Paper 2 General Insurance Quiz 06

This question tests the understanding of specific exclusions within a Product Liability policy. Option (a) correctly identifies that liability stemming from the inherent design or formulation of a product, such as a TV cabinet failing to support a weight exceeding its specified limit, is typically not covered. This is a common exclusion designed to prevent insurers from covering risks associated with the fundamental integrity of the product itself, which is the responsibility of the manufacturer’s design and engineering processes. Options (b), (c), and (d) describe situations that are generally covered or are not standard exclusions in a Product Liability policy. For instance, liability to bystanders (b) is often included, and while liability for the repair of goods can be complex, the scenario in (d) highlights that the damage caused by the faulty product (the car) is covered, not just the product itself. Liability for advice or instructions (c) is also a distinct exclusion, but the question focuses on design flaws.

The scenario describes an individual intentionally engaging in a physical altercation to rescue friends. The Complaints Panel determined that the insured’s injury was not accidental because it was a foreseeable consequence of his deliberate actions in joining the fight. The key principle here is that for a personal accident claim, the injury must be the result of an unforeseen and unintentional event. By actively participating in a dangerous situation, the insured’s actions led to a predictable outcome of being injured, thus removing the ‘accidental’ nature required for the claim. The insurer’s rejection was based on the injury not being accidental, which aligns with the panel’s finding that the insured’s foreseeability of harm negated the accidental nature of the event.

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, regardless of whether specific questions are asked. Therefore, facts that impact an underwriter’s assessment of insurability or the terms of the policy are considered material.

The Code of Conduct for Insurers, established by the Hong Kong Federation of Insurers (HKFI), specifically addresses the standards expected in the insurance industry concerning personal insurance policies for Hong Kong residents. It covers a broad spectrum of practices, including underwriting, claims handling, product knowledge, and customer rights. While the Insurance Companies Ordinance (ICO) sets out foundational requirements for insurers’ authorization and financial stability, and the Code of Practice for the Administration of Insurance Agents details intermediary conduct, the Code of Conduct for Insurers is the primary document that outlines the expected good practices for insurers themselves in their dealings with policyholders, particularly in the context of personal insurance.

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, it addresses how insurers should handle underwriting and claims processes to ensure fairness and efficiency. Furthermore, it explicitly outlines the rights and obligations of customers, ensuring they are informed and treated equitably. The Code also emphasizes the broader interests of customers, ensuring that their welfare is a primary consideration in all dealings. While an insurer’s role as a good corporate citizen is important, the Code of Conduct’s primary focus is on the direct relationship and transactions between the insurer and the policyholder, and the operational standards that govern these interactions. Therefore, while the industry’s public image is a consequence of good practice, it is not a direct subject matter covered by the Code itself in the same way as underwriting, claims, and customer rights/interests are.

The question tests the understanding of an insurer’s obligation regarding policy renewals. According to general insurance principles and common practice, an insurer is not legally mandated 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. While it is often in the insurer’s interest to send reminders to retain business, this is a commercial practice, not a legal requirement. Therefore, the insurer is not obligated to remind the insured.

The scenario describes a situation where the insured delayed notifying the insurer about a claim. The policy likely contains a condition requiring prompt notification. While the insured took the watch for repair immediately, the claim submission to the insurer occurred two weeks after the repair was completed. This delay in reporting the incident to the insurer, even after the repair, could be a breach of the policy’s notification clause, which is a contractual term affecting claims. The insurer has the right to investigate the claim, and a delayed notification can hinder this process, potentially impacting the insurer’s ability to assess the loss or verify the circumstances. Therefore, the insurer might be able to decline the claim based on the breach of the notification condition.

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.

A cover note is a temporary document that provides immediate evidence of insurance coverage, binding the insurer even before the final policy is issued. It is not conditional on the submission of a satisfactory proposal form later. While it offers unconditional cover, it typically includes cancellation provisions and is intended for a short duration, often replaced by a formal policy. Its primary role is to provide the insured with documentary proof of existing insurance, which can be crucial for various purposes, such as vehicle registration or satisfying lender requirements.

