by the fire policy, not the boiler explosion policy.

The Employees’ Compensation Ordinance in Hong Kong establishes a strict liability framework for employers. This means that an employer is legally obligated to compensate an employee for injuries or death sustained in accidents that arise out of and in the course of employment, regardless of whether the employer was at fault. The ordinance mandates insurance to cover these liabilities. Therefore, the core principle is the employer’s legal responsibility to compensate for work-related injuries, irrespective of negligence.

In marine insurance claims, a surveyor’s report is a crucial document. This report provides an independent assessment of the cause and extent of a loss, which is essential for the insurer to process the claim. While the original policy and bill of lading are also important, the surveyor’s report is specifically required to verify the physical damage or loss, especially for cargo. Medical reports are relevant for personal accident claims, and witness statements are generally handled by the insurer, not a primary requirement from the insured for verification of the loss itself.

The question tests the understanding of the legal significance of a certificate of compulsory insurance, particularly in motor insurance. According to the provided text, a certificate of motor insurance merely confirms the existence of compulsory insurance as prescribed by law and does not detail the policy’s coverage level (e.g., Comprehensive or Act Only). The law mandates the issuance of these certificates, and failure to do so is a criminal offense. Furthermore, the insurer has a legal obligation to recover the certificate if the policy is cancelled, highlighting its critical legal role beyond simply acknowledging coverage. Therefore, the certificate’s primary function is to satisfy a legal requirement for compulsory insurance, not to provide a comprehensive summary of the policy’s terms.

The ‘step-back’ system for No Claim Discount (NCD) in private car insurance, as outlined in the IIQE syllabus, dictates how a claim affects future discounts. For drivers with an entitlement of four or more claim-free years (equivalent to 50% or 60% NCD), a single claim in the policy year will result in a reduction of the NCD to 20% or 30% on renewal, rather than a complete loss of the discount. This is a key distinction from vehicles where any claim typically resets the NCD accumulation to zero. Therefore, a driver with a 60% NCD who has one claim will not lose all their accumulated discount but will see it reduced.

This question tests the understanding of ‘System of Check’ in fidelity guarantee insurance, which is crucial for internal discipline and control within an employer’s operations. The correct answer highlights the proactive measures an employer takes to prevent losses by implementing robust internal controls and oversight of employees entrusted with financial responsibilities. Option B is incorrect because while audits are part of a system of check, they are typically a retrospective review rather than the primary mechanism for ongoing control. Option C is incorrect as external audits are important but the ‘System of Check’ primarily refers to the employer’s internal mechanisms. Option D is incorrect because while employee background checks are a component, they are a pre-employment measure and not the entirety of the ongoing system of internal control.

In the context of insurance contracts, a ‘representation’ is a statement of fact made by the proposer before the contract is concluded. The principle of utmost good faith (uberrimae fidei) requires that such representations, particularly those concerning material facts, must be substantially true. If a representation is found to be untrue, and it relates to a material fact, it can give the insurer grounds to avoid the policy, even if the non-disclosure or misrepresentation was unintentional. This is because the insurer relies on the proposer’s statements to assess the risk and determine the terms and premium. Option (b) is incorrect because representations do not always need to be in writing, though written representations are often preferred for clarity. Option (c) is too strict; while accuracy is important, the legal standard for representations is typically substantial truth, not absolute accuracy, unless specifically stipulated. Option (d) is incorrect as untrue representations of material facts can indeed affect the contract.

Institute Cargo Clauses (ICC) (A) provides the broadest ‘all risks’ coverage for own damage to cargo. ICC (B) covers specified risks, including major casualties like fire, stranding, sinking, and collision, as well as natural events like earthquakes and lightning, and specific handling losses. ICC (C) is the most limited, covering only a few specified risks such as jettison and discharge at a port of distress, in addition to General Average sacrifice. The question describes a scenario where cargo sustains damage due to a collision between vessels. Under ICC (A), this would be covered as an ‘all risks’ peril. Under ICC (B), collision is a specifically listed peril, so it would also be covered. However, ICC (C) does not list collision as a covered peril for own damage. Therefore, the most accurate statement is that ICC (A) and ICC (B) would cover damage from a collision, while ICC (C) would not.

