IIQE Paper 2 General Insurance Examination Quiz 07 Advanced

The scenario describes a situation where an insurer provides a replacement item for a non-depreciating subject matter that has been damaged. This aligns with the definition of ‘Replacement’ as a method of indemnity where the insured receives a new item to substitute the damaged one, particularly when the original item’s value doesn’t decrease over time. ‘Reinstatement’ involves restoring the damaged property to its pre-loss condition, which is not applicable here as a new item is provided. ‘Salvage’ refers to the residual value of damaged property, and ‘Repatriation Expenses’ cover the cost of returning a deceased person’s remains. Therefore, ‘Replacement’ is the most accurate term for the indemnity provided.

An insurance broker acts as an agent for the proposer (the client seeking insurance). This agency relationship means the broker is legally bound to act in the proposer’s best interest and to disclose all material information relevant to the risk being insured. When a broker withholds or misrepresents such information, it constitutes a breach of the duty of utmost good faith. This breach is legally attributed to the proposer, meaning the proposer is held responsible for the broker’s actions in this regard. This can lead to the insurer voiding the policy because the contract was based on incomplete or inaccurate material facts, undermining the principle of utmost good faith which is fundamental to insurance contracts.

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 exclusion is crucial because the policy is meant to cover errors in judgment or execution, not intentional wrongdoing. Options B, C, and D represent situations that might be covered under a PI policy, such as financial loss due to negligent advice, property damage from a professional error, or legal costs associated with defending a claim of professional misconduct, provided these are not linked to dishonesty.

The scenario describes an individual injured while ice-skating. The insurer denied the claim based on a ‘winter-sports’ exclusion. The Complaints Panel, in interpreting this exclusion, determined that ‘winter-sports’ generally encompass activities on snow or ice, regardless of the season or whether they are performed indoors. Therefore, ice-skating, even in an indoor shopping complex, falls under this exclusion as it is an activity performed on ice. 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.

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 unless those breaches also result in an injury covered by the ordinance. Product liability insurance, on the other hand, specifically addresses the manufacturer’s or seller’s duty of care to consumers regarding defective products, which is distinct from an employer’s liability to its employees. Therefore, a claim for damages due to a defective product supplied by the employer to a third party, even if the third party is also an employee, would not fall under the scope of compulsory Employees’ Compensation Insurance, which is focused on workplace accidents and occupational diseases.

A warranty in insurance is an absolute undertaking by the insured to the insurer. A breach of this undertaking, regardless of its impact on the claim, can automatically discharge the insurer’s liability from the date of the breach. However, insurers in Hong Kong have provided an undertaking to the Hong Kong Federation of Insurers that they will only refuse a claim due to a breach of warranty if there is a causal connection between the breach and the loss, or if the breach is fraudulent. This means that a breach that does not cause the loss and is not fraudulent would not typically lead to a claim refusal under this undertaking, even though technically the warranty is breached.

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 theft, there must be evidence of forced or violent entry into the premises. The other options represent different insurance concepts: ‘Franchise’ relates to the deductible amount that the insured must bear before the insurer pays; ‘Fraud’ refers to dishonest acts by the insured; and ‘Fundamental Risks’ are those with potentially catastrophic loss potential, often excluded from standard policies. Therefore, the presence of forcible and violent entry is a prerequisite for a theft claim under such policies.

The question tests the understanding of the basis of cover for Public Liability (PL) insurance. The provided text explicitly states that PL insurance is usually on a “claims-occurring” basis, meaning that the policy covers incidents that happen during the policy period, regardless of when the claim is actually made. While “claims-made” policies are not unknown, they are not the common practice for PL insurance. Therefore, a policy that covers claims reported within the policy period but arising from incidents that occurred outside that period would not align with the typical “claims-occurring” basis.

