IIQE Paper 2 General Insurance Examination Quiz 08 Advanced

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 due to an accident arising 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 fault, which is then covered by compulsory insurance.

The question tests the understanding of an insurer’s obligation regarding policy renewals. According to general insurance principles, an insurer is not legally obligated to remind the policyholder about an approaching renewal date. If the policyholder fails to take action, the policy simply lapses at the end of its term. Cancellation, on the other hand, implies a premature termination of coverage, which is distinct from a policy lapsing due to non-renewal.

A Scheduled Policy Form is a common structure for insurance policies that includes a policy schedule. This schedule details specific information about the policy, such as the insured’s name, the property covered, the sum insured, and the period of insurance. The Signature Clause, also known as the Attestation Clause, is a crucial part of this form where the insurer formally signifies their agreement to the terms and conditions outlined in the policy contract. This clause confirms the insurer’s undertaking and makes the policy legally binding.

The core principle of an indemnity policy is to restore the insured to their pre-loss financial position. When new parts are used to repair an older vehicle, these new parts inherently offer a superior lifespan and condition compared to the original, aged parts. This improvement, often termed ‘betterment,’ places the insured in a financially advantageous position post-repair. Therefore, the insurer is entitled to deduct a contribution from the insured to account for this betterment, ensuring the insured does not profit from the claim. The scenario highlights that the insurer’s calculation of a 35% betterment contribution for an eight-year-old vehicle, while a standard depreciation rate might be 50%, was deemed reasonable by the Complaints Panel, especially since the policy explicitly excluded depreciation. This means the insured is responsible for the portion of the new parts’ cost that represents an improvement beyond mere restoration.

A Performance Bond is a financial guarantee, structured as a bond rather than an insurance policy, designed to ensure that a contractor fulfills their contractual obligations, specifically the completion of construction work within the agreed-upon timeframe. This aligns with the definition provided, emphasizing its role in guaranteeing project completion.

This question tests the understanding of the specific definitions used in Personal Accident (PA) cover within travel insurance. The scenario highlights that a claim for ‘loss of one limb’ requires adherence to the policy’s precise definition, which typically involves physical severance or total functional disablement. The insured’s condition, while causing inconvenience and partial functional loss, did not meet the strict criteria of ‘loss by physical severance of a hand at or above the wrist or of a foot at or above the ankle, or loss of use of such hand or foot’ where ‘Loss of Use’ is defined as ‘total functional disablement’. Therefore, the insurer’s rejection of the claim for partial disablement, based on the policy’s explicit wording, was upheld.

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 insured person, a businessman, suffered a back injury and underwent surgery. Initially, the insurer paid Temporary Total Disability (TTD) benefits. However, based on a medical examiner’s report indicating improved trunk movement, the insurer reclassified the benefit to Temporary Partial Disability (TPD), arguing the insured could perform some duties. The Complaints Panel, weighing the opinions of the insured’s attending doctors against the insurer’s consultant, ultimately sided with the attending doctors, ruling that the insured should continue receiving TTD benefits. This decision highlights the importance of the attending physician’s assessment in determining the extent of disability, especially when there are conflicting medical opinions. The key factor is whether the insured is unable to perform *any* of their usual occupation duties for TTD, or if they can perform *some* duties, which would qualify for TPD. The panel’s inclination to believe the attending doctors suggests their direct and ongoing observation of the patient’s condition carried more weight in this specific dispute.

The question tests the understanding of the specific limitations of motor insurance policies for motorcycles, particularly concerning the coverage for loss of accessories. According to the provided text, for motorcycles, theft claims are only admissible if the entire machine is stolen. This implies that the loss of accessories alone, even if stolen, would not be covered under the ‘Own Damage/Accidental Damage’ section of a standard motor insurance policy for a motorcycle. Therefore, an insurer would typically reject a claim solely for stolen accessories.

This question tests the understanding of exclusions in a Professional Indemnity (PI) policy, specifically concerning liability arising from dishonesty or fraudulent acts. The scenario describes a financial advisor who intentionally misrepresents investment performance to a client, leading to financial loss. PI policies are designed to cover errors in professional judgment or negligence, not intentional misconduct. Therefore, liability stemming from dishonest actions is typically excluded from coverage under such policies, as it falls outside the scope of professional errors and omissions. The other options represent potential coverages or are irrelevant to the core exclusion being tested. Liability for financial loss due to negligent advice would be covered, but the dishonesty element negates this. Fines and penalties are also generally excluded, but the primary reason for non-coverage in this specific scenario is the dishonest act itself. Geographical limitations are a separate exclusion and not directly applicable to the nature of the advisor’s misconduct.