The question tests the understanding of the scope of theft insurance, specifically concerning damage to the premises during an attempted theft. The provided text states that theft policies typically include damage caused by thieves to the insured premises during forcible and violent entry or exit. This damage is not subject to a separate sum insured but is covered under the general policy for stock and specified contents. Therefore, if a thief breaks a window to gain entry, the cost of replacing that window would be covered as part of the theft insurance, provided it was a forcible and violent act.

The Motor Vehicles Insurance (Third Party Risks) Ordinance mandates compulsory third-party motor insurance in Hong Kong. This ordinance ensures that victims of motor accidents have a legal recourse for damages caused by negligent drivers. While other options relate to insurance, they do not specifically address the foundational legal requirement for third-party coverage in motor vehicle use.

The question probes the understanding of prohibited practices in the insurance industry, specifically concerning rebating. Rebating, in essence, involves offering inducements or discounts on premiums that are not part of the standard policy terms. This practice is detrimental because it distorts the principle of fair pricing and can lead to unfair competition. It undermines the integrity of the underwriting process and the accurate assessment of risk. Furthermore, offering such benefits to employees or associates of the insured without explicit consent can be construed as a form of bribery or corruption, as it provides an unfair advantage. The Code of Practice for the Administration of Insurance Agents and the Minimum Requirements of the Model Agency Agreement are key regulatory documents that explicitly prohibit such actions to maintain ethical standards and a level playing field within the insurance sector. Therefore, any arrangement that involves returning a portion of the premium or offering benefits beyond the policy’s stated terms, without proper authorization, is considered an improper inducement.

This question assesses the understanding of an insurance broker’s obligations regarding client funds, specifically the requirement to maintain separate client accounts. The Insurance Authority mandates this practice to safeguard client monies from the broker’s own operational funds, thereby preventing commingling and ensuring client assets are protected. Failure to adhere to this requirement can lead to regulatory action and jeopardizes client trust. Option B is incorrect because while proper record-keeping is essential, it does not negate the specific requirement for separate client accounts. Option C is incorrect as professional indemnity insurance protects against claims of negligence, not the segregation of client funds. Option D is incorrect because while brokers must be fit and proper, this is a broader assessment and the specific requirement for separate accounts is a distinct operational mandate.

This question tests the understanding of the Insurance Claims Complaints Bureau (ICCB) in Hong Kong, a key dispute resolution mechanism for insurance policyholders. The ICCB scheme is designed to provide an accessible and cost-effective avenue for resolving complaints against insurers. It is crucial to understand its scope, operational principles, and limitations. Specifically, the ICCB handles complaints related to both general and long-term insurance, not just personal lines. The service is free for complainants, ensuring accessibility. While the ICCB makes recommendations, its decisions are not legally binding in the same way as a court judgment, and either party can choose not to accept the recommendation and pursue other legal avenues. The maximum claim amount handled by the ICCB is HK$1,000,000, not HK$800,000. Therefore, only the statement that the complainant is never charged a fee is accurate.

The Insurance Claims Complaints Bureau (ICCB) is designed to handle disputes related to personal insurance claims. It has a jurisdictional limit of HK$800,000 for the value of the claim. Complaints exceeding this amount, or those arising from commercial, industrial, or third-party insurance, fall outside the ICCB’s purview and must be resolved through other means such as litigation or arbitration. Therefore, a dispute involving a commercial property insurance claim, regardless of its monetary value, would not be handled by the ICCB.

A voluntary excess, also known as a ‘self-insured retention’ or ‘excess requested by the insured’, is an amount that the policyholder agrees to bear themselves in the event of a claim. This is typically offered by insurers as a way to reduce the premium. The insured chooses a higher excess amount in exchange for a lower premium. This is in addition to any compulsory excess that might apply to the policy, such as a young driver excess.

