IIQE Paper 2 General Insurance Examination Quiz 06 Advanced

The scenario describes a situation where an insurer denied a hospitalization claim due to a pre-existing condition. The insurer’s reasoning was based on the size of the tumor, suggesting it couldn’t have developed within the 10 days after the policy inception. The Complaints Panel agreed, citing the policy’s exclusion for illnesses presenting signs and symptoms prior to the policy commencement date. The key principle here is the insurer’s right to decline claims for conditions that existed before the policy’s effective date, provided there’s evidence of prior manifestation or development. The difficulty in pinpointing the exact onset date is a common challenge, but the panel’s decision was based on the tumor’s size as an indicator of its development period, aligning with the policy’s exclusion clause.

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 fraudulent activities by their employees. 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 reactive measure (investigation) rather than a preventative system. Option D is incorrect because while training is important, it’s a component of a broader system, not the definition of the system of check itself.

The question tests the understanding of the scope of theft insurance, specifically regarding damage to the premises during an attempted theft. According to the provided text, theft policies typically include coverage for damage caused by thieves to the insured premises when making 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. Option (a) accurately reflects this, stating that damage to the premises during forcible entry or exit is covered. Option (b) is incorrect because while theft by staff is excluded, the question is about damage to the premises during theft, not theft by staff itself. Option (c) is incorrect as fire damage is explicitly excluded from theft policies. Option (d) is incorrect because while warranties are common, the question is about the scope of cover for damage to the premises, not specific warranty conditions.

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 law requires insurers to recover these documents if the policy is cancelled, highlighting their critical legal role. Therefore, while it confirms compulsory insurance, it does not provide a summary of the policy’s specific terms or coverage details.

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 Insurance Companies Ordinance (ICO) establishes stringent requirements for insurers to ensure their financial stability and operational integrity. These include mandates for authorization, minimum capital levels, maintaining adequate solvency margins, and ensuring that directors and controllers meet ‘fit and proper’ standards. Furthermore, it requires insurers to have sufficient reinsurance arrangements. These provisions collectively aim to safeguard policyholders and maintain public confidence in the insurance sector, directly contributing to the economic and social viability of insurance companies, which in turn supports customer service and protection.

Average adjusters are specialists in marine insurance, particularly in the complex area of General Average (GA) claims. Their expertise is crucial due to the intricate legal knowledge required, the potentially large number of interested parties involved in GA situations, and the often lengthy duration of investigations and settlements. While Lloyd’s Agents and Loss Adjusters are also involved in claims handling, their roles and specializations 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 insurer’s 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 assessing and settling complex marine claims.

A fire business interruption policy is designed to compensate an insured business for financial losses incurred due to a disruption of operations caused by a covered peril, such as fire. This compensation typically extends beyond the direct physical damage to cover consequential losses like loss of profit and ongoing expenses that continue even when the business is not operating. Options (a), (b), and (c) describe direct physical damage or third-party liabilities, which are generally covered by other types of insurance policies (e.g., property insurance for buildings and contents, or liability insurance for third-party claims). Therefore, the primary purpose of business interruption insurance is to address the indirect financial consequences of a covered event.

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.

A ‘claims-occurring’ basis policy provides coverage for events that happen during the policy period, regardless of when the claim is actually reported. This means if an incident occurs while the policy is active, the insurer is obligated to cover it, even if the claim is filed after the policy has expired. Conversely, a ‘claims-made’ policy only covers claims that are both made and reported during the policy’s term. The scenario describes a situation where a potential liability event occurred during the policy’s currency, but the claim was lodged after its expiry. Under a ‘claims-occurring’ policy, this would be covered because the event happened within the policy period. The other options describe different insurance concepts: a Certificate of Insurance is a formal confirmation of compulsory insurance, not a basis for claim settlement; Combined Liability policies bundle different types of liability coverage; and Collision Liability specifically addresses damage from vessel collisions.

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 violates the insured’s duty to minimize loss, which is a common law obligation and often explicitly stated in policy conditions. The insured’s inaction leads to an increase in the overall damage, which the insurer may seek to attribute to the insured’s breach of duty, potentially impacting the claim payout. Admitting liability to a third party or failing to disclose other insurances are separate duties, and while important, they are not the primary breach in this specific scenario. Subrogation rights are also a duty, but the failure to preserve property is a more immediate and direct breach of the duty to mitigate loss.