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 scenario describes a situation where an insured person sustained an injury and received a certain number of days of temporary total disability benefit and temporary partial disability benefit. The insured was dissatisfied, believing they should have received temporary total disability benefit for the entire duration. The Complaints Panel’s decision was based on the nature and severity of the injury, the insured’s occupation (self-employed director with mainly office duties), and the absence of complications. The panel determined that for the latter part of the sick leave, the insured’s condition met the definition of Temporary Partial Disability but not Temporary Total Disability, making the insurer’s offer appropriate according to the policy terms. This highlights the critical distinction between these two types of temporary disablement benefits in personal accident policies, where the benefit amount often differs based on the degree of incapacitation.

This question tests the understanding of the ‘fit and proper’ requirement for insurance brokers, which is a fundamental aspect of their licensing and ongoing supervision. The Insurance Authority (IA) mandates that all insurance brokers must be fit and proper to operate. This assessment goes beyond mere technical qualifications and encompasses aspects like integrity, financial soundness, and adherence to regulatory standards. While professional indemnity insurance and maintaining proper books are crucial operational requirements, they are components that contribute to demonstrating fitness and properness, rather than being the overarching criterion itself. Similarly, adherence to a code of conduct is a demonstration of proper conduct, but the ‘fit and proper’ status is a broader assessment by the regulator.

An insurance broker acts as an agent for the proposer. When a broker withholds or misrepresents material facts, this action is legally imputed to the proposer, constituting a breach of the duty of utmost good faith. This principle is fundamental to insurance contracts, where both parties must disclose all relevant information that could influence the insurer’s decision to accept the risk and on what terms. Therefore, the broker’s failure to disclose is considered a failure by the proposer.

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 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 certificates upon policy cancellation due to their legal importance. Therefore, a certificate of motor insurance is primarily a legal document confirming compliance with compulsory insurance requirements, not a comprehensive summary of the policy’s terms.

The ‘Schedule’ within a scheduled policy form is the section that specifically details all information pertinent to the individual risk being insured. This includes crucial data such as the policy number, the insured’s personal details, the sums insured or limits of liability, the effective dates of coverage, a description of the insured item or risk, the premium paid, and any special terms, warranties, exclusions, or endorsements that modify the standard policy wording. The Recital Clause introduces the contract and references the proposal form, while the Operative Clause outlines the circumstances under which coverage is active, and General Exceptions apply to the entire policy. Therefore, identifying the policy number, insured’s details, and sums insured falls under the purview of the Schedule.

A ‘Scheduled Policy Form’ is a common insurance contract structure that includes a policy schedule. This schedule details specific information about the policy, such as the insured party, the subject matter of insurance, the sum insured, and the period of insurance. The ‘Signature Clause’, also known as the Attestation Clause, is a specific part of this scheduled policy form where the insurer formally confirms their commitment and undertakings under the contract. Therefore, the Signature Clause is an integral component of a Scheduled Policy Form.

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 the Motor Insurers’ Bureau of Hong Kong (MIB) plays a crucial role in fulfilling the intentions of this compulsory insurance when direct insurance is unavailable or ineffective, it is the Ordinance itself that establishes the fundamental requirement for all motor insurance policies to cover third-party risks.

A performance bond is a type of surety bond, not an insurance policy. Its primary function is to guarantee the fulfillment of contractual obligations, specifically the completion of construction work within an agreed-upon timeframe. Unlike insurance, which typically covers unforeseen events, a performance bond is a financial guarantee that the contractor will perform as stipulated in the contract. If the contractor defaults, the bond ensures that the project owner can recover costs or find another contractor to finish the work. The other options describe different types of insurance or financial instruments: Personal Accident and Sickness Insurance covers injury or illness, Professional Indemnity Insurance covers negligence in professional services, and Public Liability Insurance covers general third-party injury or property damage.

The core principle of an indemnity policy is to restore the insured to their pre-loss financial position. When new parts are used to repair an older vehicle, these new parts inherently offer a superior lifespan and condition compared to the original, aged parts. This improvement in the vehicle’s condition beyond its pre-accident state is termed ‘betterment’. The insurer is not obligated to provide a benefit that exceeds the original state. Therefore, a contribution from the insured towards the cost of these new parts is justified to account for this betterment, ensuring the insured does not gain an advantage. The scenario highlights that the insurer’s calculation of a 35% betterment contribution for an eight-year-old vehicle, considering the normal depreciation rate of 50%, was deemed reasonable by the Complaints Panel. The policy’s exclusion of depreciation further supports the insurer’s stance on the insured contributing to the betterment.