The scenario describes an insurance broker offering a portion of their commission to a potential client to secure business. This practice, known as rebating, is explicitly addressed in the provided text as a grave matter if used as an improper inducement. While seemingly a gesture to make the premium ‘cheaper,’ its intent as an inducement for business makes it a serious ethical and potentially legal issue, falling under general business conduct and expected conduct in connection with proposal completion. The other options are less direct or incorrect: ‘cooperation with principals’ relates to the relationship between the intermediary and the insurer, not client inducements; ‘handling of premiums’ refers to the management of client funds; and ‘minimum requirements for insurance brokers’ covers capital, qualifications, and professional indemnity, not specific sales practices like rebating.

The concept of ‘Agreed Value’ in insurance, particularly for high-value items like jewelry or antiques, means that the sum insured is fixed and payable in the event of a total loss, irrespective of the item’s actual market value at the time of the loss. This differs from the principle of indemnity, which aims to restore the insured to their pre-loss financial position. For partial losses, however, the principle of strict indemnity typically still applies, meaning the payout would be based on the actual loss incurred, not the agreed value. Therefore, the statement that the agreed value is payable for both total and partial losses is incorrect.

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 warranty in insurance is an absolute undertaking by the insured to the insurer. A breach of this undertaking, regardless of its impact on the loss, can automatically discharge the insurer’s liability from the date of the breach. However, insurers in Hong Kong have provided an undertaking to the Hong Kong Federation of Insurers that they will only refuse a claim due to a breach of warranty if there is a causal connection between the breach and the loss, or if the breach is fraudulent. This means that a breach that does not cause or relate to the loss, and is not fraudulent, will not be used to deny a claim, even though technically it’s a breach of warranty.

Moral hazard refers to the increased likelihood of a loss occurring because an individual is insured. This can manifest in various ways, including dishonesty, carelessness, unreasonableness, and negative social behaviour. While dishonesty leading to fraud is a direct form of moral hazard, carelessness, which increases the probability of accidents or losses due to a lack of diligence, is also a significant manifestation. Unreasonableness, characterized by inflexible or opinionated views that create problems, and negative social behaviour like vandalism, also contribute to increased risk for the insurer. Therefore, all these behaviours, stemming from the ‘human element’ of the insured, are considered aspects of moral hazard.

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.

The scenario describes a shop owner whose wallet containing cash went missing after her shop closed. The money insurance policy specified that cover was 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 policy’s defined scope of coverage. Money policies typically restrict coverage to business-related losses during operational periods to differentiate from personal losses and manage risk. Therefore, the insurer’s rejection of the claim is consistent with the policy terms.

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 portion of the commission to an employee of the insured without the insured’s explicit written consent directly contravenes these regulations, as it provides an unfair advantage and bypasses the proper channels of compensation. Therefore, such an action is a clear violation of the principles governing insurance intermediary conduct.

The question tests the understanding of the scope of theft insurance, specifically concerning 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 by 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 the theft itself by staff. Option (c) is incorrect as fire damage is explicitly excluded from theft policies. Option (d) is incorrect because while average might apply to under-insurance, the primary coverage for damage during forcible entry is a standard feature, not an exclusion.

A cover note is a temporary document that provides immediate evidence of insurance coverage, binding the insurer even before the final policy is issued. Its primary function is to assure the insured that protection is in place, often used in situations like motor insurance where proof is needed for registration or when a bank requires evidence of fire insurance before approving a loan. While it offers unconditional cover, it typically includes cancellation provisions and is intended for a short duration, to be superseded by a formal 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 portion of the commission to an employee of the insured without the insured’s explicit written consent directly contravenes these regulations, as it provides an unfair advantage and bypasses the proper channels of compensation and disclosure. This action is not merely a customer service gesture but a violation of the principles of honest dealing and fair reward for intermediaries.

This question tests the understanding of exclusions in Directors’ and Officers’ (D&O) liability insurance, specifically concerning actions taken by the insured. The scenario describes a director who, prior to the policy’s inception, was aware of a potential issue that later led to a claim. D&O policies typically exclude coverage for circumstances known or that ought to have been known at the policy inception date. This exclusion aims to prevent individuals from obtaining insurance coverage for known risks they have already chosen to undertake. Therefore, a claim arising from such a known circumstance would be denied. Option B is incorrect because while dishonesty is an exclusion, the scenario doesn’t explicitly state dishonesty, and the primary exclusion here is the prior knowledge of the circumstance. Option C is incorrect as contractual liability exclusions are separate from known circumstances. Option D is incorrect because while pollution is a standard exclusion, it is not the relevant exclusion for the given scenario.

