IIQE Paper 2 General Insurance Examination Quiz 03 Advanced

This question tests the understanding of the specific definition of ‘loss of one limb’ within the context of personal accident insurance, as illustrated by Case 12. The scenario highlights that a fracture causing functional impairment, but not physical severance at or above the wrist or total functional disablement, does not meet the policy’s strict definition for this benefit. The explanation clarifies that the Complaints Panel upheld the insurer’s decision because the insured’s condition, while inconvenient, did not align with the policy’s precise wording for ‘loss of one limb’ or ‘total functional disablement’. It also notes the absence of provisions for proportional compensation for partial permanent disability in the policy.

The question probes the understanding of prohibited practices in the insurance intermediary sector, specifically concerning rebating. Rebating, in this context, refers to offering inducements or benefits to policyholders or potential policyholders that are not explicitly stated in the policy contract. This practice is considered unethical and potentially illegal because it distorts the true cost of insurance, undermines fair competition, and can be a form of bribery or corruption. The Code of Practice for the Administration of Insurance Agents and the Minimum Requirements of the Model Agency Agreement are key regulatory documents that outline these prohibitions. Offering a commission or any financial benefit to an employee of the insured without the insured’s explicit written consent directly contravenes these regulations, as it bypasses the primary party to the insurance contract and creates an unfair advantage or incentive. This action is not merely a matter of customer service or general business ethics; it is a specific regulatory violation designed to maintain the integrity of the insurance market and prevent illicit practices.

This question tests the understanding of the duty of utmost good faith in insurance contracts, specifically concerning the disclosure of material facts. A material fact is defined as any circumstance that would influence a prudent insurer’s decision regarding premium calculation or risk acceptance. The duty to disclose these facts is a fundamental principle of insurance law, requiring the proposer to reveal all relevant information, even if not explicitly asked. Therefore, facts that impact an underwriter’s assessment of insurability or the terms of the policy are considered material.

In the context of marine insurance claims, the assured (the policyholder) is typically responsible for arranging and initially paying for a surveyor’s report. This report serves as an independent assessment of the cause and extent of the loss. While the surveyor’s fee is generally recoverable from the insurer as part of a valid claim, the initial appointment and payment usually fall to the assured. This contrasts with non-marine loss adjusters, who are more commonly appointed and paid by the insurer.

The question tests the understanding of the ‘claims-made’ basis for Directors and Officers (D&O) liability insurance. Under a claims-made policy, coverage is triggered by a claim being made against the insured during the policy period, regardless of when the wrongful act occurred. This contrasts with an ‘occurrence’ basis, where coverage is triggered by the event causing the loss happening during the policy period. Therefore, if a director leaves a company, they need to consider how to maintain coverage for potential future claims arising from their past actions. This is often achieved through ‘tail coverage’ or ensuring the policy has a sufficient retroactive date. The scenario highlights the importance of understanding this basis of cover for individual directors after their tenure ends.

The question probes the understanding of prohibited practices in the insurance intermediary sector, specifically concerning rebating. Rebating, in essence, is the offering of inducements or benefits to a policyholder that are not explicitly stated in the policy contract. This practice is considered unethical and potentially illegal because it distorts the true cost of insurance and can lead to unfair competition. The Code of Practice for the Administration of Insurance Agents, along with provisions in agency agreements, aims to prevent such practices. Offering a portion of the commission to an employee of the insured, without the insured’s explicit written consent, falls under the definition of rebating. This is because it provides a financial incentive to an individual associated with the insured entity, which is not part of the standard insurance transaction and could influence the decision-making process. Such actions undermine the integrity of the insurance market by compromising the principle of fair pricing and honest reward for intermediaries.

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 their employment, regardless of whether the employer was at fault. The ordinance mandates insurance to cover these liabilities. Therefore, the core principle of this compulsory insurance is to provide compensation based on the occurrence of a work-related accident, not on proving the employer’s negligence.