The ‘step-back system’ for No Claim Discount (NCD) in private car insurance, as outlined in the IIQE syllabus, dictates how a claim affects the accumulated discount. For a private car with an entitlement of four or more years (equivalent to 50% or 60% NCD), a single claim in the policy year will result in a reduction of the renewal discount to 20% or 30% respectively. This means the discount does not reset to zero but is significantly reduced, requiring subsequent claim-free years to rebuild to the previous level. Options B, C, and D describe scenarios that are either incorrect (no impact or full loss of NCD for a single claim) or apply to different vehicle types or claim frequencies not specified in the question’s premise.

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. The Motor Insurers’ Bureau of Hong Kong (MIB) plays a crucial role in fulfilling the intentions of this compulsory insurance by providing coverage when a valid policy is not in place or is ineffective, thereby safeguarding the public interest. Therefore, understanding the foundational legislation for compulsory motor insurance is essential.

The question tests the understanding of ‘Public Policy’ in the context of contract law, specifically how it can render agreements void. Agreements that restrict an individual’s freedom of marriage or attempt to oust the jurisdiction of the courts are classic examples of contracts that contravene public policy. The scenario describes a situation where an individual is prevented from marrying due to a contractual clause, which directly infringes upon a fundamental personal freedom, thus making the clause void as it is against public policy.

The ‘step-back system’ for No Claim Discount (NCD) in private car insurance, as described in the IIQE syllabus, dictates how a claim affects the accumulated discount. For a private car with an entitlement of four or more 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% respectively upon renewal. This means the discount is not entirely lost but is significantly reduced, requiring subsequent claim-free years to rebuild to the previous level. Options B, C, and D describe scenarios that are either incorrect regarding the step-back system’s impact on higher NCDs or misrepresent the consequences of claims on NCD accumulation.

This question assesses the understanding of the positive impacts of excellent customer service in the insurance industry, specifically focusing on customer retention and the generation of new business. The provided text highlights that satisfied customers not only remain loyal but also become a valuable source of referrals through word-of-mouth, directly contributing to increased business and profitability. Options B, C, and D represent negative consequences of poor service or are tangential benefits not directly emphasized as primary positive outcomes in the context of customer loyalty and business generation.

The scenario describes an insurance broker who, to secure a new client, offers a portion of their commission back to the client. This practice, known as rebating, is explicitly addressed in the provided text. While sometimes seen as a harmless gesture, it becomes a serious issue when used as an improper inducement to gain business. The question tests the understanding of this distinction and the ethical implications of such actions within the insurance industry, particularly concerning general business conduct and the prevention of insurance fraud.

The question tests the understanding of the insured’s duty to minimize loss after a claim event, as stipulated by common law and often reinforced in policy conditions. The scenario describes a fire damaging a commercial property. The insured’s immediate action of boarding up windows and securing the premises is a proactive step to prevent further damage from vandalism or weather, thereby fulfilling the duty to mitigate further losses. Option B is incorrect because while reporting the loss is a duty, it doesn’t directly address minimizing further damage. Option C is incorrect as admitting liability to a third party without the insurer’s consent would prejudice the insurer’s rights, not minimize loss. Option D is incorrect because disposing of damaged property without permission can be problematic and doesn’t necessarily minimize loss; in fact, it could be seen as jeopardizing the insurer’s rights to salvage.

The question tests the understanding of the core components typically found in a company’s published declaration of customer service standards. These declarations are designed to outline the company’s commitment to its clients and stakeholders. Option (a) correctly identifies the commitment to quality and service as a fundamental element. Option (b) refers to professional standards, which is also a common inclusion. Option (c) highlights efficiency and ethical business practices, another key aspect. Option (d) focuses on claims handling, a critical service promise. The provided text emphasizes that these declarations are not just self-imposed but can also be mandated by industry bodies or legislation, reinforcing their importance in demonstrating declared intentions and measuring performance. The question probes the candidate’s knowledge of what constitutes a comprehensive customer service declaration in the insurance industry, as outlined in the syllabus.