A voluntary excess, also known as a ‘self-insured retention’ or ‘deductible’, is an amount that the policyholder agrees to bear themselves in the event of a claim. This is typically offered by insurers as an incentive for the policyholder to take on a portion of the risk, which in turn can lead to a reduction in the insurance premium. This concept is distinct from mandatory excesses that might be applied due to specific policy conditions, such as those related to young drivers or particular types of claims. The core principle is that the insured voluntarily accepts a higher deductible in exchange for a lower premium.

A Certificate of Insurance serves as a formal confirmation of the existence of compulsory insurance, particularly in contexts like motor vehicle insurance. It is a standalone document, distinct from the main policy, providing evidence of coverage. While it confirms coverage, it does not typically detail the specific terms and conditions of the underlying policy, nor does it represent a guarantee of future insurability. Its primary function is to satisfy legal requirements for proof of insurance.

This question tests the understanding of the core principle of ‘All Risks’ insurance, which is that it covers all losses unless specifically excluded. The insurer bears the burden of proving that an exclusion applies. Option (a) correctly states this principle. Option (b) is incorrect because ‘All Risks’ does not imply coverage for all possible causes of loss, but rather for all causes except those explicitly excluded. Option (c) is incorrect as the insured is not responsible for proving the cause of loss; rather, the insurer must prove an exclusion applies. Option (d) is incorrect because while exclusions exist, the fundamental basis is broad coverage, not limited to specific perils.

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.

The question tests the understanding of the insured’s duty to minimize loss after a claim event. This duty, recognized under common law and often reinforced in policy wordings, requires the insured to take reasonable steps to prevent further damage or increase in the loss. Option A correctly identifies this duty. Option B is incorrect because while cooperation is a duty, it’s distinct from the active effort to reduce the extent of the damage. Option C is incorrect as admitting liability to third parties is a separate duty (not to compromise the insurer), and while related to preventing further loss, it’s not the primary action of minimizing the existing damage. Option D is incorrect because while fraud is a breach of duty, it’s a separate concept from the proactive duty to mitigate losses.

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 law does not typically require absolute truth for every minor detail, but rather substantial accuracy on matters that are significant to the risk being insured. Options (b), (c), and (d) present incorrect interpretations of this principle. Representations do not always need to be in writing unless specified by law or the proposal form, absolute truth is not always the standard for every minor detail, and untrue representations on material facts can indeed affect the contract.

This question tests the understanding of how changes in the insured risk can impact the policy. The Insurance Companies Ordinance (Cap. 41) and general insurance principles dictate that if the circumstances under which a risk was insured alter for the worse, the insurer may have grounds to cancel the policy, provided the policy terms allow for it and proper notice is given. This is because the original risk assessment and premium calculation are no longer valid. Option B is incorrect because while a change in market conditions might influence underwriting strategy, it doesn’t directly grant the right to cancel a policy due to a change in the insured’s circumstances. Option C is incorrect as a policyholder’s financial stability, while a factor in underwriting, doesn’t automatically lead to cancellation if the risk itself hasn’t worsened. Option D is incorrect because while an insurer might review terms, the primary action when the risk deteriorates is often cancellation or renegotiation, not necessarily an immediate premium increase without further assessment or policy adjustment.

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 are not required to be absolutely true, nor can they be untrue without consequence.

A fire business interruption policy is designed to compensate an insured business for financial losses incurred due to a disruption of operations following a covered peril, such as fire. This compensation typically includes the loss of gross profit and continuing expenses. While the physical damage to buildings and contents is covered by a standard fire policy, business interruption insurance addresses the consequential financial losses that arise from the inability to trade. It does not cover direct third-party liabilities, which are typically addressed by other types of insurance.

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 fall under product liability, not employees’ compensation insurance.

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’ concerns dishonest acts by the insured, and ‘Fundamental Risks’ refers to catastrophic potential losses that are often excluded.