The question tests the understanding of policy conditions, specifically the ‘Average’ condition. 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. In this scenario, the property’s value is HK$500,000, but it is insured for only HK$300,000. The loss is HK$100,000. Applying the Average clause, the insurer will pay (Sum Insured / Value of Property) * Loss = (HK$300,000 / HK$500,000) * HK$100,000 = 0.6 * HK$100,000 = HK$60,000. Therefore, the insured will bear the remaining HK$40,000.

The scenario describes a situation where an insurer might impose specific conditions on a policy, such as excluding coverage for a pre-existing back condition in a personal accident policy or limiting cover for a family member with a poor driving record in a motor insurance policy. These are examples of ‘Specific Exclusions’ or ‘Underwriting Exclusions’ where the insurer modifies the policy terms based on the assessed risk of the individual or the specific circumstances of the insured item or activity. Market exclusions, on the other hand, are standard exclusions applied across the industry for fundamental risks like nuclear or war risks. Fraud and public policy are legal grounds for voiding a policy, not underwriting decisions. Therefore, the most appropriate classification for these insurer-imposed limitations is specific exclusions.

This question tests the understanding of the relationship between material damage insurance and business interruption (BI) insurance, specifically the ‘material damage proviso’ in BI policies. This proviso stipulates that a claim under a BI policy is contingent upon a valid claim being payable under the associated material damage policy for the same insured peril. If the material damage policy does not cover the event causing the interruption, or if it’s invalid, the BI claim will not be admitted. Therefore, the absence of a valid material damage cover for the physical loss directly invalidates the business interruption claim.

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 the insurer to cover a loss due to theft, there must be evidence of forced entry or exit from the premises. Without this evidence, the claim may be invalidated. The other options represent different insurance concepts: ‘Franchise’ relates to the deductible amount that the insured must bear before the insurer pays, ‘Fraud’ concerns dishonest acts by the insured, and ‘Fundamental Risks’ are those with potentially catastrophic loss potential that are often excluded.

The scenario describes a situation where an insurer has consistently accepted late premium payments without objection. This pattern of behaviour, if it leads the insured to reasonably believe that punctuality is no longer a strict requirement, can lead to the insurer being prevented from enforcing the strict contractual term regarding timely premium payment. This principle is known as waiver, where the insurer, through its conduct, relinquishes its right to strictly enforce a contractual term. For estoppel to apply, the insured must demonstrate they reasonably relied on this conduct to their detriment. Option B is incorrect because while the policy is the written contract, the insurer’s past actions are key to waiver/estoppel, not just the policy wording itself. Option C is incorrect as the Motor Insurers’ Bureau of Hong Kong (MIB) deals with compulsory motor insurance failures, not general premium payment punctuality issues. Option D is incorrect because the Employees Compensation Assistance Scheme (ECAS) relates to compensation for employees, not the enforcement of premium payment terms in general insurance contracts.

The scenario describes an individual injured while ice-skating. The insurer denied the claim based on a policy exclusion for ‘winter-sports’. The Complaints Panel, in interpreting this exclusion, determined that ‘winter-sports’ generally encompass sports played on snow or ice, regardless of the season or whether they are indoors or outdoors. Therefore, ice-skating, even indoors, falls under this category. The key principle here is the interpretation of policy exclusions and the broad definition applied to terms like ‘winter-sports’ by regulatory bodies when specific definitions are absent in the policy wording. This aligns with the understanding that insurers may interpret such clauses broadly to limit liability for activities deemed inherently risky, even if not explicitly listed.

This question tests the understanding of ‘System of Check’ in fidelity guarantee insurance. A robust system of check is crucial for an employer to maintain internal discipline and control over employees who are entrusted with financial responsibilities or valuable assets. This involves implementing procedures and controls to prevent or detect fraudulent activities. Option (a) accurately describes this by emphasizing the employer’s role in establishing internal controls and discipline. Option (b) is incorrect because while audits are part of a control system, they are a specific tool, not the overarching concept of a ‘system of check.’ Option (c) is incorrect as it focuses on external regulatory oversight, which is separate from the employer’s internal system. Option (d) is incorrect because while employee training is important, it’s a component of a broader system of checks and balances, not the definition itself.