In the context of insurance contracts, a ‘representation’ is a statement of fact made by the proposer before the contract is concluded. According to established insurance law principles, particularly those derived from the Marine Insurance Act 1906 (which heavily influences Hong Kong insurance law), representations must be substantially true. This means that while minor inaccuracies might not invalidate the contract, any misrepresentation of a material fact that influences the insurer’s decision to accept the risk or the terms offered can lead to the contract being voidable at the insurer’s option. The requirement for substantial truth is a cornerstone of the principle of utmost good faith (uberrimae fidei) in insurance. Options (b), (c), and (d) present incorrect standards: requiring absolute truth (c) is too stringent, stating they can be true or untrue without affecting the contract (d) ignores the principle of materiality, and mandating written form (b) is not universally required for all representations, especially oral ones made during initial discussions.

The scenario describes a situation where an insured person, a businessman who travels frequently, sustains a back injury. Initially, the insurer paid Temporary Total Disability (TTD) benefits. However, based on a medical examiner’s report indicating improved trunk movement, the insurer reclassified the benefit to Temporary Partial Disability (TPD), arguing the insured could perform some duties. The Complaints Panel, however, gave more weight to the attending doctors’ opinions, which stated the insured was unable to perform *any* work until a specific date. This aligns with the principle that TTD benefits are payable when an insured is unable to perform *any* work, while TPD benefits are for situations where the insured can perform *some* but not all of their usual duties. The panel’s decision to continue TTD benefits until the stated date, despite the insurer’s assessment of partial recovery, highlights the importance of medical evidence supporting the inability to perform *any* work for TTD claims.

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) is also a common element, focusing on professional standards. Option (c) highlights efficiency and ethical business practices. Option (d) addresses the crucial aspect of claims handling. Option (e) refers to specific details on business conduct. The provided text emphasizes that these declarations are not just self-imposed but can also be mandated by industry bodies or legislation, serving as both a benchmark for intentions and a measure of performance. Therefore, a comprehensive declaration would encompass all these aspects to varying degrees, but the question asks for a primary commitment.

Moral hazard refers to the increased likelihood of a loss occurring because an individual is insured. It’s often linked to the ‘human element’ of risk, encompassing attitudes and behaviours. While dishonesty (including fraud) is a direct manifestation, carelessness, unreasonableness (like inflexibility or opinionated views that create problems), and negative social behaviour (such as vandalism) are also considered forms of moral hazard. These behaviours, even if not overtly fraudulent, can significantly increase the probability or severity of a claim, thus representing a poor moral hazard from an insurer’s perspective. The question tests the understanding that moral hazard extends beyond outright fraud to include a broader spectrum of detrimental human behaviours.

An insurance broker acts as an agent for the proposer, meaning they are legally identified with the proposer. Consequently, any failure by the broker to disclose material facts, such as withholding or misrepresenting information about the client or the proposed risk, constitutes a breach of the duty of utmost good faith. This breach is legally imputed to the proposer, potentially voiding the policy or affecting its validity from the outset. Therefore, the broker’s actions directly impact the proposer’s obligations and the enforceability of the insurance contract.

Moral hazard refers to the increased likelihood of a loss occurring because an individual is insured. It stems from the ‘human element’ of risk, encompassing attitudes and behaviours. While dishonesty (including fraud) is a direct manifestation, carelessness, unreasonableness (like inflexibility or opinionated views), and negative social behaviour (such as vandalism) also contribute to adverse moral hazard. These behaviours can increase the probability or severity of claims, even if not driven by outright deceit. Therefore, a comprehensive understanding of moral hazard includes these less overt but still impactful human factors.

A ‘Scheduled Policy Form’ is a common structure for insurance policies that includes a policy schedule. This schedule details specific information about the policy, such as the insured party, the subject matter of insurance, the sum insured, and the period of insurance. The ‘Signature Clause’, also known as the Attestation Clause, is a specific part of this scheduled policy form where the insurer formally confirms their commitment and undertakings under the contract. Therefore, the Signature Clause is an integral component of a Scheduled Policy Form.

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’ are those with potentially catastrophic loss potential, often excluded from standard policies. Therefore, the requirement for forcible and violent entry is directly linked to the conditions for a theft claim.

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. The other options represent incorrect calculations or misinterpretations of the average clause.