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 damage caused when a vehicle is used as a tool for its primary function, such as a mechanical digger being used for excavation. This exclusion is a key differentiator for commercial vehicle third-party cover, except where statutory requirements mandate otherwise. The other options represent different types of exclusions or coverages not directly related to the ‘tool of trade’ concept.

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. The requirement for adequate reinsurance is also a key component of the ICO, aimed at managing risk and ensuring the insurer’s ability to meet its obligations. These provisions collectively contribute to the economic and social viability of insurance companies, which indirectly supports customer service by ensuring the insurer’s long-term capacity to pay claims and provide ongoing coverage.

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 audits are part of a system of check, they are a retrospective review rather than a primary preventative control. Option C is incorrect as it focuses on external regulatory oversight, not the employer’s internal system. Option D is incorrect because while insurance indemnifies against loss, it doesn’t replace the employer’s responsibility for internal controls.

Moral hazard refers to the increased likelihood of a loss occurring because an individual is insured. This can manifest in various ways, including dishonesty (fraud), carelessness leading to accidents, unreasonableness in decision-making that exacerbates risk, and negative social behaviour like vandalism. The question asks to identify a behaviour that exemplifies moral hazard. While all options describe potential negative behaviours, dishonesty, particularly in the form of fraud, is a direct and severe manifestation of moral hazard where the insured intentionally causes or exaggerates a loss to benefit from the insurance. Carelessness, unreasonableness, and social behaviour can also contribute to losses, but dishonesty represents a more deliberate exploitation of the insurance coverage.

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 excess is HK$2,000. Therefore, the insurer will pay the amount exceeding the excess, which is HK$12,000 – HK$2,000 = HK$10,000. The question is designed to ensure the candidate understands that the excess is deducted from the total loss, not added to it or applied in some other way.

A combined liability policy, as described in the context of insurance, is designed to consolidate various types of liability coverage into a single document for convenience and potential premium savings. While it typically encompasses Public Liability, Products Liability, and Employees’ Compensation Liability, clients may also opt for additional coverages like Directors’ and Officers’ Liability or Professional Liability. The critical caution highlighted is the importance of ensuring each coverage section functions as a separate contract. If a warranty or condition within one section is breached, and the policy is treated as a single contract, this breach could potentially invalidate all other sections of the policy, even if the breach is only relevant to that specific section. This is due to the nature of warranties, which do not depend on materiality or causation for their operation. Therefore, clear policy wording that delineates separate contracts for each type of insurance is paramount to prevent such cascading effects.

This question tests the understanding of exclusions in a Professional Indemnity (PI) policy. Specifically, it focuses on the exclusion related to dishonesty, fraud, or criminal acts. While a PI policy covers errors in professional advice or omissions, it does not extend to losses arising from intentional wrongdoing by the insured professional. The scenario describes a situation where a financial advisor intentionally misrepresented investment performance to a client, leading to financial loss. This falls squarely under the dishonesty exclusion, meaning the PI policy would not cover the resulting claims.

Institute Cargo Clauses (A) provides the broadest coverage, operating on an ‘all risks’ basis. This means it covers all losses unless specifically excluded by the policy wording. Clauses (B) and (C) are more restrictive, covering only a defined list of perils. Therefore, a shipment insured under Clause (A) would be protected against a wider array of potential damages compared to shipments under Clauses (B) or (C), assuming the cause of loss is not an explicit exclusion in the (A) clause.

The scenario describes a shop owner whose wallet containing cash went missing after her shop closed. The money insurance policy specified that cover was 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 cover for this specific policy. Money policies often restrict coverage to business hours to differentiate between business funds and personal funds, and to manage the risk associated with money outside of controlled business environments. Therefore, the insurer’s rejection of the claim is consistent with the policy terms.

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 repairing that window is covered as part of the theft insurance, provided it was necessary for the forcible entry.