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 that influences the insurer’s decision to accept the risk or the terms offered, the insurer may have grounds to void the contract. The requirement is for substantial truth, meaning minor inaccuracies that do not affect the risk assessment are generally acceptable, but significant falsehoods can invalidate the policy. Options (b), (c), and (d) present absolute or incorrect standards for representations. Representations do not always need to be in writing unless specified by law or the proposal form, and they do not need to be absolutely true, nor can they be untrue without consequence.

This question tests the understanding of the duty of utmost good faith in insurance contracts, specifically concerning the disclosure of material facts. A material fact is defined as any circumstance that would influence a prudent insurer’s decision regarding premium calculation or risk acceptance. The duty to disclose these facts is a fundamental principle of insurance law, requiring the proposer to reveal all relevant information, irrespective of whether specific questions are asked. Therefore, facts that impact an underwriter’s judgment on premium or acceptance are considered material.

The scenario describes a situation where a proposer for fire insurance fails to disclose that they store highly flammable materials on the insured premises. This fact significantly increases the risk of a fire, beyond what a prudent underwriter would typically expect for a general business. According to the principles of utmost good faith and the duty of disclosure, a proposer must reveal all material facts that could influence an underwriter’s decision. Storing highly flammable materials is a fact that would likely alter the underwriter’s assessment of the risk and the premium charged, thus it is considered a material fact that must be disclosed. Failure to do so would be a breach of this duty.

The question tests the understanding of policy conditions, specifically the ‘Average’ condition. 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. In this scenario, the property’s value is HK$500,000, but it is insured for only HK$300,000. The loss is HK$100,000. Applying the Average clause, the insurer will pay (Sum Insured / Value of Property) * Loss = (HK$300,000 / HK$500,000) * HK$100,000 = 0.6 * HK$100,000 = HK$60,000. Therefore, the insured will bear the remaining HK$40,000.

A Certificate of Insurance serves as a formal confirmation of the existence of compulsory insurance. It is a standalone document, distinct from the main policy, and is commonly issued for motor and pleasure vessel insurance to demonstrate compliance with legal requirements. While it confirms coverage, it is not the policy itself, nor is it a claim notification or a summary of all policy terms.

A General Average Act is defined as an extraordinary sacrifice or expenditure voluntarily and reasonably made or incurred in time of peril to preserve the property imperilled in the common adventure. When a ship’s engine fails and the vessel is adrift in a storm, the captain decides to jettison a portion of the cargo to lighten the ship and regain steerage, thereby saving the vessel and the remaining cargo. This act of jettisoning cargo is a voluntary and reasonable sacrifice made in a time of peril to preserve the entire marine adventure. Therefore, it constitutes a General Average Act, and the loss incurred by the owner of the jettisoned cargo is a General Average Loss, for which the owner is entitled to a contribution from the other parties whose property was saved.

This question tests the understanding of how an excess works in motor insurance, specifically the difference between a voluntary and a compulsory excess, and how they interact. A voluntary excess is chosen by the policyholder to reduce the premium, while a compulsory excess is imposed by the insurer. Standard policy excesses are a type of compulsory excess that applies universally or to specific risk factors without a premium discount. In this scenario, the policyholder chose a voluntary excess of HK$5,000. The insurer then imposed a compulsory underwriting excess of HK$2,000 due to the vehicle’s high performance. Standard policy excesses are applied in addition to any voluntary or underwriting excesses and do not qualify for premium discounts. Therefore, the total excess applicable to the claim would be the sum of the voluntary excess and the standard policy excess, which is HK$5,000 + HK$3,000 = HK$8,000. The explanation for the incorrect options: Option B is incorrect because it only considers the voluntary excess and ignores the standard policy excess. Option C is incorrect because it incorrectly sums the voluntary excess and the underwriting excess, and also fails to include the standard policy excess. Option D is incorrect because it only considers the standard policy excess and ignores both the voluntary and underwriting excesses.