The concept of ‘Agreed Values’ in insurance, particularly for high-value items like jewelry or antiques, allows the sum insured to be the payable amount in the event of a total loss, irrespective of the item’s actual market value at the time of the loss. This differs from strict indemnity, which aims to restore the insured to their pre-loss financial position. While partial losses are typically subject to strict indemnity, the agreed value clause provides certainty for total loss scenarios. The other options describe different insurance concepts: ‘All Risks’ cover refers to the breadth of perils covered, not the valuation method; ‘Average’ (non-marine) is a penalty for under-insurance; and ‘Betterment Contribution’ relates to the insured contributing to improvements made during repairs.

The question tests the understanding of policy conditions, specifically the ‘Average’ clause. The Average clause is a penalty for under-insurance. If the sum insured is less than the value of the property at the time of loss, the insurer will only pay a proportion of the loss, calculated based on the ratio of the sum insured to the actual value. This prevents the insured from insuring only a portion of their property and claiming for the full value of a partial loss. Option A correctly describes this principle. Option B describes a deductible or excess, which is a fixed amount or percentage the insured pays first. Option C describes a franchise, which is similar to an excess but the insurer pays the full amount of the loss if it exceeds the franchise amount. Option D describes a general exception, which is a broader exclusion that might apply to the entire policy.

The scenario describes a situation where the insured experienced a loss (damaged watch) and took action to mitigate it by sending it for repair. However, the claim was lodged only after the repair was completed and the watch was collected, which was two weeks after the incident. The provided text (3.1.3 (a) Notification to the insurer) states that instructions are always given regarding the manner in which notice of a possible claim should be given, and Case 15 highlights that notification is required ‘as soon as possible’. Lodging a claim two weeks after the incident, even though the repair was done, likely deviates from the ‘as soon as possible’ requirement for notifying the insurer of a potential claim. This delay could impact the insurer’s ability to investigate the loss effectively or assess the damage, potentially leading to the claim being considered invalid due to a breach of the notification condition. Therefore, the most appropriate reason for the claim’s potential invalidity is the delayed notification of the loss to the insurer.

The scenario describes a shop owner losing cash from her bag after closing her shop. The money insurance policy explicitly states that cover is for losses occurring during normal business hours while being conveyed by a messenger. Since the loss happened outside of business hours, it falls outside the defined scope of coverage for this specific policy, leading to the rejection of the claim. The policy’s wording is crucial here, limiting the coverage period to ‘normal business hours’.

The question tests the understanding of the ‘Forcible and Violent Entry’ condition in theft insurance. This condition is a standard requirement for a valid claim under commercial theft policies, meaning that for a theft to be covered, there must be evidence of forced or violent entry into or exit from the premises. The other options represent different insurance concepts: ‘Franchise’ relates to the deductible amount that applies to claims, ‘Fraud’ concerns dishonest acts by the insured, and ‘Fundamental Risks’ refers to catastrophic potential losses that are often excluded.

The scenario describes a situation where an insurer has consistently accepted late premium payments without objection. This pattern of behavior, if demonstrated clearly and consistently, can lead to the insurer being considered to have ‘waived’ their right to strictly enforce the contractual term requiring punctual premium payment. The doctrine of waiver implies that the insurer, through their conduct, has relinquished their right to insist on the original terms. Estoppel, on the other hand, requires the insured to show they reasonably relied on this conduct to their detriment. While both concepts are related to the insurer’s conduct regarding late payments, waiver focuses on the insurer’s relinquishment of a right, whereas estoppel focuses on the insured’s reliance on the insurer’s conduct. The question asks about the insurer’s potential loss of the right to enforce punctuality due to past acceptance of late payments, which directly aligns with the definition of waiver in this context. The other options describe related but distinct concepts: ‘estoppel’ requires reliance, ‘forfeiture’ is the loss of rights due to a breach (which the insurer might be waiving), and ‘subrogation’ is the insurer’s right to step into the insured’s shoes to recover from a third party.