The Employees’ Compensation Ordinance (ECO) mandates compulsory insurance for employers to cover their liability for employee injuries or deaths arising out of and in the course of employment. While the ECO covers accidents, it does not typically cover liabilities arising from breaches of contract that are unrelated to the employment relationship itself, such as contractual indemnities given to third parties. The question describes a scenario where an employer’s claim was rejected because the injury did not meet the ‘arising out of and in the course of employment’ criterion, which is fundamental to ECO coverage. The insurer’s rejection is based on the policy’s intent to cover statutory liability under the ECO and common law liability for employment-related injuries. Contractual liability, unless it directly stems from and is a consequence of the employer’s statutory or common law duty towards the employee, is generally excluded. Therefore, the insurer’s rejection is valid if the claim pertains to a liability that falls outside the scope of the ECO and common law employer’s liability, such as a purely contractual obligation to a third party.

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.

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.

The Code of Conduct for Insurers in Hong Kong is designed to promote good insurance practice and protect policyholders. It covers a broad spectrum of insurer conduct, including their interactions with customers and their operational responsibilities. Specifically, the Code addresses how insurers should handle underwriting and claims processes to ensure fairness and efficiency. It also explicitly outlines the rights and obligations of customers, ensuring they are informed and treated equitably. Furthermore, the Code emphasizes the importance of safeguarding customers’ overall interests and well-being throughout their relationship with the insurer. While a good corporate image is desirable, the Code’s primary focus is on the direct conduct of insurance business and customer protection, rather than the broader societal impact of the industry’s public image as a corporate citizen.

The scenario describes a situation where an insured event has occurred, and the insured is obligated to provide reasonable proof of their claim. This includes demonstrating the insurer’s liability (i.e., that the loss falls within the policy’s coverage as outlined in the operative clause) and substantiating the quantum of the claim (the amount being claimed). While cooperation and minimizing loss are also duties, the primary immediate requirement after a loss, to initiate the claims process, is to provide evidence of the loss and its value. Admitting liability to a third party without the insurer’s consent would prejudice the insurer’s rights, and disclosing other insurances is for contribution purposes, which are secondary to establishing the initial claim’s validity and value.

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.

This question tests the understanding of General Average (GA) acts and their consequences. A GA act involves a voluntary and reasonable sacrifice or expenditure to preserve the common adventure. When a sacrifice is made, such as jettisoning cargo, the owner of the sacrificed goods is entitled to a contribution from other parties whose property was saved. This contribution is known as a General Average Contribution. The scenario describes a situation where a portion of the cargo was intentionally discarded to lighten the vessel and prevent it from sinking, which is a classic example of a GA sacrifice. Therefore, the owner of the jettisoned cargo has a right to claim a contribution from the owners of the saved cargo and the vessel.

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.

Institute Cargo Clauses (ICC) (A) provides the broadest coverage for own damage on an ‘All Risks’ basis. This means it covers all perils except those specifically excluded. ICC (B) covers specified risks, and ICC (C) covers even fewer specified risks. The scenario describes a situation where cargo is damaged due to a peril not explicitly listed in ICC (B) or (C), but which would be covered under the ‘All Risks’ provision of ICC (A). Therefore, ICC (A) is the most appropriate cover for the bank’s requirement to protect its financial interest in the cargo against a wide range of potential damages.

This question tests the understanding of the specific definition of ‘loss of one limb’ in 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 key is that the policy specifically defines ‘loss of use’ as ‘total functional disablement,’ and the insured’s condition, while inconvenient, did not reach this threshold. Furthermore, the policy lacked provisions for proportional compensation for partial permanent disability, reinforcing the insurer’s decision.

A cover note is a temporary document that provides immediate evidence of insurance coverage, binding the insurer even before the full proposal details are finalized. Its primary function is to assure the insured that protection is in place, often serving as proof for regulatory or financial purposes, such as vehicle registration or loan approvals. While it offers unconditional cover, it typically includes cancellation provisions and is intended to be replaced by a formal policy. A policy, on the other hand, is the final, formal document that represents the completed contract of insurance, incorporating all agreed terms and conditions, and supersedes any prior cover notes. A certificate of insurance, particularly in the context of compulsory insurance like motor, serves as proof of that legal requirement, but it is a separate and permanent document, distinct from the temporary nature of a cover note and the comprehensive nature of a policy. Therefore, the document that provides immediate, albeit temporary, evidence of insurance coverage and binds the insurer is the cover note.