A General Average Act is defined as an extraordinary sacrifice or expenditure voluntarily and reasonably made or incurred in time of peril to preserve the property imperilled in the common adventure. In this scenario, the decision to jettison a portion of the cargo to lighten the vessel and prevent it from sinking during a storm is a classic example of a voluntary and reasonable sacrifice made in a time of peril to save the entire maritime adventure. This act, aimed at preserving the ship and the remaining cargo, fits the definition of a General Average Act. The other options are incorrect because they do not describe the specific circumstances of a General Average Act. Salvage refers to the reward for saving property from peril, Sue and Labour charges are expenses incurred by the assured to preserve insured property, and Actual Total Loss means the subject matter is destroyed, irrecoverably lost, or damaged beyond recognition as the insured item.

This question tests the understanding of exclusions in a Professional Indemnity (PI) policy, specifically concerning financial losses arising from dishonest acts. PI policies are designed to cover negligence or errors in professional advice or services. However, they explicitly exclude liability stemming from dishonesty, fraud, or criminal behavior by the insured. While a PI policy might cover financial loss due to a negligent omission, it would not extend to losses caused by intentional fraudulent actions. The scenario describes a fund manager deliberately misrepresenting investment performance, which falls squarely under the dishonesty exclusion, making the resulting financial loss uninsurable under a standard PI policy.

The question tests the understanding of the ‘pro rata average’ condition in insurance policies, specifically how under-insurance affects claim payouts. The scenario describes a situation where the sum insured for contents is less than the actual value of the contents at the time of loss. The pro rata average condition stipulates that the claim payment will be reduced proportionally to the extent of under-insurance. In this case, the sum insured ($500,000) represents 80% of the actual value ($625,000). Therefore, the claim for a loss of $100,000 will be paid at 80% of that amount, resulting in a payout of $80,000, provided it does not exceed the sum insured.

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 still subject to indemnity principles, a total loss is settled based on the pre-determined agreed value. This mechanism provides certainty for both the insurer and the insured regarding the payout for a complete loss, mitigating disputes over valuation at the time of an incident.

This question tests the understanding of the specific definition of ‘loss of one limb’ within the context of personal accident insurance, as illustrated by Case 12. The scenario highlights that a fracture causing functional impairment, but not physical severance at or above the wrist or total functional disablement, does not meet the policy’s strict definition for this benefit. The explanation emphasizes that the insurer’s decision was upheld because the insured’s condition did not align with the policy’s precise wording, and the policy did not offer proportional compensation for partial disabilities. Therefore, the insurer correctly rejected the claim for partial disablement under the ‘loss of one limb’ benefit.

This question tests the understanding of how contract terms are classified based on their timing of operation within an insurance policy. A ‘condition precedent to liability’ is a term that, if breached, does not void the entire contract but rather prevents a specific claim from being paid. The scenario describes a notification requirement for a change in profession, which, if not met, would invalidate a claim related to that change, fitting the definition of a condition precedent to liability. A condition precedent to the contract would prevent the contract from coming into existence in the first place. A condition subsequent to the contract would typically occur after the contract is in force and, if breached, could lead to termination or other consequences, but the phrasing here specifically links the breach to the invalidation of a claim.

The question tests the understanding of specific exclusions in third-party liability cover for commercial vehicles, as distinct from private car policies. The ‘tool of trade’ clause specifically excludes liability arising from the vehicle’s use as a tool of trade, such as a mechanical digger performing its function. While statutory provisions for compulsory insurance might mandate certain cover, the general exclusion applies to the vehicle’s operational use in this manner. Food poisoning claims are also excluded, as is damage to stock-in-trade. Damage to roads due to the vehicle’s weight is another specific exclusion. Therefore, the use of a vehicle as a tool of trade is a key exclusion under the third-party cover for commercial vehicles, as per the provided syllabus.

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’. Since the loss happened outside of these specified hours, the insurer is justified in rejecting the claim based on the policy’s temporal limitation. While the cash was intended for business purposes, the timing of the loss violates a key condition of the policy. The policy’s coverage for ‘robbery, burglary or theft’ is secondary to the condition of occurring within business hours.

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.