Institute Cargo Clauses (A) provides the broadest coverage, operating on an ‘all risks’ basis. This means it covers all losses unless specifically excluded. Clauses (B) and (C) are more restrictive, covering only specified perils. Therefore, a shipment insured under Clause (A) would be covered for damage caused by a sudden, unexpected event like a storm at sea, provided it’s not an excluded peril. Clause (B) would cover fewer perils, and Clause (C) would cover the fewest, typically only those explicitly listed such as fire or sinking. The scenario describes damage from a storm, which is a peril generally covered under the ‘all risks’ framework of Clause (A).

The question tests the understanding of how premiums are determined in Personal Accident (PA) insurance, specifically referencing the provided text. The text explicitly states that while individual features like age might have underwriting consequences, the standard premium calculation is primarily based on the insured’s occupation, which is classified according to accident risk. Other factors like gender are mentioned as not affecting the premium if other conditions are equal. Therefore, occupation is the most significant factor for standard premium calculation in PA policies.

The question tests the understanding of exclusions in pleasure craft insurance. Specifically, it focuses on the treatment of the ship’s boat. According to the provided text, a ship’s boat is excluded from coverage if it is not permanently marked with the parent boat’s name. This implies that if it *is* permanently marked, it would be covered. Therefore, a pleasure craft policy would typically exclude coverage for a tender that lacks the parent vessel’s name permanently affixed to it.

The principle of indemnity in insurance aims to restore the insured to the financial position they were in before the loss. When replacing old parts with new ones, there’s an inherent betterment, as the new parts are superior to the old, worn-out ones. The insurer is entitled to deduct a reasonable amount for this betterment to avoid over-indemnifying the insured. The case highlights that for an eight-year-old vehicle, a 35% betterment contribution is considered reasonable by the Complaints Panel, especially when the policy explicitly excludes depreciation. This contribution reflects the improved condition of the vehicle post-repair due to the new parts, aligning with the indemnity principle.

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 theft. This directly aligns with the core purpose of Fidelity Guarantee Insurance, which is to cover losses arising from employee dishonesty, such as theft or fraud. The other options are incorrect because Public Liability Insurance covers third-party bodily injury or property damage, Burglary Insurance covers theft of property from a specific location, and Money Insurance covers loss of money during transit or in specific premises.

The question tests the understanding of exclusions in pleasure craft insurance, specifically concerning the ship’s boat. According to the provided text, a ship’s boat is excluded from coverage if it is not permanently marked with the parent boat’s name. This implies that if the ship’s boat is properly marked, it would be covered under the policy. Therefore, the scenario where the ship’s boat is not marked correctly leads to its exclusion from the policy’s coverage.

The question tests the understanding of ‘Agreed Values’ in insurance, specifically for high-value items like jewelry and antiques. Under an agreed value policy, the sum insured is the amount that will be paid in the event of a total loss, irrespective of the item’s actual market value at the time of the loss. This differs from a policy based on indemnity, where the payout would be limited to the actual loss incurred. For partial losses, however, the principle of strict indemnity typically still applies, meaning the payout would be based on the actual loss suffered, not the agreed value. Therefore, the statement that the agreed value is payable for a total loss but strict indemnity applies to partial losses accurately describes this type of cover.

The Code of Conduct for Insurers, established by the Hong Kong Federation of Insurers (HKFI), specifically addresses the standards expected in various aspects of the insurance business. Among these are the fair, efficient, and prompt handling of claims, as well as the criteria used when a claim is denied. While other regulations might touch upon claims, the Code of Conduct for Insurers is the primary document outlining these specific practices for personal insurance policies.

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 cargo is jettisoned (thrown overboard) to save the ship and other cargo during a peril, it constitutes a GA sacrifice. The owner of the jettisoned cargo is then entitled to a contribution from the other saved parties to compensate for their loss. The key is that the act must be extraordinary, voluntary, reasonable, and performed in a time of peril for the common safety. Option A correctly identifies the scenario where jettisoned cargo leads to a GA contribution. Option B is incorrect because while salvage awards are paid for saving property, they are distinct from GA contributions which arise from sacrifices made for the common good. Option C is incorrect as sue and labour charges are expenses incurred by the assured to preserve the insured property from an insured loss, not a contribution from other parties. Option D is incorrect because while a total loss of a portion of the cargo might occur, the principle being tested is the recovery from other parties due to a GA act, not just the loss itself.